American consumers have spent years shifting their purchasing power toward e-commerce. That steady march became an all-out sprint in 2020 as the COVID-19 pandemic strangled foot traffic at brick-and-mortar businesses from coast to coast.
Now, even with some pandemic restrictions rolled back and people receiving vaccines, retailers face a permanently changed landscape. And for brick-and-mortar businesses, the number one predicament may be what to do with their physical footprint.
Many businesses have already unleashed impressive innovations to deal with this new normal, finding technology solutions that can shore up physical storefronts and pivoting their real-estate holdings into e-commerce assets. One key example: “dark stores,” dedicated pickup-and-delivery hubs that don’t offer any in-person shopping—more on that mysterious sounding trend later. First, what’s happening with e-commerce as a whole?
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E-commerce transformation speeds up
Retail consultants with McKinsey & Co. estimate that e-commerce as a share of U.S. retail spending jumped from about 16 percent in 2019 to more than 30 percent in the first quarter of 2020—a leap equivalent to 10 years’ worth of growth in just three months.
That growth is also upending consumer habits. McKinsey reports that three-quarters of shoppers have sampled new retailers or brands during the pandemic, and 60 percent of those consumers said they would probably stick with those new companies after COVID-19 fades from the scene.
Brick-and-mortar businesses have been forced to adapt quickly. “We saw five years of projected growth in pickup and delivery in five weeks,” Walmart chief customer officer Janey Whiteside told the National Retail Federation (NRF).
Some businesses had to stand up new e-commerce operations seemingly overnight. NRF reports that Tractor Supply Co., a supplier of home and agricultural goods, launched its first mobile app, curbside pickup, and delivery during the pandemic.
Others sped up existing plans: Gap Inc. opened a new distribution center two months sooner than expected, while Lowe’s implemented curbside pickup almost a year early.
“The time horizon in which we make decisions, act, take risks and launch products to market has shrunk from months to weeks now,” said Farhan Siddiqi, chief digital officer of grocery operator Ahold Delhaize.
Remaking physical retail brings a long list of logistics challenges as well. According to commercial real estate firm CBRE, 2020 holiday spending is expected to result in more than $70 billion worth of returns, about three-quarters higher than the average of the previous five years. That translates into dramatically increased reliance on third-party shipping and logistics companies, squeezing their capacity.
Underlying all this change is a dramatic reduction in foot traffic to storefronts: Analysts estimate that Black Friday visits by in-store shoppers were down more than 50 percent compared to the year before. That leaves retailers wondering how to best position their real-estate footprints, or whether to keep them at all.
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Physical space can aid digital transformation
Brick-and-mortar businesses have looked at ways to creatively use their physical space for years, and those experiments took on new importance amid the pandemic.
The following leading-edge examples offer some insight into how businesses of all kinds may rethink their real-estate commitments in the post pandemic world.
Dark stores
Some major retailers have turned their stores into shipping centers that fulfill e-commerce orders, otherwise called “dark stores.” This trend started before the pandemic, but rapid changes to foot traffic and online ordering could have even more businesses considering this step.
- Walmart has tested the dark-store concept for a few years, opening their latest example in mid-2019 in a suburb of Chicago. The 40,000-square-foot center—formerly a grocery store—looks like a traditional Walmart inside, but customers can pull up outside to get their orders loaded up.
- Grocery chains such as Stop & Shop and Hy-Vee are also testing out the dark-store concept in order to speed order fulfillment. Whole Foods, for example, converted six grocery stores to “dark” stores focused solely on delivery and pickup in spring 2020.
- Macy’s has also shifted some physical stores. It began testing the concept in 2020 at stores in Delaware and Colorado. The so-called “omni service center” model allowed customers to pick up orders, return unwanted purchases, and pay their Macy’s credit-card bills, with all traditional shopping done completely online.
- Nordstrom, an upscale retailer, has rolled out “Nordstrom Local” stores in cities such as Los Angeles and New York. These miniature Nordstrom locations offer online order pickup, “express” alterations to garments and some limited customer service.
Converting in-person shopping locations to distribution centers can benefit retailers by giving them a third option beyond subsidizing a struggling store or trying to withdraw from a costly long-term lease or land ownership. “Every chain in the world will be doing this in the future. And the future is now, because COVID-19 has pushed the timeline up for a number of these kinds of initiatives,” Cambridge Retail Advisors managing partner Ken Morris told Fast Company.
Related: 7 lessons brick-and-mortar businesses can learn from the delivery boom
Ghost kitchens
Some companies have started offering food delivery from restaurants that exist solely to sell delivery and takeout, without a “real” front door for customers and no in-person service. Referred to as “ghost kitchens,” the idea has expanded into nonfood retail as well.
- DoorDash, the online restaurant delivery service, opened a ghost kitchen in late 2019 in the San Francisco area, offering food from several different restaurant brands, ranging from gyros and chicken to burgers and ice cream.
- Brands like Cloudkitchens are enabling restaurants to expand without the significant brick-and-mortar investment. Instead, Cloudkitchens builds out ghost kitchen infrastructure, from which restauranteurs can rent and customize a space that is optimized strictly for delivery.
- Delivery companies have also started offering “ghost stores” which essentially function as convenience-stores with dispatched drivers dropping off quick essentials someone might have previously walked to grab from the corner market. DoorDash’s version of this idea is called DashMart.
The benefits of ghost kitchens for restaurants are obvious, including reducing physical footprint and labor costs by simply not having tables and chairs to clean and serve. Experts note that customers benefit from ghost kitchens, too by gaining more flexibility to customize orders and check out restaurants that are usually too far away or generally out of their price range. It’s all made possible by innovation in mobile ordering and online delivery networks.
Hybrid models
Some businesses believe a blended model that mixes traditional shopping and online fulfillment is the key.
- In the fall, Walmart announced it was converting four stores to “test centers” that would try out new types of shopping and fulfillment services, with the idea of perfecting new concepts before they’re rolled out across the company’s 4,700 stores. These blended stores test concepts such as offering more of the store’s physical inventory for online shopping, improved in-store navigation to help workers fill orders, and augmented-reality apps to help workers see which items are ready to be moved to store shelves.
- Grocery stores are also combining online-ordering fulfillment centers with their existing physical stores. The grocery chain, Albertson’s partnered with a logistics partner called Takeoff Technologies, which uses robots to pull orders from shelves in its micro fulfillment centers.
Retailers who see their physical stores as a primary asset can benefit from a hybrid approach because it allows them to add value to an existing system that makes up the core of the business. “Our existing footprint is already within 10 miles of 90 percent of the population,” Walmart e-commerce chief Marc Lore said.
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The physical footprint needs reassessment
Pandemic lockdown orders that quickly crippled in-store sales eventually gave way in many locations to reopening plans with reduced indoor capacity. But amid that disruption, many brick-and-mortar businesses were forced to reevaluate what their physical businesses would look like in the years ahead.
The economic disruption led to a wave of closed stores and broken leases, with Bloomberg reporting that a record number of retailers sought bankruptcy protection to exit leases and close thousands of retail stores. Accounting firm BDO reported that the pace of store closures in 2020 broke the previous year’s record of 9,500 by August.
The trend of shrinking footprints predated the pandemic and is unlikely to reverse once the crisis eases. The United States is generally considered to be “over-retailed,” with experts estimating the country may have more than 40 square feet of retail space per resident, compared with less than 3 square feet per person in Germany.
A BDO survey of retail-company chief financial officers shows that brick-and-mortar businesses are already thinking ahead, with 40 percent planning to rethink how much real estate they occupy in 2021. “Whether by rebuilding their infrastructures, transforming their business models or rightsizing their assets,” the firm said, “retailers must sharpen their focus and go all in on strategically investing in what matters most.”
The quick thinking and agility of U.S. retailers during the pandemic shows that, even when circumstances are dire, decisive bets are possible. And carrying that attitude forward into the new normal of post-COVID-19 life will certainly pay dividends.
2020 was the year of, well, many things for many people. For brick-and-mortar businesses and their customers, the pandemic year marked the start of intense digital acceleration. The migration to e-commerce in the United States alone went from 17 percent to 33 percent in just two months. (It was previously estimated to reach 24 percent by 2024.)
As safety continues to be a top priority for brick-and-mortar merchants (and their customers), digital storefronts are not only an effective post-pandemic strategy but also a larger way to bridge the physical/digital gap overall.
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COVID-19 changed consumer behavior for the long term
In short: Digital storefronts meet modern consumer demand.
The pandemic forced most merchants to quickly pivot to a digital-forward business model. But studies show the model isn’t going anywhere, even after the crisis slows—and the data doesn’t lie. According to McKinsey, “79 percent of consumers intend to continue or increase their usage of self-checkout in retail after COVID-19.”
Meanwhile, 75 percent of consumers in the U.S. have tried curbside pickup or have started using delivery apps since the pandemic began, and 73 percent intend to continue after COVID-19 slows.
Almost every sector has been hit with the need to pivot to digital, from banking and gyms to pharmacies and grocery stores. The digital trend extends beyond e-commerce and is vital to economic recovery.
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The evolution from website to full-scale experience
Over the years, digital storefronts have evolved from something as simple as having an online presence, like a website or an online store, to a full-scale physical, frictionless experience.
The hospitality sector has been one of the hardest hit during the pandemic, so it’s no wonder restaurants have been among the quickest to adopt new digital technologies. From ghost kitchens and mobile ordering apps to digital-order-only locations, restaurants are turning their focus to recovery and growth rather than just survival.
Today’s digital world means the faster, the better—so to get food to consumers faster, chains like Chipotle, Burger King and Taco Bell have pivoted new locations to include digital-first storefronts.
Chipotle’s Digital Kitchen
In November, Chipotle opened its first Digital Kitchen in Highland Falls, New York, after digital sales skyrocketed throughout 2020. According to Restaurant Business Online, “Digital sales grew 202.5 percent year-over-year in Q3 to $776.4 million,” and about half of the fast-casual chain’s sales are now digital, proving demand for the new model.
Since the new locations don’t have a front service line, orders for pickup or delivery are solely placed online, either through Chipotle’s app or website or through a third-party delivery service. Despite being extremely digital-forward, for the new concept, customer experience is a focus. Unlike ghost kitchens—which specifically exist to fulfill delivery orders and don’t directly interact with consumers—Digital Kitchen locations are open to the public. Even the lobby is equipped with a realistic experience, offering the same sounds, smells and ambiance as a typical Chipotle location.
Burger King’s Restaurant of Tomorrow
Burger King is set to launch its new contactless concept, “Restaurant of Tomorrow,” in 2021. Burger King’s new locations have two main goals: to reduce their footprint—the new locations will be 60 percent smaller than traditional Burger Kings—and to increase patron comfort amid the pandemic and beyond by going completely contactless.
Burger King has a few plans for going digital. Solar-powered canopies will hover over a drive-in area, where guests can park, use the restaurant’s app to place an order, and have that order delivered to their car. The new location will also feature dedicated parking spots for curbside pickup, lockers that hold mobile and delivery orders, a walk-up window and drive-thru lanes specifically for online order pickup.
Taco Bell’s Go Mobile
Some chains opt for a hybrid model. Taco Bell is set to launch its first digitally emphasized store, Go Mobile, in 2021. The new model will offer tablets for ordering, curbside pickup, double drive-thru lanes and order pickup shelves—all with the intention of emphasizing order-ahead. And for customers that still want to order on the fly, Go Mobile will feature a traditional drive-thru lane.
Similar to other concepts above, Taco Bell’s new Go Mobile locations will feature a much smaller footprint than traditional locations—1,325 square feet compared to 2,500 square feet, respectively.
Unlike Chipotle, whose consumer base had clear demonstrations of digital intent before the pandemic, Taco Bell’s digital concept is the result of a sudden surge in demand. The chain also swiftly launched a new in-app loyalty program in the midst of the pandemic five years after the first iteration.
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Small businesses go digital with third-party assists
Digital storefronts aren’t reserved for million-dollar chains. Options like localized marketplaces and DoorDash Storefront offer SMB-friendly versions of the examples above.
For retail, localized marketplaces, like Cinch Market and Member Marketplaces Inc., offer expanded e-commerce efforts to small businesses. Localized marketplaces also offer a handful of advantages to consumers by offering the “shop small” experience while providing one central checkout and delivery options.
The rise in marketplace success isn’t coincidence. According to Digital Commerce 360, 93 percent of e-commerce consumers have turned to a marketplace to get their shopping done. As a result, 36 percent of retailers “adjusted their marketplace strategy as a result of COVID-19.”
For smaller restaurants, an online presence has been key to survival during the pandemic and, presumably, will be long after.
Digital storefronts and brick-and-mortar are a perfect match
In-store technology isn’t diminished by digital storefronts; digital storefronts extend the need for modern, reliable, digital-first solutions for brick-and-mortar businesses. Brick-and-mortar isn’t dead, but its digital transformation is upon us. Discover how Chipotle Europe modernized its mobile experience by integrating a new customizable solution that met the needs of younger demographics, driving customer growth and loyalty.
An NCR survey revealed that 62 percent of consumers were more likely to use self-service technologies, like scanners and mobile apps, while interacting with a merchant in-person. And 86 percent of those surveyed globally by PwC said they were “likely to continue to shop online/by phone when social distancing measures are removed.” Brick-and-mortar businesses can use this transformational time to do just that: transform their digital-first offerings to better serve their customer.
Brick-and-mortar businesses can start their digital transformation by thinking about the ideal experience they want to offer to their customer(s), then walking back into the technology from there. To increase contactless offerings, would outsourcing or in-housing delivery work best? To take a frictionless experience to the next level, would investing in a mobile POS make sense? Some quick reaction and adaptation is necessary, but merchants can use this opportunity to shift their perspective from mere optimization to full transformation.
