Rises in Online Advertising Prices are Driving Some Brands to Physical Stores, but What are the Strategic Risks?
First, they said that online-only brands were the future of retail. Now, they’re all building stores IRL. What’s going on?
It turns out, it’s hard to build a presence for your hot new e-commerce brand. How will people know that Heybrook's Hockey Sticks is the best new place to score the hottest in hockey stick technology? You can’t count on people to type “heybrookshockeysticks.com” into their browsers without prompting. There are the usual recommendations: build up social media accounts for the brand, starting with Instagram and Facebook. Encourage referrals, sponsor contests. And most importantly: advertise, advertise, advertise.
But advertising isn’t easy, and advertising isn’t cheap. It’s not enough to make people aware that your name exists. You must connect your brand with your message. Heybrook’s Hockey Sticks equals the most technologically advanced sticks – people that have one just handle the puck better. While $5 million for a Super Bowl ad may be out of budget, you can instead target online advertising to your most likely customers. Does that make it the right strategy?
The online advertising space is pretty much owned by Facebook and Google. The cost per click (CPC) of online ads has skyrocketed in recent years. As a result, digital brands are looking for alternatives to get their brand and products in front of as many customers as possible. Alternatives that don’t involve the costs rising for every person who sees them. Turns out, the best place to do that is in the real world.
Online advertising is becoming so expensive that it can rival the costs of opening traditional stores. The whole point of e-commerce was to save businesses all the money they were spending on stores, on employees, on inventory. Switching to an online-only presence was supposed to create lean and mean machines that made killer profit margins by avoiding the costs of physical stores, global distribution networks, and lots of employees.
Yet, opening a limited number of physical stores is popular with online brands such as Casper, Warby Parker, and yes, even Amazon. The goal isn’t to become Mattress World, with outlets on every corner. It’s to make sure that the tens of thousands of people passing the store front become aware of the brand and connect it to its core value proposition. And to make sure the hundreds of people who do venture into the store can interact hands-on with those high-tech hockey sticks, talk about the details of goalie stick technology, feel like real insiders, and come away telling their friends about it. There’s no doubt that physical stores are an expensive proposition. But they can directly “pay for themselves” through product sales — that makes the brand awareness essentially free. However, it’s still a risky game, and you should be careful in outlining your value proposition.
Positioning your store for brand awareness advertising requires opening in a physical location where the most eyeballs will see it. But those are some of the most expensive locations in the country. Plus, many e-commerce operators aren’t aware there can be a major catch to creating a presence in a shopping center. It is perfectly legal for big shopping center owners to demand a “radius restriction” (you agree not to open any other locations within a specified distance, usually covering the main “other mall” in that city). Alternatively, owners with multiple shopping centers may only agree to give you space in a great mall location if you also open additional locations in one or two of their underperforming malls. These stipulations may lead to a more expensive proposition than intended while not getting you the eyeballs or the customers you’re looking for.
It’s also important to know that many leases come with a “go-dark” clause that prevents shopping center owners from having to deal with too many vacant store fronts. You can end up on the hook to keep operating your store for the multiple years on your lease, even if it isn’t making a profit. Or, you may be responsible for finding a subletter if your store can’t make ends meet.
There’s also still the consideration of your strategic goals. If you decide to prioritize getting the highest overall traffic over attracting your specific customer demographics, you’ll be betting on that location generating higher brand awareness rather than direct sales. This approach makes it less certain that the store will cover its own operating costs. A store must move a lot of product to cover the its lease, labor, inventory, and distribution before it allows the advertising “to be free.” However, if you can sell enough product to offset the costs, or if this store’s brand presence strengthens the profitability of your overall portfolio, then this method of creating brand awareness may be less expensive than online advertising.
Is all of this worth it, just because the cost-per-click is going up at Google and Facebook? It can be: Sears (the Amazon of the physical mail era) learned that lesson almost a century ago and had a long run with a hybrid model. If you are thinking about a brick and mortar store, think carefully about the risks. Know your customer demographics and be sure to balance sufficient in-store sales with showing off your brand to new people. Otherwise, you may end up with one really expensive advertisement.
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Note: These opinions were authored about the considerations of brick and mortar strategies prior to the shifting economic and logistical landscape accompanying the COVID-19 global pandemic. As the impact on doing business continues to unfold, the considerations may be updated and revised.