Why Online Retailers Like Warby Parker Are Opening Stores
Most retail sales still happen in-store
Although eCommerce sales continue to grow quickly the vast majority of shopping still takes place in physical stores. eCommerce as a percentage of retail sales is estimated to only be 7% in Canada and 9% in the U.S. Since the balance of sales is still in favour of brick and mortar many pure play online retailers have started to open stores.
Dave Gilboa, co-founder and co-CEO of Warby Parker, in a 2017 interview with PBS, said that when they first launched in 2010 having an online business was an effective way to reduce capital costs. The four co-founders were still in college when they started the business. They did not have any external funding therefore opening stores was not an option. Fast forward to 2013 and over $100 million in funding at the time, Warby Parker opened its first store in New York.
Since the vast majority of people buy glasses in-person trying to convert those customers to online only shoppers proved too difficult even for a breakout star like Warby Parker. It can take a long time to change customer behaviour even when you have a great product and online offering.
Warby Parker now has over 65 stores and approximately 50% of its business now comes from its stores
Consumers like to touch and feel products
Amazon started selling fresh food in 2007 but after ten years in the business it struggled to make its mark. Online grocery delivery sales only represent 3% of total grocery sales in the US. Even with inexpensive delivery people prefer to see, touch and select their fresh food items. That was one of many reasons for Amazon’s acquisition of more than 460 Whole Foods stores in August of 2017. Amazon’s goal is to be a top 5 grocery retailer by 2025 and it can’t do that through online sales alone.
With its foray into physical retail Amazon’s track record of innovation means that the way we shop offline will change in profound ways. A sneak peak into the future was given when Amazon created Amazon Go in December of 2016. Amazon Go is a convenience store that has no cashiers but instead uses machine learning and sensors to determine which items customers have taken off shelves. Customers can get the items they want and walk out of the store without having to ever stand in a line or go through a checkout. When customers leave the store their Amazon account is automatically charged. Amazon Go opened to the public on January 22, 2018. If Amazon Go is any indication of what Amazon has in store for physical retail customers should be excited.
In addition to grocery stores Amazon has over 60 pop-up stores and 13 bookstores (the first one opened in 2015) and three more bookstores are planned to open soon. The pop-up stores are usually under 500 sq. ft and feature Amazon’s devices such as the Kindle. In a 2017 earnings call, Amazon’s CFO Brian Olsavsky said that Amazon’s bookstores are a “really great way for customers to engage with our devices and see them, touch them, play with them and become fans. So we see a lot of value in that as well”. The undisputed leader of eCommerce’s move offline underscores the importance of stores to the overall shopping experience.
Shipping is costly
In the early years of eCommerce free shipping was introduced as a temporary incentive to get people to shop on-line. Since then consumers have come to love and now demand free shipping on most items. The cost of picking, packing and delivering orders adds up fast especially when these costs are not charged back to customers. Then there is the dilemma of returns. According to a study by Barclaycard 30% of shoppers knowingly over-purchase and then return unwanted items. In the same study 18% of shoppers said that a better in-store experience including not having to wait to try on clothes would decrease the number of items they return.
J.C. Penny has said that orders bought in-store are the most profitable channel for the retailer followed by orders made on-line and picked up in-store. Coming in third for profitability is when the customer orders on-line then the order is shipped from its distribution centre to the customer. The most expensive purchase is the one that is ordered on-line and shipped from store. At least one third of JC Penney’s customers that pick-up orders in-store buy additional items with an average ticket of $50. These transactions increase the overall profitability of those types of orders.
Customer acquisition is difficult
Walk-in traffic is one of the big benefits of having a store and it does not exist online. Locating a store in a mall or on a busy street increases the likelihood that a customer will discover a new brand. Then while in-store customers often discover and purchase products they did not originally intend on buying. While many online only companies rely on digital marketing to drive traffic it can be difficult to stand out. The Marketing Manager for Oak + Fort (a Canadian clothing retailer that was founded in 2010 as an online business and now has 19 stores) said in an interview that “what we find with online and social media is that it is hard to advertise because it is a crowded space."
Drew Green, CEO of Indochino a Canadian men’s made-to-measure retailer in an interview with the CBC said: “customer acquisition is the hardest part of running an online-only business”. In markets where Indochino has a showroom online sales grow twice as fast as markets where it does not have a physical presence. Indochino launched its online only business in 2007. Retailers view stores not only as another channel but as an effective way of marketing. As Jonah Berger stated in his best-selling marketing book Contagious, only 7% of word of mouth happens on-line. Indochino plans to open over 100 showrooms during the next decade. Its showrooms are now its number one customer acquisition channel.
As eCommerce continues to grow lets not forget that the customer decides and for now the customer wants the best of both worlds.
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Berger, Jonah. Contagious. Social Dynamics Group, 2013.