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Brick-and-Mortar Remains a Major Retail Opportunity

Dan Kline covers the pitfalls of underestimating physical retail concepts.

January 22, 2021

The headlines tell you that the internet has won. Consumers have shifted their shopping online and America’s shopping centers will wither and die due to the growth of Amazon (NASDAQ: AMZN) and other online retailers.

That, of course, sounds right, but it’s a mix of wrong and not quite understanding what’s going on fully. The retail marketplace has changed and the role of stores is evolving but the need has not gone away. Consumers still like to shop in physical stores but that’s only part of the story.

Most successful retailers see their brick-and-mortar locations as part of their overall strategy. Yes, these locations serve customers who visit, but that’s only a small piece of it. Stores also serve as distribution hubs powering the omnichannel model that many consumers want.

People still like to shop

Digital sales accounted for roughly 13.4% of all retail sales in 2019 and mall foot traffic was actually up before the pandemic took hold in March. Even during the height of the pandemic the internet only made up 20% of retail sales.

During a pandemic where people have been urged to stay home and shopping in stores has become less pleasant, 80% of sales still happen in stores. And, when you look at the 20% of sales that have moved online, in many cases, a chain’s physical stores support some portion of those sales.

Having a brick-and-mortar footprint has proven beneficial even to digital retailers. Amazon has leveraged its Whole Foods locations and its partnership with Kohl’s (NYSE: KSS) to make returns easier. The online giant has also slowly been increasing its physical locations as it tests formats ranging from bookstores to convenience stores and its fledgling chain of grocery stores.

The narrative that physical retail is dying is a story told through a narrow lens that ignores the broader trend. Department stores are struggling because most chains (or maybe all of them) have struggled to adapt to an omnichannel model. Lower-end malls are in trouble because consumers have options they no longer need to visit a shopping center that’s half-filled with limited restaurant choices and few stores people want to actually visit.

That does not mean consumers want to do all their shopping online. They clearly have a desire to visit well-run brick-and-mortar stores as has been proven by retailers as diverse as Target (NYSE: TGT), Costco (NASDAQ: COST), Five Below (NASDAQ: FIVE), and the TJX Companies (NYSE: TJX) (Marshalls, Home Goods, and T.J. Maxx). The same logic applies to the top-tier malls and outlets owned by Simon Property Group (NYSE: SPG), Tanger Factory Outlets (NYSE: SKT), and Brookfield Property Management (NASDAQ: BPY).

Which companies will this benefit?

The retail chains that will win going forward offer on of two things:

  1. An omnichannel experience that lets customers shop how they want mixing in-store and online shopping as they choose.

  2. Destination shopping: Many of the companies above offer treasure hunt models where shoppers don’t know what they might find when they visit the store, something that drives repeat visits.

All of the companies above should be successful going forward. Costco has shown that you can operate a business model with stores at the center of your strategy. Target (and others like Best Buy (NYSE: BBY)) have shown that stores remain a key part in serving customers who want the convenience of same-day-delivery, curbside pickup, and the option of shopping in-store.

Five Below, however, may have the most upside of any company named because it has huge opportunities for growth both in adding stores and developing a stronger web presence. The company offers value shopping (most items sold are priced under $5) and the treasure hunt model which consumers clearly enjoy.

Consumers like value in a bad economy but they don’t stop valuing it during tougher economic times. Five Below (like Costco or the TJX brands) has made shopping as much about entertainment as it is about finding something you specifically set out to buy.

It may take more to get people to leave their house because the internet makes shopping for many things incredibly easy. That does not mean that consumers don’t want to shop in stores — they clearly do — and retailers that embrace giving people what they want will continue to thrive.

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