The future of e-commerce could be coming to a local mall near you
Online furniture seller Wayfair, W -8.08% which saw a decline in active customers last year, is placing new hopes in that physical world: It plans to open three bricks-and-mortar stores in Massachusetts this year. In an earnings call on Feb. 24, Wayfair Chief Executive Niraj Shah said the stores will be “valuable avenues for discovery, visualization and marketing.”
The adjustment for Wayfair—and a number of other online sellers—is due in part to a slowdown in e-commerce from the early months of the pandemic. The online share of U.S. retail sales hit a peak of 15.7% in the second quarter of 2020, declining to 12.9% in the fourth quarter of last year, according to the U.S. Census Bureau. Meanwhile, shoppers are hitting the malls again: As of March, foot traffic at indoor malls was up 16.6% from a year earlier, according to Placer.ai.
Those slowing growth prospects shed roughly $80 billion in combined market value from online pet retailer Chewy, Wayfair and online crafts marketplace Etsy since their respective peaks. That is roughly four times the combined value of department-store stalwarts Macy’s, Nordstrom and Kohl’s.
E-commerce sellers have other challenges to overcome. It is becoming more expensive to lure in new online customers as advertising costs increase and organic search visits for shopping decline. Google organic search visits to retail and consumer goods sites fell 14% in the fourth quarter of 2021 compared with a year earlier, while search visits for travel have increased 41%, according to marketing agency Merkle.
This puts pressure on retailers to spend more to make sure their ads appear before consumers. Facebook parent Meta Platforms said the average price per ad increased 30% year over year in its first quarter.
Chewy is facing these hurdles. In fiscal 2019, it spent roughly $148 in selling and advertising expenses per net new customer. By 2021, that figure had ballooned to $424 per net new customer and in 2022 is expected to reach $505, based on consensus estimates polled by Visible Alpha.
The so-called customer acquisition cost looks less scary if one excludes spending on “retention” marketing for existing customers and takes into account gross new customer additions, not the net number. But even after taking in those nuances, the broad picture remains the same: Chewy’s acquisition costs were roughly $120 per customer in 2021, a 44% increase compared with 2019, according to estimates from Seth Basham, equity analyst at Wedbush Securities.
“The cost of customer acquisition has gotten pretty high online because e-commerce has already cherry-picked the customers that are most likely to shop online,” said Mr. Basham. “There’s that natural limit.”
Contrast that with Petco, a pet retailer which generates most of its revenue in its stores. Petco spent roughly $170 of advertising per net new customer in 2019, but that figure declined to $64 per net new customer in 2020 and then to $60 last year. Petco said in its recent investor day presentation that because of its store footprint, it is able to offer same-day delivery that is cheaper and faster compared with pure-play e-commerce. It is remodeling its stores to grow hands-on services such as veterinarian care and grooming services, which can’t be provided online.
There are far more examples of bricks-and-mortar retailers adding e-commerce than the other way around. But the broad track record for profitability isn’t great for e-commerce, as variable expenses such as shipping costs and processing returns can quickly add up. As online penetration of retailers’ sales more than tripled between 2012 and the first three quarters of 2021, margins on the basis of earnings before interest, taxes, depreciation and amortization halved, according to an AlixPartners study of publicly listed retailers with annual revenues exceeding $1 billion.
Because online retailers have already attracted highly online shoppers, stores could serve to attract a different type of customer. As Bank of America analyst Lorraine Hutchinson puts it, “many different people walk by stores.”
Of course, if the intention is to acquire new customers, those stores will have to be located in prime retail corridors, which is not cheap. Still, while online advertising costs have gone up, retail rents have gone down. In New York City, for example, asking rents at prime retail corridors declined by an average of 11% in the first quarter compared with a year earlier, according to data from Jones Lang LaSalle.
Some direct-to-consumer brands which started out as online sellers have continued to add physical stores, citing better profitability. Eyewear brand Warby Parker plans to open 40 new stores this year, while footwear maker Allbirds plans on 16 to 17 new locations. While neither company is profitable on a whole-company basis, both have indicated that margins are strong within their stores. Ms. Hutchinson, for example, noted in a November 2021 report that Allbirds’ physical stores have earnings before interest, taxes, depreciation and amortization, or Ebitda, margins of 20% to 25%. Warby Parker has said that it is on track towards reaching its targeted Ebitda margin of 35% for its stores.
When the company opens a new store, that geographical market sees revenue growth of over 250% on average in the first year of the store debut, Warby Parker Co-Chief Executive Dave Gilboa said at the company’s last earnings call in March. That resonates with what Macy’s has found: Adrian Mitchell, Macy’s chief financial officer, has previously said that digital performance is stronger in markets where the company has stores. The department store giant has delayed most of the remaining store closures it had earmarked in 2019 to maintain physical presence in many markets.
Online retailers’ success in the physical world might, in part, depend on how much of the consumer wallet they already capture. Small direct-to-consumer brands, after all, have a lot of room for growth—whether that is online or through stores.
For Amazon, which already has high market share, the foray into bricks-and-mortar retail hasn’t made much of a dent. Revenue at its physical stores—which include bookstores, as well as grocers such as Whole Foods and Amazon Fresh—declined last year compared with 2018.
In any case, for Amazon the physical stores serve a larger function: They are also avenues through which Amazon tests out new services—such as the “just walk out” technology—that the company can license out to third-party retailers. Its new clothing store that is slated to open in California—Amazon Style—will use technology that allows customers to add items to the fitting room through an app.
Moving from a variable cost-based business to one that adds fixed costs will add different kinds of pressures, of course. It could involve more capital expenditures, so returns on capital could suffer in the short term, notes Mr. Basham, who also says that operational challenges could be more significant in physical retail. Given that many bricks-and-mortar retailers are seeing persistently depressed valuations, they may strike more partnerships, business combinations or other kinds of tie-ups such as real estate deals with online players in the years to come.
Retail, in short, is about to get a lot less bifurcated. Some of the most successful merchants will be those that understand how to bridge the worlds of bricks and clicks.
Although there’s nothing wrong with solely running a brick-and-mortar store or an ecommerce business, many business owners have implemented a “bricks and clicks” business model—in which they combine physical and online operations into a single retail strategy. How does a bricks and clicks business work? Is it worth investing in for your business?
In this guide, we’ll explain everything you need to know about the bricks and clicks business model, including tips for how to best implement this retail strategy, which you can also find summarized in the infographic below.
What Is the Bricks and Clicks Business Model?
As we briefly mentioned above, the bricks and clicks business model refers to the combination of a physical retail location (the brick) and an ecommerce sales channel, or online store (the click). This business model is also sometimes called “brick and click,” “click and mortar,” and “clicks and bricks.”
In essence, this business model allows small businesses to take advantage of two unique sales channels by implementing a unified retail strategy. This being said, combining both channels with the bricks and clicks business model gives businesses the opportunity to offer more shopping options to customers—while also increasing their earnings and potential brand reach.
Examples of Bricks and Clicks Businesses
With the growth of ecommerce, most large retailers have implemented the bricks and clicks business model—running retail stores as well as selling their products online.
Therefore, big-name companies like Target and Walmart could be considered bricks and clicks businesses, as well as retail stores such as Old Navy, Petco, and DSW.
This being said, although the bricks and clicks concept is most commonly applied to businesses with physical locations that then open an online store, there are examples of the reverse—popular ecommerce businesses investing in brick-and-mortar locations.
In this case, these stores are usually referred to as “clicks and bricks” and include retailers like Warby Parker, Casper, and Bonobos.
Eyewear brand Warby Parker plans to open 40 new stores this year.
How Does the Bricks and Clicks Business Model Work?
As you can see by these examples, the bricks and clicks business model can encompass a variety of different types of businesses across many industries.
You might currently run a brick-and-mortar store and decide to start an online store to offer your products through an ecommerce experience as well. On the other hand, you might currently run a successful ecommerce business and decide to open a storefront to bring your products to customers in-person.
When it comes down to it, therefore, the implementation of a bricks and clicks model will likely be unique to your specific business.
This being said, however, regardless of how you implement this model, bricks and clicks generally functions based on a few common principles:
Flexibility of operations: One of the goals of this business model is to offer customers flexibility that you wouldn’t be able to offer with a single channel. As an example, brick and click retailers can offer customers the choice of purchasing products online or in-store and having their orders delivered either to the store or shipping directly to their home. Similarly, returns can be streamlined in a brick and click model, giving shoppers the ability to make a return in the physical store to save on shipping costs.
Unified shopping experience: Similarly, another goal of the bricks and clicks model is to provide customers with a unified shopping experience, meaning your two channels (your physical store and your online store) need to build upon each other in cohesion and offer greater value than you would receive by simply having one or the other alone. In this case, an example might be that syncing your inventory across channels allows customers to check if an item is in stock before heading to a store to purchase it.
Improved customer experience: Both of these goals contribute to the larger principle of improved customer experience. Instead of catering to a single customer channel preference, the bricks and clicks model can cater to a wider range of customer desires. With two channels that work together, customers can access the best of both worlds and are more likely to find a shopping scenario—for example, ordering online and picking up in-store, that meets their preferences.
Brand building and growth: Finally, of course, the ultimate goal of this strategy is the success of your business. By reaching more customers and providing a better experience, you’ll hopefully access increased profits and business growth. To this point, although perhaps less tangible, implementing the bricks and clicks model allows you to increase brand awareness and reach—especially through integrated advertising and marketing strategies.
Pros and Cons of the Bricks and Clicks Model
With all of this information in mind, before we dive into our tips for implementing the bricks and clicks business model, it’s important to understand the possible benefits and drawbacks of doing so.
In our discussion of how this business model works, we touched on some of the advantages, but we’ll list out both the pros and the cons here:
Pros:
Reach more customers: In addition to providing in-store experiences for customers, an online channel distributes goods far outside a local community to global consumers.
Analytics can improve offerings: Using web analytics tools can help a physical store refine in-person offerings while meeting customers in a physical location can provide real-time feedback for a better online presence.
Provide a better customer experience: The bricks and clicks model allows retailers to cater to a wide range of customer preferences while remaining competitive.
Cons:
Potentially cost-prohibitive: Operating both an ecommerce and brick-and-mortar location comes with additional overhead costs, such as buying a store security system and paying regular website management costs.
Comes with a learning curve: For digital native or brick-and-mortar-only brands, learning how to leverage a new sales channel can present a challenge.
Increased time investment: Inventory management across two channels, turning online analytics into action, and lessening discrepancies between the online and offline experience requires more time to implement and manage.
As you can see, although there are impressive benefits to turning your operations into a brick and click business, there is also a sizable investment when it comes to time, money, and resources.
Therefore, before you decide to grow your business with a new sales channel, you’ll want to evaluate the possible risks and rewards. In doing so, it may be helpful to talk to industry experts or business advisors, perform research into trends in your specific industry, as well as create financial projections.
Moreover, before diving into the bricks and clicks model, you’ll want to work on a detailed plan that specifies what actions you’re going to take, how you’re going to implement them, what resources and funds you’ll need, and how long it will take to complete these initiatives.
How to Implement the Brick and Click Model: 8 Tips for Success
As we’ve mentioned, much of the implementation of the brick and click model will be unique to your business and industry.
First and foremost, of course, the process will depend on whether you’re adding an ecommerce arm or retail location to your existing strategy. As you might imagine, the latter will be much more involved, requiring you to decide where to put your store, finding a location, purchasing or renting the real estate, etc.
By comparison, adding an online store to complement your brick-and-mortar operations will be a much simpler process. In this case, the first step will be creating and launching your ecommerce website—or adding products with a shopping cart element to your existing website.
Overall, however, regardless of your specific situation, there are some areas of your business you’ll want to focus on when implementing the brick and click model. Here are eight tips to help you do just that:
1. Use a robust point of sale system.
The right point of sale system is integral to any brick-and-mortar business, and therefore, any bricks and clicks business. You’ll want to ensure that your existing POS, or any system you purchase, is all inclusive—allowing you to integrate key parts of your operation—payment processing, inventory, team management, etc. across online and offline channels.
Ideally, your POS system will be able to integrate directly with your ecommerce website, giving you the ability to manage your retail location and online store all the more seamlessly. To this end, all-in-one POS systems like Clover or Square are great for managing brick and click businesses.
2. Level up your merchandising.
To promote your products both online and offline, you’ll want to ensure that you’ve thought about your merchandising and the best way to draw customers in through each respective channel.
For your brick-and-mortar store, you’ll want to think about how your displays are placed, which products you highlight throughout the store, and how customers will best navigate the space. For your online store, on the other hand, you’ll want to focus on product photography, descriptions, and the best way for customers to virtually complete the order process.
Of course, your ultimate strategy will be different for your online store compared to your retail shop, but in both cases, your brand’s feel, style, and messaging should be consistent.
3. Keep inventory consistent.
As we discussed above, one of the biggest benefits of the brick and click model is that it offers customers the ability to browse online and purchase in-person and vice versa. To ensure that customers have an ideal experience, therefore, it’s important to keep your inventory consistent and synced across both channels.
Again, the right point of sale system can help with this process. Depending on the type of business you run, you might also opt to invest in a separate inventory management software.
4. Make shipping and returns easy.
Not only will you want to offer shipping and returns for both online and in-person purchases, but you’ll want to make sure that you do so in the easiest way possible. Ideally, customers should be able to place an order online or in-store and have it shipped to their home, as well as be able to return items by mail or in-person.
To this end, you’ll want to establish your shipping and returns policies from the beginning and make sure they are properly communicated to customers. Additionally, you’ll want to make sure you choose the right shipping provider who can make the process as simple and as affordable as possible—for you and your customers.
5. Don’t skip mobile optimization.
If you’re adding an ecommerce branch to your physical retail location, you’ll want to ensure the website and shopping cart process you create are both mobile-friendly. Customers should easily be able to browse your online store and complete orders using their mobile devices, whether tablets or smartphones.
6. Leverage your analytics.
As we mentioned earlier, one of the benefits of the bricks and clicks business model is that it gives you the opportunity to access web analytics and use these tools to improve your in-person and online experience.
Therefore, when you create your online store, you’ll want to see what kind of analytics tools the ecommerce platform offers and determine the best way to track and gain insight from your sales and customers.
7. Focus on customer engagement.
In order to implement the brick and click model, you’ll want to encourage feedback from your customers and engage them in any way you can. Not only will focusing on customer engagement give you access to insights you can use to improve both arms of your business, but it also will make your customers feel appreciated, heard, and hopefully, encourage brand loyalty—in which they buy from your business again and again.
This being said, you might engage customers by sending email surveys, creating a cross-channel loyalty program, offering in-store and online discounts and promotions, as well as by encouraging feedback and interactions on social media platforms.
8. Create a singular brand experience.
Of course, the goal of a brick and click business is to create a singular brand experience across two very different sales channels. So, what can you do to achieve this goal?
Ultimately, by following all the tips we’ve listed here, you should be actively contributing to reaching that goal. Specifically, however, you might also think about how you integrate the “offline” and “online” from a business branding perspective. How do you inform customers of your online store within your physical location?
How do you advertise across both channels? How do you ensure that your brand is consistent in both places?
Overall, these are questions you’ll want to ask yourself as you go through the process of implementing a brick and click strategy—the unified brand experience should always be top of mind.
Bottom Line
At the end of the day, with the retail industry constantly changing, it’s likely that the bricks and clicks business model will become more prevalent among small and large businesses alike. After all, by implementing an omnichannel sales strategy, the hope is that you’ll access more customers, more sales, and eventually, more profit and business growth.
This being said, however, before you decide to add a “bricks” or “clicks” element to your current business model, you’ll want to determine whether it’s the right path for your business to take—especially considering the investment in time and resources.
Ultimately, if you do decide it’s right for you, it’s important to create an implementation plan ahead of time and focus on some of the high-level areas—like your point of sale system, inventory integration, and customer engagement strategy—that we discussed above (which are also illustrated in the infographic below).
