The Yves Saint Laurent Beauty SoHo pop-up shop.


A mismatch has evolved between the demand of retailers (who need less offline space and want flexible short-term agreements) and the incentives of commercial real estate owners. A number of thoughtful entrepreneurs have focused on figuring out how to address this problem. Two key business models have emerged to date:

  1. “Airbnb for Retail” (Short-term real estate rental marketplaces): In theory, a marketplace makes a lot of sense. It leverages a classic marketplace business model to help match demand for short-term spaces with the supply of such spaces in cities, and takes a transaction fee/scrape on the value of the rental. There are natural network effects that should drive a “winner-takes-all” outcome, and which can drive high margins. And, it’s an “asset-lite model.”

However, one drawback of this model is that while it directly addresses retailer demand, it assumes that the supply side of the market (i.e. the retail CRE owners) will willingly put their vacant supply on the platform. Unfortunately, there are real structural challenges that may prevent this kind of marketplace from acquiring enough desirable supply, which would constrain liquidity.

When evaluating this kind of business, I would look to understand traction and growth in a few key KPIs: number of spaces on the marketplace (and any exclusivity), percent penetration of the supply in a given city, number of retailers (or agencies) on the platform, retailer logo and fiscal retention, number of transactions completed on the marketplace, percent of transactions coming from the top 10 retailers and from the top 25 spaces, average length of rental, average booking size of rental, length of time to close a transaction and percent take rate. Evidence of growing supply with high utilization and short transaction close times would suggest a company has “figured out” the supply side of the market.

  1. “WeWork for Retail” (Retail stores subleasing space to online brands): Companies pursuing this model actually address the challenges and incentives of the retail CRE owners (supply side). They do so by signing a long-term lease for a retail location, and then “subleasing” shelf space to various (usually online-only) brands and retailers who couldn’t afford to or wouldn’t want to sign a full (long-term) lease on their own. These “landlord” companies charge a subscription fee based on the amount of space subleased, and may also take a percent cut of each retailer’s sales. The biggest pro of this model is that it’s a solution for both sides of the market. And, by its nature it helps create truly “experiential” shopping for customers. Further upside here is many companies in this space have introduced (often third-party) technologies that help tie a customer’s in-store experience back to their online profile (i.e. scanning a bar code when entering the store, tracking which products a customer spent time looking at, etc.), both adding to the “experience” as well as providing meaningful data back to the retailer/brand.

From an investment perspective, however, this is a challenging model to scale. First of all, it requires meaningful capital (and commitment to long-term leases) to roll out multiple such stores, plus managing offline real estate (unlike a fully online model). Second, it may be difficult to acquire and manage relationships with brand and retailer customers, most of whom are likely quite small (and thus also likely to churn at higher rates), as well as to deal with the logistics of coordinating inventory from various customers (unless the model fully subleases a, say, 10’ x 10’ space to a brand that brings in its own salespeople). Ultimately this is not a great solution for medium or large brands who want their own dedicated (short-term) storefront where they fully control the brand message and experience.

Important KPIs for this model include: number of stores operated, average rent and duration of leases signed, percent utilization of shelf space, number of brands/retailers per store, number of stores a given brand is in, brand retention, price/square feet charged to brands, average number of square feet per brand, store-level end-customer traffic, repeat end-customer visits, end-customer time spent per visit, customer conversion to purchase (and if there’s any way to track offline traffic back to an online purchase what that behavior looks like), average in-store purchase value, store level unit economics and paybacks, ROI of acquiring a brand customer. Traction in these KPIs that demonstrate attractive paybacks on stores, sticky brand/retailer relationships and high end-customer engagement would indicate a business that has the potential to scale.

A Blueprint for What’s Next?

There seems to remain a need for a third business model to emerge that can, at scale, address the incentives of the CRE owners to sign long-term (10-plus year) leases. One such idea we’ve been thinking about here at General Catalyst is creating a network of retail real estate locations in prime retail locations (such as in SoHo in NYC, Union Square in San Francisco, Abbot Kinney in L.A., etc.), as well as eventually in Tier II and III cities in the U.S. and ultimately internationally.

This “NewCo” would sign 10 year leases with the CRE owners of these locations, and then sublease out an entire storefront to a brand/retailer for shorter lease durations. The NewCo would be able to help its brand clients create a national (eventually international) “store-in-a-box” solution for their chosen duration, while leveraging algorithms to schedule brands’ presences in the right storefronts for their brand marketing goals (based on demographic data collected) and to optimize occupancy among its stores (similar to how a public cloud optimizes computing resources sharing).

This model clearly has the drawbacks of being extremely capital-intensive (i.e. need to sign multiple leases to create a network from Day One), and the NewCo would need to have multiple brand clients from Day One to drive high occupancy rates. However, this kind of model is the exact kind of intermediary that could help match up CRE owners’ desire to sign long-term leases with brand and retailer’s interests in signing flexible and shorter-term leases for entire storefronts.

Addie Lerner is principal at General Catalyst. Read her bio here.

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