OPINION – Retail Revolution: Rethinking the retail store model

*By Victoria White

In the past year, consumer purchasing behaviour has overwhelmingly pivoted to digital channels. Online e-commerce and, in particular, social commerce has increased to account for over 52 per cent of total retail sales in the China market in 2021.

This has been spurred by greater accessibility, convenience and confidence from the consumer’s perspective compared to traditional brick and mortar retail stores. With the latter suffering forced closures during lockdowns, overall reduced footfall and limited inventory supply due to supply chain disruptions, as well as higher operating costs to support post-pandemic safety measures, we must ask whether physical retail stores are on the verge of extinction?

The answer is likely two-fold: retail stores still have a key function to play in the consumer’s retail journey, but must transform to a new role. The efficiency of online sales and delivery has been seen to vastly outperform purchases through conventional brick and mortar stores, forcing the function of retail stores in the customer cycle to adapt in order to earn their keep and survive going forwards.

As the majority of retail sales transactions are now conducted online in China, in future we see that retail locations will primarily operate as marketing tools, rather than points of sale, in order to reinforce the brand’s DNA and lifestyle values in-person to consumers. 

Even before the events of 2020, top tier luxury brands had tinkered with the concept of lifestyle destinations replacing the basic retail location. Prada’s Bar Luce, Gucci Osteria da Massimo Bottura, The Blue Box Café by Tiffany & Co. and Ralph’s Coffee & Bar all dabbled in cross-overs with F&B partners to stimulate consumers’ appetites – quite literally – and lure them to linger for hours surrounded by the brands’ designs and ethos.

Labels had also looked to dedicate space to educating customers more about the brand’s heritage, presenting pop-up exhibitions and art installations to transform stores into cultural destinations. Flagship stores of Alexander McQueen, Ferragamo and Cartier all featured archive designs, photographs and artworks alongside current collections to engage customers and cultivate an emotional connection with the brand.

Today, however, it is not only flagship stores but also shopping mall and central retail locations that must re-model their function and design in order to play a role in the new offline-to-online consumer cycle, or otherwise face closure.

With the costs of digital media advertising continuing to soar from rising demand for ad space across key digital platforms, physical stores serve as an alternative marketing medium for customer acquisition and customer engagement.

We can expect to see retail locations clear away racks and stock, in order to make room for digital imagery, interactive displays and entertainment to immerse customers in the brand’s lifestyle proposition. The real value of physical locations lie in their capacity to attract consumers’ eyeballs to the brand and its story for longer than the duration of a Douyin/TikTok video clip, and establish an in-person connection with potential customers.

In Macau, we have already seen luxury brands investing substantially in new pop-up exhibitions and displays to support product launches and enhance the overall customer experience. Going forwards, increasingly inventive concepts will be needed which convey the brand’s identity in order to maintain impact and differentiate the brand from its competitors.

Originality is the key to success: for example, the mattress and bedding retailer, Casper, opened a location in New York where customers can pay US$25 for a 45 minute ‘rest session’ in a sleeping pod fitted with Casper mattress and bedding, with complimentary pyjamas, health snacks and luxury skin-care brand samples. The Dreamery, as its known, exudes wellness and relaxation as an oasis of calm, reinforcing the brand’s image as a premium product among younger health-conscious consumers.

For Macau retail locations, this general industry shift from sales to marketing functions may be somewhat qualified by the unique make-up of the consumer market.

Tax-free purchases and the casino loyalty-rewards ecosystem may still provide an incentive for customers to buy at physical retail stores in Macau ahead of e-commerce channels. The sales function is still likely to continue, alongside the new marketing/lifestyle destination function, representing a dual purpose for retail stores in the SAR going forwards.

A particularly important aspect of the marketing potential of these retail stores encompasses e-commerce live-streaming services. In the China market, social commerce live-streaming saw a huge increase in the past year, up 210% on 2019 sales with audiences of over 617 million and 388 million active purchasers as of December 2020.

Live-streaming direct from the brand’s store helps reassure customers they are buying direct from the prestige brand, and gives them access to collections and products potentially not available within China. Moreover, where the products sold are taken from the store’s inventory and the sales contribute to the store’s turnover, local tax regulations will apply.

Therefore, retail groups should revisit their regional sales strategy in order to centralize live-streaming and online sales in the optimal retail location from a tax perspective. Macau, with low taxation rates in comparison to other Asian countries, could play a pivotal role in these sales activities for the Asian market.

From now on, dedicated live-streaming studio areas within retail stores will appear as a core feature that ensures professional streaming quality and avoids interrupting in-person customer visits.

At the same time, tax, shipping, consumer protection, IP and data privacy are all issues which must be overcome before embarking on live-streaming and e-commerce activities to international audiences. However, a well-planned strategy can support a tax-optimal sales structure and new revenue streams from widespread target audiences. 

With the change in function of retail stores from a purely sales to a hybrid marketing function, store profitability can no longer be calculated based on sales performance figures alone. Instead, stores’ ROI will likely be determined by a combination of sales and marketing KPI metrics.

These could include the store’s media value, that potentially could be based on the number of consumers visiting the store factored with a RMB/$ value per consumer impression and the store’s net promoter score. PoS sales, online sales to delivery addresses within the store’s catchment area, and live-streaming sales could also be considered in determining the store’s overall performance.  

Retail stores have the capacity to provide a full brand immersion to consumers which surpasses digital media in terms of impact and longevity. To this end, traffic volume and store visibility is critical for justification of the underlying operational costs, meaning prime locations with high customer flows will command a premium. Secondary sites with less exposure may adapt as destinations for live-streaming broadcasts and remote sales potential.

The ability of brands to cultivate a sense of brand community within stores – effectively becoming ‘brand residences’ or ‘clubhouses’ – is key to drawing return customers and the overall success of the store as an engagement tool. 

As a result of the shift in store function, the conventional method of calculating retail rents may also be revisited. Rents may no longer be tied to a standard base rate and an additional percentage of retail gross income.

Instead, retail rents could be considered as a marketing cost of customer acquisition, calculated according to in-person visitations and number of impressions generated by the store. Digital imaging and footfall technology may assist landlords and retailers to accurately measure store visitations and dwelling times to calculate store rental values accordingly. 

Meanwhile, retailers may also consider negotiating extensions to the scope of permitted activities within their current lease agreements to allow for new services to be provided onsite: such as F&B, exhibitions, entertainment and broadcasting (live streaming) activities.

Going forwards, retail stores may take on an important new role in the customer journey as highly visible and effective marketing channels. Additionally, the benefits of consolidating live-streaming and online sales at retail locations in low tax jurisdictions, like Macau, should not be overlooked as part of a regional sales strategy.

With these new functions, store performance can no longer be measured in sales volumes alone, but will require use of AI, integrated analytics and consumer tracking to calculate the overall impact of the store in terms of brand productivity. Hence, retailers may look to revisit existing business models, as well as sales and marketing functions and contractual lease agreements, in order to address their new needs. This will also allow businesses to equip stores with the engagement resources and sales tools needed to support their role in the new retail ecosystem.

About the author: Victoria is Special Counsel at MdME Lawyers. She heads MdME’s Digital Transformation team which focuses on the legal, regulatory and policy aspects of digital transformation, emerging technologies and digital-first solutions. Victoria is a data privacy law expert and Certified Information Privacy Professional/Asia by the International Association of Privacy Professionals.