Article by: Steven D’Souza
Hudson Yards development has dedicated an entire floor to digital brands making their brick and mortar debut
By setting up his first physical store in the same building as big names like Coach, Kate Spade and H&M, Brian Berger, the co-founder of online menswear brand Mack Weldon, knew he was facing a major challenge.
“It’s like showing up for your first game and it’s the Super Bowl,” said Berger, as he toured the company’s location inside the Hudson Yards development in New York City. Hudson Yards is a joint venture of Related Properties and Oxford Properties, the real estate arm of the Ontario Municipal Employees Retirement System (OMERS) in Canada.
The new West Side neighbourhood features office towers, a hotel and a seven-storey shopping mall with more than 100 stores. The feature attraction is the Vessel, a 16-storey, walkable, Instagram-friendly public art structure.
Inside the mall, Mack Weldon isn’t alone as it makes its first foray into bricks and mortar retail. While the first floor of the mall is dedicated to luxury brands such as Cartier and Fendi, most of the second floor is reserved for digitally native brands making the leap offline.
It’s a targeted and deliberate move by the landlord, Related Companies, to attract shoppers in the midst of what some describe as a “retail apocalypse.”
Vice-president Webber Hudson says the idea was to attract new shoppers by bringing online retailers into the mall. The hope is the web traffic those stores generate online will translate to increased foot traffic in the stores.
With malls hollowing out across America and closing signs increasingly popping up in storefronts, they needed to get creative to attract shoppers, he said.
“The whole revolution of what was happening online and how aggressive online buying was becoming, somewhat at the cost of bricks and mortar, was stunning and we couldn’t ignore that.”
Hudson says retailers that made it big online aren’t as bound by the old conventions of in-store retail and in many cases offer more unique shopping experiences.
Yet, he admits the strategy is a calculated risk — and not every store will make it.
A bleak retail landscape
Among the brands that have set up shop alongside Mack Weldon are shoe company M. Gemi, men’s clothier Rhone, home and lifestyle shop Batch, and b8ta, a store where shoppers can get a hands-on feel for dozens of tech products typically only found online.
They are swimming against a retail tsunami that’s seen a record number of closures in recent years. Coresight Research, a global research firm, says so far in 2019, U.S. retailers have announced 6,130 store closures. That already exceeds the total of 5,864 for all of 2018.
Last year, it was large chains such as Sears, the U.S. chain of Toys “R” Us and Kmart at the crest of the wave. This year, Payless ShoeSource announced it is closing all 2,100 of its stores.
Meanwhile, other brands that aren’t closing altogether are shrinking their retail footprint. Gap announced it would close about 200 Gap and Banana Republic stores in the next three years.
CoStar Group, which tracks commercial real estate, says 2018 was a record year for announced store closures in the U.S. It found that 155 million square feet of retail space was announced for closure, compared to 102 million square feet in 2017.
Faced with this grim reality, landlords must find new ways to keep shoppers coming out to their stores.
“I think landlords are really looking toward, ‘How do we reverse this trend? How do we get ahead of our competitors and making a more curated and experiential product?'” said Victor Rodriguez, a senior market analyst with CoStar Group.
This has led major landlords such as Related Companies and Brookfield Properties to reach out to digital brands, offering flexible leases in hopes they can translate the success they’ve found online to the storefront.
The money is still in stores
Russ Winer, a marketing professor at New York University, says established online brands such as mattress-maker Casper and eyeglass company Warby Parker were the first to start the trend. Casper announced last year it would open 200 stores, while Warby Parker opened its first store in 2013 and now aims to have close to 100 by the end of the year.
The latest version of the trend has bigger developers seeking out smaller brands to help rejuvenate their retail offerings.
Winer says the move offline is also beneficial for the digital brands. When it comes to acquiring customers, it can actually be cheaper, he said. The banner ads and discounts used to attract shoppers online can be more expensive than a shopper discovering a storefront.
And despite the hollowing out of malls and the public perception of online shopping’s success, people still buy most of their goods in stores.
“Still 90 per cent of all retail sales take place in a physical store,” Winer said. That number is even higher in Canada, where Statistics Canada says online sales, while rising steadily, still only make up about three per cent of overall retail sales.
Saviours of retail?
Rodriguez says what’s happening at Hudson Yards will be closely watched in the industry, especially in New York City, where malls typically struggle because people prefer shopping along streets like 5th Avenue or in fashionable neighbourhoods like SoHo.
“This is going to be the proving ground,” Rodriguez said. “Are those online retailers the way to go in the future and are landlords going to accommodate them?”
Marketing professor Russ Winer says no matter what happens, don’t expect these smaller digital brands to start filling up malls across suburban America. He says these kinds of stores need dense urban areas with lots of residents and tourists to succeed.
Malls still require large anchor tenants, he says, so landlords need those stores to adapt to the new retail environment. That involves everything from downsizing the size of their stores, improving the customer experience, and modernizing the kinds of information they gather about their customers, he said.
“I think physical retail is here to stay. I think the pressure is on J.C. Penney and Macy’s and some of the other physical retailers to become more relevant in today’s world.”
Brian Berger at Mack Weldon says they don’t plan on a massive expansion across the United States, and instead will be opportunistic about where they open any future stores.
New kids, new data
Back at Hudson Yards, the shopping area has been open for almost two months. Across from Mack Weldon sits another born-online brand, Italian footwear company M. Gemi.
The company has done pop-up shops before, so brand director Heather Kaminetsky says they know the benefits of physical retail.
“We actually find that customers that shop online and shop within our physical spaces will spend more over their lifetime.”
The key to success, she says, lies in the data they gather both online and in the store. They can use the information to determine everything from what shoes to stock to where to place them in the store.
Rodriguez says that data may be the difference that allows the new kids on the retail block to thrive where legacy retailers are failing.
“I think they just know how to use it better. They were born online. This is their bread and butter.”
Berger says online brands typically see a 20 to 30 per cent uptick in web sales in areas where they’ve set up a physical space.
“[Customers] come in, they have a three-dimensional experience — they’re seeing, feeling, and touching the product. That can’t be replicated and can’t be undervalued.”