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Small Business Center

10 Things for Digitally Native Retailers to Think About When Opening a Physical Store

February 17, 2023

Over the past two decades, digitally native retailers have attempted to disrupt the retail world by operating solely through online means. But recently, with the rising costs of digital advertising and higher vacancies, many online-first retailers have embraced the idea of physical space in an effort to drive new engagement and offer an omnichannel experience.

“Consumers want to not only communicate with you online; they would like the opportunity to go and see and speak to a live person in the store and touch and feel” the products, explained Capricorn Retail Advisors and Capricorn Asset Management CEO Jason Richter, who has negotiated more than 3,000 deals and helped many digitally native companies, including well-known brands like Rhone and Outdoor Voices, find their first physical spaces. “It’s just a much more meaningful and deeper connection when you can have that experience in person,” he said. And in today’s convenience-driven world, customers want the option to buy goods online and return or pick those goods up at physical locations.

Yet brick-and-mortar is a different animal than e-commerce. “With digitally native brands, you can sell online in minutes with a great e-commerce platform,” Richter said.  With physical locations, you need to think about things like buildouts, staffing and locations that often require larger upfront investments.

Not sure you’re ready to make the jump? Here are 10 things Richter advises to think about before you start the process of opening a physical location.

1. Look at your budget.

To be prepared for a successful launch in your first physical space, you want to have enough capital to cover operating expenses at the store level for at least a year. That includes rent, payroll and benefits, Richter said. No matter how successful you are online, it takes time for customers to become aware of the fact that you’ve opened a physical location and even longer for consumers to integrate your store into their shopping rotations. “This is where digitally native brands get tripped up because they think: If you open it, they will come,” Richter said. “And it really just doesn’t work like that.” You need enough of a cushion to be able to weather that time period.

2. Think about your product size.

You might be selling thousands of items online daily, but if the items aren’t large or if there is not a lot of diversity in the product line, it might not make sense for you to lease a large physical space. “You need to make sure that you have enough product to fill the space,” Richter said. If you don’t, a kiosk or pushcart might make more sense for a physical location.

3. Determine where you want to be located.

“Location, location, location” is a common mantra in real estate, but there are factors other than ZIP codes to think about, Richter said. For instance, are your customers more likely to come to an enclosed regional mall or a neighborhood center to shop? Are they more likely to shop in a tourist area or in a transit-oriented development? And what makes sense logistically for where you, as the owner, are based? The good news is that digitally native brands, Richter said, tend to have quite a bit of data on who their customers are. Before making any big moves, look at the psychographics of your consumers, i.e., age, where they live and gender. Once you’ve narrowed down a few specifics on location and property type, be patient. “You can’t just snap your fingers and say: ‘Hey, this is where I want to be, and I want the location at this price point.’ You need to have some realistic expectations,” Richter said. In commercial real estate decisions, you need to be less emotional and more open to different options. “You have to have a little bit of breadth of scope and say: ‘Hey, I’ll look at a handful of markets to make sure that we find the right location,’” Richter said.

4. Make sure you’re working with an expert.

There’s no substitute for experience, particularly when working with brick-and-mortar spaces. In the physical retail industry, “missteps can be very, very expensive,” Richter said. A digitally native business owner’s lack of knowledge of the construction costs they’ll entail, the permitting time in a particular municipality, the fire alarm or life safety requirements or similar considerations can set them back tens of thousands of dollars. As a digitally native company moving over to the physical space, you “don’t know what you don’t know,” Richter said. That’s why it’s so important to have a trusted resource to help guide you.

5. Once you’ve found a space you like, take time to really explore it.

It’s common for small business owners new to brick-and-mortar to see a space once and fall in love with the location, but one viewing is never enough. You want to take the time to really understand the logistics of the space, thinking through things like the utilities within the space and whether the existing condition would enable you to open with a minimal buildout and thus without the need to pull a permit. Think through storage and backroom space. Will you have access to storage space? Is it easily accessible? Would you need to leave a customer alone on the floor to get something? Richter suggested taking photos and videos so you can look at the space again after your visit.

6. Talk to the neighbors.

The best way to get inside information about a specific location is to ask other retailers that have been there for a while. “You’d be surprised by how forthcoming people can be,” Richter said. Ask questions like how long they’ve been there, what the challenges are and whether flooding has ever been an issue. Also ask about foot traffic. Is it dead on the weekdays but alive on the weekends and evenings, for example? Also get as much of a sense of sales information as you can. “That’s probably the hardest thing,” Richter said. “It’s really anecdotal most of the time.” But even stories can help piece together a picture of a property’s foot traffic.

7. Figure out a timeline.

Before signing any lease, which is a major contractual obligation, think about timelines. What do your staffing needs look like? Do employees need to go through a six-month training plan, for instance, before they can get on the floor and start to sell? As Richter noted: “A good manager and staff can make or break your store.” Also think through your buildout needs. Construction times can be especially tricky to figure out. Every market has different permit requirements, for instance, and in certain municipalities, “it could take you six months before you can even start construction,” he said. There are other transitions that take time, as well. Your point-of-sale system may differ from what you’re using online, or your enterprise resource planning system might need to be tied in so all systems are speaking to one another. One key: Give yourself grace periods for each phase in your timeline. “Tie the rent commencement date to various other deliverables like possession [of space], plan approval and construction permits,” Richter said. “There are too many brands to mention that get stuck in the position of timing a lease and not opening in the time allotted and thus pay dark rent.”

8. Commit to the long term.

The hope when you open a physical store, said Richter, is that it will show hockey stick growth: slow while you establish your customer base, then shooting up over the next few years. To get to that bigger revenue, you have to stay with your strategy. “Two months in, you can’t be like: ‘Oh, this isn’t working,’” Richter said. If you judge success only on the first few months or sign only a short-term lease, you can lose the space before your brand has an opportunity to establish itself, Richter said. Success in the brick-and-mortar field is more of a long-term game.

9. Approach lease negotiations from a position of strength.

Shopping center owners and developers show a lot of interest these days in digitally native brands, Richter said. New brands bring excitement, and if you have data that establishes who your audience is and what sort of foot traffic you might bring, use that in your negotiating of lease terms. Come to the table from a position of power. “You can say: “Instead of signing a 10-year deal, I want a seven-year deal with termination rights or a sales kick-out clause,” Richter said. Negotiations are where a good broker can be particularly helpful. They know where the market is “and can help you structure a deal that gives you the best of all worlds and will be constructed to mitigate your risk,” Richter said.

10. Don’t forget to budget for marketing.

A lot of brands don’t build in a pre-opening or post-opening marketing budget, and that’s a big mistake. “You need to drive traffic, no matter how cool and how well-known you are in the digital space,” Richter said. That means really pushing your opening on social media — “You’d be surprised by how many brands don’t do that,” Richter said — and thinking through what sort of events and incentives you can offer throughout the year to draw people to your space. For instance, Richter’s client Outdoor Voices offers yoga workshops and meditation classes to draw customers to the activewear brand’s first physical stores. And men’s activewear line Rhone offered trainer-led running groups with routes that ended back at the store. Not every marketing event has to be exercise based. Richter attended a bourbon tasting with night-of discounts at another recently opened retailer. “It’s about building that ongoing connection,” Richter said. And those relationships take time, persistence and creativity. “The goal,” he said, “is to keep in front of your customers in a tasteful way.”

By Rebecca Meiser

Contributor, Commerce + Communities Today and Small Business Center

Small Business Center

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