The beauty of a retailer adopting an online-only or direct to consumer model is that they cut out the middleman. By removing the landlord or a third-party retailer and not having to pay rent or suffer a retail mark-up on their goods, respectively, they can sell their wares at lower prices directly to consumers.
This has led to many wanna-be retailers – most famously Amazon (NASDAQ: AMZN), when it was a simple online book store way back in the mid-1990s – founding their businesses as online only.
But as discussed in a fascinating article by Inc. Magazine, this model runs into a rather important problem when you’re a new business: how to acquire customers and, once you get a certain number of customers, how to keep acquiring them profitably.
Obviously, online-only retailers don’t have any physical stores, and most try to acquire customers by advertising…er…online.
One cheap way to do so is to create an amusing video, post it to YouTube (owned by Alphabet (NASDAQ: GOOG)) and hope its goes viral.
Unfortunately, most don’t, and so the more realistic alternative is to advertise via Google itself, Facebook (NASDAQ: FB) or Instagram (also owned by Facebook).
As Inc. Magazine details, it is relatively cheap – and profitable – to acquire a small group of initial customers this way.
But as many online retailers try to acquire a wider group of customers, customer acquisition costs (CAC) rise dramatically.
This is because the sheer number of eyeballs that Google and Facebook command gives them a great degree of pricing power when dealing with advertisers.
As a result, once a certain number of customers are obtained, acquiring incremental customers via Google and Facebook becomes unprofitable for the online retailer.
To try to solve this problem, online-only retailers have adapted their business model in various ways.
You’ll have to read the article for more details but for our purposes, the most interesting way they have adapted is to commit the equivalent of online retail blasphemy and open physical stores. This is because CAC costs rise so high that they become similar to the fixed costs of renting a physical store (“CAC is the new rent”).
As well as providing places for customers to pick up and return goods purchased online – thereby saving on shipping costs – these stores do what they’ve always done: act as displays for the company’s products and brand while also giving customers the opportunity to see, touch and feel the products they’re interested in.
And by attracting passing foot traffic, they also serve as an efficient customer acquisition channel, while also encouraging impulse buys by customers who enter the store (something that online stores are much less effective at achieving).
And the kicker?
Many retailers – whether they were previously online-only or traditionally just bricks-and-mortar – have found that opening a new bricks-and-mortar store in a new location leads to increases in online sales in that region.
For example, Nordstrom (NYSE: JWN) last year noted that when it opens a bricks-and-mortar store in a new market, online sales there rise 20%. And the article has other examples.
Even Amazon itself has opened physical book stores, and also purchased organic grocery chain Whole Foods – with 460 stores, most of which are in the United States – last year for US$13.7bn.
So it seems online sales and physical stores have something of a symbiotic relationship.
Big shopping centres the most attractive
And if you are an online-only retailer, where are the best places to locate bricks-and-mortar stores?
Somewhere easily accessible by public and private transport, with high foot traffic to market your products and brand while minimising the cost of acquiring customers.
The large shopping centres with minimal competition owned by the likes of Scentre Group (ASX: SCG) and Vicinity Centres (ASX: VCX) fit this bill exactly.
Another reason Scentre and Vicinity are best placed among the Australian shopping centre owners to deal with the rise of Amazon and online retailing in general.