Nov 10

Getting Physical with e-Tailers

Alan Barocas is bullish on the business model of new General Growth Properties tenant Fabletics, which sells activewear and clothing for yoga and workouts. “It’s an ath-leisure concept that has a Lululemon fashion proposition, but at a third of the price,” said Barocas, GGP’s senior vice president of leasing. But Fabletics intrigues Barocas for yet another reason: The retailer is part of a new wave of formerly online-only concepts that are now breaking into brick-and-mortar real estate. “We have five of [Fabletics’] first six stores opening in 2015,” Barocas said. “Fabletics sees the value that a mall brings to the table.”

So, too, does, apparently. Primarily an online retailer of mattresses and furniture, the Brighton, Mich.–based company aims to roll out 15 or 20 stores in and around metro Detroit over the next few years, according to its -president, Joe Nashif. “We just opened our fifth store here,” he said. “We see [brick-and-mortar] retail as an important way to extend our reach.”

Other formerly online-only concepts — including Athleta, BaubleBar, Birchbox, Boden, Bonobos, ModCloth and Warby Parker — continue to explore their real estate options as well. Gap’s Athleta, which started out online and in catalogs, has become a mall mainstay, with a rollout of 102 stores since 2011. Fashion retailer Bonobos has launched 20 so-called Guideshops (a shop at which a staff “guide” walks the customer through the selection and purchasing process) in 16 cities thus far, with roughly half of these opening in the past year. Eyewear chain Warby Parker now operates 12 stores as well as four store-within-a-store showrooms. And more deals are on the horizon: ModCloth is reportedly gearing up for its own multistore rollout, while British fashion e-tailer Boden aims to open stores on both sides of the Atlantic.

How can landlords bolster their chances of doing deals with these expanding retail concepts? The key is to recognize how these companies’ priorities and goals with regard to markets, branding, target customers, product delivery and the overall shopping experience differ from those of conventional tenants, experts say. As established businesses, some of these boast strong balance sheets, thousands of loyal customers, and years of experience in online retailing. Warby Parker is valued at $1.2 billion, according to published reports, and ModCloth reportedly took in upwards of $150 million in 2014.

By definition, however, these operators tend to be real estate newbies. As Barocas sees it, landlords seeking to woo e-tailers should work closely with them on site selection in particular. “At General Growth, we think it is part of our responsibility to bring new and different retail uses to our malls, so that we don’t get stale,” he said. “All of these e-commerce startups represent an opportunity to do that, so we spend a lot of time and effort with them trying to understand who their customer is. We want to match the demographic and psychographic profile to specific malls in our portfolio.”

Traditional retail chains come to the table with reams of market research and a precise understanding of their ideal co-tenants. As online retailers scout -potential brick-and-mortar sites for the first time, however, they are likely to benefit from candid discussions with the leasing team about markets, malls and co-tenants, Barocas says. He also suggests investing in these new tenants — up to and including offering them lower rents for their first units — as a way to reap bigger dividends down the line. “Fabletics is only doing five stores with us right now, but we want these first stores out of the chute to be tremendously successful,” Barocas said. “That way we can talk to them about 10 more stores next year or maybe 20 the year after that.”

Brand-building also tends to be a key consideration for these companies, which helps explain why so many of them are flocking to high-profile malls and streets in important markets such as Chicago, Dallas, Los Angeles, New York City and London. Personal-shopping website Trunk Club, which launched in 2009, is testing its brick-and-mortar concept at two locations in Chicago’s Hyde Park neighborhood. Likewise, when -jeweler BaubleBar opened its first store this past June, it chose Roosevelt Field mall, near New York City.

“These are not full-fledged rollouts where they’re doing 30 or 50 units a year and going into every single market in the country,” said Douglas J. Green, a principal at Philadelphia-based MSC Retail. “For the most part, [e-tailers] are sticking with the top 10 to 12 major markets.” Opening brick-and-mortar stores in high-traffic locations helps these companies cut through the white noise of the Internet and its endless array of e-commerce-enabled sites, Green says. “It gives retailers a way to educate consumers about the brand,” he said. “People can hold, touch, feel and smell the products, and they can ask brand ambassadors or employees about the brand and how it works. After that, consumers can go back to their computers and make an educated purchase.”

Birchbox, Bonobos and Trunk Club put a priority on using real estate to reach Millennial-age shoppers. This can give landlords with Millennial-friendly mixed-use properties a competitive advantage, says Grant Gary, president of brokerage services at the Fort Worth, Texas–based Woodmont Co. “Millennials want different things,” said Gary, “so the focus becomes much more on the entertainment component of a project, the availability of green space and the walkability factor.” On July 16, Bonobos opened a 950-square-foot Guideshop at North American Properties’ Avalon, an 86-acre mixed-use project in Alpharetta, Ga. Bonobos also operates a Guideshop in the 9-acre Buckhead Atlanta mixed-use project. Customers use these locations to meet with fashion experts, order what they want and have the clothes delivered free of charge.

For some e-tailers, then, brick-and-mortar real estate functions more like a showroom than a traditional store. Without the need to warehouse inventory on-site, they can get by with small spaces stocked only with what they want customers to see, touch and feel. Alternately, they can operate smaller-footprint stores with limited inventory and then steer consumers to the web for anything not available in-store. But e-tailers do not always go small: Athleta’s stores range from 3,500 to 4,500 square feet, even though the web plays a large role in the way the stores function, says Dave Cheatham, president of Phoenix-based Velocity Retail Group, a member of X Team International. “Athleta is excellent at using them as a virtual stockroom,” he said. “If they don’t have what you want in the color you want, you can walk over to a touch screen, pick that color, and the product will be shipped to you within a couple of days.”

US-Mattress, too, strives to make sure its stores are fully integrated with the web, says Nashif. Nevertheless, as it opens 3,000-to-4,000-square-foot stores in Detroit-area strip centers, US-Mattress aims to grow its business by reaching people who are less comfortable buying mattresses online, he says. “We’re looking at how we can grow,” Nashif said. “We could keep spending more money on Google and online advertising to try to get diminishing returns in the online market. But another option is to take advantage of that market that we are not reaching.”

Warby Parker’s rollout strategy clearly involves tapping into new customers who want to try on glasses before buying them, says Jason Baker, co-founder of Houston-based brokerage firm Baker Katz. “Glasses and frames are about as personal as it gets,” he said. As landlords pitch vacant space to online tenants, then, they might have better odds focusing on e-tailers that sell things people generally like to touch and feel before buying. “Supplements, toilet -paper, diapers, formula — those are things my wife would never dream of buying in a store at this point,” Baker said. “But there are certain things — maybe jewelry, women’s clothing or footwear — that she wouldn’t dream of buying online.”

And while many e-tailers are focused squarely on top-tier real estate for urban flagships, some are also leasing space a bit off the beaten track, which can create opportunities for landlords in these areas, says Gary. Lower prices are a big part of Warby Parker’s business, and so the company sometimes seeks to keep occupancy costs down by leasing less-expensive real estate. “I was actually at the Warby Parker store in New York last week, and it’s right there in SoHo, with big rent,” Gary said. “But Warby Parker’s store here [on Henderson Avenue] in Dallas is not really in the retail core; they took an older, freestanding building, with minimal signage. It really is nontraditional real estate.”

Unlike some mainstream retailers, moreover, e-tailers like Warby Parker and BaubleBar tend to be flexible about real estate, which can create opportunities for landlords in the form of pop-up and temporary in-line stores. “A lot more center owners are opening up that opportunity to retailers, ” Gary said. Meanwhile, mainstream chains like Nordstrom and Anthropologie continue to court store-within-store deals with popular e-tailers. “This allows department stores in particular to differentiate their product mix and monetize this huge footprint of their store,” Green said.

Successful e-tailers also tend to inspire copycats. In its “try before you buy” model, Birchbox sends subscribers a monthly box of makeup or beauty-product samples. Sephora’s newly launched subscription service, called Play!, works the same way. Other Birchbox-like e-tailers include BarkBox (dog toys, treats and gifts), ArtSnacks (a monthly art-supply subscription box) and Julep (nail-and-beauty products). Over time, concepts such as these could follow in the footsteps of others by leasing space for pop-ups, temp in-line spaces or full-fledged stores, observers say.

Whether online chains will gobble up space in ways that make a dent in vacancies, only time will tell, according to Gary. But given the frequency with which pundits describe e-commerce as a threat to shopping centers, the notion of e-tailers actually leasing space is encouraging, he says. “It is refreshing for a lot of people in the retail industry to see that going in reverse,” Gary said, “because the opportunities are endless when you look at how many concepts can build successful brands online and then have the opportunity to grow stores.”

The world’s e-tailers are learning the value of brick-and-mortar stores. In recent months, a host of web-based companies around the globe have announced plans to make the leap into the physical realm.

U.K. fashion retailer Boden, with annual sales of about $425 million, has been mail-order and online-only (except for one store) since its founding in 1991. In September the firm announced plans to open several new shops in Britain. It is also seeking space for physical stores in the U.S., according to reports. U.K. furniture e-tailer Loaf is opening its first store in south London this fall, a 7,500-square-foot location in Battersea.   The retailer hopes to open 10 more stores by 2018.

In India computer manufacturers Acer and Ricoh are opening stores to show off their wares to consumers. The country’s largest online lingerie retailer Zivame has raised $40 million from investors and plans to spend some of it to open 100 “fitting salons” throughout India. Indian beauty products e-tailer Nykaa has also raised capital for expansion. The company will spend $9 million to build a network of mall stores in such cities as Delhi, Mumbai and Bangalore.

Also in India furniture e-tailer Pepperfry opened a 1,800-square-foot store, in Santacruz, Mumbai; Online Indian eyewear brand Lenskart is also opening mall stores to better connect with consumers; and online travel agency MakeMyTrip is also moving into bricks-and-mortar by opening a dozen company-owned stores.

And the offline migration does not end there. In China smartphone maker Xiaomi, which has only sold its products online, plans to open a store in Beijing’s Modern Plaza shopping center later this year.