For a retailer to know whether a store is worth its cost—whether it’s getting a return on its investment—it needs a way to determine its value. In the past, that was simple enough. Shops were first and foremost points of sale, their value to the retailer closely tied to how much stuff they sold. A standard way to calculate that was to measure how much it sold relative to its size, or sales per square foot.
These days, the calculation is a lot more complex. E-commerce is siphoning sales from brick-and-mortar retail, reducing the sales per square foot of countless stores. At the same time, stores are taking on additional roles in the new shopping ecosystem that’s emerged, and their value beyond being a place where shoppers can buy stuff is moving to the forefront. They’re logistics hubs, immersive brand experiences, touch points for existing customers, and powerful tools to acquire new ones. Today, even if a purchase doesn’t take place in a store, a store may have still had a hand in making it happen.
That means retailers need to consider factors in addition to in-store sales if they want to measure the full value of their physical footprints. Here are some measures experts say they should have in mind.
Retailers are wringing more value from their stores by using them as logistics hubs, letting shoppers pick up or return e-commerce purchases to their nearest store or using that store to fill online orders in the surrounding area. The trick is how to determine that value. It’s necessary to consider a store’s street location, where it sits in the larger geographic area, and how effective it would be at shipping to customers from its inventory, says John Morris, head of the industrial and retail practice at CBRE, a large commercial real estate and investment firm.
“If you can measure the retail value of an intersection or a site, and you can simultaneously measure the logistics value of a location, it gives the retailer a great methodology for understanding what to do with each address to get the best possible return,” Morris says. The goal is to ensure the store is playing the highest-value role based on its location, he adds.
Not every store will have a lot of added worth as a logistics hub, though. In some cases it might be just as efficient to fill e-commerce orders from a regional distribution center, especially since retail real estate is more expensive than industrial space and companies may need to consider how much square footage in a store they want to hand over to filling online orders.
Market influence and email sign ups
Stores have been shown to create a “halo effect,” raising e-commerce sales in the areas around them by boosting shoppers’ awareness of and engagement with a company. But that’s just one way they can benefit a company’s business. Praveen Adhi, a partner at consultancy McKinsey and its retail operations lead in the US, says they will often evaluate a store’s influence on the surrounding vicinity, focusing on the three-digit zip code it’s located in. (A three-digit zip code covers a broader territory than the more specific five-digit number). The measures of a store’s influence they look at “could be e-commerce sales, it could be brand awareness, it could be number of people that sign up for the loyalty program,” Adhi says.
One simple but useful measure is how many customer email addresses a store brings in. In 2019, McKinsey set up a shop it calls the “Modern Retail Collective” in the Mall of America, a gigantic shopping center in Bloomington, Minnesota. The space allows retailers to set up their own store within the shop where they can test new technologies in real life and gain insight about what works with shoppers and what doesn’t. “What we found was email addresses collected was one of our best ways of measuring the success of the store,” Adhi says.
McKinsey also worked with one of its retail partners in the collective to determine the value of those emails. “We found if I could get your email address in store—so I’m not buying this off of some generic listserv—it was worth about two and a half times what an average transaction would be in the store,” Adhi says. “Because now I know who you are, I’ve got your email, and I know what you like and don’t like.” He notes a company has to be smart about using the information, but if it is, effective marketing increases the likelihood of the customer making future purchases.
There’s a reason digital-native retailers such as Allbirds, Away, and Casper have been opening stores: They can be a great, cost-effective way to acquire new customers and build lasting relationships, especially as online competition for space and attention surges and advertising costs keep rising.
“What is more effective? A 30-second pre-roll ad on YouTube, or a 30-minute face-to-face human engagement with a consumer in one of your stores?” says Doug Stephens, a retail futurist and author. “We need to start not only looking at physical retail as a media channel, but we need to start measuring the productivity of physical stores by examining its media value as well.”
Stephens argues companies need to measure that value similar to the way they measure impressions online, meaning any time a user is displayed an ad on a website or social media. He presents a rough formula in his latest book, Resurrecting Retail: The Future of Business in a Post-Pandemic World. First, a company has to set a value per physical impression. For example, say a company pays $0.80 per Facebook impression and decides a store visit is worth five times that amount, or $4. If a store gets 100,000 visitors in a year, that’s a media value of $400,000 for that store.
Stores can have a negative media value, too. If they’re full of messy displays, bad service, and a poor selection, they can end up costing a brand.
But if a store can make a strong impression on visitors—getting them to turn over their email addresses or browse the retailer’s website later—or help fill online orders in an area, those are all benefits a retailer should be measuring, and they won’t appear in a calculation of the store’s sales per square foot.