Why Can't We Be Friends? Retail's Revenge Hinged On A Brick-And-Mortar, E-Commerce Marriage

The coronavirus pandemic was a make-or-break moment for many of the nation’s retailers. E-commerce became the modus operandi overnight, and those who had resisted digital innovation were left with two choices: Adapt or die.

But a widespread resurgence of in-person shopping leading up to the 2022 holiday season has begun to slow the e-commerce takeover, and a growing number of experts now agree the relationship is more complementary than competitive.

“Online retail does not work without brick-and-mortar,” Steerpoint Capital Managing Partner Bo Okoroji said. “It’s proven. Even Amazon understands the importance of the physical footprint.”

Retail sales are forecast to grow between 6% and 8% to around $4.86T in 2022, with brick-and-mortar purchases making up roughly $3.69T of the total, according to the National Retail Federation. Black Friday alone could see close to 115 million shoppers, the NRF said ahead of the Thanksgiving holiday, 67% of whom plan to brave stores in person, up from 64% last year.

After reaching unprecedented heights during pandemic lockdowns, online sales growth dropped from 31.8% in 2020 to 14.2% in 2021, according to a Forbes analysis of U.S. Department of Commerce data. The NRF predicts e-commerce growth to once again slow to somewhere between 11% and 13% in 2022.

Looking beyond this year, analysts at CRE research and advisory firm Green Street expect growth to settle somewhere between 6%-8% per annum in the near term, and for online purchases to make up about 17% of total retail sales by 2027.

“People thought that brick-and-mortar was dead and e-commerce was the only relevant channel,” said Paulina Rojas Schmidt, a Green Street analyst and leader of the strip center team. “Now it’s more of a balanced view; you’re seeing more of this integration.”

Despite the vast majority of transactions taking place in-store, Green Street predicts brick-and-mortar growth to be slower than e-commerce in the years to come. Specific categories vary immensely, but in general, the firm expects an annual, near-term growth rate of 3%-4%.

This recalibration should come as no surprise, Okoroji said. Shopping habits were forever changed during the pandemic, and brick-and-mortar retailers now see digital integration as a crucial way to drive business.

“Coming out of the Covid age created a whole new set of expectations from consumers,” Okoroji said. “It really requires the retail industry to embrace the omnichannel future and for the landlord to reinvest in their physical [space].”

Omnichannel strategies — which combine the advantages of in-store shopping with the convenience of e-commerce — were born out of necessity during the pandemic, but many have stuck around since. 

According to a 2021 report from McKinsey, one-third of Americans made omnichannel features, such as buying online for in-store pickup, a regular part of their shopping routine, and nearly two-thirds of those individuals planned to continue.

Some of the nation’s largest retailers have responded to this shift in behavior by adjusting store operations to accommodate omnichannel. Walmart, for example, had only a few hundred stores in 2020 that could deliver directly to a consumer’s home. Today, Rojas Schmidt said that number is upward of 3,000.

“All of these channels really emphasize the importance of having a brick-and-mortar presence,” she said. “Having your store play a key role in the delivery of goods is a way of reducing the cost of last-mile delivery, and even though everyone was aware of that in the past, the pandemic brought it to the forefront.” 

More retailers are also using their online presence to drive potential customers to their stores, B+E Net Lease CEO and co-founder Camille Renshaw said. With so much competition these days, an effective digital strategy can determine whether one option stands out among the rest.

“You have to be able to engage with your customer before they physically get in the store,” she said. “What we’re seeing more than ever is retailers thinking about how to alert the customer that they are available to them at that site and at that price.”

A growing number of online brands are also buying into the value of brick-and-mortar retail, said Emily Arft, senior associate on the retail research team at Green Street. 

Earlier this month, real estate investment trust Simon announced a partnership with omnichannel platform Leap to open physical locations for several e-commerce brands, including Third Love, Sugarfina, Goodlife and True Classic Tees.

“Retailers are slowly realizing that the return on e-commerce isn’t what it’s cracked up to be,” Arft said. “You get the highest return on buying brick-and-mortar space where you can house your product near where your consumer lives.”

The use of brick-and-mortar stores as pseudo-fulfillment centers, where customers could return or pick up orders placed online, gained unprecedented momentum during the 2020 surge of e-commerce. The strategy has grown even more valuable amid supply chain challenges, the increased cost of warehousing and labor shortages, Okoroji said. 

Even as the worst of the pandemic recedes, these innovations will be critical for the evolution of retail moving forward, he added.

“Retailers need to use their physical footprint to act as a beacon,” Okoroji said. “It’s more than just, ‘How much profit am I getting from these four walls?’ It’s, ‘How do I identify with my shopper? How do I create an identity outside of the digital world? How can I connect with the physical?’”

The visibility of a storefront can be equally as critical to the success of e-commerce, Okoroji added, referencing the 15 million to 20 million visitors per year to the nation’s highest-performing malls.

“That’s a shitload of impressions,” he said. 

Perhaps the most compelling way to interpret the revival of brick-and-mortar retail is through the psychology of togetherness, said Barry Hand, a principal and studio director in Gensler’s Dallas office. As lockdowns lifted, people clamored for opportunities to connect, which led to a trend of experience-based retail that lives on today.

“What we have noticed is an almost visceral return to public places, to outdoor dining, to concerts and to experienced-based placemaking,” Hand said. “Quality retailers and quality dining establishments are focusing more and more on environment.”

Providing an enjoyable in-store experience has proven to be just as important as the experience a consumer gets online, which is why Hand believes the most successful brick-and-mortar retailers will be backed by an omnichannel support system. Now inextricably linked, he said the two channels will address different — yet equally important — consumer needs.

“For convenience, e-commerce will own that transactional retail,” he said. “But for that human connection-based transaction, that’s where the locally owned, locally curated offerings are going to thrive — if they do it right.”