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The Big Business of Supporting the Multi-Trillion Dollar Retail Business

Brick ‘n mortar sales still account for ~90% of the massive US retail sector. In this report, we identify dozens of opportunities for supporting physical retail over the next decade.

15 Minute Read
  • While ecommerce minimizes physical retail costs (rent, inventory, and cashiers), it has other significant costs (online ads, free shipping, and customer support reps). A multi-channel approach is an increasingly prudent strategy, and we provide examples of how to help digital brands make the transition. 
  • Simon Property Group, the nation’s largest mall operator, has an active venture capital arm and innovation group. We analyze their efforts in marketing, finance, marketplaces, location-based services, online-to-offline services, and experimental retail to identify where the opportunities are for people who want to support the multi-trillion dollar sector. 
  • SPG has a multi-billion dollar redevelopment plan for the 2020s. We review the strategy and identify high-potential ideas for repurposing vacant retail space.
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Brick ‘n mortar retail had a bumpy 2019.

A number of notable retailers — including Gymboree, Payless Shoes, Forever 21, Sugarfina, and Destination Maternity — declared bankruptcy and, collectively, closed thousands of stores.

While the transition to ecommerce (“Amazon effect”) is often cited as the death knell for physical retail, in-store sales still account for ~90% of the multi-trillion dollar US retail sector.

Physical retail remains a massive market and Simon Property Group (SPG), America’s largest mall operator, is at the front lines. The company generates >$60B in revenue and operates 206 US properties, including 107 malls.

By analyzing Simon’s retail innovation roadmap, we show you smart strategies for creating impactful products and services in the physical retail space.

In this report, you will find: 

  • Why brands are pursuing a multi-channel approach and how you can help digital retailers expand to digital storefronts via a “retail-as-a-service” model.
  • Why location-based, offline-to-online, marketing and finance services are attractive opportunities for the next decade of physical retail.
  • What you can do with underutilized retail space and resources to help you identify and lease such spaces. 

 
Brick ‘N Mortar is Not Going Anywhere 

The main advantages of ecommerce relative to brick ‘n mortar retail include minimizing costs such as rent, inventory, wholesalers, and cashiers. As the ecommerce space evolves, though, those costs have shifted to online ads, free shipping and returns, and customer support reps.

This difference between physical and digital retail cost structures is famously distilled in the phrase “CAC is the new rent.” Instead of renting a storefront to attract customers, ecommerce companies pay a tax to Facebook and Google in the form of digital ads.

The new reality is that brick ‘n mortar and digital retail are not mutually exclusive channel strategies. 

Many notable DTC players — such as Casper, Warby Parker, Bonobos, and Indochino — take the multi-channel approach (and often do so within Simon properties).

In fact, there are a number of new companies that explicitly cater to the trend of digital retailers looking to diversify into brick ‘n mortar retail. 

Startups such as Leap Inc. and Guesst (an SPG partner) offer retail-as-a-service, where digital brands can quickly launch highly designed storefronts. 

One of Simon’s largest commitments to the multi-channel approach is its joint venture with the parent firm of Rue La La and Gilt. That venture is focused on discount shopping and is projected to do more than $1B in sales. 

On SPG’s Q3 2019 earnings call, Simon’s CEO David Simon was optimistic about working with digital players in the years to come

“I would say to you the level of interest and new retailers in this category continues to amaze us. They actually are very interested in our real estate. So despite the negative narrative that you see from the general media, they all want to locate in the mall… I think we’re just at the beginning of that, so I continue to expect us to redevelop our assets with those kind of retailers significantly over the next decade.”

NEW YORK, NY – MARCH 06: David E. Simon, chairman and chief executive officer of Simon Property Management, Inc., attends UJA-Federation of New York’s Fashion Division 2014 annual luncheon at The Pierre Hotel on March 6, 2014 in New York City. (Photo by Mireya Acierto/Getty Images)

Simon’s Venture Portfolio Shows There Are Retail Opportunities in Marketing, Location-Based Services, Online-to-Offline Services and Finance Startups 

A notable aspect of SPG’s retail strategy is the firm’s in-house venture capital arm Simon Venture Group, which aims to lead “the future innovation of retail by investing in brick-and-mortar and online/mobile technologies that enhance the shopping experience.” 

Since its founding more than 5 years ago, the venture group has made more than 20 investments (from seed through late stage).

In our research of the firm’s portfolio, we find that Simon’s investments have predominantly been in 6 categories (full details here). We discuss them below and, where applicable, provide our view on the opportunities for founders and investors:

Location-Based Services

Tech solutions that leverage geo-data from mobile devices to either provide information, entertainment, or services.

  • Augmate (NY): Augmate offers an Internet of Things, or system of interrelated computing devices, and wearable device management platform that allow organizations to develop end-point solutions.
  • FourSquare (Founded NY): Foursquare is a location technology platform.
    • Our Take: Four Square — originally known for its social check-ins — was able to impressively pivot into an enterprise intelligence company. To date, the company has raised nearly $400m and leveraged its location data to provide services for marketers (“turn your marketing into real-world customer visits”), developers (“give your software a better sense of place”), and explorers (“discover the best things to eat, see, and do”). 
    • Opportunity: Localized information remains extremely valuable. Do you live in or have expertise in an undercovered geographic region? Creating “intelligence” (via reviews, how-to’s etc) in these areas can lead to monetization opportunities.  
  • Parkifi (Colorado): ParkiFi is making parking less of a hassle with their real-time parking occupancy and payment platform.
    • Our Take: Parkifi was acquired in 2018 by Dish Network for $13m. Why would Dish do this? Per the Denver Post, “by snapping up ParkiFi … Dish gets kick-started into internet-of-things product development as it builds out a new [$11B] wireless network.”
    • Opportunity: While Parkifi’s product is “parking-space”-focused, the expertise the brand built in internet-connected hardware with sensors gave it access to valuable location-based data. An Internet of Things product can begin with retail in mind but also have numerous exit opportunities based on the type of information gathered.

Online-to-Offline (O2O) Services
Services that facilitate the customer journey from purchasing a product online to either picking up in-store or receiving via delivery. 

  • Deliv (SF): Deliv is a crowdsourced same-day delivery service for large national multichannel retailers.
    • Our Take: Deliv has raised $80m to date and is well-placed to ride the tailwind of growing ecommerce activity. 
    • Opportunity: The space is incredibly competitive with existing players (Amazon, FedEx, UPS, DHL) but the “last mile problem” — in which more than 50% of shipping costs take place in the last mile — means that there continue to be opportunities for innovative solutions. 
  • Miner (SF): Miner is a leading mobile shopping app for buying the latest fashion.
  • Sku IQ (SF): Sku IQ develops a cloud-based integrated commerce platform.

Marketing 

The following investments look to create mobile and personalized marketing solutions for physical retailers. 

  • Limespot (Vancouver): LimeSpot is an eCommerce conversion data network powered by advanced patented algorithms.
  • SmarterHQ (Indianapolis): Service that makes it easy for marketers to increase revenue and customer relationships by powering highly personalized, cross-channel experiences.
    • Our Take: SmarterHQ has raised more than $40m and provides an interesting suite of tools to help retailers maximize their marketing efforts through data collection, data activation, customer segmentation, ML-powered personalization (leveraging data to make better customer recommendations), and campaign management tools. 
    • Opportunity: As explained by a former head of Simon Venture Group: “One thing I have noticed about data analytics is that its biggest pain point is that it often is not actionable…The way to [make it actionable] is to incorporate it into marketing. Otherwise you are left with people looking at numbers and wondering what to do.” Applications that create actionable insight around retailer data will win big in this space
  • Swirl (Boston): Swirl is an in-store mobile marketing platform that helps retailers attract consumers while they shop in their stores.
  • Ziploop (SF): Loyalty program service via a smart wallet for mobile receipts and rewards. 


Recommerce 

These investments include startups that rent clothing, a business model popularized by the likes of Rent-the-Runway. 

  • Fashion Project (Boston): Fashion Project is an ecommerce store offering exclusive fashion products donated by style icons, celebrities, and philanthropists.
  • Le Tote (SF): Le Tote is an online fashion subscription service, delivering rental fashion directly to women’s doors.
  • Union Station (NY): Union Station is a rental service for bridesmaids’ dresses.

Finance / Marketplace

Finance services and marketplaces are difficult verticals to enter. Finance has significant capital and regulatory costs while marketplaces require the creation of large supply and demand pools. For anyone looking to enter these spaces, seeking a partnership with the likes of Simon — which holds a privileged place between vendors and customers — is a prudent strategy. 

  • Appear Here (UK): Appear Here is an online marketplace for short-term retail space.
  • Grailed (NY): Peer-to-peer fashion marketplace.
  • Jifiti (Columbus, OH): The company offers retailers and brands turnkey monetization options (eg. financing) through innovative services in-store and online.
    • Our Take: Jifiti has raised nearly $7m by offering a white label service for retailers to create their own point-of-sale (POS) financing solutions. While the white label approach is flexible, Jifiti’s war chest pales in comparison to other POS financing startups such as Affirm (raised $1B) or Afterpay ($200m). 
    • Opportunity: The addressable market for POS financing is estimated at nearly $400B. The least capital intensive ways of taking part in the market is via demand generation (e.g., blogging, reviews) for these services. 
KIEV, UKRAINE – 2019/01/04: In this photo illustration, the Simon Property Group Real estate company logo seen displayed on a smartphone. (Photo Illustration by Igor Golovniov/SOPA Images/LightRocket via Getty Images)

Direct-To-Consumer Brands

Simon has invested in a number of DTC brands from mattresses (Helix Sleep) to beverages (Iris Nova) to clothing (Ministry of Supply). The variety of Simon’s DTC investments suggests that up-and-coming DTC brands should seek out retail REITs — Simon, Macerich, GGP, Westfield, Brookfield — as potential investors or operating partners. 

  • Baublebar (NY): One-stop retailer for affordable, on-trend fashion jewelry.
  • Helix Sleep (NY): Personalized, made-to-order mattresses at value driven prices.
  • Iris Nova (NY): Beverage company. 
  • Fabfitfun (LA): Subscription services that allow its members to discover new brands and products.
  • MeUndies (LA): Sustainable undies and apparel. 
  • Ministry of Supply (Boston): Next-gen fashion through fabric and engineering innovation. 

Simon’s In-House Creative Design Team is Hyper-focused on Customer Engagement

Aside from its venture arm, Simon also has an internal creative design team called the Simon Innovation Group. The team is staffed with leading members from Simon’s creative, innovation, customer experience, and marketing teams.

According to REIT Magazine, the Simon Innovation Group “shows that it’s not just about having the best locations and massive scale. [Simon’s] work to engage consumers serves as an example of what mall owners need to think about in order to position themselves for rapidly changing consumer demand trends and the continued, relentless rise of ecommerce.”

The group’s innovations are very much in line with the idea of “engaging consumers,” primarily by making the physical retail experience either more pleasant, memorable, or convenient. 

Ultimately, that engagement increases foot traffic and benefits tenant retailers.

From our analysis, Simon’s in-mall innovations fall into 5 categories (links where applicable; full list here). We discuss them below and, where applicable, provide our view on the opportunities. 

Experimental Retail 

Simon has reserved space in its top malls for retail incubators and platforms that serve as testing grounds for retail brands and new tech-enabled retail experiences.

  • The Edit: Located in NY (Roosevelt Field Mall), The Edit is a retail platform that allows brands to showcase their products in experimental ways including: Clientele (streetwear), Winky Lux (make-up), Jars By Dani (dessert), Revtown (denim). 
  • Launchpad: An incubator that showcases tech-enabled retail solutions including “VR concepts, youth tech (featuring a smartphone-enabled gaming console), a robotic dog able to respond to verbal commands, and other trendy tech.”
    • Our Take: Both The Edit and Launchpad are interesting concepts for maximizing underutilized retail space. While the initiatives make more sense in a multi-pronged business with available space (e.g., Simon Property Group), the trend towards experimental and experiential retail is worth keeping an eye on. 
    • Opportunity: According to the Boston Consulting Group, brands that focus on engagement and personalization see up to a 10% lift in their revenue. Opportunities in this space for entrepreneurs unaffiliated with brands include creating an agency model that ideates new experiential retail ideas (e.g., sleep pods within Casper stores) or organizes events (e.g., dunk contests within Nike stores). 

Online-to-Offline (O2O) Services
As with its venture investments, Simon’s O2O innovations are focused on bridging the divide between digital and brick ‘n mortar retail. 

  • Retail Connect (Fulfilment-as-as-service): RetailConnect enables mall-based retailers to fulfill ecommerce orders without the need to allocate extra space, staffing or technology. 
  • Last-Mile Terminal (In-mall fulfillment): An advanced logistics offering that helps retailers ship from stores in the most efficient and affordable manner. 
  • Quick Eats: Service that facilitates a seamless food pick-up or delivery from Simon mall food vendors. 
  • Happy Returns: Service which streamlines the customer return process and creates a seamless method for in-store returns or exchanges.
    • Our Take: Happy Returns addresses a very clear pain point and provides value to all players involved in the return process: 1) customer (can process return without a box or receipt at a conveniently located “return bar” with an immediate refund initiated); and 2) seller (keeps the customer happy as well as increases revenue potential via point-of-sale exchange suggestions and reduce costs via cost-effective shipping). 
    • Opportunity: According to Appriss Retail, merchandise returns cost retailers more than $300B. The opportunity to streamline the return process is significant and will only get larger as ecommerce grows from its current base (10-11%) of the US retail market. 

Location-Based Services
Services that make it more convenient to navigate mall spaces. 

  • Interactive Digital Directory: Dynamic 65” directory displays which are interactive and can serve different ads based on who is looking. 
  • MyPark App: On-demand parking service that allows the most convenient parking experience. 
  • Apple Maps Indoor: iOS indoor navigation. 
  • DropIt: Locations to drop off shopping bags so customers can continue “hands-free” shopping. 

Chat
Simon has launched a number of communication initiatives to serve as “digital concierges” to assist customers and offer up relevant promotions. The efforts expand across mediums (FB Messenger, Snapchat, Alexa) and also cater to foreign shoppers (Digital Voice Translator, WeChat).

  • Shop Simon
  • Digital Voice Translator
  • WeChat Mini Program
  • Santa Bot
  • Snapchat Filters
  • Alexa Skills

Children

To make the shopping experience enjoyable for all ages, Simon creates play spaces that are “reimagined to be more interactive and community-oriented”. 

Rethinking Retail Space 

The final section of SPG’s strategy analysis looks at the real estate firm’s redevelopment plan. 

Simon’s plan –– dubbed “Live. Work. Play. Stay. Shop” –– has earmarked billions of dollars to upgrade (and repurpose) its mall real estate for the decade to come.

While much larger in scale as compared to the aforementioned Simon initiatives (venture investments, in-house innovation), the upgrading of retail space serves 3 main purposes that are relevant for anyone looking to support physical retailers: 

  1. Bring in foot traffic 
  2. Make the stores more appealing 
  3. Foster a sense of community to have people excited to spend time in brick ‘n mortar locations 

This doesn’t even take into consideration the viability of the new services and businesses that are brought in to replace older retail space (The Trends Facebook Group had a great conversation on potential uses of vacant mall real estate). 

Based on SGP’s strategy, here are 6 ways that retail space might be repurposed to achieve the aforementioned goals:

  • Community: Simon’s Tacoma Mall hosts an “urban village” that intertwines retail, food, and entertainment with pedestrian-friendly access.
  • Fitness & Wellness: Simon has a partnership with Lifetime to create “athletic resorts” targeting the retirement crowd with space for socializing, exercising, and even health clinics and residential spaces. (Other developers have looked at repurposing vacant mall space for for senior living).
  • Offices: Simon has a lot of top-tier office real estate to make its property truly multi-use. (Repurposing vacant mall space for other business purposes include co-working spaces and data centers).
  • Entertainment: In addition to traditional entertainment offerings such as high-end theatres and bowling alleys, SPG has invested in a global E-sports company (Allied E-sports) and also uses its real estate to host E-sports tournaments (Simon Cup).
  • Greenspace: Simon has embraced the trend towards a “greener” world with a focus on greenspaces including one of America’s largest open air malls – The Falls Miami. (Other developers have also leveraged green spaces to bring in foot traffic to help retail tenants).

EV & Gas In Parking Lot: Simon utilizes its vast parking lot footprint to provide car services such as EV charging and on-demand gas fill-ups. 

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