5 ways the coronavirus pandemic is reshaping the future of retail stores

The retail industry, buffeted by the devastating impacts of the Covid pandemic, is being forced to redefine the role of the of the brick-and-mortar store.

The fallout felt around the world from the global health crisis has accelerated several trends: People flocked to the web at unprecedented levels to order goods; the rate of permanent store closures ramped up, leading to a deepening crisis hitting America’s malls; and many retailers got smarter about using inventory stored in stock rooms to fulfill shoppers’ digital purchases.

In coming years, retailers that want to survive and thrive in this new era of commerce should rethink their store layouts and make features like curbside pickup permanent, to meet shoppers’ changing needs, according to a report released Thursday from CBRE, a commercial real estate services firm.

While more store closures and retail bankruptcies are inevitable — following the more than 8,400 closures announced by retailers and more than three dozen bankruptcies in 2020 — the stores that remain open for business, along with their workforces, are going to have to become more agile, according to CBRE.

“There’s a sort of misconception that e-commerce growth means the end of the store, that e-commerce essentially eliminates the need for the store, both for retailers and for customers,” said Melina Cordero, a leader of CBRE’s retail capital markets business for the Americas. “And the reality is, it doesn’t.”

“What we want to do is give more clarity about what really is going on, and how e-commerce impacts the store and transforms it, as opposed to replace it,” she said.

Here are five ways retail stores are changing, for good, according to CBRE:

It might go unseen to customers, but the back of a retailer’s store has arguably become the most vital part of any store.

Companies such as Gap, Macy’s, Best Buy and Kohl’s have increasingly been using their stock rooms to hold extra inventory for digital purchases, not just to replenish store shelves. From there, companies are able to pack and ship boxes directly to customers’ homes, which likely are located closer to those stores than to warehouses, cutting down on transportation time. And that helps cut down on overall shipping expenses.

Target during its latest quarter ended Oct. 31 said over 95% of its third-quarter sales, including digital, were fulfilled by its stores, aiding its earnings in topping analysts’ estimates. In Bed Bath & Beyond’s latest quarter ended Aug. 29, the company said, stores fulfilled 36% of online orders, which included more than $120 million of curbside and in-store pickup purchases.

“The store is becoming an extended part of the supply chain, to do ship from store,” said John Morris, head of CBRE’s industrial and logistics and retail divisions. “I think the first thing you’ll see is increasing inventories at the store level.”

Among other changes, CBRE said retailers should get better at separating merchandise in their back rooms in three buckets: Online orders; buy online, pick up in store orders; and goods for in-store replenishment. Retailers will need to make sure their back parking lots have delivery access to make and receive shipments, the firm said. And they’ll require smarter inventory tracking technology, similar to what’s used in standard distribution centers, to make sure the right merchandise is always in place, CBRE said.

Stores are also going to require more space dedicated to handling shoppers’ returns, as they approach record levels.

Typically 60% to 70% of returns happen in stores, according to Amit Sharma, founder and CEO of Narvar, a returns technology platform for retailers, although that behavior has been complicated by temporary store closures and consumers feeling more anxious about shopping in person during the pandemic.

A report earlier this month from CBRE predicted as much as $70.5 billion worth of holiday purchases this year are expected to be returned. And with e-commerce sales continuing to proliferate, leading inevitably to more returns, much as 400 million square feet of additional warehouse space could be needed in the next five years just to process returns, CBRE said.

“Part of a retailer’s overall strategy will be to encourage online customers to bring their returns to the store rather than mail them,” CBRE said. “Savvy retailers will employ sophisticated algorithms to make real-time decisions about returns, thereby improving customer experience, reducing costs and promoting environmental responsibility.”

Curbside pickup has skyrocketed in popularity during the pandemic, as many retailers view the service as their best bet of getting items to customers promptly. Before the health crisis, more and more companies, like Target and Walmart, had been investing in adding a curbside offering. But it quickly became one of the more important services to have in 2020, with e-commerce volume ramping up and stores enforcing capacity restrictions.

From Nov. 1 to Dec. 9, the number of online orders fulfilled via curbside pickup was up 88% year over year, according to Adobe Analytics. From Dec. 1 to Dec. 9, with Christmas shipping deadlines rapidly approaching and Covid cases still rising across the country, curbside grew 94%, and the companies offering it saw 33% higher conversion rates over those that don’t, the firm said.

Companies including Bed Bath & Beyond and Dick’s Sporting Goods rolled out contactless, curbside this year. Mall and shopping center owners like Kimco Realty and Simon Property Group also have helped to make sure their parking lots are equipped with spaces to handle customers visiting for curbside pickup.

According to CBRE, a dedicated curbside pickup area outside the front of any retail store, including grocers, will be critical in the future to avoid overcrowding and to ensure digital orders can be fulfilled without stressing companies’ supply chains.

“Curbside pickup really became the newest addition [to stores] during the pandemic, because it was no longer like retailers had to deliver one more level of service. The customer didn’t have to come in the store,” said Michael Brown, a partner in Kearney’s consumer products and retail practice.

“It’s up and running and is far from perfect, in most environments,” he added. “But it will continue to evolve, because it’s become a customer expectation.”

As retailers add new technology to their stores like self-checkout kiosks, the role of the retail employee is evolving. Scanning and bagging items at the cashier counter is no longer the most important role in the store. More staff activity is moving to stock rooms. And automation at the front of stores is freeing up some workers to focus on customer service.

“I don’t think that automation is replacing all of the labor in the store,” Cordero said. “The goal is to streamline everything that’s happening in the store … and you’re going to need to have people in the store who understand what’s going on all over.”

According to CBRE’s report, stores in the future will require a mix of staff who are knowledgeable about both merchandising and customer service, and fulfillment. Those tasks have traditionally been assigned to different people in the past. “There will be incredible value in agile employees who can handle both roles interchangeably.”

As one example of this trend, Academy Sports & Outdoors CEO Ken Hicks said the sporting goods chain has made staffing adjustments during the pandemic, especially as it has ramped up using its stores to fulfill online purchases.

“We’ve had to change how we look at the use of labor and adjust similar to what grocery stores have done,” he told CNBC in a recent interview. “We have people now whose job it is to go around and pick orders for us.”

As the role of the retail store evolves to handle more online orders and offer services like curbside pickup, rents will likely need to adjust, as well.

CBRE says the retail industry, including landlords, must shift to a more “holistic rent model” that takes into consideration the real estate value of a physical store, the amount of online sales a company is bringing in, and the real estate value of a warehouse.

“A new and more sophisticated pricing mechanism is needed to determine the value of stores and retail rents, especially for retailers that have more online channels,” the firm said.

“For a long time, real estate has been siloed for a lot of companies,” Cordero added. “And now, those barriers are down.”