Retail store owners are facing their fair share of challenges right now.
For one thing, foot traffic to malls and physical stores is down. McKinsey reports show that, this year, customers are spending less via in-person shopping and are instead opting to buy online amid COVID-19 safety concerns.
For example, Klado is embracing a model known as micro-retail, wherein stores with smaller-scale footprints offer a limited amount of inventory.
Micro-retail isn’t just a good idea for businesses selling niche desserts, however. Even large-scale companies like Tesla have smaller-scale retail stores with limited physical inventory on-site (more on this in a bit).
The fact is, retail stores aren’t going anywhere as long as they can adapt to changing consumer trends. For some, that means minimizing inventory and embracing a showroom or pop-up-style retail experience. Others are experimenting with new inventory management strategies like just-in-time inventory (JIT).
Here’s what you need to know about this rising trend.
Table of Contents
Physical retail by the numbers
Before we get into examples, let’s look at the current physical retail landscape.
Most physical retail store challenges boil down to one thing at present: overhead. A few overhead-related issues retail store owners face include things like:
- Inventory management. On average, retail inventory is accurate at a rate of only 63%—and maintaining and storing excess inventory costs money. When inventories overshoot the mark, retailers often have to offer 30%–70% discounts to move items off the shelves, according to the National Retail Federation. Overstuffed inventories also led to retail markdowns of $300 billion+ in 2018.
- Increased risk. Theft, property damage, and other disasters pose risks to retail store owners with large inventories. The average dollar cost for the average shoplifting incident was over $500, according to one report.
On top of this, pair these overhead-related risks with the compounding issue of declining foot traffic to physical retail stores amid the pandemic. According to the National Association of Realtors, 52% of retail properties reported vacant malls.
All of these factors make it hard to justify holding large, expensive retail spaces. So, how are brands innovating? It starts with managing less inventory in-store.
💡 PRO TIP: When you use different platforms to run your online and retail stores, inventory discrepancies are more likely to happen as a result of both systems not being in sync with one another. This can lead to more frequent inventory counts to reconcile differences between your ecommerce platform and POS system’s inventory quantities and ensure stock levels are accurate.
Less inventory to manage, more convenience
Managing vast inventory is one of the biggest challenges retail store owners face, and even more so in light of recent inventory shortages.
Why? Because maintaining all that inventory costs money. There’s labor, insurance, maintenance, cleaning, commercial rent, and taxes, just to name a few costs. In fact, as of June 2019, US retailers were sitting on an average of $1.36 of inventory for every $1 in sales.
The simplest solution? Carry less inventory.
It makes logical sense, after all: in a world where retail space is becoming harder and harder to justify, every excess dollar spent on inventory deserves scrutiny.
“The physical store is often a model of inefficiency," said Brendan Witcher, Vice President and Principal Analyst of Digital Business Strategy at Forrester Research.
"With large amounts of capital invested in physical products sitting on shelves—the vast majority of which will not sell on a daily basis. This doesn’t sound like a lot of money when you look at one item, but when you extrapolate the cost of capital across all items in a store, across an entire network of stores, retailers are looking at millions and millions of dollars of capital commitments that aren’t benefiting the business.”
“The physical store is often a model of inefficiency, with large amounts of capital invested in physical products sitting on shelves—the vast majority of which will not sell on a daily basis.”—Brendan Witcher
Nordstrom’s current approach is an example that spotlights advantages of shrinking down retail space.
Right now, when a customer shops at Nordstrom, or its subsidiaries Nordstrom Rack and HauteLook, customers have the option to select curbside pickup, wherein orders are delivered all the way to the trunk of their cars.
The result: Nordstrom’s retail spaces have become less shopping destinations and more interaction/fulfillment centers. It’s not about having every last item in stock. It’s about meeting the modern customer’s needs.
The store as a showroom
With store capacity limited due to social distancing requirements, retail store owners are already aware of how important it is to optimize the use of their retail spaces.
One of the simplest solutions is to move as many services online as possible, but this isn’t always an option. Some retail stores offer a customized experience that may require a customer’s physical presence before the purchase. Tailoring is one example, as in the case of Nordstrom.
As a result, some retail store owners are embracing showrooming as a model for delivering personalized customer experiences. With a showroom experience, retailers can de-emphasize the need for inventory while focusing on long-term customer loyalty and high-touch in-person experiences.
It’s possible to expand the capacity of a retail space without expanding its square footage. The showroom approach enables this in two ways:
- Appointment scheduling. High-end boutiques are increasingly moving to an appointment-only model. For example, women’s clothing brand MM.LaFleur uses showrooms for customers who prefer to try on clothing before ordering online. Customers are paired up with stylists by appointment and can book an hour-long consultation. The goal: Make it easier for a customer to learn their style and fit preferences for online shopping with a low-risk but high-touch experience in-store.
- Virtual shopping and showrooming. With virtual shopping, customers can connect with an associate no matter where that associate may be—whether it’s in-store or even working from home. Shoppers can ask specific questions, browse the online product catalogue, and receive customized recommendations, just as if they were physically present at a store.
“One thing is clear: many consumers still love seeing items in real life before they commit to purchase," said Michael Miraflor, Global Brand Marketing at Domestika.
"The consumer experience at merchandise-free stores emphasizes education, which requires knowledgeable sales staff and interaction with and sampling of products. Smart brands will take advantage of this real-life engagement to capture user data for CRM purposes and to own the customer relationship—and 1st party data—from day one.”
"Many consumers still love seeing items in real life before they commit to purchase." —Michael Miraflor
We see this approach being used by direct-to-consumer mattress retailer Casper as well. Casper offers its customers showroom-like experiences such as:
- Casper Sleep Shops. Casper’s retail stores function as showrooms. The mattresses are there for you to try, touch, and see—but not to take home. The only merchandise available to buy and take home are limited quantities of sleep accessories (which are small, lower-cost items that are far less risky to manage). Mattress orders are placed with an associate in-store and fulfilled via home delivery.
- Nap sessions. Casper invites people to try out their mattresses firsthand, allowing customers to book 30-minute nap sessions via appointment at their pop-up locations, like the aptly named “Dreamery.”
The result: Casper makes the most of its retail store space by using it to facilitate high-touch, personalized, memorable customer experiences that ultimately drive sales. It works, too: conversion rates for the showrooming approach have been reported as 7.5x higher than those of online retail.
This approach isn’t just for mattress brands, however.
Even car companies like Tesla are using the low-stock/showroom strategy for physical store space. It’s a break from tradition in a big way: when Business Insider visited both Tesla and Mercedes dealerships, it noticed some stark differences between the two:
- Tesla dealerships have more of a minimalistic feel to them. Its emphasis on feweroptions creates an ambiance that more resembles an Apple Store that one architect described as “optimized, minimized, and decluttered.” This puts increased focus on the products themselves (rather than the quantity).
- Because Tesla maintains control over its individual dealerships and sells its vehicles to customers directly, its stores are low-pressure sales environments in which employees aren’t required to meet a predetermined sales quota.
- An in-store design studio lets Tesla shoppers customize features and build their own car from the ground up, which is a level of personalization Mercedes failed to offer.
Tesla’s direct-to-consumer approach—where shoppers can see the product in showrooms but ultimately order online—reduces the need for the company to maintain extensive on-site inventory. Employees in-store are more like customer support advocates working to match the customer with the ideal product.
This helps Tesla leverage a more sincere, low-pressure sales approach that customers tend to trust over a traditional one.
With showrooming, there’s no set quota for moving on-site inventory. This makes it easier for brands to create authentic, meaningful interactions between salespeople and customers.
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Experience-driven relationship building
Another reason retailers maintain a physical presence: it means they have a space in which they can build face-to-face relationships with customers.
These relationships don’t kick off until the retail store owner and the customer have some sort of shared experience in person.
That’s exactly why outdoor retailer Backcountry started experimenting with pop-up stores: to maximize in-person relationship-building with customers while limiting risk exposure (by only keeping limited stock on site). With limited merchandise available to purchase, it instead focused on helping customers with personalized product discovery and one-to-one guidance.
It also hosted events like ski-film screenings and happy hours, as well as on-site services like ski and snowboard mounting—all of which work to build deeper connections with customers.
The best part? Backcountry still has its full catalog of inventory available to purchase online 24/7, and in-store associates can help customers place orders in-store during their visit.
Thrills, an Australian-based clothing company, took a similar approach.
Its pop-up in Sydney wasn’t about moving massive amounts of inventory but rather increasing brand awareness and forging new friendships with locals. The pop-up helped it build its brand ethos as well as its local cool factor.
“Throughout the pop-up, we had musicians, artists, and photographers come and shop and choose their favourites as an experiential exercise that helped build brand influence," explained Nat Collins, Marketing Manager at Thrills.
"Overall, it was a major success, and our Sydney community of fans grew significantly.…It remains one of our largest audiences to date.”
Overall, the showroom approach is less sales oriented and more experience based, giving customers a new sense of rapport with the brand.
Physical retail doesn’t always have to be about moving products—it can be an in that gets the brand in front of customers who prefer a more tactile, personal, and experiential interaction.