DTC Path to Physical Retail: Shop in Shops 101

The world of physical retail is being transformed… by the brands expected to kill it. After more than a decade of retail doomsday prophecies, direct-to-consumer brands have started making the leap from digital-exclusive to physical retailer in record numbers.

Nowadays, you can’t go a day or two without hearing announcements from digital-native brands about their expansion plans. One day, you’ll see Warby Parker adding 40 stores by the end of the year. The next, you’ll see our friends at Brooklinen opening one of their 30 upcoming stores in key markets.

It’s an exciting time—not only are these players leveraging traditional retail to grow their sales, they’re adding their own unique flair, passion, and style to do so. After all, opening a retail space exposes online brands to new shoppers, rewards current customers, and generates hype.

And did we mention that DTC brands have also found physical retail more profitable?

If you’ve been keeping up with our Clicks-to-Bricks series, you already know that. The question that got you here, however, probably has more to do with the type of physical presence you’re looking to establish. Stay tuned for part two of this series next week and subscribe to our newsletter for the latest.

The Shop-in-Shop: Partnering to Create Your Physical Presence

Understandably, there are many ways to establish yourself in the world of physical retail. Some brands opt to create big, bold, experiential, and permanent spaces. Others want to test the waters, opening a memorable space built to last only a few days, weeks, or months.

But flagships and pop-ups aren’t the only way to go. In fact, an increasingly popular path taken by DTC brands is the shop-in-shop. Also referred to a store-within-a-store, this concept is used to connect spacious retailers with brands looking to establish a presence.

Though not a new phenomenon, shop-in-shops can create a truly symbiotic relationship between two brands. Whether it’s a Dunkin’ in a gas station, a Starbucks in a bookstore, an optometrist in a big box or an Adidas in a Macy’s, both sides serve to gain from the partnership.

What is a Shop-in-Shop?

The concept is simple. A retailer has space. A manufacturer has products. The manufacturer rents out space from the retailer, who gives the manufacturer complete autonomy over retail decisions, such as pricing and in-store service.

Discussed in a report in the Journal of Marketing Research titled Store within a Store, the concept became popular in Asia and Europe before taking off in the United States.

According to the report,

“The store-within-a-store arrangement is unique and intriguing because only in some specific categories do manufacturers gain almost complete autonomy over a part of the store owned by retailers. […] In return, the retailer simply charges rent (typically a lease payment) for the in-store real estate and does not set its own margin above the manufacturers’ prices.”

Common Characteristics

Though not always the case, especially in today’s slightly more collaborative environment, shop-in-shops often are defined by the following characteristics:

• The inventory is owned by and the retail prices are decided by the manufacturer rather than the department store.
• The representatives providing in-store service are employed and trained by the manufacturers owning the brands rather than the department store.
• The store offers expert service exclusively for the products offered by its brand.

The Evolution of Shop-in-Shops

So how did shop-in-shops become prevalent? It all started in the 1990s. From humble roots at warehouse clubs to the rise of the mini-mall, retailers and manufacturers continue to partner with each other.

The Beginning: Price Club Plus Cell Phone Sellers

Born in the early days of the warehouse club, the shop-in-shop was initially a way for cell phone companies to facilitate sales.

By partnering with Price Club, San-Diego-based cellular wholesaler Beau Bennett created the first shop-in-shop with the launch of Cellular Order Desk. And following the success at one store, Bennett worked with the soon-to-be Costco stores to expand the concept. One store became three, three became seven, and the concept was on its way.

The Maturation: Low Substitutability Creates Partnership

Soon after, additional retailers embraced the concept. Banks opened in grocery stores. Hair salons and optometrists opened in big box stores. Coffee shops partnered with gas stations and booksellers. But the main driver of the shop-in-shop was the department store.

The Store within a Store article in Journal of Marketing Research noted that at the time of publication, shop-in-shops had become common in a wide range of department stores.

• Bloomingdale’s hosted a wide range of manufacturers including Ralph Lauren, Calvin Klein, DKNY, and Kenneth Cole.
• Neiman Marcus partnered with Armani and Gucci.
• Nordstrom had Chanel, Chloe, and YSL.

Throughout the 2010s, the concept became even more prevalent, moving from exclusive, hard to substitute items (cosmetics, high-end apparel, etc.) into broader categories. While appliances, bedding, and the like were initially kept under the umbrella of the retailer to avoid competition, the mentality began to shift in recent years.

The Continued Evolution: Beginnings of the Retailer-within-a-Retailer

Today, especially for DTC brands, the shop-in-shop can make sense for both sides regardless of the product being sold. Why? The answer comes down to the rise of delivery and the increasing need for retailers to create unforgettable experiences for guests.

2020 changed the way that retailers had to work. People fell in love with delivery and curbside, and retailers found themselves needing less space to sell.

But you can’t simply downsize a big box or department store. You can, however, turn unused square footage into a profit center. And that’s what many players started to do. For DTC brands—whether they have a physical presence or not—this is an opportunity.

Be sure to stay tuned for part two of this blog on tips to succeed in coming weeks!

Bring Your DTC Brand into the Physical World with Morgan Li

At Morgan Li, we transform spaces. Whether that’s a traditional big box or a rapidly growing direct-to-consumer brand, you need a partner who knows the bricks-and-mortar space. That’s where we come in. With eight decades of experiences in retail, and some of the biggest names in DTC on our list of partners, we deliver your vision on time and on budget.

Over the past few years, Morgan Li has worked with DTC players across the nation to provide fixtures, furniture, and graphics built to provide guests with an unforgettable place to shop.

Startups and expanding brands like Brooklinen, Away, The Sill, and more have all trusted us to build unforgettable shopping experiences during their push to open physical retail spaces. Here are just some of the projects we’ve completed:

• Luggage brand Away turns to Morgan Li for Dallas, Houston, and Boston
• Brooklinen launches Brooklyn flagship with help of Morgan Li
• The Sill enters Chicago and trusts Morgan Li to create the space.
• From curated delivery app to corner store, Foxtrot works with Morgan Li in rapid expansion.