E-commerce hasn’t killed physical retail. It became more important
E-commerce has exploded during the pandemic. This, coupled with widespread store closures, has led many retail pundits to predict the final death of brick-and-mortar stores. In some ways they were right. Approximately 50,000 (5.7%) stores in the United States are expected to close by 2026, while online sales are expected to grow by 50%. This is prompting brands to close more stores as they question the value of physical retail in a post-pandemic world.
But the reality is that the rapid digitalization of commerce is completely transforming – rather than eclipsing – the role of the physical store, and we need new ways to measure its impact.
The true value of the retail environment today is no longer tied solely to direct financial profit, which is increasingly the domain of e-commerce. It’s in the less tangible, but essential, value of emotional and experiential engagement that only brick-and-mortar retail can deliver. These softer elements are fundamental to establishing long-term consumer loyalty, brand reputation, differentiation, and ultimately sales.
It’s no surprise that the brands are missing a trick here. In 2020, Covid-19 triggered a massive acceleration in e-commerce. Amazon recorded its biggest profit everWalmart announced a 97% increase in online salesand some brick-and-mortar stores saw their profits drop by up to 256%. Brands around the world have urgently redirected their efforts towards capturing consumer engagement in the digital world. However, in the rush to scale their e-commerce, many brands have forgotten to also scale the way they measure the impact of their remaining brick-and-mortar stores.
In a recently published white paper, we’ve created a “prioritization matrix” in which brands can score each stage of a customer’s experience in a store, from arrival to departure and while they stay in touch with the brand in line. Each stage of the customer experience can be scored based on its impact on the customer, the brand, and the business to get a complete picture of store performance. Scores are estimated by reviewing industry best practices, past consumer testing, and consulting with outside experts.
This approach provides a much broader and deeper picture of the true impact of stores, beyond profits and footfall, and also reveals how and where their value can be improved.
Customer impact considers customer service, engagement with store design, layout, and functionality, and the overall experience customers have when visiting the store.
It’s important for brands to measure this because by prioritizing customer impact, rather than just profit, stores can deliver lasting value that benefits long-term sales. A PWC report found that when brands provide a superior customer experience, their customers are seven times more likely to buy from them than from their competitors.
When American Express moved away from treating customer service as a cost center and turned it into an opportunity to improve a customer’s overall experience with the brand, it resulted in a 400% increase in customer loyalty. Here, prioritizing customer relationships — instead of focusing on reducing call times — led to increased profits. Brick-and-mortar stores that use design to prioritize the individual goals, motivations, and needs of target customers will likely see a similar increase in long-term profits.
Examples of positive customer impact include the “Nike Live” concept: smaller format, community-focused stores with tailored offers and rewards based on local customer feedback and insights. From a more customer-convenience oriented approach, Target’s growing number of “in-store stores” such as Disney, Apple, Ulta Beauty, Levi’s and Lego offer customers the benefit of multiple branded shopping experiences without need multiple trips.
As e-commerce intensifies, brick-and-mortar stores, which were once mere distribution channels, are playing an increasingly vital role in bringing the brand to life. Even if the final purchase is made online, the importance of memories, experiences, and emotions tied to the physical space cannot be understated in how they contribute to a final sale. After all, 55% of shoppers visit a physical store before making an online purchase. This is “brand impact” – the role of the physical store in making customers feel more brand loyal.
American toy retailer Camp is transforming its stores into experiential retail hubs offering places to socialize with others and family-friendly activities that go far beyond a traditional toy store. This lead to 50% of customers return once a month and 17% returning once a week, and while they may not shop in-store every visit, the loyalty encouraged will likely make Camp.com a much more likely choice for customers when making a purchase.
A leading food giant recently challenged us to create a new retail brand that would appeal to Gen Z consumers while reinventing the outdated pudding category they are known for. They wanted to increase brand awareness in the US market, which we achieved by providing customers with a variety of shareable and emotionally engaging in-store experiences. Customers were able to personalize their pudding; the interior was designed with multiple photo opportunities to encourage guests to share their experience on social media; and playful “seats” invited families and friends to enjoy pudding together in a more informal playground-like setting, encouraging spontaneous conversations. Although improving sales was not part of our briefing, this campaign had the effect of increasing overall sales by 42%.
As humans, we ultimately buy more warm and personal relationships, which cannot be replicated in the relatively cold digital environment. A First Insight Report found that 71% of shoppers spend $50 or more when shopping in-store, compared to only 54% of respondents who spend the same amount when shopping online. At the same time, customers—especially the younger ones— say they actually prefer physical stores to browse and experience products.
Physical stores can therefore still play a vital role in advancing business goals and business targets. This potential can be maximized by ensuring that stores score high by ensuring that customers have the most positive overall experience of the store when they visit, which in turn increases the chances that they will repeat purchases and visits.
The Ikea stores in central London offer free home planning and organizing services, rather than being a traditional showroom of products for sale. It may seem like a simple business decision – opening new stores to attract new audiences – but its success lies in how Ikea has adapted its retail model to focus more on providing new services and experiences tailored to people. urban living, rather than simply recreating their out-of-town warehouse format.
Finally, the perceived notion that e-commerce is more profitable than physical stores is complex. The rising costs of digital marketing and the oversaturation of DTC brands can significantly reduce the gains made by saving on the overhead of a physical space. Famous DTC brands Casper, Allbirds and Wayfair are said to have spent respectively 32%, 25% and 10% of their revenue on marketing in 2020. In the meantime, retail rents – often the biggest expense – are still below pre-pandemic peaks in many prime areas, such as manhattan, while commercial rents in major European cities. including Paris and London, are ready to fall by 2025. All of this means that it is now a tenants market, with much greater flexibility and discounts available on commercial rents than before Covid-19. The sales figures are further complicated by the fact that at least 30% of all products ordered online are returned, compared to 8.89% for physical stores.
This is why many brands are opting for a hybrid, “phygital” approach, in particular buy online, pick up in store, or buy online, return in-store approaches, giving the brick-and-mortar store an fulfillment role that removes the need for an expensive warehouse, making e-commerce and brick-and-mortar retail interdependent. For example, about 20% of Target’s sales come from e-commerce, but more than 95% of that is fulfilled by stores, not a dedicated DTC fulfillment center.
The rise of e-commerce and the effects of the pandemic have not confirmed the death of physical retail. He simply gave her a more complex and valuable role than ever. Now is the time to start recognizing and maximizing this value and, most importantly, to find new ways to measure it over the long term.
George Gottl is the creative director and co-founder of UXUSa global retail brand agency.