The hidden value of a showroom model
Why I will almost always recommend retail newbies start with an inventoryless store
The tl;dr
Inventory sucks: the cash and carry model is expensive
Managing it from Corporate requires costly overhead, complicated supply chains, and numerous forecasting models
Managing it from the field is expensive: time that should be spent tending to customers is instead spent on tidying up and managing inbound/outbound product shipments, labeling and tagging, and dilutive markdown strategies
A showroom model lowers the barrier to entry to offline retail by reducing the downsides of inventory management
But it’s not for everyone and comes with its own unique tradeoffs — some of which might surprise you
Derisking a store’s investment
When DTC brands open stores, they usually start with popups. They’re shorter commitments and lower risk overall:
Shorter lease term: as opposed to the typical 10 year retail lease, these are usually 1-12 months
Lower bar: when a brand announces their popup, customers are usually a bit more forgiving if the experience, design, or assortment is sub-par
This also applies to financial expectations: since popups are usually smaller investments relative to longer term (ie “real”) stores, the level of sales required to achieve profitability is also usually lower
Opportunistic: retail tends to be something e-com leaders ruminate on without much action until they find the “perfect” space (usually a space recently vacated by a competitor, which requires little investment)
The point of a popup in most cases — particularly for DTC brands — is to test a market and, more importantly in many cases, “try to do” retail for the first time. (I’ve written more about this before)
Popups are a great way to derisk retail, but there’s another way that doesn’t get enough attention: removing inventory from the equation.
Inventory sucks
Whether you’re operating a popup, a “real” store, or even managing a wholesale account, inventory is a huge pain the ass.
Cash and carry models (ie stores that sell products from the store; “traditional” retail) require constant attention and management in the following areas:
Operations: logistics of getting product to and from stores and warehouses; constant replenishment needs. This costs your HQ team bandwidth managing vendors and troubleshooting when there are inevitable problems.
Inventory management: this isn’t always the case, but many retailers distribute their inventory across multiple warehouses vs a single large one. While this isn’t necessarily a function of carrying inventory in stores vs not, the warehouse footprint usually supports the store footprint given the purpose is to move inventory faster to stores.
Promotional and liquidation strategies: inventory is typically bought in advance, with the hopes that you can sell through it. Inevitably, forecasting models are never 100% accurate, and many retailers end up with excess — which ends up getting marked down and sold at a discount and, at best in many cases, at cost. This costs brands margin and brand dilution, and may consequently condition shoppers to only shop your store when you’re running a markdown promotion.
Sales associate time: perhaps the greatest cost of all is your store team’s time. Instead of helping customers, a huge proportion of their time is spent doing everything but that:
Receiving, tagging, and placing new product shipments
Troubleshooting inaccurate or incomplete inventory counts
Packing, labeling, and sending excess product to warehouses
Organizing displayed product
Shuffling products between the front and back of house areas
Cash and carry stores also require more:
Space: inventory requires space. You need space to fill with inventory so you can sell it; the larger the space, the larger the sales potential. This is why many retailers measure Sales Per Square Foot (SPSF), since the metric normalizes larger spaces having more inventory, and therefore having higher sales potential.
Rent: since rents are typically priced on a Per Square Foot basis, larger spaces = higher rents.
Overhead: more stores = more inventory, which means more inventory planners and allocation specialists. It’s one thing to manage your inventory at one warehouse, but the time and overhead required to manage it across at least one warehouse plus every single store can mean this team essentially becomes a variable cost — meaning you don’t get much leverage as you grow.
In a cash and carry store model, there’s a direct correlation between your sales, time spent on inventory management, mistakes, and other overhead — contributing to a lower profit margin and a diluted customer experience.
Enter the showroom model
A showroom model is the opposite of a cash and carry model: customers cannot walk out of the store with product, which is delivered to their home after placing the order in stores. The typical model is practiced — and arguably originated within the consumer world as we know it today — with Bonobos and Warby Parker: the store (or showroom) has a wide range of products, but not depth of SKUs. In other words, and in the case of Bonobos, the store carries one of every size, fit, and color, but not one of every size x fit x color combination; it’s just enough to show every individual attribute of a product, but not enough to let you take one home with you.
Much like doing popups derisks your first venture into retail, implementing a showroom model derisks the above issues that come with inventory:
Operations: the logistics requirements of replenishment are certainly not eliminated, but by reducing the number of units you need on-hand (since customers cannot buy them out of the store), the number of units that need to be transported is significantly reduced. This reduces the cost of mistakes and the time required to manage those units’ transportation.
Inventory management: if your entire store fleet is comprised of showrooms, then you’ll have a much easier time managing just a single warehouse of inventory (assuming that’s possible to begin with). There will still be some level of “inventory” management (the store samples), but it’s drastically reduced and assortments can be a little more repeatable across locations.
Promotional and liquidation strategies: without inventory in the stores, you can reduce the level of promotionality in your stores that would otherwise come with the need to get old product out ahead of the new season’s product.
Sales associate time: store teams generally are ecstatic when they hear they don’t have to manage inventory. Associates can spend a fraction of their time managing inbound/outbound product shipments and organizing products on shelves, and instead focus on serving the customer. It’s a win-win.
Space: less inventory usually means smaller spaces will suffice. It also means more of a store’s space can be used for the sales floor versus the back of house.
Rent: less space means less rent. Pretty straightforward.
Overhead: with less inventory floating out and distributed across numerous locations, you don’t need as much overhead — whether that’s in the form of FTEs or technology.
The showroom comes with its own tradeoffs
Showrooms aren’t perfect. While they mitigate some risks and help to simplify operations, they also come with their own tradeoffs. Some are obvious, but others might surprise you:
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