If last week’s reporting of the demise of traditional retail sounded familiar, you’ve been paying attention.
In the past 20 years, few industries have transformed as frequently — and significantly — as retail. During the first wave of modern-day change, we saw Amazon transform from a bookstore to an everything store. A few other “etailers,” such as Seattle stalwart Blue Nile, pushed out traditional retailers ― from national chains to family-owned.
During the second wave — often called “bricks and clicks” — traditional retailers rushed to catch up by integrating physical stores with new online investments. Now, we’re in the thick of the third wave, as “pure-play” etailers that were born on the web are expanding into the physical world; even as many of their more traditional competitors are contracting.
Blue Nile, Warby Parker, Indochino, and even Amazon are experimenting to varying degrees with retail stores. But why?
Are these simply marketing moves to reach more potential customers? Or, are they attempts to shore up gaps that online offerings can’t fill? Do online-first models have advantages over traditional retailers? The answers are yes, yes, and yes — but the details might surprise you.
While these etailers vary in size and scope, they have one thing in common: a desire to expand their customer base. As big cities get bigger, retail locations in top urban shopping centers become galleries for brands to market to the masses.
Online acquisition is expensive, and some retailers find they can not only operate stores profitably, but that these physical locations lift online sales. Trained sales professionals also provide a more personal connection, which is especially important for high-consideration items where fit is key and price points can be high.
Marketing matters aside, each etailer has a distinct rationale for opening up shop. Let’s start with online diamond and jewelry retailer Blue Nile, which went public in 2004 — just five years after launch. With its value-based pricing, online cost structure, and supply chain advantages, Blue Nile left many a regional jeweler in its wake.
So why, with all these advantages, did Blue Nile open up a “webroom” last summer?
Despite the company’s success, the engagement ring business is largely still an in-store purchase. It’s under-penetrated relative to other categories which have steadily transitioned more sales online. This is largely attributed to the overall cost, the emotional and tactile nature of the purchase, and the complexity of diamond grading. Pricing varies greatly based on a variety of factors, and most men only make this purchase once. In short, buying an engagement ring is hard.
Opening up webrooms lets Blue Nile combat these challenges, giving men (and their intendeds) a chance to get help from a salesperson and try on different options. Couples increasingly shop together for engagement rings; the days of the complete surprise proposal are waning. An in-store experience lets co-shopping happen more organically.
Still, Blue Nile’s webroom model differs from traditional retailers.
The spaces are small (the first is about 325 square feet), which reduces overhead, and less room means fewer salespeople to compensate. Additionally, webrooms don’t sell directly to shoppers — all orders are still placed online, from the same customer-facing website — in order to keep inventory low.
And, in a sure nod toward highly sought-after millennial customers, the first webroom employs a digital wall showing real-time social content. Interestingly, Blue Nile has only opened webrooms thus far in states with no new sales tax implications. It already charges sales tax for online customers in New York, because the company has an office there, and there’s no sales tax in Oregon ― the site of Blue Nile’s first West Coast webroom.
The webroom model isn’t reserved for gemstones. Vancouver, BC-based suit-maker Indochino is expanding aggressively. After opening seven showrooms last year, it intends to launch an additional 150 in the next five. Similar to Blue Nile’s webroom model, Indochino doesn’t sell items direct from the store to minimize inventory costs.
Textiles, like jewelry, are inherently tactile. And few things need to fit better than a bespoke suit.
So, no matter how good Indochino’s online fit tutorial might be, tailors are still at the mercy of untrained hands: Ours.
I measured my husband for his suit, and while the fit of the suit that arrived was close, it still needed a few adjustments. As promised, Indochino paid for an area tailor to do so.
Webrooms eliminate this potentially costly step, provide a personal touch, and offer a chance to move some accessories. After all, you probably need a new tailored shirt as well. Knowing Indochino now has the right measurements, and can make a great suit inexpensively, my husband bought another shortly thereafter. It’s safe to say they’ve landed a customer (or two) for life.
New York-based eyewear retailer Warby Parker has already disrupted the eyewear industry in a couple of ways. First, it challenged industry leader Luxottica by similarly “verticalizing” the model, sourcing its own material, overseeing design, manufacturing, and point of sale. Then it disrupted the consumer experience with home try-on kits. But Warby didn’t stop there. After operating exclusively as an online business, it now has 27 retail locations, with more in the works.
Why expand? Sales and revenue.
Warby Parker’s first stores were a smashing success — each increased the growth rate in the city in which it’s located. Unlike Blue Nile and Indochino, Warby actually sells direct from its retail locations.
Like many omni-channel retailers, Warby’s technology investments have focused on CRM applications. Sales associates can access customer profiles to see the frames they’ve tried ― leveraging data to enhance the personal touch. The stores also have a secondary benefit of unburdening the operational costs of home try-on volume in top markets, but this isn’t the end game. If its plan to enable users to get an eye exam on their mobile phones proves successful, Warby will have disrupted the eyewear industry once more.
And then there’s Amazon’s unexpected bookstore venture. Surely bookselling, which couldn’t be a better fit for etail, doesn’t need to be fixed — isn’t that why Jeff Bezos started with this category in the first place?
Amazon’s approach to physical stores is less about shoring up gaps than building a better mouse trap. Amazon thinks it can build a better bookstore based on data.
It’s an interesting twist on the low-inventory model favored by other pure-play etailers. Amazon believes it can be more efficient because it already knows what you want. And they’re probably right.
Retail stores also allow Amazon customers to go hands-on with new devices such as Kindle and Echo ― just like an Apple store.
Amazon is the outlier in this field.
One could argue that Blue Nile, Warby Parker and Indochino have simply exhausted the customer base who was comfortable buying their goods online, but Amazon has different challenges and larger, less-predictable ambitions.
Books, once again, are only the beginning ― we can expect stores will eventually include other categories. Sources familiar with the effort say the team aims to reinvent the shopping experience by merging the best of retail with the best of Amazon.
As former pure-play etailers continue to have success with a multi-channel model, there’s little doubt others will follow.
A combination of sophisticated CRM capabilities and webroom-driven operational gains will enable them to acquire customers more efficiently, increase conversion rates, and cut costs.
Most innovations will happen behind the scenes, but there’s still tremendous opportunity to use technology to directly improve the in-store experience.
Maybe that’s the yet-to-be-realized fourth wave. If the historical rate of change is any indication, we won’t have to wait long too find out.
About the author: Alex Berg is the Director of Strategy & Analytics for Fell Swoop – a digital design firm in Seattle. Prior to Fell Swoop Alex held leadership roles with Ritani, Wetpaint, Expedia, and Blue Nile. Follow him on Twitter @alexwberg.
