Though much of the coverage of the U.S. retail sector has focused on the legacy companies that are closing or shrinking stores, industry insiders are optimistic about physical retail’s future, with even Amazon beginning to experiment with brick-and-mortar stores, and Apple, Microsoft, and Tesla showing the value of “showrooming” their products to high-end customers.

“The world is changing, but those retailers that innovate will survive and thrive,” said Margaret McCauley, principal at Downtown Works, a consultancy focused on downtown retail. “We’re social animals. We still want to see and be seen, go out and touch a product. Ninety percent of all purchases made today are in brick-and-mortar stores.”

So far just this year, JCPenney has announced plans to shutter 140 stores, Sears is closing 150, and Macy’s is closing 68. Smaller brands that were once mainstays of suburban shopping malls are also struggling: fashion retailer Bebe announced recently that is closing all 168 of its U.S. and Canadian stores to focus on online sales, and Payless Shoes will close almost 400 stores.

McCauley moderated a ULI Northwest event in Seattle featuring presentations and panel discussion on who makes up generation Z and what it will take to bring the next generation of shoppers into retail locations. Starbucks and Nordstrom executives also presented insights on how their businesses are evolving with the changing retail landscape.

From left to right:

From left to right: moderator Margaret McCauley, principal at Downtown Works; Erin Bombacie, a director of product management and customer experience with Nordstrom; Myra Vaughn, principal at MG2; and Dennis McGrath, Starbucks vice president of global operations innovation. (Josh Cohen/ULI)

Myra Vaughn, principal at MG2, a retail architecture and design firm, shared insights her firm has collected about gen Z. Loosely defined as people born between 1996 and 2010, this cohort already has an annual purchasing power of $44 billion in the United States. With that number projected to grow to $200 billion by 2020, this cohort is the demographic on which many retailers will focus.

Courtesy of MG2

Courtesy of MG2

Members of Gen Z have been heavily influenced by the experiences of their parents—gen Xers who suffered the brunt of the Great Recession. The young generation is also influenced by the fact that they are the truest digital natives yet—“swiping, pinching, manipulating screens since before they could walk,” Vaughn said.

The result is a culture of shoppers that is savvy, well informed, and skeptical of “inauthentic” branding and advertising. For example, Vaughn pointed to the success companies have had partnering with social “influencers” who promote the brand to their enormous social media audiences.

So how are big retailers responding to the demands of young shoppers and meeting the expectations of older shoppers who have also been conditioned by technology to expect instantaneous service?


Courtesy of Nordstrom

The three ways brick-and-mortar stores are staying relevant are blending online and in-store shopping, working to provide in-store experiences that cannot be replicated online, and having the flexibility to provide the different types of service a customer might want on a given day.

Erin Bombacie, a director of product management and customer experience with Nordstrom, echoed the ideas behind some of these concepts. “Customers expect speed, they expect transparency, they expect to be in control,” she said. “Eighty-four percent of customers use their phone to shop while in store. Thirty-three percent find info online they otherwise would’ve asked employees.”

619_mobileNordstrom is meeting that expectation by offering customers the option to reserve—before they arrive at the store—a changing room of clothes they want to try on. On the other hand, the retailer makes sure sales staff members are still knowledgeable and ready to share fashion tips that a customer could not necessarily get by clicking around on a website. Nordstrom has also experimented with pop-up stores within a store.

That is in the vein of the flexibility stores need to offer to customers, Bombacie said. While every store cannot be everything to everyone, stores also cannot be rigid. Many customers simply want to order something online and get it the same day from a physical location near their offices. That is why Nordstrom is providing same-day curbside pickup for online orders.

“We want to be there from a service perspective, experience perspective, convenience perspective,” explained Bombacie. “If we can do that, we start to build that loyalty from customers.”

619_respondDennis McGrath, Starbucks vice president of global operations innovation, said Starbucks has been implementing a similar vision of flexibility in recent years. Instead of trying to make individual stores meet a wide variety of needs, the company has been building different locations that meet different needs.

On one end of that spectrum is the Starbucks Reserve Roastery store in Seattle’s Capitol Hill neighborhood. The more than 15,000-square-foot (1,400 sq m) space features an ornate interior, slow bar service, fancy devices to hand-make espresso and coffee, and all the things one would expect from a hip, third-wave coffee shop.

“It is the pinnacle of what we’re trying to offer as an experience,” said McGrath. “It is the aspiration of what our brand is and a tribute to coffee and the coffee experience.”

He said Starbucks recognized that its brand was becoming ubiquitous, with a coffee shop on every corner. “It was about the beverage, not the experience,” he said. “The Roastery was our answer. It’s not about driving profit. It’s about taking back the message of authenticity.”

Starbucks is opening another Roastery in New York City and incorporating elements of the experience into other stores targeted at customers looking to kick back and relax with their coffee.

619_attributesAt the other end of the spectrum, the company is experimenting with stores offering extremely fast service—getting customers in and out in two minutes—and stores that only take mobile payments.

Beyond mobile payments, McGrath said Starbucks is considering things like how to integrate drive-through stores with ride-hailing services such as Uber. “Transportation is going to be changed over the next decade,” he said. “Could end up with 3,200 obsolete stores. What if you could incorporate Starbucks order into your Uber app?”

Over time, it is unlikely that people will continue to make 90 percent of purchases in physical stores, as McCauley cited. But McGrath and Bombacie are confident that innovative retailers can adapt to rapidly changing customer expectations and technologies, while also staying ahead of the curve to predict what customers will want before they start asking for it.

It’s also a different story outside of the United States and Canada. A recent CBRE’s study of global retail construction found that builders completed 134.5 million sq. ft. (12.5 million square meters) of shopping centers globally last year. Seven of the top 10 markets for retail completions are in China, with Mexico City, Moscow and Melbourne rounding out the rest of the list.