December 6, 2021

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Will Rent Take Over As the New CAC? 12 Retail Experts Weigh In

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There’s fierce competition brewing among digitally native retailers as they work to win over customers. As retail has rapidly shifted toward digital in recent months, customer acquisition costs (CAC) have skyrocketed.

The reason: Even though these tech-savvy brands have completely reinvented online shopping and raised customers’ expectations for engaging digital experiences, there’s often still a missing piece of the puzzle. 

In many cases, in order for these brands to scale their businesses and grow long-term, they’ve found they need to enter brick-and-mortar retail in some capacity, thus implementing an omnichannel approach. 

“The pandemic exposed glaring advantages in the ‘CAC is the new rent’ analogy. It de-risks a business by turning physical rent costs into a variable cost with real-time response to micro and macro economic conditions.”

-Raj Nijjer, CMO at Refersion

The reality is: Brick-and-mortar stores are irreplaceable when it comes to real life, touch-and-feel experiences that build deep customer relationships. For long-term success, brands need to have a presence both online and off.

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So…is rent the new CAC?

A decade ago, when many digitally-native brands were first launching, there was an axiom that claimed “CAC is the new rent.” 

Translation: it was a lot cheaper to reach customers and get more sales online than it was to rent a physical retail space.

And it was…ten years ago. 

However, the rise in competition within this landscape had a significant impact on digital advertising costs: they eventually reached a boiling point. CACs are now inching closer and closer to the cost of rent for a physical retail presence. 

As a result, many digitally-native brands ramped up their brick-and-mortar presences. From Warby Parker to Bonobos, to Allbirds, Peloton, and Casper, we’re now seeing a shift to omnichannel retail wherein digitally-native brands are still launching online, but then are moving into physical retail to lower their CAC.

“As it relates to DTC, one of the big value propositions was originally lower prices due to lower costs: physical store leases and rent being the biggest. That’s now shifted so you have to spend money on FB/IG/Google ads to acquire customers…likely as much or more than you would be spending on rent and/or leases. So the price edge that original digitally-native brands may have had…is gone.” 

-Griffin Caprio, CEO & CTO at Dante32

Today, the gap between online CAC and rent is growing even smaller in light of the pandemic. 

As commercial rents are falling by rates even greater than those seen in or after the 2007-2008 Great Recession, Moody’s Analytics estimates that effective retail rents will fall 11.1%, which is nearly twice the drop that retail rents saw following the Great Recession.

“Brand owners and marketers will have to re-evaluate their dependence on cheap paid media to acquire customers looking forward. Brand-building will be a requirement for foundational success, both short and long-term. With depressed real estate, we can expect to see new brands testing physical retail opportunities to not only sell products, but to do brand storytelling. Sophisticated brands with an omnichannel mindset will take the opportunity to capture first party data as well.” 

– Michael Miraflor, Independent Consultant at Third City Advisory

Getting into the nuances of “rent is the new CAC”

One of the fundamental mistakes many companies make, especially digital newcomers, is assuming that the strategies used five years ago still work flawlessly today. 

The truth is they don’t—especially in today’s ecommerce landscape. To feel the retail industry’s pulse, we talked with experts that share their thoughts on whether rent truly is the new CAC.

Considering the variables

If you ask Andrew Ettinger, founding team member of footwear brand Atoms, he feels hesitant to say a definitive yes. “Our CPA with rent and labor in our physical retail pop-up shop was competitive with Facebook and Google. I’d be hesitant to say definitely it’s cheaper, though, because the top-of-funnel is certainly smaller.” 

Leann Abad, a Project Manager at SLOPE, added that it’s very difficult to establish traffic channels without paying in some way shape or form. “It’s worth highlighting the analogy of rent as a cost of new business for physical retail and CAC as a cost of new business for online retail,” he said.

Factoring in unknowns

Nik Sharma, DTC expert and Founder of Sharma Brands, went on to say that there are unknowns to consider as well. While it can be easy to calculate CAC that comes with a retail store, the other factor that’s unknown is the level of foot traffic that would come in the near future. 

He gave the example in the news lately of Victoria’s Secret, a brand that seems to realize as of late that their $1M rent costs don’t make sense when evaluating the number of customers and orders they can push through a store.

“It’s obvious that even legacy retailers are looking at retail’s CAC to scale up or dissolve their spots,” he said.

Paul Munford, Founder of LeanLuxe, summarized the nuance by saying that while it’s true social CAC can be expensive, it’s because everyone is using it.

He went on to say that if these channels are saturated, it actually presents an opportunity to consider other channels that aren’t being utilized (and can still be very effective.) 

“These channels can be digital and/or physical,” he said. “I think the phrase ‘rent is the new CAC’ points to an obsession with direct response campaigns and the over-reliance on needing to track or attribute every single thing.” 

“I think the phrase ‘rent is the new CAC’ points to an obsession with direct response campaigns and the over-reliance on needing to track or attribute every single thing.”

Why physical retail appeals to digitally-native brands

Digitally-native brands planted their seeds online, but soon after they witnessed great success, they started testing waters with physical stores

The question is: why? What drove a desire to expand into brick-and-mortar if the digital-first model was so successful? 

It appears that no matter how far we’ve come within the realm of digital transformation, having a brick-and-mortar store simply brings some unique advantages. Let’s look at a few.

It acts as a billboard

Only a few years ago, the internet was flooded with headlines about the “retail apocalypse.” Fast-forward to present day, and it turns out that retail is not facing an apocalypse, but is rather undergoing a renaissance

In other words: physical retail isn’t dead—boring retail is. Unlike in the past when physical stores were purely a sales channel, the store of the future will be all about experiences, reinforcing brand image and values, and forging relationships with customers face-to-face. 

In short: Storefronts are billboards for the company as a whole.

“With the increasing trend in the consumer industry towards omnichannel distribution, I see storefront ownership as another valuable tool in the toolbox to provide deeper and more customized levels of experience. Brands need to ensure that each channel is properly differentiated and incentivized with exclusive rewards, products, and promotions.” 

-Jaime Schmidt, Color

How CARIUMA uses physical retail to reinforce brand values

CARIUMA, a sneaker company offering environmentally-conscious products for women and men, uses their pop-up storefront on the second floor of Selfridges in London as a true reflection of everything they believe in as a company—style, comfort, and sustainability.

How? One example comes in the form of a memorable experience. With every purchase made, shoppers at their pop-up stores get a free plant in a biodegradable pot to take home and plant. 

Each segment of their store represents the same small-footprint mentality: From sustainable skateboards made from recycled bottle caps to displays made from mushrooms, CARIUMA created a unique retail experience where both their products and values are intertwined in real life, creating a retail experience that acts as a billboard for the brand as a whole.

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Image source: CARIUMA

It’s one way to lower CAC

CAC has steadily increased over the last few years thanks in part to the explosion of digital channels (and the products competing on those channels.) This created digital saturation, meaning customer acquisition costs went up due to demand without necessarily resulting in higher lifetime values or sales.

Realizing that they can’t rely on paid social media ads to grow forever, digitally-native brands are expanding into physical retail as a way to lower their CAC. By getting in front of customers with a brick-and-mortar presence, brands can create unique in-person experiences and explore the untapped potential of face-to-face customer interactions.

Loeffler Randall introduces first physical retail space in 2021

Loeffler Randall is a female-founded business known for its luxury shoes and handbags. On February 24th this year, they opened their very first store in New York City’s Soho shopping district. 

The retail store allows them to personalize the in-person shopping experience, and this will be the first time all of their collections, shoes, bags, jewelry, accessories, and ready-to-wear items will be presented together under one roof. 

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Image source: Loeffler Randall

“We know our customers love coming to us directly for the most extensive offerings of Loeffler Randall, and having a store is the tangible version of that,” said Jessie Randall, Founder and Chief Creative Officer of Loeffler Randall. 

“I see the store not only as a place for selling and discovery, but as a creative laboratory as well. It will be a space where my team and I can test new ideas. For the customer, there will be personal touches. It will be nice to host private shopping appointments for them and offer special, personalized services.”

“I see the store not only as a place for selling and discovery, but as a creative laboratory as well.”

It helps foster community

While large gatherings still may be off the table for the time being, having a brick-and-mortar store helps brands deliver face-to-face customer interactions and creates a space for community gatherings that can foster a brand’s tribe.

If you think that digital natives don’t like social interaction, think again: research from eMarketer shows that more than eight in 10 Gen Z and millennial internet users in the U.S. feel it’s important for a brand to operate a brick-and-mortar location.

Thrills forges new communities in new locales with retail stores

Thrills, a lifestyle fashion brand, hasn’t slowed its retail store expansion during the pandemic. In fact, back in August 2020, they opened their first global flagship store in Tokyo, Japan.

To celebrate their expansion into Asia, they had a small, safe opening event at the store. This turned out to be a great way to raise brand awareness, to build relationships with customers, and to forge a community from day one of the store’s opening.

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Image source: Thrills

It opens up possibilities for experiential retail

As the physical retail landscape evolves, brands will have to replace sales per square foot with experiences per square foot.

Thanks to advanced technologies like augmented reality (AR) and virtual reality (VR) open up an array of possibilities for futuristic shopping experiences.

One important thing to remember: Experiential marketing is more than fancy tech gadgets in your retail store. It’s more about creating a personalized shopping experience and providing an unparalleled retail experience for your customers.

Rebecca Minkoff leverages in-store tech for greater personalization

The global fashion brand Rebecca Minkoff is one example of in-store technology used the right way. Their flagship store in New York City has a digital wall that lets customers browse items and also has interactive mirrors in the dressing room. The mirrors allow consumers to set the lighting or to order a different size or color to try on with a few taps.

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Image source: Rebecca Minkoff

The results of this experience-driven tech are impressive: since the installation, Rebecca Minkoff’s sales have been up more than 200% each year.

Their website approach is no different: Rebecca Minkoff has adopted 3D modeling and AR on its product pages and witnessed great results with Shopify Plus, finding that shoppers are 44% more likely to add an item to their cart after interacting with it in 3D, and visitors are 65% more likely to place an order after interacting with a product in AR.

Other digitally-native brands acquiring customers with physical stores

Just as they raised the bar for online shopping, forward-thinking digitally-native companies are acquiring new customers and setting new standards for engaging retail experiences. Let’s look at a few examples.

LIVELY

Lingerie brand LIVELY started online, but brick-and-mortar retail is now a crucial part of its growth strategy. 

After hosting multiple events in-store, LIVELY opened its first permanent brick-and-mortar location in 2016, motivated by its need to lower digital customer acquisition costs. Today, 50% of LIVELY’s New York customers discover the brand by walking past the Soho store. 

Experiential retail is one of the industry’s biggest trends today, but not everyone gets it right. LIVELY’s successful in-store experience comes down to authenticity and a superior customer experience.

“It’s like a clubhouse. We want women to come in and feel comfortable. They can rely on us to come in here and not feel any pressure to shop,” said Michelle Cordeiro Grant, LIVELY’s founder and CEO.

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Warby Parker

One of the pioneers in the direct-to-consumer space, Warby Parker opened its first permanent store in New York City in 2013. According to the Chicago Tribune, the company’s stores were averaging just under $3,000 in sales per square foot back in 2015.

Today, Warby Parker has more than 100 stores across North America. Despite the temporary store closures due to the pandemic, they’re still bullish on physical retail.

Westfarms Store was Warby Parker’s first opening of 2021 and its third location in Connecticut. They’ve redesigned the in-store experience with customers’ health and safety as their top priority, implementing new health and safety protocols.

Warby Parker is proof that even though ecommerce will play a larger part in how people shop, physical retail still plays a massive role in the overall economy.

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Image source: Warby Parker

Glossier

Glossier is a direct-to-consumer beauty company that has revolutionized the skincare and makeup industry. Founded in 2014, the brand leveraged the power of content and community to build an iconic brand.

After dipping its toes in retail with pop-ups and showrooms, Glossier opened its first store in 2016. As a digital-first company, Glossier has always viewed its offline experiences as a channel for connection and community-building.

While the goal with opening physical pop-ups is meeting people where they’re already shopping, Glossier’s Flagship stores are meant to be “the ultimate physical expression of the brand.”

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Image source: Glossier

Allbirds

Allbirds is an apparel and fashion company that specializes in manufacturing eco-friendly footwear. Founded in 2014, the first physical store was opened soon after.

In September 2020, the company closed a $100 million investment round that will help back the brand’s physical growth in international markets. According to Bloomberg, Allbirds will boost its number of physical stores by 50% this year, bringing the total to more than 30.

Since retail is all about the details, signage and graphics in Allbirds’s stores are from sustainable materials, which supports its overall brand story about creating products in a better, more responsible way.

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Image source: Allbirds

Gymshark

Gymshark, one of the leading fitness apparel and accessories brands, was founded in 2012.

Aside from their huge success with online sales, Gymshark fosters immersive online-offline customer experiences by using Shopify’s POS system to help organize world tours where Gymshark customers can meet their fitness idols and make purchases in person at expos and special events. In 2018, during a two-day pop-up store in Toronto, they sold 90% of their product on the first day. 

After hosting a series of pop-up events, Gymshark launched the first retail-focused store in 2020. The store features Gymshark’s specialist gym clothing range alongside experiential offers, such as in-store fitness classes. 

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Image source: Shopify

Commercial rents post-COVID

The COVID-19 pandemic upended nearly every aspect of the retail industry. On one hand, it forced companies to close stores during the lockdown, but it also had a significant impact on retail rents.

While experts predict that there will be 20% less retail real estate by 2025, rents for retail space in New York City have dropped as much as 25% from 2019 levels according to the Real Estate Board of New York.

The silver lining: lower rents and easier lease terms might encourage retailers to embrace the omnichannel approach where they can strike a balance between digital CAC and rent to get the best of both worlds.

How to make the transition from “clicks to bricks”

So how can brands bridge the online-offline gap? Here are six actionable tips to help retailers make a seamless shift to omnichannel.

1. Validate the idea with in-person events

Customers today are hungry for experiences. With branded events, customers can touch, try, and/or taste your products.

Not only can you reach shoppers on multiple levels by appealing to their senses, but you can also get immediate feedback. Armed with this information, brands can make data-driven decisions that boost future growth.

2. Start with a pop-up shop

Moving from URL to IRL can seem daunting and risky because of the costs, time, and resources required. That’s why many digitally-native brands decide to test physical retail with pop-ups before opening a permanent store.

The concept of pop-ups have become a relatively risk-free way to measure customers’ pulse before making the big move into physical retail.

3. Pick the right location

Pop-ups can also be used as testing grounds for finding the best locations and cities for physical stores. Even though the pandemic caused many people to relocate, many of them have started returning to cities (and bringing their purchasing power with them.)

“Once consumers begin moving back to cities, the focus will shift to premium streets in urban markets again,” says Ben Lazzareschi, EVP of Retail at JLL in Retail Dive.

“Once consumers begin moving back to cities, the focus will shift to premium streets in urban markets again.”

4. Decide on your retail model

Determining a store’s purpose isn’t one-size-fits-all. When making the transition from clicks to bricks, you should decide on your retail model, which might be:

  • Full inventory: Some brands form partnerships with traditional retailers in order to test out the water of physical retail. For example, Crate and Barrel launched an exclusive, limited-run collection with DTC bedding brand Parachute to sell online and in 65 of its retail stores.
  • Experiential: Stores aren’t just for making sales. We see this evidenced by concepts like Nordstrom Local, which is a merchandise-free concept store that combines services and experiential retail. This partnership approach helps digitally-native brands gain exposure with the chain retailer’s shoppers and foot traffic.
  • Showroom/low-inventory: Among those DTCs that have jumped into physical retail, several adopted a showroom model in which they don’t sell merchandise in-store but offer consumers the opportunity to touch and feel a product before going online to purchase. This concept of “showrooming,” or detaching the in-store shopping experience from the fulfillment process, helps brands like apparel retailer Bonobos create a seamless offline-online experience.

5. Leverage technology to create a seamless experience

Today’s customers don’t think in terms of channels. Instead, they research products on desktop and mobile, and when it’s time to make a purchase, they may decide to visit a store and bring their devices with them. 

What does this mean for digitally native brands? It means they need to break down silos and use technology to create a seamless experience across every touchpoint.

Customers still appreciate the social and sensory aspects of in-store shopping, but they also want their online and in-store experiences to complement each other. Tools like Shopify’s POS make this possible for brands large and small.

6. Hire talented staff

Unlike in the digital realm wherein teams are mostly in charge of customer service, when it comes to brick-and-mortar retail, staff has a double role: customer service and sales. 

Upselling and cross-selling are core goals for most in-store retail sales staff. Finding the right people and training them to develop a customer-first mindset is a prerequisite for retail success.

“To be a modern day brand, it can be argued that you’ll need both channels to thrive. A store where customers can try things (apparel, drink, hardware, etc.) that has an amazing staff will lead to a much stronger customer than paid traffic with lackluster targeting. That said, great targeted traffic will lead to efficient scaling.” 

-Philip Soriano, Head of Ops at Popshop Live | Co-Founder: Hugh & Crye

Omnichannel retail: The secret to lower CAC 

With customer acquisition costs at an all-time high, traditional retailers with deep pockets have entered the online selling space, making it even harder to acquire new customers with paid campaigns. 

As a result, now more digitally-native brands are looking to physical retail as a way to decrease costs (capitalizing on decreasing rent costs) to reach more customers. 

Both parties are learning from each others’ playbooks as they work to lower CAC. The result: Omnichannel strategies are essential for modern brands of all shapes and sizes.

Ready to learn how to create a winning omnichannel strategy of your own?

Read the success story of LIVELY and how they seamlessly started their physical store with the help of Shopify for POS and online store.

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