Last week, the New York Times published a feature on Gertrude, an events company that has managed to sidestep the art-world’s elite gallery scene by hosting pop-up gatherings in cities across the world — making fine art the latest industry to see its relationship with physical retail take a turn in new direction.
Sellers from art to apparel have started to rethink a half-century-long love affair with permanent, and often sprawling, store fronts as they struggle to confront a new normal where consumers simply shop less in stores. Instead, companies have turned to smaller, more specialized, locations that that can adapt to declining store revenues while addressing some new opportunities in selling to a connected consumer.
Investment moves from ‘in-store’ to the store itself
For the technology industry, the shift means a new channel for investment. After a few years of investing in technology that shapes the store experience, investors have started to eye the real estate infrastructure that supports the store itself. In April, Spark Capital, an investor in Warby Parker and Foursquare, poured $7.4 in Storefront, a marketplace that helps connect landlords with retailers, ecommerce and others looking for short-term rentals.
The site, which operates in seven cities across the U.S., lists a range of spaces to rent from traditional retail spaces to more unconventional opportunities such as kiosks at malls or shared spaces within an existing store. The company also provides consulting services for renters, providing access and advice to find point-of-sale systems, store designers, and other necessities to getting a store up and running.
Tristan Pollock, the company’s co-founder, says that both online and traditional retailers are starting to see the value of short-term retail. He says the flexibility allows smaller sellers to try selling through a physical location without the liability of a multi-year lease or a prolonged slow season endemic with a seasonal business.
One of the key growth markets for Storefront has been ecommerce. He says that the company has helped a number of apparel brands, which grew selling exclusively online, to open pop-up shops or longer-standing physical stores. It’s a phenomenon that has picked up in recent years as quickly growing ecommerce companies like Bonobos, Warby Parker, and even Tesla look to find an edge in competitive markets.
Indochino, a custom apparel brand that built its business largely online, expanded into the physical world in 2011 with series of traveling tailor shops, where stylists could walk customers through the process of creating a custom suit. Kyle Vucko, chief executive at the Vancouver-based company, says that company may expand into a more permanent spaces, but the pop-up shops allowed the company to test and learn before committing to longer-term liabilities.
The growth of these services points to longer-term transition in the physical marketplace. Trends in the commercial real estate market will undoubtedly shape the way retailers approach the store experience, and in turn will impact the the way other derivative industries of retail — from marketing to point-of-sale do business.
Changes in the retail real estate market
Retail real estate — the market Storefront wants to enter — is a big one. Last year, overall retail real estate transactions in the U.S. totaled nearly $79 billion in the United States. But the market still remains smaller than it was pre-recession.
The industry has fought a two-front war since the American economy tanked in 2008. On one end, retail spending as a whole in the U.S. has remained sluggish, with sales seeing slower than expected growth in May. Compounding the slow recovery, the explosive growth of ecommerce has pushed major retailers to close stores, and in some cases, bail on brick-and-mortar altogether.
But the data suggests an industry on the mend. According to data from Marcus and Millichap, the massive real estate investment firm, vacancy rates, a key indicator in measuring market growth, jumped to 8% in 2011 from pre-recession lows of slightly under 6%, but declined over the past two years and now sit at 7.2%. That means retailers are renting space, and eating up some of the unfilled supply in the market.
However, a rebound does not mean a return normal. The retail industry has undergone a fundamental shift which many in the industry agree will impact the types of retail spaces they use and the ways in which retailers rent commercial space.
Here’s how analysts at Marcus and Millichap put it in an April 2014 report on the real estate market: “The new holy grail of competition, convenience and product delivery has blurred the lines between brick and mortar stores and pure e-retailers. Space needs have evolved to include downsizing existing footprints, while adding quasi distribution centers to expedite delivery. At the same time, e-retailers now seek to open brick and mortar stores to compete for consumers desiring a personalized, in-store experience as well as the entertainment and social aspect of shopping.”
What these changes mean for local
A shift in the retail real estate market could also cause a shift in a number of the technology industries that build tools for retailers. A more liquid retail real estate market might create an incentive for retailers to invest less in the space itself, buying technology with smaller upfront costs that could easily be refitted to a new location.
Consider the point-of-sale industry, which has seen a burst of innovation over the past two years. A number of startups have built competitive, and far cheaper systems but still face a challenge in convincing retailers to ditch an embedded, and higher-touch legacy system. The bulk of their early success has come with small businesses which may have not had a POS system, or with new businesses where capital is limited.
But for larger businesses, these startups present a bigger liability than advantage. However, if retailers start to develop a more flexible approach to brick-and-mortar selling, in which they’re building smaller stores with higher rates of turnover, the mobility of a cloud-based point-of-sale will become a critical feature.
Steven Jacobs is Street Fight’s deputy editor.