June 21, 2013

Online retail wants to hit the bricks

Internet businesses see benefits in having an actual store

By THOMAS LEE Star Tribune

For a growing number of Internet retailers, offline is the new online.

click image to enlarge

Simone Xavier, CEO and founder of the online beauty store Sigma, touches up her makeup at the retailer’s new physical store in leased space at Mall of America in Bloomington, Minn.

Kyndell Harkness/Minneapolis Star Tribune

Across the country, retailers that existed only in cyberspace are now opening -- or thinking of opening -- traditional stores at a time when e-commerce's explosive growth has spawned a slew of dire predictions that brick-and-mortar retailing will become irrelevant or even extinct.

Online giant Amazon is actively exploring a store concept. Specialty retailers like Warby Parker, which sells eyeware, and Bonobos, a men's clothing company, already operate stores.

In Minnesota's Twin Cities area, Sigma Beauty, a fast-growing, four-year-old online makeup retailer, recently opened its first outlet -- at the Mall of America.

"I feel that everything we've done with this company was backward," joked Simone Xavier, who launched Sigma with her husband, Rene Xavier Filho. "But we wanted to put a face on the brand, and we wanted people to touch and feel the product."

Moving from websites to storefronts may seem counterintuitive, as online retailers enjoy lower costs than brick-and-mortar chains like Best Buy and Target, which have to pay store leases and hire salespeople. Plus, more and more shoppers are buying products online, using their laptops, smartphones or tablets.

For the first three months of 2013, e-commerce sales jumped 13 percent to $50.2 billion compared to the same period a year, according to comScore. The double-digit growth in online sales has often come at the expense of physical retailers, which is why companies such as Best Buy and Target are spending millions of dollars to upgrade their websites and mobile software.

But today's retailer will gladly record a sale any way they can get it, said Jeff Green, a Phoenix-based retail consultant.

"It is strange to see e-commerce sites open physical stores," Green said. "But when you think about, it's not surprising. The most successful retailers are going to have a combination of bricks-and-mortars and digital sales. For online retailers, you might as well get to the sale as close as you can."

Bricks-and-mortar retailing may seem outdated, but the physical store still offers a credible and safe place for customers to examine the product, ask questions, buy and, if necessary, return it.

"It's about taking the risk out of buying," said Steven Dennis, a retail consultant and a former top executive with Neiman Marcus and Sears. That's especially true of certain products like clothing, shoes, handbags and eyeglasses, where consumers still prefer real store interaction vs. a strictly digital experience.

In some cases, consumers may think a deal is too good to be true. For example, Warby Parker markets itself as a place where consumers purchase designer eyeglasses for just $95. That low price might prompt shoppers to suspect there must be a catch -- the product is poorly made, or the website is a scam. Opening a store would help alleviate those fears, Dennis said.

But don't expect online retailers to completely shed their digital roots. It's one thing to open one experimental store in a suburban shopping center to showcase your products; quite another to operate dozens of stores in big malls or large cities, which requires money and expertise that are often beyond the reach of Internet firms.

"If you're going to a high-traffic area and paying a decent amount of rent, it puts the pressure on you to know what you are doing," Dennis said.

Take Sigma Beauty. Founded in 2009, the New Brighton, Minn.-based Internet makeup retailer quickly grew, thanks to its international reach and deft use of social media like YouTube. The company expects $25 million in sales this year compared to $18 million in 2012.

Opening a store was never part of the plan, Xavier said. "The cost of maintaining and building the store is humongous. I was very hesitant."

Added Filho: "Financially, it doesn't make any sense. You're going to lose $1,000 per day."

But when the couple learned of available space at the Mall of America, they jumped on it.

For one thing, Xavier said, although Sigma Beauty sells to customers in more than 100 countries, very few people in Minnesota are aware of the company.

In addition, a retail space provides an ideal place for Sigma Beauty to host events like "beauty parties" in which the company recruits celebrity makeup experts from YouTube to offer personal makeup tutorials. But running a store requires a whole new mind-set.

"Online, it's very easy," Xavier said. "People can purchase products anywhere, anytime. You are not restricted to the hours of the malls; you're not restricted by the weather. Everything in the society around us affects the (store) sale."

 

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