The Incredible Shrinking Store

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Bricks and mortar outlets won’t go away but are changing and getting smaller.

THIS ARTICLE WAS PUBLISHED IN THE ‘Q’ – THE REGISTRY’S PRINT PUBLICATION – IN JANUARY 2013

By Maria Shao

[dropcap]S[/dropcap]hopping is no longer confined to the four walls of a store. Suppose you want a pair of blue shoes to match your coat. You canvass friends on Facebook, many of whom recommend a certain brand. You go to your local department store and find something you like in the brand—but not in your preferred color and size. On the spot, you scan the item’s bar code into a shopping app on your smart phone. Instantly, you find just what you want on a footwear website—at 10 percent less. Brandishing your phone, you ask the sales associate to match the lower price. He agrees, and orders you the right color and size from the store’s warehouse. Voila, the shoes show up on your doorstep the next day.

In today’s world of borderless retail, shoppers can browse, research, compare and purchase by crisscrossing stores, Web sites, mobile apps and social networking sites. Retailers are rushing to reinvent themselves with integrated offline, online and mobile tactics that mesh effectively. “It is absolutely critical for a retailer to have an omni-channel strategy,” said Michael Dart, a senior partner at management consultant Kurt Salmon and co-author of the book, “The New Rules of Retail.”

[pullquote_left]“We are dramatically overstored.” Howard Davidowitz, retail consultant and investment banker[/pullquote_left]But even as the direction for online retailing gains clarity, the outlook for brick and mortar grows cloudier and cloudier still. “We are dramatically overstored,” declares Howard Davidowitz, a retail consultant and investment banker. He and other retail experts predict fewer and smaller stores in years to come, with bricks-and-mortar outlets that focus selectively on urban areas, where population densities, and often incomes, are higher.

Forrester Research estimates that e-commerce sales in the United States topped $200 billion in 2011 and expects online purchases to grow from 7 percent of U.S. retail sales to nearly 9 percent by 2016.

Already, competition from e-commerce has taken a visible toll on shopping venues nationwide. Electronics retailer Best Buy, beleaguered by competition from Amazon.com, has been shuttering or shrinking its big-box stores in favor of subleasing space and rolling out smaller stores and mobile-only shops. Music, book, video rental and electronics stores, which sell products shoppers don’t necessarily feel a need to touch, have been among the biggest casualties.

In some cases, competition from Web retailers has reduced stores to mere showrooms. Who hasn’t walked into a store to check out a product and then bought it online later, often at a lower price? “I can walk into a Best Buy. I can see a Sony or Samsung TV and like it. I go to my phone and click on Amazon. This notion of show-rooming is causing a problem,” said Bill Rose, director of the National Retail Group at Marcus & Millichap, a commercial real estate services firm.

Yet, it would be “irresponsible” to suggest that the physical store is doomed, said Sucharita Mulpuru, an e-commerce analyst at Forrester. “Stores will be here forever. They inspire. We need entertainment.” But, she added: “They need to be more efficient in their real estate usage.” Among the trends Mulpuru and others foresee for physical stores: less square footage, fewer sales associates, less inventory, more in-store pickup, increased shipping from stores and more self-help kiosks.

Meanwhile, retailers are investing heavily to improve their Web operations, expand their fulfillment centers and generally to make their online and offline marketing, sales and distribution work together effectively. Research has shown that customers who shop across different channels are likely to spend more with a retailer than those who shop offline only.

The push into online retailing also has been a boon for Bay Area office landlords. E-tail leaders such as Amazon.com, Walmart.com and Macys.com have extensive operations in San Francisco or Silicon Valley, attracted by the wealth of local talent in Web site development, online search, targeted marketing, data analytics and other skills needed for e-commerce. “You fish where the fish are,” quipped Mulpuru.

Walmart.com was founded in 2000 and is located on the Peninsula, far from the Arkansas headquarters of its corporate parent. Expanding its presence in 2010, the Wal-Mart online division leased 266,000 square feet of offices in San Bruno, enough to accommodate more than 1,300 workers. The research and technology arm, @WalmartLabs, based in San Bruno, has grown by acquiring start-ups and recently unveiled an internally developed search engine for the shopping site.

Seattle-based Amazon.com has two major Silicon Valley subsidiaries. The A9 unit, which opened in Palo Alto in 2003, develops search and advertising technologies for the e-commerce giant. The other unit, Lab126, developer of Kindle e-readers, is located in Cupertino but has leased nearly 600,000 square feet in two Sunnyvale office towers that can accommodate at least 2,000 workers.

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