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Online companies get physical retail as retail stalwarts shrink

They're the switch hitters of retail - players with a growing presence on the other side of the selling field.

Customers enter on the opening day for Amazon Books, the first brick-and-mortar retail store for Amazon, in Seattle. The store opened Nov. 3.
Customers enter on the opening day for Amazon Books, the first brick-and-mortar retail store for Amazon, in Seattle. The store opened Nov. 3.Read moreAP

They're the switch hitters of retail - players with a growing presence on the other side of the selling field.

Online juggernaut opened its first brick-and-mortar store in November in Seattle. Around the same time, retail heavyweight Macy's announced it was shutting nearly 40 stores this year to beef up its online presence. Same with Sears, JC Penney, and the Gap - all closing stores.

Kohl's announced on Feb. 25 that it was closing 18 stores nationwide - with locations to be announced by the end of this month. The discount chain operates 34 stores in the Philadelphia region and a popular loyalty rewards program for in-store and online purchases.

Kohl's said digital sales increased 30 percent in fourth quarter 2015, prompting it to reevaluate its store footprint.

Meanwhile, some companies that began life online - such as Athleta and Fabletics (which both sell trendy sportswear and accessories for women), Birchbox (a cosmetics company), and Bonobos (a men's online company that rented space from Nordstrom and shipped clothes to your home) - are now adding brick-and-mortar stores.

In many cases, they are moving into prime real estate once reserved for top-performing retail stores. Birchbox opened its first physical store in downtown Manhattan in July 2014.

Warby Parker - an eyewear company conceived on the Internet by four Wharton students - is taking over premium space formerly occupied by Le Bec-Fin at 1523 Walnut St. for a second Center City store. The new location will add to its tiny showroom in Old City.

"We want to be able to reach as many customers as possible, and plan on continuing to expand our retail presence," Wharton grad Neil Blumenthal, Warby Parker's cofounder and co-CEO, said in late February. "We want as many people as possible to experience our brand in-store, in addition to shopping with us online."

Blumenthal described his firm's expansion to the other side as "organic."

"We tested brick and mortar for months through various activations, like the Warby Parker Holiday Spectacle Bazaar [a holiday pop-up store in Manhattan] and the Warby Parker Class Trip, an old yellow school bus reimagined as a mobile showroom that traveled to 16 different cities," he said. Those "gave us the confidence to sign our first lease and build out a proper store in New York's SoHo neighborhood.

"Our stores offer customers an additional way to experience our brand," he said. "We think of ourselves as a lifestyle brand. We don't think of the future as purely online or brick and mortar, but rather a new blend of the two."

Eric B. Rothman, portfolio manager for CenterSquare Investment Management, based in Plymouth Meeting, said this blending of the two worlds is all "part of the evolution of retail."

"Before, it was one versus the other," Rothman said. "That's really no longer the case.

"Catalogs didn't kill brick and mortar, and online didn't kill catalogs," he said. "Successful retailers will find ways to advertise and cross all those channels.

"From the landlords' perspective, they always want hot tenants that are selling the most volume that will attract the most customers and other hot retailers to that location," he said. "For those that have not embraced online, they might not be around.

"If you're a landlord, you have to think about what is the hot retailer. You need to have the right blend of retailers. If you have a weak property, then it will only attract weak retailers on the wrong side of the vicious cycle. That's the risk.

"When an online brand makes its first foray into the brick and mortar, they want to be in locations that have the most traffic, like, say, a King of Prussia," Rothman said. "Second- and third-tier locations, like a Granite Run Mall, have been usurped by the King of Prussias that have taken market share. Now, with online, retailers don't need a fifth or sixth location, and that is why these malls fall apart."

Granite Run, which was located on U.S. Route 1 in Middletown Township, Delaware County, closed last year.

Said Rothman: "The strong get stronger and the weak get weaker, which is exacerbated by the Internet."

Experts say the trend will continue to gain momentum, although the impact is likely to differ by retail category - such as electronics vs. clothing.

"The reason for the accelerating shift online is the expanding penetration of online sales across more categories," said Frank Badillo of MacroSavvy, which provides insights about economic, demographic, or other macro-level trends. "As that penetration reaches a critical mass - double-digit market share and higher - then the impact on the largest brick-and-mortar retailers in that category becomes much more evident."

The winner amid all of this: the shopper.

Especially "those who are omni-shoppers and who know which retail channel and retailer is the best fit for their needs," Badillo said.

Badillo predicted that the more likely build-out for online retailers is to create alternative pickup locations to home delivery.

"There are online retailers who are setting up locker pickups near transportation hubs where shoppers can order online and pick up at the locker location on their way home," he said.

Moody's senior retail analyst Charlie O'Shea said that as more business has shifted online - an estimated 8 percent of total U.S. retail sales are now online - retailers are recognizing that as they grow faster online, they need less retail-selling square footage.

The blurring of the lines is expected only to intensify in the coming years.

"For most products, consumers actually prefer to shop in store because they want to see and touch what they're buying," said Dave Parro, vice president of the retail technology practice at Walker Sands, a PR marketing firm. "But they also shop online regularly because of the convenience and range of products available."

While living in Iowa, Carmen Machado, 29, for example, ordered Warby Parker glasses online and was mailed five frames at a time to try on.

When she moved to Philadelphia four years ago, she became a regular at the company's showroom in Old City.

"With a retail location, you can go down and try more stuff, and have [the glasses] adjusted by sales staff right there - which is nice," said Machado, an adjunct professor of creative writing. "Online retailers are great, but there's no substitute for trying something on your body - whether it's clothes or glasses."