What role will physical stores play in the future of retail? That's perhaps the biggest question plaguing brick-and-mortar retailers. 

Brick-and-mortar still dominates the retail landscape today; online retail made up just 8% of total U.S. retail sales in 2013, and Forrester Research predicts it will account for only 11% of total U.S. retail sales by 2018.

But it is a growing threat. E-retailers are enticing shoppers to skip the stores with faster and cheaper shipping, mobile websites and apps, and even physical buttons that customers can install in their homes to reorder everyday household items with just one push.

“Retailers are going to need to adapt the physical store to stay relevant and compete with online retailers,” Steve Barr, U.S. retail and consumer sector leader with Pricewaterhouse Coopers, told Retail Dive.

Retail Dive has taken a long look at how brick-and-mortar retailers are adapting their stores to this new reality. What emerges is a snapshot of the retail store of the future.  

Eyeing millenials, retailers reinventing stores as an 'experience'

The need for retailers to adapt to the digital age only becomes more urgent when you look at the growing influence of the millennial generation: Ranging in age from 18-36 years old, millennials are on track to becoming the largest generation in American history. The demographic's total spending is predicted by Accenture to reach $1.4 trillion by 2020, comprising a whopping 30% of total retail sales.

When thinking about the future of the physical store, retailers today are focused on the shopping habits of these millennials. Millennials are digital natives, who have grown up using mobile, internet, and social media as tools in their social interactions and economic decisions. Now, brick-and-mortar retailers are looking to consumer-facing technology to build unique, in-store experiences for these customers. 

While brick-and-mortar must adapt to compete with e-commerce, physical stores do come with some built-in advantages, according to PwC's Steve Barr. 

“[There are] reasons that people are still going to the store—it’s accessible, people can see and feel product, try on merchandise, see what a room set looks like. It’s a very visual experience that cannot be replicated through even the best online tools,” Barr said.

Barr recommends retailers add to this experience with consumer-facing technology that can help connect shoppers with employees and products while in the store. These advancements should bring an element of delight to the shopping experience.

Big box retailers across the country are exploring how to do this. Gap is testing showroom formats, mobile registers, and RFID-tagged clothing. Target has installed digital tablet kiosks in some smaller format stores to help customers navigate aisles and locate inventory. And in September, Macy’s announced the roll-out of beacons in all of its stores nationwide. The beacons will greet consumers using the Macy’s app and offer suggestions on items they might like while walking through the store.

But it's not just the big box retailers that are trying to adapt. On the smaller end of physical stores, Story, a small Manhattan boutique, utilizes interactive tables and displays from Perch to show off its wares.

“As a physical retail experience, our goal with technology is always to do something that you couldn't just do at home on an iPad,” Story's editorial director Mean Baldwin told Retail Dive.

And while some may see these developments as little more than high-priced gimmicks with no promise of ROI, retailers that have connected with consumers on an experiential level have seen “significant growth rates, far outpacing their competitors,” according to Barr.

“The stores that are not connecting with consumers, we see a decline in same store sales and are impacted in the profitability front,” said Barr.

As urban areas grow, retailers roll out flexible formats

About 80% of Americans lived in urban areas in 2010, according to data from the U.S. Census Bureau. Millennials are following suit. 

“With the resurgence of cities as centers of economic energy and vitality, a majority [of millennials] are opting to live in urban areas over the suburbs or rural communities,” reads Nielson’s 2014 report, Millennials: Breaking the Myths. “They are currently living in these urban areas at a higher rate than any other generation, and 40% say they would like to live in an urban area in the future. As a result, for the first time since the 1920s, growth in U.S. cities outpaces growth outside of them.”

Where millennials live will likely have a sizable impact on the way they shop and spend. The sheer size of the millennial demographic — they comprise 24% of the population, according to Nielson — make them of extreme importance to retailers, who will be watching as they begin to establish roots and move into their acquisition years.

While in years past many retailers have given little thought to infiltrating a urban center — opting instead to establish a supercenter just outside city limits — the number of projected city dwellers has made some rethink this strategy. Retailers may need to come to millennials in the city because there’s no guarantee millennials will come to them. 

“You hear all of these companies adjusting to the market and responding to what the real estate needs are these days and to what the customer needs,” Maureen McAvey, Bucksbaum family chair for retail at the Urban Land Institute, told Retail Dive. “Customers are interested in shopping small, shopping near to where they live and where they work. The thought that I am going to drive 20-30 minutes to go to an outer urban area to go to a supercenter—yes, maybe I’ll do that once a quarter, but not for a weekly grocery trip.”

McAvey says big-box retailers will still try to open traditional, one-story supercenters in urban areas—if they have the room for the footprint and parking. That’s a big “if” though, as many key densely-populated, urban areas lack adequate space. But instead of abandoning the market altogether, retailers are now molding their traditional supercenters into smaller formats, or reformatting them to fit multi-level or mixed-use real estate.

Recent moves show how some big box retailers are doing this. Wal-Mart added 233 new, smaller-format Neighborhood Markets—which average approximately 38,000 square feet compared to Wal-Mart's average 182,000 square foot supercenters—in the most recent fiscal year, seen by some as part of an effort to attract city dwellers in urban centers with too little space or not enough of a market for a supercenter.

This comes after the company stated in 2014 that it would make a “significant increase” in the number of small format stores after it saw same-store sales at its smaller-format stores rise 5.6% over 2013. Same-store sales declined 1.1% at Wal-Mart supercenters during that same period.

“It’s hard to say there’s a cookie-cutter approach, and I think flexibility is something we do really well,” said Wal-Mart spokesperson John Forrest Ales. “People see us as a great big retailer, but we have the ability to be flexible and nimble and respond to change.”

While Wal-Mart doesn’t target a particular setting with its small format stores, Target spokesperson Evan Lapiska told Retail Dive that its new formats — Target Express and City Target — are focused on serving “consumers in these rapidly-growing, densely-populated areas.”

Target plans to open eight Target Express locations across the country in 2015. The retailer also makes a point to meticulously merchandise each of these small format stores based on the surrounding communities’ needs.

While big box stores have the opportunity to adjust their store formats to fit new markets, Deliotte’s head of retail Alison Kenney Paul states that stores with set square footage, whether located in a mall or shopping center, also need to be flexible when planning their store footprints.

The main catalyst driving this change? Omnichannel capabilities including online fulfillment.

“I think you’re going to see mall stores reconfigure the space, give up several tens of square feet because they need the space in the backroom to store the stuff that people bought online,” said Kenney Paul. “I think you’ll see suburban stores reconfigure or even downsize, depending on the category, and I think you’ll see the same happening with rural stores.”

She adds: “Going to the store is not the only way that you’re going to get goods anymore. That’s as obvious as you can see.”

With omnichannel, stores can become fulfillment centers

Retailers aren’t just flexible in the way they view their store formats. With the help of added technology, they appear to be increasingly flexible in the way they view stores all together.

Rather than just a simple, straight path in which inventory flows from the back room, through the store, and past the cashier, retailers are beginning to use physical stores as fulfillment centers to help process online orders.

The model for online fulfillment was set years ago when Wal-Mart started testing its pick-up-in-store service in 2010. Other retailers have followed, including Gap, Best Buy, and Target. And as part of its sweeping omnichannel initiatives, Macy’s announced this year that it will work to increase online fulfillment from its Macy’s and Bloomingdale’s stores this year.

Along with shortening shipping times to satisfy customers and compete with Amazon, retailers utilizing the service can save on shipping costs while turning stagnant inventory in stores.

“We found that ship times were generally almost cut in half when compared to ship times from regular fulfillment centers,” said Target spokesperson Eddie Baeb when talking to Retail Dive about the retailer’s testing of ship-from-store this past fall and holiday season. With these shorter ship times, the retailer can avoid costly markdowns and save money with shorter delivery routes.

The service seems to be popular with customers as well. Target store pickup orders at the 136 stores testing the service last winter spiked during the final days before Christmas, accounting for almost 50% of all digital transactions, according to the retailer.

But these new fulfillment options demand changes from physical stores, both in the way retailers utilize their backroom and their technology, and in how they train employees.

“Being able to accommodate omnichannel and the ability to pick up in store, that is a real change to the way the backroom, the stockroom, and the store floor are going to take up space, interact with one another and so on,” said Kenney Paul.

While Target doesn’t change its stores’ footprints in regards to sales space for ship-from-store operations, there is some shuffling involved in the backroom. Based on the store’s capacity and footprint, larger merchandise might be moved to make room to accommodate the space needed for the new fulfillment operations, but the overall square footage of the backroom remains the same.

Target is aware of the time it takes to train employees on new fulfillment options, including in-store pick up and ship-from-store. While its backroom employees are familiar with the workflow in the back, the new system bequeaths them with the new task of navigating the store to pick up items ordered online to bring back for processing. Target equips these employees with hand held devices that help route an efficient trip around the store and minimize time wasted looking for products on shelves.

Adapt or risk disruption

Like any business facing a growing threat to its bottom line, brick-and-mortar retailers today have a choice: adapt or risk disruption.

As digital technologies are changing the way consumers shop, many retailers are adapting with more flexible formats for urban areas, and by turning stores into a destination experience and fulfillment centers for customers. 

As for retailers who don’t feel the need to adopt new technology in-stores or lag behind their competitors in flexible store formats and fulfillment, Kenney Paul didn’t sugarcoat the consequences.

“I think the implications could be very dire. What we’re seeing is that millennials don’t mind buying things online and returning them. They don’t need to shop in the store because they grew up with digital,” she said. “So today your business might not be in trouble, but what happens when all those millennials come of age and digital is a part of their lives?”

Enjoy what you read? Now we want to hear your opinion. What do you think are some hallmarks of the brick-and-mortar store of the future? Send us your take and we’ll publish the most insightful ones in upcoming weeks.

Please email your thoughts to [email protected], using the subject line “Store of the Future.” Submissions should be 150 words or less and include your name and position. Retail Dive reserves the right to edit submissions for content and length.