1. Partnerships & Alt Profit

The Rise of Brand Partnership in Physical Retail

Store-within-a-store (SWAS) strategies are nothing new, from the more traditional cosmetic brand and department store relationships, to the ongoing partnerships we’ve seen between brands like Best Buy and Sony. And while the concept is a familiar one, this past year has brought a new flurry of activity in this space: Target with UltaKohl’s with Sephora, Tonal at Nordstrom, and more.

With COVID-19 accelerating consumer preference for digital-first, omnichannel retail experiences, we’ll likely see a continuation of this trend. What are the key benefits of this approach, and what are some considerations for delivering long-term success?

Discovery, Distribution, and Destination

As COVID-19 has fundamentally changed the role of the physical store in the customer experience, retailers need to play to the potential strengths of their physical environment. These are the three D’s: discovery, distribution, and destination. We’ve seen that a symbiotic relationship between them can benefit from a SWAS strategy.

Beauty, electronics, and fresh food are all “discovery” categories where customers seek inspiration, product interaction, and the opportunity to make considered choices. The physical store remains a stronger medium to serve these needs. In contrast, for “replenishment” categories (e.g., paper towels, toilet paper, etc.), we’ve seen a shift to the convenience of online. This change in demand requires a rebalancing in space allocation towards discovery, which provides the opportunity for new brands to fill this space.

These discovery brands benefit from a physical presence, which brings us to the next strength: distribution, and the need to be conveniently close to consumers. Building a network of retail stores is a slow, expensive proposition. Warby Parker opened its first store in 2013, and by 2021 has reached 138 locations. Contrast this to Target’s 1,868 stores. When it comes to distribution, SWAS offers a less resource-intensive and faster path to market.

Lastly, destination. A record 12,200 stores closed in the U.S. last year. Survival requires being a destination, drawing shoppers because your offer isn’t available elsewhere. In the past, too many retailers relied on a generic offer and convenience, a weakness that online has exposed. SWAS brand collaborations provide that destination and a unique experience anchored in discovery.

Related story: Target to Open ‘Mini Apple Shops’ in Select Stores

The Rise of Private Label

The urgent need to create destination has spurred growth in private-label brands. We’re now seeing a natural next step, which is the introduction of private-label experiences. In 2019, specialty discount chain Five Below introduced Ten Below, a sub-brand with higher cost items, and is scaling the concept nationally. We created Fresh to Table for Wakefern, a Northeast grocer, as a SWAS concept that competes within the immediate consumption space. As with national brand partnerships, these enable retailers to enter new categories, create destination, and bring authority that may not exist today in a banner brand. Quite like the SWAS strategy, we expect to see more examples of this model in coming years.

Considerations for Delivering Long-Term Success

Partnerships are challenging. Incentives rarely fully align, and future events can derail even the best of intents. To maximize the odds of success with SWAS, ask yourself three key questions:

1. Can you clearly articulate the rationale for the partnership?

For instance, the incoming retailer is providing authority in a discovery category. The network retailer is providing distribution with little overlap on the current physical footprint. The SWAS concept is unique relative to what else is available, creating destination. There’s alignment in the brand values and shopper target across the two retail brands, and customers feel that the partnership is additive and complementary.

2. Is there a balance of power in the relationship?

The contribution of each partner is clearly articulated in the above rationale. The upsides and risks are evenly distributed across the partners. There’s no conflict with their respective stand-alone businesses. Culturally, the two teams are collaborating for mutual success vs. an adversarial relationship.

3. Are there clear principles that anticipate and guide exit scenarios?

Partnerships are dynamic and rarely long term. Be clear on possible exit scenarios and the principles by which they should be governed. Create objective measures and milestones to assess progress and enable course correction when necessary. Each retailer should also plan, and keep current, their contingency for how to replace the relationship.

Retailer partnerships are a response to the changing retail landscape and provide an agile solution to keeping physical retail relevant. They’re also a point-in-time solution to a longer-term challenge that will likely see the rise of private-label experiences. Retailers should ask themselves what they’re doing to solve for now, while building internal capabilities for the future.

David Mayer is a senior partner at Lippincott, a breakthrough brand for a beloved coffee company.

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