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INNOVATE

How 2 Upstart Retailers Want to Reinvent the Traditional Department Store

The fall of big retailers is making space for innovative startups to rethink the future of malls and shopping.

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BY Michelle Cheng - 18 Oct 2018

How 2 Upstart Retailers Want to Reinvent the Traditional Department Store

PHOTO CREDIT: Getty Images

Sears is the latest of the big retailers to fall.

About a decade ago, Sears had some 1,800 stores but now counts less than half that number. The Hoffman, Illinois-based retailer, which filed for bankruptcy protection on Monday, has lost about $5.8 billion since 2013, according to the New York Times. Sears plans to shutter around 142 more stores by the end of this year.

Mall landlords welcome Sears's exit. As more online-first brands like Warby Parker and Rent the Runway look to open brick-and-mortar outposts, these new tenants could bring as much as six times the rent Sears was paying for decades, the Wall Street Journal reports.

"With more and more shifting online, [brands can] have a lot smaller stores. They can offer five or 20 times the number of products online than they offer in store," says Brian Yarbrough, a Dow Jones equity research analyst covering the retail industry. "I think longer term we're going to continue to see more retailers solve bankruptcy."

To help fill the gap left by stalwarts like Sears, a number of startups have emerged with the goal of helping online brands go offline--and adapting the traditional store model to better suit their needs.

After founding a nonprofit that provides free retail space to entrepreneurs and artists a few years ago, Matt Alexander says he saw how meaningful a physical space can be. In 2017, through mutual connections Alexander met Mark Masinter, a founding investor at Restoration Hardware who also helped Steve Jobs conceptualize the Apple Store. What began as a 30-minute meeting to toss around ideas on how to re-imagine retail space lasted for hours.

From those discussions the pair came up with the idea for Neighborhood Goods, a 14,000 square foot space--a fraction of the size of a typical department store--designed to showcase mostly online brands on a rotating basis. The first store, which will be equipped with a restaurant and events spaces, will open at Legacy West, a 255-acre open-air retail and restaurant development, in Plano, Texas in November.

Neighborhoods Goods will launch a store at Legacy West in Plano, Texas.

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Rather than compete in the overheated markets of New York and L.A., the founders chose Dallas, one of the fastest-growing cities in the U.S. with a strong retail market. To date, Alexander and Masinter have raised a $5.8 million seed round led by Forerunner Ventures.

To elevate the shopping experience, the company is largely eschewing traditional store shelves and instead designing displays that integrate the products into the space. Resembling an IKEA store, Neighborhood Goods will feature bedrooms outfitted with customized frames by Framebridge, The Inside's furniture, and Allswell's bedding--all of the goods ready to buy. Even the plates used at the restaurant will be available for purchase. The store will also sell clothing. The company's staff, which will be around 30 when the store opens, is tasked with designing a "polished and consistent experience" with about 30 or so brands Neighborhood Goods will carry.

Via the store's app, customers can arrange in-store pick-up, perform self-guided checkouts, browse the menu, and request in-store assistance.

"The pressure on them is to not transact but to experience and enjoy," says Alexander.

To lower the barriers for entry, Neighborhood Goods will provide short-term, flexible leases ranging from six to 12 months, which Alexander says will encourage brands "to be playful and experimental." He declined to disclose a specific figure but said the leases would come with two options: A fixed fee per month where brands take 100 percent of their sales, or a slightly lower fee where brands would give Neighborhood Goods a percentage of sales.

The 14,000 square foot space will showcase about 30 brands from clothing to furniture on a rotating basis.

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The strategy is a big departure from from the traditional department store model, where brands often must commit to a three-year long lease and can easily be lost in the excess square footage of department stores. "What's dying in the space is that there's been a huge amount of complacency from a lot of the incumbent large-scale brands and department stores," says Alexander.

Brands born online can't afford to be complacent. Carving out a niche and attracting customers to a website--when they can choose to go to hundreds of other websites--requires a different mindset. That's why Mark Ghermezian spotted an opportunity in using technology to help digital brands integrate into brick-and-mortar stores more efficiently.

Ghermezian founded Braze, a software-to-service mobile app, in 2011 but he comes from a family with deep roots in retail. His father and grandfather founded the Mall of America in 1992. The largest mall in America--about the size of five Yankee Stadiums--has avoided the fate of other malls by focusing on experiences since the beginning: over the years, the mall has housed an amusement park, community college, a chapel, and hotels. It is Minnesota's single most valuable real estate asset, according to The Minneapolis Business Journal. Now Ghermezian wants to continue his family's legacy of reinventing retail with his newest startup Fourpost.

Launching Nov. 1, Fourpost's stores inside highly trafficked shopping centers like Mall of America (10,400 square feet) and West Edmonton Mall (5,000 square feet) will showcase about 30 local brands, giving them access to customers they might not be able to reach otherwise.

To help brands create a better experience for customers, Fourpost will offer an online analytics dashboard that tracks point-of-sales data and foot traffic. The startup will also provide tutorials on how to scale a business and compile trend forecasting reports.

"[Retail] needs to change to service the new needs of the brands that are coming to market," Ghermezian says. Fourpost has raised $5 million in funding from investors including the CEOs of Warby Parker and Parachute Home.

To be sure, these new retail concepts will need to prove themselves over time in a landscape that is continually in flux. "Creating something that feels really unique is hard," Alexander admits. Ghermezian says a challenge for his company is scaling and finding the right locations for future stores.

Still, one thing is certain: these startups are proving that retail is far from dead.

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