Warby Parker. Cotopaxi. Brilliant Earth. UNTUCKit.
You are likely familiar with some of these retailers. And odds are you know them thanks to Instagram, Facebook, Google ads or other digital media channels. That’s because these companies were born online and built both a retail presence and strong customer following without physical stores.
Over the last decade, faced with fewer barriers to entry than traditional retailers— and thanks in large part to venture capital funding—these digitally native brands (DNBs) have grown dramatically, both the number of new entries to the market and as a share of e-commerce sales. In 2020, for example, digitally native brands sales in the U.S. were $27 billion, according to Statista. Forecasts exceed $38 billion for this year and more than $44.6 billion by 2023.1 Part of the growth story is the spike in online shopping the pandemic created when consumers were faced with lockdowns and limited shopping alternatives. In the pandemic’s first year, overall e-commerce sales increased 30% in the U.S., and in some countries, grew as much as 70% to 100%.2 Like most online sellers, digitally native brands benefited from the trend.
Although you may have seen these retailers first via social media or online ads, recently you may have noticed a physical store. Vision and eyewear company Warby Parker was among the earliest digitally native brands to expand into physical locations in the U.S., opening its first shop in 2013, just three years after the company’s launch. Today, most of Warby Parker’s revenue comes from its more than 160 stores. The company added 35 locations in 2021, is targeting 40 more in 2022, and with a potential long-term footprint of 900 stores.3 While other DNBs may not be rolling out stores on the same scale as Warby Parker, many have followed a similar path to physical locations. In fact, finding a mature online, direct-to-consumer retailer that doesn’t have a store presence—or isn’t planning on one— is becoming increasingly rare.
What is a digitally native brand (DNB)? Digitally native brands are retailers that are conceived, built and developed online and offer customers an innovative product or service. DNBs manage most, if not all, of their business operations with digital technologies and can garner a wealth of intimate customer knowledge and data.
WHY MORE DIGITALLY NATIVE BRANDS ARE COMING TO A CORNER OR LIFESTYLE CENTER NEAR YOU
One reason is cost. While digitally native brands initially find niche customers online, many have struggled to acquire a broader set of customers. As more competitors have entered the market, digitally native brands have been vying for customers through the same digital marketing channels, which has compounded the challenge. Not only are these retailers trying to differentiate themselves in an often too-crowded field, the crowd itself has driven up digital marketing costs. That’s made customer acquisition, a key financial health metric for retailers, too expensive in many cases. So, in a slight twist of irony, brands have turned to physical locations to grow their customer base, despite the costs of securing, building out and operating stores.
A second reason digitally native brands have expanded to brick-and-mortar locations is for the one-of-a-kind experience stores create for customers. Websites and social media can do many innovative things, but they can’t offer a full sensory brand experience, a place where shoppers can truly interact with products and services. A visit to a store or showroom can be memorable and personalized in a way a visit to a website can never be. Take one simple example. Casper, which until 2019 only sold its mattresses online, created Dreamery by Casper, a nap room in one of its New York City locations. The concept provides an opportunity for store visitors to rest for 45 minutes on a Casper mattress in a private, comfortable and curated space. To enhance the experience, the retailer offers touches such as luxurious sleepwear, skincare products and meditation music. Unique experiences like this continue to represent a retail brand’s best opportunity to differentiate itself. Long before the pandemic, consumers showed their affinity for experiential retail. Those interests haven’t waned and that’s why DNBs that have ventured into physical retail are primed to take advantage of a wave of pent-up demand for those experiences.
What’s more, digitally native brands typically have an advantage over traditional retailers in understanding their customers. Given their online roots, DNBs have rich customer data—everything from site user habits, to click patterns, to search queries. Armed with the insights from this data, they are well equipped to customize every aspect of the store experience, designing innovative layouts and creating unique moments that meet their customers’ needs and expectations.
Other benefits underscore why expanding to physical locations makes good business sense for digitally native brands. On a per visit basis, for example, consumers are likely to spend more in-store than online. Further, according to a First Insight survey of shopping habits and purchase behavior, consumers also tend to make more impulse buys in-store than they do online.4 For men, 78% said they are likely to add impulse items in-store while only 67% are likely add them when shopping online. For women, the story is largely the same—nearly 90% report they’re likely to add an item shopping in a store versus 77% who said that they are likely to add items online.
MAKING THE TRANSITION OFFLINE
Despite the advantages of physical locations, opening retail stores is not easy. Location, for example, is still critically important. The pandemic created significant retail vacancies, and all retailers, including digitally native brands, have one of the best opportunities in years to secure superior locations. But while there may be more options to assess, the best locations in the best neighborhoods, high streets, lifestyle centers and malls still come with a price tag. According to Cushman & Wakefield research, while retail rents overall are still recovering, in some of the most desired retail locations and properties, asking prices are approaching pre-pandemic levels—even exceeding those levels for select available spaces.
The good news for digitally native brands is that despite retail vacancies, landlords are still focused on finding the right tenant mix and providing unique and memorable shopping experiences that will drive foot traffic and consumer engagement. As such, many real estate owners are open to making creative deal structures or providing turnkey retail options to bring exciting new tenants into their properties. Many digitally native brands fit that profile.