Reimagining Retail: The Department Store in a post-internet world

For many of you reading this article, Department Stores will have lodged in your consciousness during formative years, perhaps due to an exciting visit to one of these wonderfully big (and perhaps intimidating) store, or from afar via reference in popular culture - think of Macy's appearing in the movies Miracle on 34th Street or Mannequin. And even if you're not American, you may associate the Macy's brand with Thanksgiving, a public holiday they are synonymous with after hosting the world's largest parade every year on Thanksgiving since 1924 in New York City.

Today, long established department store brands, and the format in general, face questions about their continued relevance. Digital technologies, new business models, and new customer profiles have emerged whilst the department store format has got stale and its offering has become homogenous. To compete in today's retail industry, all retailers - not just department stores - need to continually evolve their offering just to keep up, from sales channels store floor offerings and service to back office operations and fulfillment. When we look at the department store in particular, the post-internet generation that we are often labeled Millennials have inherited a model that was designed and built for a pre-internet world.

The Origins of the Department Store

Paris is often referenced as the birthplace for the department stores format that still exists in large part today. The Bon Marché opened in 1852, soon followed by Printemps (1865) and the Samaritaine (1869). In the United States, Stewart in New York, Wanamaker in Philadelphia and Marshall Field in Chicago all adopted the format during the 1870s, bringing together a series of retail methods tested out in smaller European and American shops earlier in the century. The department store made a dramatic appearance in modern major cities and permanently reshaped shopping habits and the definitions we give to service and luxury. When Macy’s opened in 1878, a New York Times article hailed it as “a place where almost anything can be bought…and at the most reasonable prices.”

Success was enjoyed in large until the 1970s, when the format came under heavy pressure from discounters, and later came under even heavier pressure from e-commerce sites since the 2000s. The recent reports of Sears’ looming liquidation and the drastic drop in Macy’s stock price, after a below expectations warning on 2018’s Christmas holiday performance, portend one very important fact: department stores - if they fail to change from the form we have known them to date - are doomed.

Limitations of the traditional model

By enlarge, people don’t want to, or need to, go to traditional massive department stores anymore. When they want specific products, they can go directly to the brand or to the manufacturer for a more immersive experience or more convenient fulfillment, usually using online channels that are far more polished and informed than those of their department store counterparts (if those channels exist). Department store shopping is by its nature time-inefficient and requires human contact. When you think you have found the escalator it usually turns out to be the wrong one. You will need to ask directions, and make purchases on multiple floors.

This is at odds with the modern consumer’s instinct for speed and individualism, enabled by technology. Even the approach to the design of recent department stores around the world has remained steadfast and flawed, with modern design concepts of user experience, personas and scenarios blatantly ignored or reverse engineered after detailed design is complete. Far too many department stores remain in existence and the vast majority of them - even the new ones - have little experiential value, they’re merely well-lit warehouses. And yet we somehow expect new generations of people - some of the most visually stimulated, connected and socially integrated in the history of the planet - to enjoy shopping in these destinations.

Many scoff when it is suggested that Millennials value experiences over products – as if to suggest that one day they will get over this and learn to appreciate the significance of material possessions. We fail to appreciate that this is a generation that has grown up literally documenting every meaningful location, event and meal that they had in their lives, for all to see online. Experiences are the outward expression they use for the world to know who they are. Experiences are ultimately their social currency. This is unlike the baby boomers who came before them, where social currency was measured in the car you drove and the house you lived in. For Millennials, it is more important to project where you are, who you’re with and what you are doing.

Far too many department stores remain in existence - the vast majority of them offering no experiential value and resembling well-lit warehouses. At one extreme, what they need to remain relevant is to be put experience and social engagement at their heart with a wraparound design that is Instagram-able. The failure to maintain relevance is no ones fault but the brands or the franchise operator.

Anyone based in the Middle East can see this for themselves. Local retail operators pay licensing fees to emblaze a recognizable global brand name above the store doors and gain instant legitimacy. They then designed their interpretation of what the brand represents in the region. Ultimately these stores are a pale reflection of the parent brand heritage and fail to appreciate the needs and wants of a hyper-connected population with a growing list of shopping alternatives. The value proposition of these stores has steadfastly remained fixed on 'we will have all the best brands' when the internet - and the growing presence and influence of the brands themselves in market - has completely eroded that value over time.

Blinded by ever-growing sales success enjoyed in the 2000s - that were as much to do with a booming economy, affluent tourist spend and (in the absence of ecommerce) exclusivity of product - local operators continue to sleepwalk and stockpile luxury product across every square meter with no nod to what the brand represents, the customer experience aspirations, the use of digital channels, inclusion of food and beverage offerings, and multi-party social engagement. And so here we are today, with these department store operators left pitching a brand showcase strategy that features less assortment depth and overall inventory than the brand’s own store a few hundred feet down the way in the mall. And they're left wondering why footfall continues to dwindle.

Ironically, looking into the distant past and the features and differentiators of the original department store format would point at what is required for the format to have future success. Many department stores used to have elegant tea rooms, complete with high ceilings, beautiful views, entirely homemade food and weekly fashion shows, to boot. They were full of energy and newness – acting as magnets to their customers, just like Fortnum & Mason, Selfridges and Liberty continue to be. If the modern shopper is to stretch themselves, bypass online offerings and go shopping in a physical store, they want to be guaranteed a great experience, excitement and entertainment. And they need to be fed and watered along the way to keep up their energy.

Unfortunately, many Middle East operators have chosen to prioritise product over options to deliver this and as a result, they have missed opportunities to entice customers and truly differentiate themselves. You can't tell people what you're about and what you stand for if all you do is present product. And if you don’t stand for something, you stand for nothing. Then we come to opportunities missed for provision of ecommerce options and digital engagement. Whatever the reasons or excuses, valid or not, there has been a complete failure for any Middle East operator to deliver a compelling ecommerce site or true omnichannel capabilities.

As such, a huge void exists and other retailers have stepped in to fill it. Customers whose needs are being missed, are leaving in their droves. Millennials and their younger sisters and brothers, uninfluenced by the merits of the foreign parent brand have no way of discovering the brands through their preferred digital channels. This lose of relevance and the doubts over the format's strength in region means that mall operators are deciding to no longer incorporate department stores as an anchor in their new offerings. Big, bland stores are at odds with modern consumers’ need for speed and individualism. And so the department store format, as we know it, is ultimately doomed to disappear in the Middle East.

Is there a future for the Department Store format?

The answer ultimately comes down to whether the operators will change the focus of their department stores from products alone, be authentic to the brand and strive to deliver unique and engaging experiences across the channels that customers want. To get back on the right path, it will take sifting through years and years of business model debt - architectural debt, technological debt and cultural debt - to come out clean on the other side and to imagine something completely fresh and new. But success is possible. Stores are still relevant - people will always get a social joy of being in physical places with others and sharing experiences. And as incumbents of the store footprints they have, owners of the brands, with talented people within their organisations, and a savvy, well-pocketed consumer on their doorstep, there is all to play for.

But what does the Department Store of the future need to look like? The likes of Macy’s, Neimen Marcus and Nordstrom are all trying to tackle that question in their own particular way. And whilst many have embraced innovation - and the uncertainty that goes with it - it feels hard to abandon everything you’ve done for decades and embrace change. And so we see new store formats, use of Virtual Reality in the Home departments, a shiny new app. Some of these things enhance experience, some on the other hand are friction points. The problem is that they are all being used to augment brands, retail models and a customer journey that is often disjointed and in many places irrelevant. They are merely a facelift for a very old model.

In fairness, it is hard for old dogs to learn new tricks. Those not shackled by the heritage of the big brand department stores or the organizational hierarchies invested in and supporting them are free to try new things and may have an advantage as a result. Add to it a clear focus on customer centricity, appreciation of digital capabilities and a strong fashion retail business acumen and you’ve got some great ingredients to get going. To prove the point, we will look at an example that has recently established itself in Plano, Texas and put forward its play for department store of the future - Neighborhood Goods.

The people behind Neighborhood Goods have taken a blank sheet of paper and drafted a whole fresh take on the typical department store. So far, the concept is operating mostly on the down-low with much of the buzz coming from the two founders’ previous experience (Matt Alexander and Mark Masinter) - a combination of real estate, Apple stores experience, editorial, startups and digital. In Neighborhood Goods, they have developed a Department Store offering that incorporates many good things from many of the new retail businesses and offerings that have emerged from the US in the last few years.

There is the essence of ‘Story’, which put itself forward as 'more like a magazine or a gallery than a store, offering an eclectic range of wares curated around constantly changing themes'. There are overlaps with Simon Property Group's ‘The Edit’ which offers a “curated selection of independent brands that is constantly evolving” and GGP's ‘In Real Life’ which describes itself as “an immersive shopping experience that fosters the human connection between you and brands in today’s digital age within an omni-channel storefront”. You or I might see that as essentially a store that allows e-commerce retailers to serve mall customers.

A different business model with focus on experiences

To the average European or US shopper walking in the doors, Neighborhood Goods will likely feel like a good old department store. It sells clothing, skin care products, home goods, gadgets, and more. It has a sneaker museum, where shoppers can learn about the history of 'drops' and presumably get some great shots for Instagram - exactly the kind of experience that malls are trying to give shoppers more and more these days. Nothing revolutionary that will set the world alight so far.

Look a little closer at the detail and you will come to realise that Neighborhood Goods is first and foremost a physical presence for up-and-coming, cult-favorite, and direct-to-consumer (or online only) brands, who will host pop-ups or 'activations' in a 13,000-square-foot footprint. This is much smaller than your traditional department store - or fit for purpose, depending on where you stand in the argument.

Opened in Autumn 2018 with a first round of brands, whose typical stay will be about six to 12 months, included men’s wellness-focused Hims, affordable contact lens company Hubble, luxe UK pyjama brand Desmond & Dempsey, and about 10 to 15 other digitally-native companies (each of their websites more beautiful than the next).

"They’re a great partner; they’re really changing the idea of brick and mortar shops. It’s just a really cool concept."

Neighborhood Goods’ array of products will also include lingerie from MeUndies, clothes from Reese Witherspoon’s Draper James, men’s grooming products from Hims, rare sneakers from the marketplace Stadium Goods, children’s apparel from Primary, and bedding from Allswell.

For a monthly fee, these brands each get spot inside the 14,000-square-foot space with the costs of staffing, marketing, and retail design covered. New companies are planned to roll in and out of the store on a regular basis. Neighborhood Goods keeps activations affordable for brands by taking care of staffing and buildout. Alexander says: “All we really need is a perspective around a creative idea. Because it’s relatively low risk in terms of investment, it allows the brands to be more playful and experimental.”

It can only help to have scored some high profile brands for the first round of offerings. This includes the Serena Williams-led 'Because Serena', strictly an e-commerce brand with the clothing line only featured in different cities as a temporary pop-up. The pop-up nature and access to this otherwise direct-to-consumer brand entices customers and delivers footfall for the store. But the business model is also enticing to the brand. A lower overhead cost means that Serena is able to keep all of her items more affordable while preserving a high level of quality. Williams has admitted that she often asks her designers how in the world they are going to continue to create premium clothing while also keeping it affordable and this model contributes to that. On Neighborhood Goods, Williams says: “they’re a great partner; they’re really changing the idea of brick and mortar shops. It’s just a really cool concept. I feel like brick and mortar shops needed a different look, and Neighborhood Goods is doing it and doing it well.”

Of course, Serena Williams can afford to take risks, but others support the position too. Galyn Bernard, the co-founder of kids clothing brand Primary says: “The Neighborhood Goods model enables us to test and learn about physical retail for a fraction of the investment that would be required to do something like this on our own. The fact that we can trust them to manage our physical space for us means that our small team can continue to stay focused on the thing we are best at, which is making awesome clothes.”

Essentially the business model the founders have offered, allows startups to rent space in the store, the way office workers can in a WeWork or vacationers do via Airbnb and if successful (it’s early days of course) could potentially disrupt brick and mortar retail as we know it. So what is making these digitally native, direct to consumer brands migrate to the physical / bricks and mortar side of retail. In part it’s down to how digital has evolved. With so many brands online, there’s a fight for relevance and engagement. We have seen that to truly connect with their customers and fans and to tap into new customer bases digitally native brands like Everlane, Away, and Warby Parker have been opening creative new brick-and-mortar store concepts to much fanfare and solidifying their place in the segments they entered or created.

These brands who have great representation on the likes of Instagram would rather tap into their networks and share their following than continue to give money to Facebook, which will take their ad dollars and then place them right next to a competitor. They also realise there are new and existing customers who want to learn about new brands, but don’t know how to discover them when there are hundreds of Instagram ads working against them.

The power of discovery - without direct competition - is a huge potential benefit of brick and mortar. And with Neighborhood Goods, part of the value proposition is that you have a curation of the best of online. Before launch, Neighborhood Goods raised funding from VC firms like Forerunner Ventures and Maveron, which are frequent investors in digital, direct-to-consumer brands. This means the company will have unlimited access to the latest direct to consumer brands that don’t sell to other stores. So far, luggage brand Away and sneaker company Allbirds are brands the company is looking into bringing to the store later next year. The star power of known brands like these stands to bring greater attention to the smaller brands already sharing the space.

Delivering Experiences that Surprise and Delight

Unique business model? At the very least, it is an evolution. But all this means nothing, if Neighborhood Goods can’t entice people to come and spend. So how are they doing this?

The emphasis is on delivering experience rather than moving merchandise. “We are not buying at wholesale, so it affords us the opportunity to dramatically remerchandise and update the experience of the spaces on a fairly frequent basis” says Alexander,

“There’s going to be something happening just about every day that gives shoppers a reason to come back and discover something new and different.”

In place of fixed lanes of racks are multiple frontages of retail spaces. “It’s a more cohesive, modern version of a pop-up." he continues, “there’s going to be something happening just about every day that gives shoppers a reason to come back and discover something new and different.” It used to be 'if you build it, they will come.' Now it’s 'if you engage them, they will come.'

Specially curated activations will also come and go, like the Christmas Gift Guide that was set up for the 2018 end of year holidays. But there are also innovative approaches to how some products are represented with not all brands having an actual activation. Brands that don’t have full-fledged activations are incorporated throughout the space and in Neighborhood Goods own, more permanent retail concept, The Residency. In an 'everything is shoppable' concept, some companies have products incorporated throughout the space, like Otherland who provide a signature scent for the store, Made In’s cookware, and simplehuman’s mirrors and bins. Custom artwork by local artist Rob Wilson decorates the walls and is available for purchase exclusively at Neighborhood Goods.

“Everything is purchasable. So, if you’re sitting in our restaurant and you decide you want to buy the cutlery you’re eating with, you can do so. We’re creating something much more vibrant and socially oriented where we can bring in some of the most interesting brands from around the country,” says Alexander. “We had this idea, and it turns out that a lot of people have been waiting for something like this, including customers.”

That restaurant is called Prim and Proper and is designed to be integrated into the heart of the shopping experience and will offer coffee and cocktails throughout the day. “The restaurant is designed to be integrated into the shopping experience. It’s the heart of the store,” says Alexander. “You can walk around with a glass of wine and shop, or if you want to use the [Neighborhood Goods] app to buy some shoes from across the store, you can have them brought to you.” With bites, coffee, and cocktails filling what Neighborhood Goods calls a thoughtfully-edited menu, Prim and Proper is intended to be comfortable, unique, and welcoming all day long.

Leveraging technology - and not for technology’s sake

Cutting-edge gadgets are of no use if customers play around with them only to order the items online. Executives are trying to gauge which generate enough sales to justify the cost. While most major retailers these days offer their own mobile application, not many combine the online and brick-and-mortar experience. This is another area where Neighborhood Goods have differentiated their offering, releasing an iOS phone app at launch that customers can use stand alone or to enhance their in-store shopping trip. More importantly, Neighborhood Goods decided not to delineate between ecommerce and physical commerce. This decision supports the customer through whatever journey they are taking but is something many UAE based retailers failed to follow and achieve - often due to internal bureaucracy and lack of confidence in human and technology capabilities to support. With the Neighborhood Goods app, the customer might be transacting inside the physical space completely self?guided through the iOS app, or they might be across the country engaging with the brand and ordering merchandise remotely.

For the retailer, the app directly supports the merchandising strategy and use of space. Activations aren’t what you’d typically imagine in a department store display, each space is minimally merchandised, with most of the inventory kept behind closed doors. This is enabled by the app, where interested shoppers can venture into the space, find what they want, and then use the mobile app to page a store associate when they wish to purchase.

A fascinating aspect is how Neighborhood Goods have married the mobile app to different user experiences and use cases. The app at a distance from the store is great for someone wanting to shop from home, with editorially driven ecommerce. As the user get closer to the physical store’s location, it allows for in?store pickup, RSVP?ing for events, things like that. Once you are actually inside the store, three new buttons appear in the User Interface that allows the user to text with staff or request for people to come to you wherever you are in the store to learn contextual information about the brand as you walk around the room. If you’re standing next to the Draper James brand, for example, and don’t know the story behind the brand, Neighborhood Goods are able to deliver it to you right there based on where you are.

If you’re in the Prim and Proper restaurant, sipping a cocktail and finally decide to bite the bullet on the Draper James bag you were eyeing up earlier, you can buy them from the app using self-guided checkout, and have them brought right to your table. Neighborhood Goods have made the web and the iOS integral elements of their offering but they can serve that in-store experience just as much as they can be a great ecommerce experience for people across the country. Hence it is not technology for technology’s sake.

But there’s more clever stuff below the surface of the app that is testament to why the founders are being seen as so innovative. Retail business B8ta set the bar when they launched concepts with advanced camera tracking systems that measure shoppers’ movements and with their store, Neighborhood Goods have integrated a similar solution but combined it with the app. Across the store footprint, 30 security cameras are dotted around the space and work with the app to track shoppers’ habits and better understand the customer and their preferences allowing for the opportunity to understand customer experiences and to potentially personalise notifications. As an example, if a camera sees a shopper pick up a Draper James bag but decline to buy it, Neighborhood Goods could use the app could them a push notification a few days later, offering 10 percent off.

“The cameras and beacons will be capturing data to see how people interact,” Alexander says. “Department stores already have tons of cameras on shoppers, they just don’t do anything with the footage. We’ll be providing useful information for brands to determine what their overall retail plan will be.” The store also has screens all across the space and they can track a shopper as they walk by and display ads from the brands they browsed. This is another example of physical retail leveraging technologies that level the playing field with their online equivalents. To some this will sound creepy, but to those brought up with a mobile phone in their hand and an expectation for personalized services, it provides the retailer with the capabilities to service these needs and wants.

Building brand connection and community

Apple impressed everyone when they took an already impressive physical retail store design approach and started to open increasingly ambitious and inviting locations supported by an engaging schedule of creative events. But why take this approach when they already have a winning portfolio of products and a plethora of revenue streams, many digital, including apps, music and video downloads and subscriptions and commissions?

“Retail is not dying, but it has to evolve. It has to continue to move and I think it has to serve a bigger purpose than selling, because anybody can do that faster, cheaper.”

So said Apple’s senior vice president of retail, Angela Ahrendts, at the 2018 Cannes Lions International Festival of Creativity. There approach ensured that their 500 million yearly visitors won’t just shop, but also discover a place to connect with like-minded individuals in their own communities. Sixteen thousand learning sessions are held weekly in over 500 Apple stores globally – covering diverse areas including photo and sketch walks, music labs, kids hours and coding. Humanity is a major ingredient in the success of retail at Apple. Store associates are hired for empathy, not sales skills, and told to “enrich people’s lives by telling something they don’t know.”

The Neighborhood Goods team have paid attention to the approaches of Apple and other Retail innovators and the successes they have had. Albeit on a smaller scale, with this 14,000 square foot concept, they are offering a modern alternative to a stilted concept, in what they themselves refer to as a 'vibrant space for building a community through social discovery' with the pressure on customers not being to transact, but to experience and enjoy. “We are trying to have this very friendly, inviting and human room rather than having something that would be very traditional in the sense that it’s about extracting dollars in wallets, and instead focusing upon giving people a really good reason to come back to the space, having the magnetism for this room be something that goes far beyond buying products,” says Alexander.

They maintain that the stories behind the brands are just as important as the items themselves - along with their own story of 'transparency, fallibility, and experimentation.' To share this, Neighborhood Goods will develop podcasts (to be recorded live in-store) and a printed magazine in early 2019. And, also on the horizon, the store says it will be announcing its next locations soon.

In addition, they let the customer engage with the store on their terms. If the customer wants wanted to come in and have a showroom experience where they buy something, but don’t necessarily want to carry it home, they can ship it to you. If they want to order for in?store pickup that’s fine as well. If they want to order for on?demand delivery within a few hours, they can do that as well. If they want to order from the comfort of their home and have it brought to you, that’s fine too. Neighborhood Goods puts the customer in the driving seat. There’s a lot going on, but Masinter and Alexander have the experience to pull it off.

 

About Scott Ellis: Scott is an experienced retail development executive and speaker and now the Retail and Consumer Industry Lead for IBM Middle East.

Please note that the information shared in this article is sourced by Scott and the views expressed in this article are his own.

If you are an existing or aspiring Retail professional and want to capture the attention and spend of technically savvy customers who expect instant gratification, your store must focus on the customer experience – not just the products you sell. Please feel free to contact Scott. He can help you to reimagine your physical space by exploiting sensory, social and digital technology to create dynamic store experiences and simplified processes – nothing referenced in this article is beyond realisation.