Look for more stores-within-stores
Stores-within-stores have been prevalent in Europe and Asia for years, and while they’ve been in play for decades in the U.S. (think perfume counters in Macy’s), all indications call for much wider adoption here in the years ahead. Already, the concept has branched into new combinations. Apparel shops within supermarkets, electronics boutiques in department stores, and branded sections of sporting-goods stores are some commonly seen examples.
The main goal for a department store, or the “host retailer,” is to find a suitable retail partner. On the horizon are possibilities such as cocktail lounges inside apparel stores, spas within luxury department stores, travel planners operating in department stores, kids’ haircuts inside discount retailers, and outposts for kitchen housewares inside high-end grocery stores.
Department stores are racing to optimize their store portfolios in the evolving retail market. As so many store closing headlines have proved, they are under tremendous pressure to monetize their underused space and recapture lost market share. They are also being urged to provide deeper experiences to shoppers, and that could well play out with varied merchandise, services, and store designs. Stores-within-stores address both those issues. The partner retailer provides a product or service that is beyond the scope and expertise of the host, yet targets the same demographic and behavioral profile of the host licensor’s customers.
A great example would be an optical provider in a department store. Eyeglasses and eye exams are specialized and highly regulated. Rather than trying to do this in-house, a host retailer could bring in an optical retailer to provide the product and service as a concession business in exchange for the host receiving a share of the revenue. It’s likely that the host’s target demographic and existing customers would find this to be a benefit.
Some natural-fit-category alignments are being missed at retail. For example, a home-improvement store may find it advantageous to host a workwear-apparel merchant. The store focuses on the hardware products it knows, while the apparel partner handles clothing and footwear sales outside of the host’s core competency.
The usual arrangement in these partnerships is for the specialty retailer to share a percentage of sales with the host. Surprisingly, this is not considered a real estate transaction. The specialty store is not “leasing” space from the host, but rather using the host’s underperforming physical space while benefiting from the provider’s marketing and operational support. In many situations, the host will build out the space for the specialty retailer and then support them with storewide services such as merchandise replenishment and integration into the host’s transactional point-of-sale system.
The specialty retailer typically owns all the merchandising, payroll, and operational costs of running their store inside a host environment. However, these are all contractual obligations that should be ironed-out in the initial store-within-a-store agreement.
Done well, the store-within-a-store is the proverbial win-win situation. The host retailer reduces expenses such as inventory and payroll, while extracting value from underused floor space. Not to be overlooked are ancillary benefits for the host such as enhanced brand image, an energized store environment, and increased customer draw.
The specialty retailer experiences low risk, low overhead, minimal start-up costs, and rapid scalability. Absent from the arrangement are real estate expenses such as rent, real estate taxes, or utilities that are charged to the store-within-a-store retailer. But the ultimate payoff for the partner brand may be expansion into potentially hundreds of new locations virtually overnight.
Store-within-store operators also benefit from exposure to a much larger customer profile than their stand-alone stores do. Other pluses: higher margins by selling directly to consumers rather than wholesaling to the host retailer and exposure to the host’s customer base, marketing channels, operational support, distribution resources, loyalty programs, and financial services.
We are certain to see more innovation spring up around retail partnerships that solve the needs of today’s consumers. They are a powerfully effective counter-balance to the threat of e-commerce and category-specific retailers that continue to seize market share.
Kevin Marschall is a Vice President of Retail Advisory & Transaction Services and store-within-a-store specialist for CBRE Group, Inc. He is based in Chicago.
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