Stores are shrinking as tech takes over

A coffee chain is not usually the kind of endeavor that attracts investors, but after raising $200 million in an initial investment round, Luckin Coffee is attracting a lot of attention. The hype around the new coffee chain is partially by design, but it also has to do with the way it uses novel retail trends in China to take on Starbucks, which has long lacked a serious challenger in China.

Luckin is primarily a mobile retail company. The only way to order coffee is through its app. Coffee can be delivered or picked up at one of its many compact locations found in less-trafficked areas with lower rents. While Luckin has some “relax” locations meant to compete more with the Starbuck environment, the vast majority of Luckin’s locations are “pickup” places without sofas on which customers can lounge with their cup of java. This scaled down approach reduces overhead while utilizing changing retail trends to attract younger consumers. While Luckin is unique in its industry and hype, it’s not unique in its approach. More and more, retailers are recognizing pared-down stores and mobile commerce are essential to staying alive.

In recent years, retailers of all types in the U.S. have been experimenting with smaller stores. A range of retailers from discount to upscale stores are giving it try. Target, Walmart, Kohl’s, Sears, Macy’s and Nordstrom have all tried out locations with less physical space to varying degrees of success (or lack thereof). Walmart ultimately found it couldn’t shift consumer perceptions of its brand away from an “everything for everyone” store with limited offerings.

Going smaller doesn’t have to mean a brand leaves behind its roots. It could mean getting back to basics. That’s what beleaguered bookseller Barnes & Noble wants to do by building smaller stores and “refocusing on books.”

Whether retailers succeed with smaller locations, the shifting tides pushing retailers in this direction haven’t changed. It’s sink or swim.

Anyone familiar with recent omni-channel retail trends can imagine how and why this strategy works. A physical location is great for getting new products noticed. It helps with the serendipity of product discovery. This is important to bibliophiles, for example, which is part of why independent bookstores have been making a comeback.

Mobile commerce makes it easier to not have everything in stock, though. A store may have a single product for display and allow customers to order immediately through their phones and get it within a day (if the warehouses are close enough). This solves the serendipity problem and allows stores to cut cost by downsizing. It may also be more ideal for high-density urban areas.

Perhaps this is why omni-channel retail has been taking off in China. The country has more than 650 cities with more than 1 million people. This high density lends itself well to fast deliveries. China’s population is also very familiar with mobile commerce, using local Alipay and WeChat Pay for mobile payments and buying many common goods and services directly through those apps.

The ubiquity of mobile payments allows for more experimentation in retail. Alibaba is experimenting with a new type of supermarket called Hema that allows customers to pay as they go, scanning products with their phone before putting them in a cart.

Hema isn’t about downsizing, but this technology does give retailers the option. In recent years, a new kind of convenience store has starting springing up that doesn’t have any staff at all. These small, unmanned shops can only allow one person to enter at a time, but gaining entrance and payments are all done through mobile.

In the U.S., Amazon is also experimenting with stores that use sensors to automatically follow customers around, monitor what they put in their cart and charge them automatically when they leave. This new kind of retail could allow for more but smaller stores, allowing customers to quickly get in and out and supplement physical shopping with online shopping for other products they need.

For startups, the pressing question as physical locations downsize is how to be one of few products to make it on the shelf. Retailers want new, unique products to fulfill that sense of serendipity in their customers. The best product to have on display is one that consumers don’t know they need until they see it and try it.

One way to get retailers enticed enough to put a product on the shelf is to show it off to them at trade shows and similar events, giving them the same serendipitous experience they hope to give customers. Having a product that will wow buyer is another matter. There’s no substitute to good innovation.

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