Why are some retailers running brick-and-mortar stores with little or no stock to sell?

A recent article in the Economist explored that very question as it looked at clothing retailer Bonobos, which has successfully pursued a no-stock strategy. The company began as an online-only store for better-fitting menswear but now has 20 brick-and-mortar shops--with no pants or suits to sell.

Here's how the Economist puts Bonobos' no-stock strategy in a contemporary retail context:  

The growing threat from online shopping has spurred some physical retailers to do more than just sell goods. Lululemon lures shoppers with both yoga clothes and yoga classes; Louis Vuitton displays fine art beside its frocks. Among the most interesting models to emerge, however, are chains such as Bonobos, whose outlets have no stock to sell.

None of which is an entirely new idea in the realm of retail. Traditionally, for example, furniture retailers have not kept their stock of couches or mattresses in the stores. You came to the store to try out the merchandise. Then the retailer shipped the bulky product to your home not from the store itself, but from a distribution center.

Of course, this is the very reason several mattress startups--most of whom began as online-only sellers--have followed Bonobos' lead and opened brick-and-mortar stores. In fact, Bonobos' founder Andy Dunn acts as a formal advisor to mattress startup Tuft & Needle, which has a showroom in downtown Phoenix. Likewise, mattress startup Casper has two mattress showrooms: one in Manhattan and another in Los Angeles. These showrooms--where customers actually can lie down on a mattress to try it out--are analogous to how Bonobos complements its e-commerce channel with offline stores.

While the idea of having no stock in the store is not a new concept for furniture retailers, Bonobos is one of the first clothing retailers to see the wisdom in it. And the wisdom in it is apparent, from a cost perspective. Without inventory, you don't need as much square footage for your store, which saves you money on rent. Likewise, your employees don't have to spend time unpacking and shelving deliveries of new stock.

What's more, store management doesn't have to worry about inventory levels. That may not seem like a big deal, but it has always been the heart (and headache) of the retail business model. A few years ago, Harvard Business School professor Clayton Christensen explained to Inc that business thinkers used to openly question if Walmart could compete with traditional department stores. To show what he meant, Christensen drew two basic multiplication formulas in green marker on a whiteboard:

40% 3x 120%

20% 6x 120%

The upper formula represents how department stores created 120% returns on capital invested in inventory. Their margins were 40%, and they turned over their inventory three times a year. Forty times three equals 120.

When Walmart came along, Christensen explained, there were skeptics who wondered whether their 20% margins would allow them to compete with department stores. For the skeptics, it was a simple matter of 20% margins being less than 40% margins. Only when they realized that Walmart turned over its inventory six times a year--therefore creating the selfsame 120% returns on capital invested in inventory--did the skeptics realize how competitive Walmart could be.

The point of the story, he said, was that "the formula has to be different." But the bottom line result has to be the same.

So what Bonobos has done is found a different retail formula, one which obviates the rapid turning-over of inventory as part of the brick-and-mortar equation. It's not the only retailer with online roots operating this way. As the Economist points out, the shoe companies Paul Evans and Jack Erwin both have showrooms in New York where you can browse and try on the shoes, and then make the actual purchase online. Just as Warby Parker does with glasses.

Does this mean all brick-and-mortar retailers will switch to no-stock or low-stock models? Not necessarily, notes the Economist. Certain established retailers have trained their customers to anticipate a different sort of instant gratification as part of the shopping experience. "Buy a Zara dress in the afternoon, for example, and go dancing in it that same evening," notes the article. But low-stock or no-stock could be the formula of the future.

Published on: Mar 14, 2016