Pure-play retailers opening physical stores is a growing feature of the industry’s landscape and is a trend that has taken hold in the US where there are around 600 such stores at present and the forecast is for around 1,500 of these digital-first brand outlets to be operating within the next five years.
These retailers recognise the advantages of adopting this old school route to market. But the decision to open up on high streets and shopping malls is not specifically grounded on old ways of thinking. The drivers behind such moves are based very much on the digital world.
One factor is the increasing cost of customer acquisition through online-only channels and this is making it very hard for the pure plays to grow their businesses. According to a report from Bernstein the e-commerce pure-plays spend around nine per cent of sales on advertising whereas for store-based retailers this falls to only four per cent.
Fundamental to this high ad expenditure is the continuous rise in the cost of advertising through the likes of Facebook. Bernstein calculates that the price of advertising on the platform has increased by nine-times since 2013. Just how profitable this has become for Facebook can be seen from the fact it has grown its revenues at around 50% CAGR (Compound Annual Growth Rate) over the last three years from what has been fewer ads placed. The number of ads has decreased by 36% when indexed to 2013.
The other key factor driving the opening of stores by online-only players is the fall in rental costs as a result of traditional retailers offloading unwanted stores because of growing levels of sales shifting online. Taking a look at the New York real estate market the Bernstein report found that the average asking rent across the city’s 17 key shopping areas has declined by around 25% since 2015.
The effect of this is not only the greater availability of sites but also greater flexibility on leases. In London for instance, the terms of a lease have dropped from the traditional 25-year period down to a mere three-years. This very much fuels the move towards online-only retailers trialing physical units with reduced downsides if it does not work out.
With these various factors at play – and the trends likely to become even more pronounced – we can expect to see high streets around the country host an increasing number of new names who will undoubtedly help to add some much needed vibrancy to the shopping experience.
Glynn Davis, editor of Retail Insider
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