March 3, 2014, 11:20 AM

The digital future of stores

(Page 3 of 5)

Most retailers know they have to figure out what consumers truly want, and some are eager to get going. Michael Burgess, recently named president of HBC Digital, the newly created division of the Hudson's Bay Co. charged with overseeing digital implementations across the retailer's sales channels, is one of those retailers. He came to Hudson's Bay through its $2.9 billion acquisition last year of Saks Inc., where he was president of Saks Direct, that chain's e-commerce business.

Burgess will have the opportunity to think differently about the convergence of the web, mobile and store as Hudson's Bay designs the first Canadian Saks store, in downtown Toronto, slated to open in fall 2015. Burgess and Marigay McKee, the newly hired president of Saks Fifth Avenue, will work together to determine how consumers want to shop Saks across channels and how the retailer can offer that to them. "We all believe in the importance of the digital experience in stores, and we are still in the process of making plans on how it will evolve," Burgess says. The HBC Digital division will be part of all brand developments across the HBC portfolio, and Burgess will report directly to HBC chairman Richard Baker.

Like Saks developing stores in Canada, other retailers launching stores formats in the United States are entering the process with a digital state of mind. And they're selecting where to open stores carefully. Japanese apparel retailer Uniqlo Co. Ltd. began opening U.S. stores in 2005, and launched its U.S. e-commerce site in fall 2012. The company's stated goal is to generate $10 billion in North American sales by 2020, most of that through its physical stores. It currently operates 17, with about two-thirds of those in and around New York City and a third in the San Francisco Bay area. "Bringing digital into every aspect of our operations and our interactions [with] customers is a major focus for Uniqlo in its ongoing development," says Larry Meyer, Uniqlo USA president and former executive vice president of youth apparel retailer Forever 21. "We need to be thinking from both sides, bricks-and-mortar and the digital view, to make sure our development is synergistic and the view [to consumers] is seamless."

The retailer is experimenting with technologies like a so-called "magic mirror" that photographs a consumer trying on say, a black down jacket, and morphs to show the consumer how a dozen other colors available would look on them without the consumer having to try those colors on. The mirror is currently in place in Uniqlo's San Francisco flagship store and Meyer says the retailer is working at rolling it, and other technologies that engage consumers similarly, out more broadly.

Finding empty retail space is still easy— retail availability rates are still above 10% after peaking above 13% two years ago, according to data from investment and risk advisory firm CBRE Econometric Advisors —but retail space under development in 2014 is at a historic low as developers wait for retailers to absorb existing vacancies. "Development is in limbo state right now," says Abigail Rosenbaum, a CBRE Econometric Advisors economist, noting that the economic recovery has been muted for retailers. "The omnichannel piece is affecting how retailers think about stores, and how developers are thinking about retail centers." Retailers have a much smaller number of projects planned than prior to the recession, she says, and the ones that are planned are smaller than before (see chart, page 20).

Gap Inc., for instance, managed 6.2% fewer square feet of retail space in 2012 than it did in 2010 (see chart, page 24), but combined with online sales and an increasing integration of the web in the stores, such as the "reserve online, pick up in store" program that it rolled out to 652 stores last November, the retailer generated 16.2% more in sales. Meanwhile Macy's Inc., while operating roughly the same number of department stores nationwide, is slowly shifting the stores' locations to places, which, presumably, will drive more sales per square foot. For example, in January it announced it would close five stores in suburban locations like Florissant, Mo., which is about 17 miles northwest of St. Louis, but open six new stores in such tony locales as Miami and Palo Alto, Calif. It is also expanding its stores' roles to support e-commerce. At the close of 2013, 63% of Macy's stores fulfilled online orders from store inventory, up from 37% a year earlier.

One retailer taking a carefully thought-out approach to new store build-outs is Boston Proper Inc., which sells contemporary women's apparel. Originally a catalog company, it grew into an e-commerce powerhouse, peaking on the Internet Retailer Top 500 list at No. 146 in 2011, when it generated $111 million in online sales. Chico's FAS Inc., which operates store brands including White House Black Market, Soma and its namesake Chico's, subsequently acquired it for $205 million.

In 2012 Chicos FAS began planning the first Boston Proper shops with retail design firm Kramer Design Group, which has designed retail store concepts for retailers including Kate Spade, John Varvatos and Club Monaco. They were meant from day one to be "fully omnichannel," says Robin Kramer, founder of the firm and lead consultant on the design creation with Boston Proper. With the Boston Proper brand a "greenfield" operation at the bricks-and-mortar level, Kramer and Boston Proper had a clean slate to build upon. "We felt it was important that the brand be seamless, online, in store, in the catalog," she says. "We had the opportunity to do a smaller store with great digital integration that could hold less inventory but still keep sales at a high rate."

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