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C+CT

DTC, Meet B-and-M: Digitally Native Brands Go Indoors

May 3, 2022

The shoes you could buy only online a few years ago have a pretty sizable footprint on store shelves today. From the fancy sneakers by Allbirds to the minimalist offerings by Xero Shoes, the path from direct-to-consumer origins to in-store retail is increasingly well trodden. The reasons why are worth noting for small businesses that have started online and are considering the leap to brick-and-mortar.

A complex mix of sales formulas, brand identities, consumer preferences and rising costs is spurring DTC brands to set up in physical locations. Whether DTC brands open their own flagships or place their goods on the shelves of other retailers, consumers and businesses are marching retail as a whole to an omnichannel model. “It’s not an either/or question,” said Acadia Realty Trust president and CEO Ken Bernstein. “There’s a realization among many DTC brands that physical real estate is complementary, not competitive, and in many cases, it may be the most profitable channel for brands to grow their business.”

When DTC darlings Warby Parker and Allbirds went public in 2021, industry watchers got a good look at the financial logic behind their forays into stores. Warby Parker now has about 180 in the U.S. and could open as many as 900. Allbirds, which recently opened its third store in New York City, has 41 retail locations worldwide. Simply put, it’s cheaper to get and keep customers by attracting them to store counters than it is to acquire them in an exclusively online environment.

Thank the pricing at Google, Instagram and Facebook for reintroducing the late 1990s internet-boom term “customer acquisition costs.” The phrase originally referred to money-losing promotional pricing and other shiny gimmicks from the early years of online shopping but now reflects the price tag for digital advertising to attract and convert customers to sales. “Rent is the new CAC” is the catchphrase for DTC brands in transition, and the accuracy is reinforced ironically by the news that Meta, the parent company of Facebook and Instagram, will open a retail store near its Burlingame, California, campus to sell its own hardware, including the Quest 2 virtual reality headset, Portal video calling device and Ray-Ban Stories smart sunglasses.

The digital giant is taking this step for the same reason Xero Shoes, maker of ultralightweight running shoes and other active footwear, got its merchandise into 172 REI stores and the REI catalog. Xero president and co-founder Lena Phoenix said the move, which started with a 2019 test run, came after the company’s growing customer base expressed a desire to handle the merchandise. “They were buying shoes directly from us because they couldn’t try them on anywhere else, and we were able to tell them, ‘Hey, here’s a retailer where you can try them on.’” Phoenix said Xero sells its products through 74 U.S. retailers, and its European subsidiary has about 100 separate retail accounts. Xero had $23 million in revenue in 2020, and in-store sales played a role in the company’s 46% jump to $33.6 million in revenue in 2021.

Digitally native brands are appealing to commercial landlords and brokers, as well. Cushman & Wakefield recently opened its DNB Next division to pursue digital brands, and major brokerages like JLL, CBRE and Marcus & Millichap all have shown strong interest in helping online-only brands set up in physical stores.

While Cushman & Wakefield economists have forecast that 80% of retail spending is still in the store and new data pushes that up to 85%, there may be something more elemental at work. Alana Loeffler, Cushman & Wakefield managing director of business strategy for Americas retail, said the desire for in-person shopping reflects an appetite for simple human interaction. “I definitely think there’s a lot of pent-up demand from everyone being in lockdown mode and refraining from going out in the past two years,” she said. “The weather has gotten warmer around the country, and the pandemic has sort of taken a turn. It’s time to get out there.”

There’s demographic evidence to back up the economists’ forecast, as well. A 2016 study asserted that more than 80% of Gen Z and Millennial shoppers believed brands should have physical stores, and a more recent study by Deloitte found that the post-pandemic consumer will shop wherever they want to and expects the freedom to choose. “Data shows the pandemic hasn’t redefined, revolutionized, forced or otherwise transformed consumers into something new,” the study said. “What it has done is accelerate an already identified trend that consumers are switching seamlessly between online and offline channels and more often using both even within a single shopping journey.”

Even with the trend supporting in-person shopping options, all-out store launches will be easier for larger brands than smaller ones. Phoenix said Xero Shoes’ merchandise won’t be trekking to brand-exclusive stores anytime soon. “We’ve considered opening our own stores, but that’s not on the table right now,” she said. “Running a retail operation is a sizable amount of heavy lifting.”

By Will Swarts

Executive Editor, ICSC Small Business Center

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