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December 14, 2017

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Some big retailers are still betting on brick and mortar

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Jeenah Moon / The New York Times

Target’s new smaller-format store near Herald Square, in New York, Nov. 4, 2017. Despite bankruptcies and closures of some major retail stores, others, especially retailers like Target, Walmart and T.J. Maxx, are expanding.

NEW YORK — One morning last month, Target’s chief executive, Brian Cornell, stood amid racks of designer T-shirts and a cooler filled with prepackaged sandwiches in a store in Midtown Manhattan.

“This is really a symbol of the future,” he said.

Cornell wasn’t talking about an e-commerce warehouse staffed by robots. Nor was he speaking into a voice-activated device that knows just how much toilet paper a customer needs.

He was discussing Target’s new store near Herald Square in New York City, down the block from Macy’s flagship store and other national retail chains. It is one of about 130 smaller format stores Targethas opened or plans to open by the end of 2019. The new stores are scaled back versions of the big-box Targets that predominate in the suburbs.

The company’s store strategy stands out at a time when just about everyone seems to be questioning the relevance of brick-and-mortar retail. Amazon is seizing an ever-larger share of consumers’ wallets, reducing foot traffic to stores.

Such pressures have contributed to a string of recent retail bankruptcies, including Toys “R” Us, Payless, Gymboree and Radio Shack. Sears and Macy’s have also been closing hundreds of stores around the country as they struggle with slipping sales.

Last month, the company that owns Lord & Taylor sold its famous flagship Fifth Avenue store to WeWork, a startup catering to millennials in need of shared office space. The deal was seen as a vivid reminder of how the allure of the department store has faded.

But for all the gloomy uncertainty that surrounds the industry’s future, stores will most likely remain at the heart of retailing for a long time — even as they evolve to meet the demands of the modern shopper.

The retail industry has been pushing back against the pessimism. This summer, the IHL Group, a retail and hospitality advising firm, produced a report that showed retailers will open more new stores than they will close this year. (Most of the growth, however, came from restaurant openings, not new department stores or big box retailers.)

“The negative narrative that has been out there about the death of retail is patently false,” Greg Buzek, the group’s president, said in August when the report was published.

Some of the biggest growth in brick-and-mortar stores is coming from discount retailers, like TJX, the parent company of T.J. Maxx and Marshalls. E-commerce may offer convenience and instant gratification. But shoppers are still willing to go into a store to hunt for a good bargain.

In August, TJX said that over the “long term” there was an opportunity to open as many as 5,600 stores, up from the 1,700 the retailer currently operates.

“We continue to see store openings as an attractive investment and a very good use of capital,” the company’s chief executive, Ernie Herrman, told investors on a conference call.

While discounters like TJX operate in a sort of an oasis, many other retailers face a conundrum. While retailers are plowing more money into their digital operations, they risk rendering their stores even less attractive to shoppers by starving them of investment.

“The big challenge is how do you get customers to come into a store if they don’t have to,” said Melina Cordero, head of retail research for Americas at CBRE, the real estate firm.

Walmart, the nation’s largest retailer, has slowed its brick-and-mortar expansion, though it continues to open stores, particularly smaller format ones. The company is also using its vast store network — located in nearly every corner of the country — to support its e-commerce business.

Walmart gives discounts to customers who order certain items on the company’s website and then pick them up in the stores. The company has converted thousands of workers into “personal shoppers” who pick out groceries for customers who order them online and drive to the store to pick them up.

Even as it expands its digital offerings, Walmart is also trying to generate more buzz around its stores, which had drawn complaints from some customers in recent years for being too cavernous and unpleasant to shop in.

This month, Walmart is holding holiday parties — complete with toy demonstrations and workers in reindeer hats — as it “cranks up the volume on store experiences.”

Retailers like Walmart are hoping they can build a more profitable business that incorporates both brick-and-mortar and online shopping — a strategy known in the industry as “omni-channel.”

Online retailers like Amazon face high transportation costs, particularly as they guarantee free two-day and even same-day delivery. They are also bearing the cost of processing free returns.

Many analysts and retail executives said Amazon’s purchase of Whole Foods and its more than 460 stores validated the relevance of brick and mortar.

Still, e-commerce continues to grow at a blistering rate, far outpacing the increase in overall retail sales. Unless that growth abates, analysts and economists question how so many stores — from suburban malls to hip boutiques — can survive.

“E-commerce is putting extreme pressure on brick and mortar,” said Mark Zandi, chief economist at Moody’s Analytics. “This really feels like a watershed moment.”

Target is betting its stores will win out. It boosted sales at each renovated store by as much as 4 percent, said Cornell, the CEO. The company now fulfills about 50 percent of its customers’ online orders from its stores.

Target also recently said that it was raising its starting wage to $11 an hour and planned to increase it to $15 by 2020 — part of an effort to attract and motivate its workers to offer strong customer service.

“Our stores are our core strength,” Cornell said.