Last weekend, holiday shoppers entering Macy's at Chicago's North Shore location stopped just inside the door, contemplating an odd promotional display. For one thing, the branding was different—a giraffe was involved, and one of the letters was backward.
On closer inspection—these weren't even Macy's products! The display directed shoppers to patronize a different icon of 20th-century retail: Toys "R" Us®. Once a staple of the big-box retail landscape, the toy chain vanished a couple of years ago amidst corporate financial troubles. Now, thanks to a partnership with Toys"R Us' new parent company, Macy's is bringing the toy retailer back, placing Toys "R" Us micro-stores inside Macy's locations across the country. At the location in the Chicago suburbs, Toys "R" Us transformed an otherwise-forgettable section into kid catnip, featuring toys by the likes of Lego, Nerf, and Disney.
The early returns of the partnership are so promising Macy's projects the micro-stores will eventually earn $1 billion in annual sales. That's not only due to people buying from the Toys "R" Us-branded areas—87 % of Macy's Toys "R" Us customers are also shopping for other items within Macy's. The department store reports its children's apparel business has benefited from a sales surge since the Toys "R" Us partnership was unveiled.
Macy's is far from the only big-box retailer experimenting with cross-promotion in the form of store-within-a-store partnerships. As more shopping has moved online, brick-and-mortar retailers with huge footprints are getting creative to draw customers and make better use of their sometimes-cavernous spaces.
For example, earlier this year, home improvement retailer Lowe's announced it was piloting a program to include Petco mini-stores across more than a dozen locations in the South and Southeast. The strategy appears similar to that of Macy's: partner with a brand that appeals to a similar customer but sells products that only minimally compete with your own, and then, once customers are in the store, hope they spend more on both brands. Lowe's states the partnership makes sense because of Lowe's pre-existing pet-friendly atmosphere and also touts Lowe's products, such as dog beds, cleaning supplies and stain-resistant carpets which will attract pet owners.
Two other department stores, Kohl's and Target, have also forged high-profile partnerships with complementary retailers. Both brands teamed up with beauty brands: Kohl's with Sephora and Target with Ulta Beauty. Kohl's and Sephora began their partnership on a limited basis in 2020, and based on the results from the first 200 store-within-a-store locations gave both brands the confidence to push forward with a full rollout. In August, Kohl's announced plans to open Sephora shops throughout Kohl's network of 1,165 stores, a move it estimates will produce $2 billion in annual revenue by 2025. Target is also dialing up its partnership with Ulta Beauty, opening 250 new Target-embedded Ulta Beauty locations as part of a larger plan to reach 800 total combined locations.
For companies like Petco, Ulta Beauty and Sephora choosing to establish a network of physical locations within larger stores, these partnerships promise an opportunity to reach new customers and expand the number and convenience of touchpoints with existing customers, all without the overhead that goes along with operating a standalone store. They're taking a formula that's worked for banks and snackeries that have established outposts within large grocery stores—Starbucks, for example, has more than 1,300 cafes located within Target locations—and building on it.
For big-box retailers whose footprint became an unwelcome drag on their profits as more shopping moved online, the partnerships can drive more traffic into stores and spur more purchases while repurposing existing space.
Store-next-to-a-store: the original retail synergy
Stores-within-stores may be a new idea. But the notion of retail synergy is a core tenet of commercial real estate: businesses with complementary appeal can benefit from being located near one another. For example, global real estate firm CBRE has made such a science out of this approach that it uses machine learning to recommend retail locations to its clients based on consumer shopping data and the mix of co-tenant brands. And on the low-commitment end of the spectrum, brands that join forces for multi-brand pop-up shops report benefiting from shared costs and the added traffic sparked by bringing different brands' audiences together.
CBRE's data-centric approach is interesting because colocation insights traditionally relied heavily on intuition and experience. For example, if an apparel retailer had one thriving location next to a fast-casual restaurant and a coffee shop, it might try to replicate that formula elsewhere.
But there's a reason why partnerships such as Kohl's-Sephora, Target-Ulta and Lowe's-Petco are taking it slow: Before you commit to hundreds or thousands of partnerships not only near but inside your own stores, you want to be confident in the value and scalability of the relationship. Track record matters here, which is why piloting the projects is useful.
The logic behind these store-within-a-store partnerships has parallels in the digital world, where flagship brands like Target and Walmart increasingly turn to Retail Media Networks to drive additional revenue. At the same time, sellers are drawn by the opportunity to showcase their products in front of a broader audience within a trusted setting.
Retail Media Networks, such as CitrusAd, powered by Epsilon, enable retailers to grow revenue and relationships. For retailers who want to retain, enhance and acquire new shoppers while maximizing on-site and off-site monetization, a Retail Media Network might be an option. Here are three strategies for a successful one.
It's too early to say definitively whether retail cross-promotional partnerships will be a profitability engine for brick-and-mortar retailers. But the early returns and investments in such partnerships suggest a promising path forward for brands willing to get creative.