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Brick-and-Mortar Retail Isn’t Dying

Brick-and-Mortar Retail Isn’t Dying
By Andy Gordon
Date November 4, 2020

Thank goodness this isn’t the 80’s. If COVID-19 happened back then, we’d be in a full-blown depression by now. The rolling shutdown of non-essential stores and restaurants across the country would have maimed and crippled the economy. The 80’s had great music but no internet — and no way to shop or pay for things online. 

The economic devastation would have been incomparably more damaging than today. 

But things have changed much since the 80’s. Well before COVID-19 hit, online shopping was gaining massive popularity. Last Christmas, it surpassed traditional shopping for the first time. It was the future. Then COVID-19 arrived. As a founder of an online wine company we recommended so colorfully put it, the pandemic “dumped rocket fuel on digital shopping” as both buyers and sellers rushed online. 

Many pundits have subsequently declared brick-and-mortar (B&M) companies to be either dead or dying. It’s easy to see why. Lord & Taylor, Brooks Brothers, JCPenney, Neiman Marcus, J. Crew, Pier 1, Diesel, Payless, Nine West and dozens of other retailers have declared bankruptcy. Many more have closed the majority of their stores in order to survive the pandemic. 

But the D2C (direct to consumer) online model didn’t need the pandemic to grow and prosper. D2C had a lot going for it prior to the pandemic — and it will continue to do well when the pandemic is behind us. It offers a superior business model in terms of lower costs, better user experience and the ability to gather massive amounts of data. You can shop on your lunch break. There’s no waiting in the long lines that I saw during my trip to the mall last weekend.

And, besides, what else are you going to do while stuck at home?

I’m bullish on D2C companies. But I’m also keeping an open mind regarding brick-and-mortar shops. Visiting stores in person isn’t dead (or about to die). Another one of our First Stage Investor holdings is a tequila maker. Tequila has been one of the most popular spirits during the pandemic. But this company had to get its bottles into chain stores before October in order to grow. Tequila sales are seasonal. And the best months are October through December. Getting into brick-and-mortar was its prime directive — and it was mostly successful.

Other retail markets also offer more of a mixed picture than you’d think. One of our First Stage Investor portfolio’s fastest growing D2C retailers pre-COVID admits that the pandemic has slowed down growth and represents a “mix of challenges and opportunities.” Smallish retailers — including ones that are D2C — are in survival mode.   “Money is tight, loans tough to get, sales will take a while to fully recover and raising funds can be especially hard for them,” says the founder of our FSI retailer.

So I wouldn’t be so anxious to climb aboard the e-commerce bandwagon, if I were you. In-person shopping isn’t disappearing anytime soon. It’s evolving… adapting… recalibrating. Brian Cornell, the CEO of Target, made the point that stores still represent over 80% of where the dollars are being spent. “Even during the pandemic,” he said, “our store comps grew 11%.”

The D2C model gives companies a superior way to service customers and run a business. But we need to remember that it’s not infallible. In many sectors, D2C companies vie against each other in a vicious competition for scraps of market share. And many of those deep-pocketed brick-and-mortar companies are adopting effective hybrid models — part B&M and part online selling. And there’s Amazon’s to deal with. 

Online shopping can be a winning formula for founders and investors. But both groups still need to do their diligence. Physical stores and their online counterparts are destined to be with us for a long time. 

What is going away is the pure online and pure brick-and-mortar models. The best retailers will be  the ones who can most effectively integrate brick-and-mortar and e-commerce sales. Investors who prioritize execution, nimbleness and adaptability in their startups will have the best shot at picking future successful retailers. 

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