Retailers Rethink Brick-and-Mortar Potential

·14 min read

Brick-and-mortar retail is approaching an inflection point.

There’s been no lack of pessimism on the future of physical stores, particularly those selling “non-essentials” amid the rise of online shopping; COVID-19; consumers spending more on travel, restaurants and health activities, and the tidal wave of bankruptcies and closings in the past two years.

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Yet this year, the rate of store openings in the U.S. is creeping closer to the level of store shutdowns. It hasn’t reached parity, but some researchers and retail analysts say it’s getting closer to it.

A Coresight Research report issued Aug. 27 indicates that based on announcements so far this year from about five dozen U.S. retailers, 4,748 store closings are set for 2021, versus 4,616 openings. That puts closures only 2.9 percent ahead of openings this year, compared to 142.1 percent ahead at the same time in 2020.

Coresight also indicated that major retailers have revealed 48.4 percent more openings and 37 percent fewer closures compared to 2020, and that U.S. store openings this year are tracking ahead of the pace in 2019 and 2018.

Sectors expanding most aggressively are dollar stores, offpricers, beauty chains, discounters and groceries. Categories seeing the greatest growth include home, athleisure, performance wear, plus sizes, sneakers, denim, fragrance and beauty. Lately, dresses, occasion and work-to-work styles have picked up, according to comments from several retail executives during quarterly conference calls. As sales strengthen, so does the inclination for brick-and-mortar growth, though the positive sales trends and store growth plans can quickly reverse, depending on the trajectory of the pandemic, inflation, the labor market, the stock market, and supply chain issues.

“Apparel stores have long trimmed down their footprints but actually they’re beginning to add stores now,” said Craig Johnson, president of Customer Growth Partners. “It’s on the plus side versus a minus, though it’s not like the heyday decades ago when there was massive growth. Apparel is coming back. Apparel sales were down about 70 percent last year, but this year it’s up a little bit more than 70 percent. Specialty players like Aerie, American Eagle, Aritzia, Altered States and Madewell are growing. Chico’s has been choppy for a few years, but its Soma brand (specializing in bras, panties, sleepwear and sportswear) is growing quite strongly. In athleisure, Lululemon and Athleta are both expanding.”

Rue21, currently with over 650 stores, set 15 openings by the end of 2021. “Next year, we’re going to open at least 20, and about half of those are already committed. It’s really a very disciplined approach. We’re not taking on risk,” Bill Brand, Rue21’s chief executive officer, said in a recent interview.

The brick-and-mortar strategy, he stressed, has a data-driven site selection process that’s “laser-focused” on selecting real estate that fits Rue21’s customer profile and targeted demographics — the 15-to-25-year-old Gen Z customer, multicultural, seeking affordable, “on-trend” private label fashion. In its headiest days, Rue21 grew to 1,200 stores but fell victim to overexpansion, lack of marketing and technology and too much debt. The company survived two bankruptcies, leading to hundreds of store closings.

The Aerie division of American Eagle Outfitters has targeted 76 store openings for 2021 and expects to have 500 to 600 units operating in 2023. Athleta, the fast-growing activewear division of Gap Inc., plans to open between 20 and 30 stores a year in the U.S. and will soon be opening stores in Toronto and Vancouver, Canada. And Fabletics, another active brand, sees opening two dozen stores this year, which will bring it to over 70 by the end of 2021.

Target continues to expand as well, most aggressively with its smaller urban format. The discounter has 1,909 brick-and-mortar locations, has opened 19 stores so far this year and 12 more are planned for the fall, in locations such as New York City, Hawaii and next to Disney World in Orlando, Fla. The company sees opening 30 to 40 stores annually for the foreseeable future. Meanwhile, inside Target doors, over 50 Ulta beauty shops are up and running, with 100 expected to be operating by year-end. Ulta also has set 40 freestanding openings for this year.

Ulta’s main rival Sephora is hardly standing still. Sephora has embarked on its biggest expansion ever, with 60 freestanding sites and 200 shops inside Kohl’s in the works this year.

Target’s partnership with Ulta Beauty is fueling growth for both businesses.
Target’s partnership with Ulta Beauty is fueling growth for both businesses.

Among off-pricers, Ross Stores sees 60 openings this year; TJX plans 74, and Burlington, 92. Burlington, which has over 1,000 stores, believes it can successfully operate about 2,000 stores. Ross this year slated 60 new doors, and sees its fleet growing from around the current 1,900 stores to over 2,400.

The tech sector continues to invest in building brick-and-mortar retail. Google pop-ups have sprung up around New York over the years, but its first permanent location opened in June underneath its offices in the Chelsea neighborhood in New York City, which is not far from the Apple store in the Meatpacking District. The Google store sells hardware products like Pixel phones, Nest smart home products and Fitbits.

Amazon, with its growth with Amazon Fresh groceries, cashierless formats, and possibly department stores in the future, continues to disrupt the retail industry and win over consumers. Amazon’s efforts will force competitors to come up with their own innovations or copy the e-commerce giant’s.

Other digitally native companies such as The RealReal, Bonobos, Rhone, Koio, Allbirds, Glossier and Warby Parker are also steadily opening stores. So are some start-ups. For example, Mehdi Read, founder and CEO of men’s fashion brand Maceo, wants to bring his start-up to more consumers by adding brick-and-mortar locations, according to a report in Pymnts.com. He recently opened a store at the Aria Resort & Casino in Las Vegas and plans at least six more in Dallas, Atlanta and other metro areas in the coming year, on top of a couple of units operating in Miami, Tampa, and a flagship location in San Diego, according to the report.

Camp, a summer camp-themed store with toys and activities such as crafts, story-telling, comedy shops and music classes, opened its first location in 2018 in Manhattan and has five locations now, three in New York City and one each in Texas and Connecticut. The experiential retail concept will be brought to additional locations.

Academy Sports + Outdoors will be growing its store fleet next year.
Academy Sports + Outdoors will be growing its store fleet next year.

“There’s a whole experiential/entertainment segment developing with companies like Camps and the Museum of Ice Cream and pop-ups like the Immersive Van Gogh Experience. The more traditional brick-and-mortar is still going to represent a meaningful share of the business, but it’s a balance between the online business and the physical,” said Brandon Singer, founder and chief executive officer of Retail by Mona, a real estate leasing and advisory firm.

Singer cited the rise of formats offering speedy deliveries and convenience, like Gorillas, a pantry-style warehouse for groceries situated in neighborhoods, and Fridge No More, which operates small, “hyperlocal” delivery-only grocery stores in city locations. He pointed to Reef, which boasts it’s grown to 4,800 locations reaching 70 percent of North America’s urban areas with modular warehouses and direct-to-consumer lockers. “They’re optimizing space in parking garages and utilizing them for retail fulfillment,” Singer said.

In a world where’s there are a lot of retail vacancies, overall costs to operate in smaller city sites can be less than having large, outlying warehouses where there would be tolls and transportation costs to deliver to consumers, Singer explained.

In addition, newer quick service restaurants are taking up retail space, such as Odd Burger out of Canada which has a vegan menu, and Cava, a Mediterranean-style restaurant chain, Singer added.

“Brick-and-mortar is definitely not dead, its changing,” he said.

Athletic apparel and sporting goods chains are also in growth mode. Ken Hicks, chairman, president and CEO of Academy Sports + Outdoors, told WWD in June that no new stores are planned for this year, but eight to 10 are planned for 2022, and even more openings are being considered for 2023. None were planned for this year because the Academy team couldn’t explore sites last year as COVID-19 raged through the U.S.

Academy’s newest stores have updated formats, with a more open layout, better adjacencies and allocation of products, and a lot more visuals including fishing reel bars, and collaborating with vendors on presentations, Hicks said. New stores are 62,000 square feet, compared to 70,000 square feet in the old format. “We also developed a new model that is 40,000 square feet,” Hicks said, giving Academy more flexibility to expand its brick-and-mortar footprint, though the larger version is preferred.

The biggest single chunk of real estate is being gobbled up by dollar stores, followed by off-pricers and discounters. “Year-to-date, we’re seeing that about 42 percent of new stores opening are dollar stores. This is the continuation of a trend we’ve seen for the last few years as this category moves into a market opportunity,” said Ken Fenyo, president, research and advisory at Coresight Research. “If you look at the bifurcation in the economy where higher income customers have done quite well, before and during the pandemic, and lower income customers have not done as well, dollar stores have positioned themselves quite well to serve that end of the market.”

Dollar General sees opening 1,050 stores this year on top of the 17,000-plus units operating at the beginning of 2021 and potentially ultimately doubling its store count. The company accelerated the rollout of its Popshelf format selling home decor, health and beauty items, cleaning supplies and party goods, with almost all items costing $5 or less. The company launched the first two Popshelf locations in the fall of 2020 and sees 50 Popshelf stores opening this year, 20 more than originally planned.

Dollar Tree plans to open a total of about 600 stores this year under the Dollar Tree and Family Dollar banners.

Retailers and analysts cite job growth, the economy expanding at over 6 percent, consumers being steeped in savings, and a sudden pent-up demand for occasion and work wear, with continued interest in casual clothes, as helping to fuel the brick-and-mortar boom.

Furthermore, landlords are loosening up on lease terms, keeping healthy retailers, start-ups and digital native brands in the real estate game with either permanent stores, or pop-ups which are often operating for extended periods — months instead of weeks. Mature retailers have been retooling stores with new partnerships — think Ulta at Target and Topshop at Nordstrom — and alternative experiences and services, many that support their e-commerce operations and add convenience. That all helps retailers to think about the potential for brick-and-mortar and maintain certain locations that otherwise might have been shuttered.

While the industry view toward brick-and-mortar is about as positive as it’s been for several seasons, the mood could quickly swing negative if business in the second half doesn’t meet expectations for big gains or sours next year. Rising COVID-19 cases around the world, inflation, supply chain bottlenecks and climate change can stall retail sales and add uncertainties to the planning.

Major retailers still downsizing include J.C. Penney, Sears, Kmart, Disney, Gap, Banana Republic, and Macy’s. Topping Coresight’s list of store closing announcements this year is Christopher & Banks with 449. The company went bankrupt in January, citing difficulties caused by COVID-19, and sold off its online business. Second on the list of closings was Francesca’s with 342. The company went bankrupt in December 2020, when it had 558 locations, and emerged from bankruptcy in February 2020.

Bloomies, launched last week in Fairfax, Va., is a potential growth vehicle. - Credit: Anne Chan
Bloomies, launched last week in Fairfax, Va., is a potential growth vehicle. - Credit: Anne Chan

Anne Chan

Last year, Macy’s set 125 department stores closings over a three-year period, though it’s been opening smaller formats, including Backstage off-price stores, Bloomingdale’s The Outlets, and two new formats, The Marketplace at Macy’s and Bloomies.

“We opened a freestanding Backstage store in the Dallas-Fort Worth area last quarter, the first of two freestanding Backstage stores in 2021,” said a Macy’s spokeswoman. “Later this year, we will open three new off-mall Market by Macy’s locations in the Atlanta and Dallas areas. Our first small-format Bloomies location in the D.C. metro area opened in August.” In 2020, right at the beginning of the pandemic, Bloomingdale’s opened a department store in the Westfield Valley Fair center in Santa Clara, Calif. No other Bloomingdale’s department stores are planned, but its CEO Tony Spring said, “We don’t rule out the future for more.”

Gap Inc. continues to downsize in North America with 75 Gap and Banana Republic closings set this year as well as about 40 Old Navy and 30 Athleta store openings this year.

Walmart isn’t changing its footprint much. It’s already saturated the country. “We have four new Walmart stores scheduled to open through the end of 2021. There are no new Sam’s Clubs scheduled,” said a Walmart spokesman.

“By our count, store closures were steadily growing for about eight years and peaked in about the middle of the third quarter of last year, because of COVID-19, changes in demand, and a ton of co-tenancy closes were triggered, enabling stores to close when anchor stores close or when the right adjacencies aren’t in place,” said Johnson, of Customer Growth Partners. Retailers, he said, “took the opportunity to right size their footing. But the rate of closings kind of bottomed out in late third quarter, early fourth quarter” of last year. “After being on a plateau, openings began to exceed closures around March and April, the weaker stores faded out through bankruptcies and the stronger, smarter stores used this opportunity to recut lease deals, or close locations even when they were four-wall profitable. The stores being closed may not have been profitable enough, or the retailer had another store in the same market with greater potential for profits and worth shifting investments there.

“Dollar General, Dollar Tree, Five Below, and TJX and its Home Goods business, they’re all very strong and expanding,” Johnson added. “RH is growing in much smaller numbers but the emphasis is still on growth. At the end of the day, people still like to shop in physical stores, and use online for convenience and replenishing.”

Online sales, as a percent of total retail sales, peaked at 29 percent during COVID-19, around March 2020 through the early summer of 2020. They’ve since dipped down to 25 percent of total sales, Johnson said.

At Ralph Pucci International, a showroom for furniture, lighting, sculpture, painting, photography and mannequins, the home category is undergoing “the biggest boom I’ve ever seen in my career,” said Ralph Pucci. “People are looking for new and unique pieces and willing to pay top dollar. They’re not looking for what’s typical. They’re looking for pieces made with quality, a strong brand, or something with great designer behind it. Obviously, COVID-19 put everyone in their homes for a year and a half, so they wanted to upgrade their homes. Also, the stock market has been a big, big plus and a lot of people have moved to places like Texas and Miami, so there is a lot new homes being bought or homes getting renovated. It’s a perfect storm for success.”

Asked if the shopping spree will continue through the year and into next year, Pucci predicted, “When you have been in business as long as I have, you get a feel for things like this. I’d like to think it’s going to be sustainable, not necessarily at the current level for a long time. But it will be very healthy for the next couple of years. At the level it’s at now, I’ve never seen anything like it, to be quite honest — and I’ve been in business for almost 47 years.”

Athleta, a fast-growing Gap Inc. division, displays a heightened focus on size inclusivity.
Athleta, a fast-growing Gap Inc. division, displays a heightened focus on size inclusivity.

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