The shape of the retail market and the demand that drives it is evolving. Planned and announced US store openings for 2024 are to total more than 4,200 — outpacing store closures by 20 percent and resulting in nearly 78 million square feet of new retail space, Coresight Research estimates.
The market has moved accordingly and presents an opportune moment for the industry. Vacancy rates in US shopping centres fell to 5.3 percent in the last quarter of 2023, the lowest rate on record in more than 15 years, according to brokerage Cushman and Wakefield.
Physical locations can offer tangible, sensory experiences that customers can’t get online, and 79 percent of consumers believe that the experience a company provides is just as important as its products and services, according to Salesforce.
In 2024, retailers have a lot of opportunities to provide value to their customers through in-location experiences — demonstrated by the likes of Dick’s Sporting Goods with their “House of Sport” concept, that expands locations and provides experiences that have become a key part of their business model.
Even among consumers young enough to be digital natives, shopping in stores is just as important, if not more so, than shopping online. In a survey conducted by the International Council of Shopping Centers in August 2023, 95 percent of Gen-Z respondents said they shopped online and 97 percent said that they shop in person.
In fact, Gen-Z consumers are more nostalgic for the shopping mall than their generational predecessors. A separate study by financial services firm IPX found that 66 percent of Gen-Z respondents said they wish traditional shopping malls in the US would have a revival, compared to 59 percent of Millennials, 66 percent of Gen-X and 54 percent of Baby Boomers.
This four part series unpacks what retailers need to know about opening and running a profitable store. It draws on insights and examples from BoF’s proprietary case studies, curated to be applicable to brands seeking to start or expand their physical retail ecosystems.
In future iterations of the series, The Business of Fashion will focus on operational excellence and removing friction from the retail process; how DTC brands should explore physical retail; and finally, before concluding with insights on customer centricity, community branding and building effective loyalty programmes.
In this, the launch article, insights will be focused on the foundational building blocks of retail success — location, forecasting and staffing — drawn from BoF’s case study ‘The Art and Science of Retail Store Success,’ sharing insight from companies including Suitsupply and Lush Cosmetics, heavyweights such as Uniqlo and Aritzia, La Ligne and luxury retailer Elyse Walker.
Location is the one thing a retailer can’t change about a store, which is why it’s critical to gather as much information and data as possible before committing to a space. The precise spot matters — down to the specific corridor of a mall or side of street on the same block.
Whatever is in the direct vicinity of the store matters as well. Whether luxury boutique chain Elyse Walker is scouting a new location in an outdoor mall or a standalone store on a popular retail street, it looks for “key adjacencies,” according to Summer Holl, president at the company. Among the most important factors is being close to restaurants, whose patrons might do some impromptu shopping before or after their meal. But, an area with high foot traffic isn’t always the best option.
According to Coresight Research, malls have higher sales productivity than open-air shopping centress and other retail formats. This is because malls capture a larger share of sales than their share of space. Top-tier malls are particularly productive because they are located in desirable areas and have an affluent customer base.
Men’s custom-suiting chain Suitsupply, which has more than 100 stores globally, eschews high streets altogether. Its clientele tends to be exceptionally deliberate: men in need of an outfit for a formal event, who are either loyal shoppers with the brand or have heard of it through friends. Many of them make an appointment with the store beforehand, and those who do are likely walking out of the store having made a purchase.
Suitsupply does its due diligence when researching a new market. Ideally, the city or postcode has existing customers via its e-commerce customer data. Brands can also compare demographic information between two similar markets to determine the type or format of the store. Or, they can use pop-up stores to measure demand and stress test concepts at a lower cost to the business.
Sources in BoF’s “The Art and Science of Retail Store Success” case study overwhelmingly indicated their preference for long-term leases, defined as five years or more. Short-term leases mean more frequent negotiations, which can be risky for the tenant, especially before a store has had the chance to develop it’s customer base, which can take time.
“When we open a store, we really want to build a relationship with the community, with our staff and the customers,” said Cheryl Rose, head of property, North America for Lush Cosmetics. “To be able to do that, we really have to do something more long-term, because our stores are expensive to build and construction costs have gone up. We need a period of time to amortise that cost.”
Elyse Walker, which has eight stores including two new locations in New York, likes to host multiple pop-up events in a new city before signing a long-term lease. “It’s a temperature check, and a way for us to get customer feedback, too,” said Holl. “If we’re seeing that this customer is only shopping denim and sweatshirts, then we’d know it’s not a good market for us. We want to see jewellery and handbag sales.”
Similarly, as part of its opening week festivities, Birkenstock, for the first time, integrated into the Miami art community, through a sponsorship with Design Miami. The brand took over a sprawling space within the fair to offer foot massages, seating areas and various interactive displays, including a showcase of the work of Californian-based timber sculptor Vince Skelly.
Prior to launching brick-and-mortar shops, French luxury label Jacquemus opened pop-ups with some of the world’s best-known department stores, including Galeries Lafayette in Paris (March 2023) and Selfridges in London (May 2022). Celine, Louis Vuitton, Baccarat, Versace and Bottega Veneta have all executed pop-ups in malls in recent months.
Brand building and brand identity were a core-focus of the retail experience. Incorporating surreal, playful elements for which the brand has become known, the Galeries Lafayette pop-up featured a giant version of its popular Bambino bag and a similarly large toaster with toast popping out printed with the brand’s logo. The Selfridges space, called “Le Bleu,” featured bright-blue installations including a mock swimming pool.
Critically however, the pop-ups also encourage customers to spend time in store, interacting with a photo booth, flower stand, coffee shop — whatever it may be — and in the process capture content that they are self-motivated to share. Bright, monochromatic features that photograph well for visitors’ social media posts and areas inviting interaction with the brand beyond purchasing clothes and bags, like arcade machines stocked with popcorn, can further bring this type of experience to life.
Jacquemus’ ability to bring what made the brand pop online and social media into the “real world” has further strengthened its identity. As there are more channels than ever for brands to activate, consistency across those channels is key to building — and maintaining — a strong brand identity. “Our lives are so digital and so disconnected; driving the power of something that happens in the real world is just that much more meaningful,” said Jon Haber, co-founder of creative agency Giant Spoon, which specialises in experiential marketing for brands such as HBO.
Jacquemus also engaged with local shoppers by, for example, holding a branded takeover of a beach in Ramatuelle, France, with bright yellow striped beach chairs and umbrellas in the summer of 2023, and opening pop-up shops in St. Tropez as well as Portofino and Lake Como in Italy. As other digitally native brands are now realising, such distinct in-person experiences can cement a customer’s long-term affinity with a brand.
Before signing a lease, it’s important to forecast what sales will look like to determine if the rent and square footage make sense. Typically, landlords will provide demographic information about the store’s trade area, which is the geographic region where local consumers will drive or commute to shop, according to retail consultant Gabriella Santaniello.
Retailers with a robust online customer base in the postcode can use their e-commerce sales as a baseline for the store forecast. But, in order to come up with an estimate of sales per square foot, retailers should also research the market in other ways, like reaching out to friends and peers in the industry, preferably those with a similar product and stores in the same neighbourhood.
“You have to sniff around and talk to other store managers, friends, mall owners and developers,” said Joseph Miller, co-founder of development firm Runyon Group. Miller and his business partner, David Fishbein, operate their own multi-brand boutique at Platform in Los Angeles’ Culver City area.
“Talk to anyone you can reach and the truth is somewhere in there,” Miller said. When New York-based contemporary label La Ligne set out to open its first store on Madison Avenue, co-founder Molly Howard said she and her partners were able to sit down with the manager at the Veronica Beard store less than a block over, who shared all the “do’s and don’ts of having a store in that location,” according to Howard.
The store that La Ligne would go on to open spans just 650 square feet. But, with a premium price point and a neighbourhood customer who may already know the label, it was ample space for the small brand. The location became profitable by the end of its first operating year. One thing Howard and her partners knew was that they didn’t want to pay more than 15 percent of their annual store sales in rent.
The percent of sales that will go to rent, or the rent-to-revenue ratio, is one of the most important factors a brand should consider. As a general rule, the average business should have rent that is 15 percent of annual sales, depending on the category and margin of the business. This leaves enough capital to cover other costs like staffing and inventory. The latter typically is the biggest expense for retailers, and the higher its margin on costs of goods sold, the more the tenant can afford to pay in rent and other charges.
Brands that struggle with profitability often make the mistake of overestimating sales per square foot — or renouncing it as a key performance indicator altogether, treating the storefront as a cheaper form of online customer acquisition.
As the cost of capital has gone up in recent years, operating a store involves significant investment today. While crunching the numbers as best as one possibly can is crucial, it does ultimately include elements of guesswork. This why the first store is the hardest one to figure out, La Ligne’s Molly Howard said. But from there, it’s possible to project sales within a narrow margin. Depending on you brand, with certain landlords, companies can negotiate lease arrangements that involve a base rent and a percentage of sales, alleviating some initial pressure.
If a brand is ready to take the next step in its growth, consulting with experts such as your property partner or landlord will ensure you make the best decision for your business.
Typically, retail operators should aim for staffing costs to be around 25 percent of sales, according to Joseph Miller of Runyon Group. But, a common mistake is understaffing stores and not investing enough in the quality of service.
Keeping employees on for years takes effort. Investing in talent, training and career development is a common priority among high-performing retailers. It begins with attracting exceptional job candidates with competitive pay.
Maintaining a consistently high employee retention rate guarantees a level of customer service even if the sales figures fluctuate due to external factors. That’s because experienced and motivated sales associates are all hyper-focused on one thing: the customer. “There is a social and clienteling element that’s very important to driving sales because retail is ultimately a relationships business,” said Jonathan Schley, senior vice president, global retail advisory and transaction services at CBRE.
“That’s where I see the biggest gap between success and failure with stores.” When store employees are set up for success, they better engage with shoppers and, in some cases, build one-on-one relationships with them, which results in higher sales and profits over time. And when associates take ownership of their store, they’re empowered to have a say in operational decisions, such as merchandising or in-store services.”
The most supportive retailers — and therefore the most attractive employers to retail workers — can further incentivise their associates to overachieve by creating a talent pipeline in which even entry-level workers can enter and move up in the corporate ladder. Suitsupply founder and chief executive, Fokke de Jong, said his sales associates, whom Suitsupply calls style advisers, have an average annual churn of 15 percent. According to McKinsey & Company, the average annual employee turnover among frontline retail workers is at least 60 percent.
It’s one thing to get a new employee ready to work and another to keep them engaged for years. However, the most effective tactic for keeping employees happy is offering them a real career development trajectory. This means entry-level wage workers who demonstrate talent and hard work have an opportunity to join their employer at a corporate level.
At Suitsupply, 80 percent of retail leadership vacancies are fulfilled by internal promotions and almost all store managers began their careers as style advisers.
Aritzia, the Canadian retailer known for its minimalist workwear and casual staples, boasts that its CEO Jennifer Wong and a number of others on its executive team started out as sales associates. Of its retail management vacancies, 84 percent were filled internally in the past year.
To incentivise employee loyalty, the womenswear retailer set up a career development programme called Aritzia University that includes onboarding for all new hires as well as ongoing training for employees of all levels. It’s a “digital education platform,” as the company calls it, that offers workshops on retail practices, diversity and inclusion and leadership.
When it comes to merchandising the store, another common thread among retailers is a mix of art and science. Art is intuition of what consumers want — that almond-toe boots will be more coveted this season than square-toe boots, or taking a bet on a new vendor. Science is the diligent analysis of sales data, incessantly examining what’s selling and where. Retail leaders say it’s crucial to always look at the data and strategically adjust the business accordingly.
“I’m all about KPIs but there’s no one set of rules,” said Simeon Siegel, a retail analyst at BMO Capital Markets. “Everyday, the business needs to wake up to designing newness, so there’s a healthy equilibrium between prices, novelty and driving profitability … If I get stuck looking at a specific group of metrics all the time, then I would miss something.”
It may seem intimidating to expand from a single store to a fleet of locations, but successful retail chains all seem to have one thing in common when it comes to managing multiple outposts: They empower and trust every store to do its own thing, its own way. At Uniqlo, all 2,434 Uniqlo stores around the world have their own business plans, from what inventory they stock to how they style the products.
Store managers are responsible for ordering products and determining the volume of styles they select in every location, and there is no mandatory blueprint for stocking even the most basic or best-selling products. Though a guideline for how much each store should stock is provided, there are no specific percentages of lines that a store must carry in order to enable locations to adequately match local demand.
When it comes to inventory and merchandising, it’s crucial for retail chains to allow each individual store to make its own decisions. Each location has a distinct customer profile, whether that’s local residents or tourists. Every set of shoppers has its own needs and preferences, and it’s the local store managers and sales associates who are the most intimately familiar with them. That’s why it’s vital for store employees to be empowered as decision-makers, rather than dictate the product-offering and cadence of service from the top down.
Fluidity in visual identity is also advantageous when it comes to connecting with local consumers. At Elyse Walker, each store has its own visual merchandiser, who makes weekly — sometimes daily — adjustments based on local preferences, but within the Elyse Walker lifestyle lens, said Holl. “We don’t plug and play,” she said. “You can’t expect to open a store and expect it to run itself … We’re changing our mannequins daily, and we understand the importance of our visual merchandising team.”
1. When planning to sign a lease, virtually every operator said it’s critical to conduct extensive research in order to calculate a sales forecast. This typically entails reaching out to a network of friends, peers and neighbouring tenants, as well as consulting with your property partner or landlord on what success looks like in that specific market.
2. Some brands like to test out a market with pop-ups before committing to a long-term lease. With that information, the retailer can determine how much of a store’s revenue will go towards rent payments. As a general rule of thumb, rent should not exceed 15 percent of sales.
3. According to McKinsey’s Future of Retail Operations, autonomous stores are “likely to achieve EBIT margins twice those of today, with the added benefits of improved customer experience, better employee engagement, and an easier-to-run store”.
4. There should be a level of flexibility in terms of individual store goals and objectives. With the ebbs and flows of the economy at large, fashion brands must be nimble with shifting business priorities. Sales, for instance, is not an indication of future demand but past.
5. Several sources underscored the importance of retaining store employees, which helps to keep customers coming back. It’s not just about pay and benefits; the most effective store leaders have autonomy to order new products, reformat the store and even host local events.
Stay tuned for the upcoming articles in this series and check out Brookfield Properties’ www.Retailvisory.com for additional retail insights.
This is a sponsored feature paid for by Brookfield Properties as part of a BoF partnership.
