Ecommerce Companies Finding Success in Brick-and-Mortar

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Woman handing over shopping bag at cash registerIn 2012, Bonobos, the startup men’s apparel brand, opened its first physical showroom. The store was small, but significant — if only as a concession by founder Andy Dunn that physical retail still mattered. But what began as an experiment in its headquarters has quickly turned into a cornerstone of the company’s strategy to grow from a specialty maker of men’s jeans to a household name capable of competing for the mainstream consumer.

The move into physical retail has become a fashionable choice within New York’s growing ecommerce industry. In the past six months, BirchBox and Rent the Runway, both newly-funded and extremely popular online brands, joined the fold, opening stores in the city to help expand their brand. What’s more, the founders of these firms now suggest that industry watchers may have overstated the economic advantages of an online-only sales model particularly as new technologies allow retailers to reduce the footprint needed to generate sufficient revenue.

“If you told me five years ago that we would be opening brick-and-mortar retail stores, I would have told you ‘no way,’” said Bonobos’ Dunn during a panel hosted by the company and American Express Thursday. “That’s been very humbling to discover that there is a way to be wrong, and build something far better in a much more interesting ways”

Dunn says the company, which raised $55 million in June, plans to open another thirty stores across the country before the end of 2015. The Guideshops offer customers the chance to try on clothes and test fabric only — the orders are processed as an ecommerce purchase and delivered days later. Without the need for inventory, the company can afford to place the stores in higher-traffic, more expensive locations, and sell a much larger number of styles at a fraction of the price.

Even for companies that do hold inventory, the foundation in ecommerce provides other benefits. Rent the Runway, which allows people to rent designer dresses and clothes for a night, opened its first location in New York last month. But the stores have a slight difference than a high fashion boutique: more than half of floor plan is used by fitting rooms.

Andy Dunn, chief executive at Bonobos, with Rent the Runway co-founder Jennifer Fleiss and Birchbox co-founder Katia Beauchamp at Online's Day Off in New York last week
Andy Dunn, chief executive at Bonobos, with Rent the Runway co-founder Jennifer Fleiss and Birchbox co-founder Katia Beauchamp at Online’s Day Off in New York last week

Co-founder Jennifer Fleiss said Tuesday that the company built its store locations around an appointment model in which customers book time with a stylist who uses the shoppers past purchases to select a handful of dresses to try on in the store. By using the same system as its online site, Fleiss says the company can bring the same level of personalization to physical retail while requiring a smaller footprint.

For these sellers, the most surprising part is the bottom line. Both Dunn and Fleiss said Thursday that the most surprising insight about brick-and-mortar has been that the economics of physical retail— widely held as untenable in a digital age — are, at times, more favorable than those of ecommerce.

“The thing we worried about most was the profit margin we would be able to generate from the physical locations,” said Fleiss. “But what actually turned out to be the case is that both revenue and average order size in store is substantial larger than [online.]” Fleiss said that the store format allows the company’s salespeople to upsell customers on accessories or suggest new dresses, driving up the average revenue per user.

The ecommerce industry has suffered from low conversion rates for decades with little signs of improvement. The shopping cart abandonment rate, a measure of unbought goods online, has slowly increased over the past decade, increasing from around 60% in 2005 to well over 70%. Online-only firms such as Amazon have invested heavily in strategies to shrink delivery times — widely considered a driver of abandonment — but the efforts remain extremely expensive.

At Bonobos, Dunn says the Guideshops have helped to generate new business in a way that the online store cannot. “We’ve found that are stores are the flip of our site: our site is about two thirds repeat customers while the store is about 70% new business,” he said Thursday. Dunn also underscored the strength physical retail in driving more purchases, saying that the company sells about four times as many suits per shopper in the store rather than online.

Increasingly, the site and store are playing a tandem role. The store, an intimate experience in which a brand has the full attention of a consumer, plays the role of discovery and introducer. The site, unencumbered by physical limitations and empowered with the capabilities of connectivity, serves as the problem solver. Underneath both, a complex software layer that forms the foundation of modern commerce.

Steven Jacobs is Street Fight’s deputy editor.