The impurity of pure play

online shopping2Some time in the future, if a doctor is called in to fix the time of death of the ‘pure play’ online retailer, 2015 will be a little too early. But could it be the year that signalled the beginning of the end?

Pure plays are engaged in an orderly rush to become connected to physical real estate in some shape or form. It’s partly for this reason that owners of retail property, once regularly having to explain to an incredulous public why their assets were still viable alongside the e-commerce juggernaut, now have some of their old strut back.

Just how deep is the move to offline and to what extent will retail property owners benefit?

In the past few days I’ve assisted a retailer in leasing space at a large retail project under development in a North American gateway city that expects to have two very famous global pure plays as tenants.

The pedestrian traffic at this place is likely to be both strong and demographically varied, in that it will have the draw of a superregional shopping centre, supplemented by interstate and international tourists. This makes it an ideal location for an online retailer to offer a broad cross-section of humanity a chance to touch and test its products, while entertaining and engaging them in a way that can create a buzz around the brand. This, in turn drives higher sales online.

However, it doesn’t mean that the store itself represents an important direct sales channel in the same way that an Apple store does. And that’s why some industry observers argue that most online retailers will only open a small number of carefully selected flagship locations, often in the very best ‘trophy’ shopping centres and freestanding sites.

If so, only the top echelon of shopping centres and Main Streets will really benefit from a property standpoint. Secondary locations will miss out, just as they are missing out on the top international brands.

A taste too much?
But that could be an oversimplification. Some of these e-commerce giants will get a taste for opening stores and they’ll not be able to resist opening more and more of them. US menswear ex-pure play, Bonobos, is a case it point – it already has 19 shops open and reportedly plans to more than double that number over the next year. Another example, eyewear ex-pure play, Warby Parker, is headed down the same road.

Meanwhile, Shoes of Prey, a Sydney-based online footwear retailer, has opened a shop-in-shop at the David Jones Sydney CBD flagship, a pop-up at Westfield Bondi Junction (now closed) and six shop-in-shops at Nordstrom in the US.

Clearly, all this store-opening activity is not exclusively about brand-building. Rather, the pure play dream of pursuing a simplistic, low-cost e-commerce model was found to be inadequate for properly serving their customer base.

Ironically, the cost structure for pure plays has often turned out to be worse than for omnichannel retailers.

Deborah Weinswig, Executive Director at Fung Business Intelligence Centre in New York and a long-time retail technology expert, used the title of one of her recent reports to pose a loaded question: The End of The Pure Play?.

Weinswig observed that a store network confers some key competitive advantages, beyond just the ability to build a brand. Pure play retailers experience larger – sometimes massive – rates of return (as examples, she cites 30 per cent in the case of ASOS and nearly 50 per cent for German fashion retailer, Zalando).

This loads costs onto the business. Ironically, it also creates pressure on them to offer their customers sweet deals like free delivery and returns, which drags even further on profitability.

Omnichannel retailers, in contrast, are able to use their stores for customers to try products before they buy, to pick up online orders (click-and-collect), and also for walk-in product returns. As Weinswig says, “There is strong evidence that internet retailers are less profitable than stores.”

Creating a store network from scratch will be impossible and undesirable for many pure plays, particularly those that can attach to real estate in a way that doesn’t involve acquisition of shopfronts. Some pure plays will partner with other retailers that already have multiple locations – like convenience stores and post offices – that they can use as pick-up and drop-off points for their merchandise.

Net benefit?
So, what is the net benefit to retail property? Clearly it’s a positive, but despite all of the current real estate-related activity among pure plays, the benefit is still skewed toward the ‘A’ shopping centre. Moreover, it will still primarily drive sales online rather than offline.

Even Weinswig concludes – answering her own question about whether this was the end of the pure play – that many internet-only retailers can continue to thrive without a store network.

So now let me answer my own question: 2015 isn’t likely to be the beginning of the end for the pure play retailer. It does, however, mark another step though in the integration between online and offline retail. But no one on the property side should be getting too excited about it.

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