How Neighborhood Goods Is Breathing New Life Into The Department Store Model

For physical retail, and department stores in particular, it’s both the best of times and worst of times. The headline topping the news this week was that, in 2019, more than 4,800 retail locations have or will close. Furthermore, reports of weak holiday sales results from department stores in the U.S. and U.K. certainly don’t make for compelling reading for retail executives.

That’s why it was a bit of a head turner when department store startup Neighborhood Goods announced it had expanded its Seed funding round by $8.8 million in late February, bringing its total to $13.75 million. Begging the obvious questions: Why the concept, why now and why were investors willing to part with nearly $13.8 million to get the startup off the ground?

So began the latest Matchmakers Is In podcast with Karen Webster and Neighborhood Goods CEO Matt Alexander.

Alexander agreed that the world of physical retail is changing, and that the scores of stores closing is a menacing sight. However, he said, even the “most apocalyptic” predictions for the future of physical retail still forecast it to be the locus of a bulk of all retail spend.

It’s why well-established, digitally native brands like Warby Parker and Peloton are deploying stores. The cost of acquiring customers online is going up, and lifetime value is going down. Stores, deployed properly, can be “an efficient way to find growth,” he said.

“Physical is a meaningful channel, and there is a recognition that physical isn’t dead, but that the mundane, complacent acceptance of a certain kind of experience is very much dying out,” Alexander told Webster.

Neighborhood Goods — at the first store it opened in Plano, Texas, and in the following locations it hopes to open — is looking to help brands that want to connect to physical retail, but also want to experiment with doing retail in a new or different way, and find a physical marketplace in which to do so. It’s a new idea, Alexander told Webster — but, in another sense, a traditional one as well.

Back To Basics

What customers don’t like, he explained, and have every reason to not like, is what the modern department store experience has degraded into for them. The identical displays and inventory offerings across stores, and the commission-based payment model for employees, create the perfect soup of a bad physical retail experience. It’s uninspiring, it’s high pressure and the whole experience can be done equally well from home — from a mobile phone.

That’s not the way the department store experience once was, Webster noted. There was a time in the not-too-distant past when going to a department store was a full day of activity. Shopping was always critical, but so was eating, getting a haircut or having one’s shoes repaired.

Andrews agreed, noting that much of what Neighborhood Goods is doing isn’t a new idea. It’s just making an older idea modern.

“We want to get back to be a place one can go because they trust that what is inside has been curated for them, and displayed in a relevant, thoughtful way, and of an appropriate quality,” he said. In other words, bringing back the idea of the shopping destination as a community gathering point — with shopping, but also activities that create engagement: speakers, dining, product launches and local brands.

Of course, there’s a transactional element to the whole experience. Yet, the bigger play, Alexander said, is about more than just a convenient transaction channel and finding consumers who value that. If all a customer wants is to find the fastest, cheapest transaction node for a specific product, odds are good they are buying it — or will — online.

“You can have a great transaction experience if that is what you want, but some part of our model is for a lot of other goals than … that traditional push for a conversion,” he said. “This space creates more of a … storytelling mechanism, in addition to selling great products.”

The brands that Neighborhood Goods brings to this neo-traditionalist model of the department store run the gamut. Some, he noted, are the kinds of direct-to-consumer brands that have been online only, and are putting a toe into physical retail. Others are brands with scores of stores already that are looking to develop a new type of experimental channel for their customers. Others still are looking to test certain types of ideas, and need a physical space in which to do so. The concepts vary, but the goal remains to “create a dignified experience” for the customer — and to be a neighborhood department store of old, yet updated for modern shoppers.

The Underlying Technology

Underlying that new experience is a backbone of enabling technology that has been fully thought through in the context of the merchant and customer experience. The big problem with technological upgrades to physical retail, he said, is that they are applied somewhat randomly (a smart mirror here and there), without a bigger plan as to what that technology is supposed to do for anyone.

Neighborhood Goods provides merchants with analytics similar to what they’d have online, in the form of generalized demographic information about who comes into the store, what they do and what appeals to them. That demographic data has already turned up some surprises. The customers the company advertises to — and the consumers it has assumed — aren’t millennials (the firm sees plenty of them at night and on the weekends), as daytime shoppers skew into their 40s and 50s.

The technology experience matches the diversity of the shoppers. If a customer wants to come and have a completely traditional shopping experience end to end, they absolutely can. The only technology they must encounter are iPads at checkout and some digital signage. However, he noted, if they want to have a full, technologically enabled experience, they can opt into that through the store’s app.

“Physical retail can be quite an alienating experience. Sometimes, it can be pretentious, and can make people feel bad and self-conscious because they want to look at the goods or touch them, but they don’t want to feel like they are being sold to,” he said.

The app can make that easier by letting consumers customize their engagement. Want to order items in a cart and have them delivered directly? The app can do that. Eating lunch at the restaurant and suddenly realize one should have bought shoes? The app can have someone bring those right to the table. In the future, he noted, the company will add the ability to text an associate for help because some people feel uncomfortable talking directly with a stranger.

Adding features to the app isn’t the only thing on deck for Neighborhood Goods’ future — it’s also opening more stores. The next stop: New York.

“If you had asked me where we would be going next, I would not have said New York. I did an interview in December, a month after we opened in Plano, when someone asked me if New York was next, and I said absolutely not. A month later, we announced we chose New York,” he said.

The business is learning as it goes, he added, and learning to deal with a high pace of change in the environment. While the next stop is another major market, those secondary and tertiary suburban markets are also on the radar. That offering may be “more subdued” than the full opening coming to the Big Apple, but still a personalized and community-based experience.

“We want to be that discovery and delivery method for consumers,” he explained. “We’re working on a number of locations. We’re planning to expand pretty quickly over the next 18 month, and it will be a split mix between urban and suburban markets. It is very much a [learning] process, and we are finalizing those deals right now.”