The Supply Side: Report suggests physical stores key to retail growth

There was a time when it was uncertain if retailers would continue to build physical locations for consumers to visit. But brick-and-mortar stores are now viewed as assets even as digital commerce, fueled by artificial intelligence, grows.

Recent reports highlight the growing importance of physical locations for retailers. Coresight Research forecasts 5,500 new stores will open this year, up 4.4% from 2025.

In the State of Stores survey report by Retail Brew, 78% of respondents said they are investing in physical stores in addition to placing bets on AI. Stores are also viewed as brand builders, not just transaction hubs, according to the report. One-third of respondents operate an even mix of online and physical stores, and 62% are investing in the in-store experience.

“There is a realization that there is an inherent AI-proof opportunity for stores to create that kind of experience you can’t replicate via an AI agent,” Nikki Baird, vice president of strategy at retail solutions provider Aptos, noted in the report. “Especially among younger generations, we see more and more a shift toward, ‘I want a real experience.’”

Bain & Co. reported in 2025 that 75% of retail executives were planning a large-scale store transformation over the next two years, and 44% said they expected technology investments in the stores to boost profits.

Walmart recently announced plans to remodel more than 650 supercenter locations and Neighborhood Market stores this year. The remodels include 72 stores in Texas, 58 in Florida, 56 in California and 37 in North Carolina. The store remodels include wider aisles, updated layouts and expanded assortments. Work also includes new signage inside and outside, improved parking and landscaping, and expanded pickup and delivery service areas. Some vision centers and pharmacies will include private consultation rooms.

Walmart also launched an AI-powered shopping assistant named Sparky to help customers with purchases and product discovery in stores and online. During a fourth-quarter earnings call, Walmart CEO John Furner said customers who use Sparky spend approximately 35% more than those who do not use the artificial intelligence agent. Roughly half of customers using the Walmart app activate Sparky’s help, according to company execs.

Other retailers, such as Target and Kroger, each under new leadership, have said they are shifting resources to improve store experiences.

LOYALTY DRIVER
Perception and loyalty building are also among the reasons retailers say they are investing in stores.

“Physical stores are necessary to supplement the online business, because they create loyalty, familiarity and a sense of community for the consumer around the brand,” noted Michael Brown, partner at Kearney, in the State of Stores report.

Several respondents in the report cited strategic reasons for investing in physical retail. Six in 10 said stores are crucial for driving traffic, and 58% said stores can also increase customer loyalty.

Stores serve as showrooms and fitting rooms for consumers who may have never purchased the brand before. This can reduce the expense of returns that often occur with online purchases of apparel.

Brown said stores also allow retailers to provide experiential elements with some personalization, which could be achieved through stellar customer service. The store also allows consumers to accessorize purchases and touch the products while also checking out expanded selections online through digital connections within the store.

“It’s very important for the customer to have that inspiration,” Brown said. “Whereas online, it’s just a piece of cloth hanging on a mannequin, or just there on its own against a white background that the customers look at.”

FULFILLMENT HUBS
Stores are also being used as fulfillment sites for online and some marketplace orders. Walmart has been in front with this effort since before COVID-19, expanding the online grocery pickup business to more than 4,000 U.S. locations. That has since become a major contributor to Walmart’s continued gains in same-store sales, now spanning 28 quarters.

McKinsey and Co. estimates two-thirds or more of e-commerce orders touch stores, including merchandise through a store during fulfillment or as returns from the retailer’s website and third-party sellers.

Returned goods can be inspected, redirected and resold. A store helps minimize write-offs and markdowns, and as an apparel executive noted, the lag between when an online order is placed and picked up in the store creates an opportunity to reallocate inventory to higher-demand locations, according to a report from Harvard Business Review.

Same-day and one-hour delivery are gaining popularity among consumers and are only made possible by store fulfillment. Walmart’s massive 4,700-store footprint allows for delivery within three hours for 94% of the U.S. population, according to Walmart U.S. CEO David Guggina.

Customers pay an additional $6 fee for the three-hour delivery, even when the delivery is free the next day. The retail giant has said one of the reasons its U.S. online business has become cash-flow positive is because of added fees customers are willing to pay for express delivery. There is another multiplier effect with express delivery, according to Guggina.

“Customers who use fast delivery spend two times more than the average digital customer,” he said. “Customers who have utilized fast delivery four or more times spend three times more than our average digital customer, which is absolutely fantastic to see, and we’re going to continue to lean into the space.”

Furner recently announced that Walmart will test some marketplace sellers using the back-room space in stores, which is closer to customers. The retailer will pilot this in several Dallas stores.

If Walmart expands this test, analysts believe it would help merge the retailer’s first- and third-party inventories, making larger-margin marketplace items as convenient to buy as in-store products. U.S. marketplace sales are expected to double over four years, ending 2028 at $21.3 billion, according to eMarketer.

Editor’s note: The Supply Side section of Talk Business & Politics focuses on the companies, organizations, issues and individuals engaged in providing products and services to retailers. The Supply Side is managed by Talk Business & Politics.