Offline demise and offline renaissance is the paradox of new retail writ large. Swiss multinational financial services company Credit Suisse projects that by the time the numbers are in, more than 8,500 stores in the United States will have closed in 2017.1 Consensus estimates predict that 25% of all shopping malls will shrink or close in the near future. At the same time, online-first brands from suitcase retailer Away to eyewear maker Warby Parker are successfully opening pop-ups, showrooms, and full-blown stores.2 Not to be outdone, Amazon.com, the granddaddy of online-first, has opened bookstores and is rumored to be planning to open 2,000 AmazonFresh grocery stores over the next 10 years.3
The net result: Offline is dead and dying, yet it is also alive and thriving.
To understand why, consider the arc of Bonobos, founded in New York City in 2007 as Bonobos.com and sold in 2017, as Bonobos, to Walmart Stores Inc. for $310 million.4 CEO Andy Dunn founded the company with Brian Spaly while both were MBA students at Stanford’s Graduate School of Business.5 Their vision was simple: Sell men a better-fitting pair of pants, and do it without the “burden” of physical stores. Looking back to 2007, Dunn readily admits, “I really thought stores were going away at that time.”6 Ironically, nearly 10 years later, The Economist praised Bonobos for pioneering a new form of physical retail. The “zero-inventory store” is a small-footprint store where customers get a high-service, tactile experience, purchase via tablet, and order the product shipped to a location of their choosing.7
The trends exemplified by Bonobos reveal retail’s future: It will be small footprint and high experience, regardless of whether the retailer is online-first with offline additions or offline-first (legacy) plus e-commerce.
In this article, we pursue two interconnected themes: the expansion of online-first retailers into offline stores that serve the purpose of “supercharging” customer value, and the transformation of the stores of offline-first retailers from fulfillment-dominant centers into experience-dominant centers, which simultaneously reduce store size and inventory while improving the customer experience. In doing so, we explain how offline-first retailers can benefit from mimicking the showroom concepts started by online-first retailers, and why online-first retailers can benefit from opening more traditional stores.
1. J. Wattles, “Stores Are Closing at an Epic Pace,” April 22, 2017, http://money.cnn.com.
2. J. Smith IV, “Long Live Retail: Fashion Startups Finally Learned Why Physical Stores Still Matter,” Observer, Jan. 8, 2015.
3. See, for example, M. Addady, “Amazon Wants to Open 2,000 Grocery Stores Across the U.S.,” Fortune, Oct. 27, 2016.
4. M. de la Merced, “Walmart to Buy Bonobos, Men’s Wear Company, for $310 Million,” The New York Times, June 16, 2017.
5. Spaly went on to found Trunk Club, which sold to Nordstrom for $350 million. This “curated commerce in a box” has found favor with Stitch Fix, an online subscription and personal shopping service, as well.
6. L. Zumbach, “Bonobos CEO Says ‘Guideshop’ Model Is Working,” Chicago Tribune, April 25, 2016.
7. “Shops to Showrooms: Why Some Firms Are Opening Stores With No Stock,” The Economist, March 10, 2016.
8. C. Reagan, “A $260 Billion ‘Ticking Time Bomb’: The Costly Business of Retail Returns,” Dec. 16, 2016, www.cnbc.com.
9. Lenihan delivered this insight while giving a guest lecture to MBA and undergraduate students at the Wharton School.
10. L. Dishman, “Inside LA’s New, Futuristic Store — Magic Mirrors Included,” Oct. 8, 2015, http://fortune.com.
11. This concept has a long and important history in retailing. In his best-selling book, “Why We Buy: The Science of Shopping,” Paco Underhill introduced and validated the idea of an anthropological view of shoppers. His researchers literally followed shoppers through the store environment in order to glean nuggets of insight into their behavior.
12. As of January 2018, Bonobos had 48 Guide Shops throughout the United States. https://bonobos.com/guideshop.
13. D.R. Bell, S. Gallino, and A. Moreno, “Offline Showrooms in Omnichannel Retail: Demand and Operational Benefits,” Management Science, published online March 23, 2017.
14. The Retail Equation, “2015 Consumer Returns in the Retail Industry,” (December 2015), PDF.
15. Once frames are fitted with customer-specific prescription lenses, the salvage value is close to marginal cost.
16. M. Matousek, “Samsung’s Vision for the Future of Retail Is a Store That Doesn’t Try to Sell You Anything — Take a Look Inside,” Jan. 1, 2018, www.businessinsider.com.
17. S. Kapner, “Nordstrom Tries on a New Look: Stores Without Merchandise,” The Wall Street Journal, Sept. 10, 2017.
18. N. Walters, “7 Cool Things You Can Buy at the New Amazon Books Store in New York,” Aug. 29, 2017, www.thestreet.com.
19. K. Opam, “Oak Labs’ Interactive Fitting Room Feels Like the Future,” Nov. 18, 2015, www.theverge.com.
20. S. Miles, “5 Buy Online, Pick Up In-Store Platforms for Retailers,” Aug. 9, 2016, http://streetfightmag.com.
21. A customer walking in New York City enters “Nike stores” in the search bar on his or her mobile phone. Brickwork surfaces store locations and appointment options.
22. Additional examples are available from the authors, upon request. All the reported differences are statistically significant with p<.01.
23. K. Stock, “Staples Is Shrinking; Radio Shack Is Sinking,” March 6, 2014, www.bloomberg.com.
24. For the technically inclined, the simulated demand for each store comes from a log-normal distribution (to ensure that the sales number generated for each store and from each draw from the simulation is positive).
25. “95% in-stock rate” means that there is a 95% chance that a customer will find his or her preferred item in stock.
i. See D.R. Bell, J. Choi, and L. Lodish, “What Matters Most in Internet Retailing,” MIT Sloan Management Review 54, no. 1 (fall 2012): 27-33.