Is the physical store still relevant in an age of online shopping and remote working?
According to today’s guest, the answer is an emphatic yes.
Doug Stephens is a retail futurist who, as CEO of Retail Prophet, advises the leadership of global brands on what’s next for retail.
His client list includes Walmart, IKEA, Disney, LVMH and Microsoft.
He’s also the author of the best selling books The Retail Revival and Re-Engineering Retail.
In a nutshell, Doug’s view is that the future is bleak for physical shops selling mundane items that are easier (and cheaper) to buy online.
But when it comes to high-interest products, he thinks consumers are hungry for physical stores.
Especially ones that brim with imaginative experiences – like the Apple Store.
Meanwhile, Doug says that for brands that want to boost returns on their marketing spend, exciting physical retail is a no-brainer.
Why?
For a start, online advertising costs have gone through the roof.
That means physical stores are often a cheaper way to make potential new customers aware of your brand.
Next, he argues that nothing beats an inviting physical store for enthusing people about a brand and its products – and converting those people into buyers.
Meanwhile, Doug has strong views on the future role of landlords.
In particular, he says that if landlords want to avoid tumbleweed blowing through their retail spaces, they need to get busy driving footfall.
How?
By curating spaces and places that people want to spend time in.
Listen to our conversation now (or read the transcript below) and you’ll learn:
- How the relationship between physical and online retail works today (hint: there’s more to it than you think).
- How to win with physical stores.
- What kind of physical experiences appeal to younger consumers.
- Why the changing role of physical retail will impact rent models.
- How the shift to remote working will change the shape of physical retail.
- Which landlords are getting it right.
- And MUCH MUCH more.
Liked this interview with Doug? Don’t miss upcoming talks with the world’s best developers and real estate thought-leaders – subscribe to my free email newsletter.
Transcript:
Note: this transcript has been lightly edited to improve clarity and readability…
[Tim Benjamin] You’re listening to the Floorplate podcast.
It’s where the creative people bringing fresh ideas to commercial real estate, share with you what they’re doing, and how they’re making money along the way.
Hi, I’m Tim Benjamin, a commercial property developer based in London.
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On today’s show, retail futurist and best selling author, Doug Stevens reveals what the future looks like for bricks and mortar retailing.
Doug advisors the leaders of businesses like Walmart, Disney, Microsoft, L’Oreal, Coca Cola, IKEA and LVMH.
And his ideas have been covered by the BBC, The New York Times, Bloomberg, the FT and the Wall Street Journal.
So what does Doug see when he peers into the future?
Well, for a start, he thinks boring bricks and mortar stores are toast.
But he believes the future is bright for stores that deliver incredible experiences.
I started the conversation by asking Doug how he first got into retail…
[Doug Stephens] In my mid to late 20s, my first kind of real job was working in the real estate sector selling residential real estate.
And that happened to coincide with the early 1990’s and a severe economic crash that vastly affected commercial and residential real estate across North America and other parts of the world.
And so that became sort of a road to nowhere.
And so, in looking at what was out there and what I was interested in doing, I took a role with a Canadian retailer and started very much on the ground floor of retail, learning the ropes of how you run a retail business.
And then from there, I quickly moved into the training and development stream and began training other managers.
From there into the operation stream and across marketing, franchise sales.
And ultimately, after about 25 years in the industry, I wound up working in general management in the US market in New York City.
And shortly before the financial crisis, moved back to Canada.
And it was at that point that I decided that I was going to start Retail Prophet.
And part of that was because I think one of the most important lessons for me, in my time in corporate retail was just around the short sightedness of the industry.
It was so apparent to me that it was very much a quarter-to-quarter earnings report-to-earnings report kind of industry.
And by 2008-2009, when everyone was sort of saying, “Hey, when’s the recession going to be over so we can get back to business as we know it?”, I felt that that there were really some deep and important shifts that were taking place in the sector that required sort of a longer term narrative.
And so that was what propelled me into starting Retail Prophet – with the aim of understanding what that future looks like.
And then communicating that to executives in the hope that they would take the information and build long-term strategy.
[Tim] Well, if we talk about Retail Prophet for a moment, what sorts of things do you do with your clients?
[Doug] So most of our work is really on the strategic end.
We do a tremendous amount of research – always focused on the five to 10 year horizon in retail.
And rather than just reporting on trends – because I don’t really think that’s the work of a futurist – I think if something is already apparent as being a trend, then you don’t need a futurist to tell you about it: you can read about it in the newspaper.
I think futurism is more about finding the undetected patterns, if you will, in data – events that are going on in the world, certainly around consumer behaviour.
And it’s often a matter of finding the combinatorial influences of these things on one another.
So, for example, I mean, robotics certainly is a trend.
But if you take the aspects of robotics, plus artificial intelligence plus computer vision plus an ageing population plus neuroscience – and what we know about the ageing brain – that may lead you somewhere.
It may lead you to a plausible conclusion that something in the future is likely to happen.
So, really a lot of the work we do is taking these abstract events and trying to turn them into some sort of signal that we can then present cogently to organizations.
And say “Look, these things are likely to happen – or some sort of extrapolation of these things are likely to happen – and therefore, how can we build scenarios around this? How will you deal with this if, in fact, it unfolds? Or how can you prepare for it?”.
So that’s a lot of the work.
And we work with brands as large as Walmart, IKEA, Google, Microsoft, Intel, etc.
And, again, all in an effort to try and present a coherent map of the future.
[Tim] In 2017, you published Re-Engineering Retail.
And the book, which I think is one of the most impressive looks at what is happening not only in retail but really right across vast spectrums of our economy, essentially made – the key point that it really made – was that there are two great forces which are sweeping across our economies.
The first one was the commoditization of goods and services.
And the other is the rise of the experience economy.
Can you just take me through those two key trends one by one, just so we can understand exactly what it is that they refer to?
[Doug] You know, I have to give some credit here to a fella by the Name of Joseph Pine as well.
Joe Pine and James Gilmore wrote a book in the 1990’s that really changed the way I thought about retail.
And they were so far out in front of the experiential trend – to this day – it’s pretty remarkable.
But I guess in terms of framing the whole thing up from a retail standpoint, my feeling was that if you look at the evolution of retail, much of the legacy assets – and the infrastructure that we see around us today in the retail world – is really a product of an industrial era of retail.
It was a product of an era where consumers really didn’t have access to either brands in some cases, products in some cases, categories of products and certainly information about the products that they were buying.
And so if you were a retailer, you could be very successful simply by availing distribution to consumers.
So if you happen to be a retailer in a market that didn’t sell Hoover vacuum cleaners, and you were able to set up distribution of Hoover vacuum cleaners in your market, unless you did something really stupid, you could be pretty successful doing that.
But now, when we live in a post-digital world where access is an expectation of consumers, where consumers have information at their fingertips, where they can have anything they want – including automobiles – shipped directly to their door, the role and purpose of a store can no longer be simply the distribution of products.
It simply doesn’t make sense.
And so, the question then becomes “Well, if product isn’t the advantage, and if brand isn’t really even the advantage anymore, and service is a basic expectation that everyone has, then where can retailers differentiate?”.
And this is where we go to the work of Joe Pine.
And it was basically, he and James Gilmore that said once you once you get past products and service, the only next echelon is experience.
And experience being sort of the culmination of all of those things: your product, your brand, your location, the way your store looks and feels, the way your people act.
All of that culminates into an experience that can differentiate you both as a brand and a retailer.
And so that was really, you know, kind of the crux of the argument for the book is that if we’re moving from an industrial age of retail into a post digital age of retail, what does that look like?
What does that new world look like?
And that was sort of the backdrop.
[Tim] Well, in terms of what it looks like, can you make generalisations about that?
[Doug] Well, I think so.
The conclusion that I came to was that it is not to say that we don’t need physical spaces.
Of course we do.
Shopping is not simply a matter of acquisition, right?
It’s not simply a matter of sitting at home and ordering the things we need and having them delivered.
We shop for other reasons: we shop for entertainment, we shop for inspiration, we shop sometimes for education – to look and try something out.
So there still is certainly a role and a purpose for physical stores.
But it doesn’t revolve around the distribution of product.
The consumer really doesn’t care where the product is coming from.
But they do care where they have the experience and they care about the quality of that experience.
And so what I sort of postulated was that, you know, where much of the market was talking about omni-channel, you know, just sort of throwing their arms up and saying “Okay, well, you know, we’ve talked about multi-channel, we’ve talked about cross channel, and we don’t really know what to call this, so let’s just call it ‘omni-channel’. It’s all one big experience, whether it’s on a mobile device, a laptop, or in a physical store.”.
And I felt that that was really short-changing – I felt that that was sort of intellectually lazy, you know, as a concept.
And so I dug a little further and I started to sort of put it into different terms.
See, to me, what was happening was that traditionally speaking in the retail market, we went out as retailers and we bought media on the open market.
And we use that media in an effort to drive consumers to our stores.
The problem is that the media itself was becoming less and less effective.
And more and more costly.
So what do I mean by that?
So if we consider that media as a concept has always been effective wherever consumers gather in numbers.
And so if we go back 1000 years, that place was the market bazaar, or the central square in a city.
That’s where people went to shop, to commune, to talk about politics, to talk about current events.
It’s where they got their information, and it’s where they did commerce.
Flash forward 1000 years and the printing press becomes the new means of communication on a wide scale.
And so the printed word becomes the most effective form of media.
That gets replaced eventually – or marginalised somewhat – by radio.
Radio by television.
And now today it’s digital.
But the problem with the digital landscape today is that it’s flooded.
It’s absolutely being crushed with retailers moving their assets from conventional media over to digital media.
So you have a very, very crowded marketplace.
And wildly escalating costs of digital media in that marketplace.
What we also know is that that media is becoming less effective as the market becomes increasingly flooded with brands that are trying to connect with consumers.
And so what’s happening is that the cost of that media is now outpacing the actual value of the customer that is acquired through it.
I’ll give you an example.
Outdoor Voices is a brand of clothing, a relatively new startup, several years old.
And they were an online brand that was coming offline setting up stores in order to showcase their products.
They reported recently that the cost of acquiring the incremental customer through digital media is now greater than the lifetime value of that customer to the brand.
So what do they do instead?
Well, they’re opening physical stores.
It’s turning out that physical stores are actually turning out to be a more cost effective and effective – period – form of media in terms of connecting with consumers and leaving a lasting impression with those consumers.
The physical experience is actually a kind of a more ironclad way of truly delivering a brand experience to a consumer that is measurable, that is actionable, and that we can attribute a value to from within the company.
And so what I started to see happening was that this was actually an inversion of the marketing funnel.
Where we used to go buy media in order to drive people to stores, what was really happening in the marketplace is that brands were beginning to use stores to attract new customers and then move those customers into media channels where they could buy the product over the course of their lifetime.
So it wasn’t just omni-channel that was happening.
It was a complete reversal of roles between stores and media.
So, to my mind, the store was becoming a media channel.
And media was becoming the store.
[Tim] In terms of the way that these stores operate – again, this will vary I imagine from one retailer to the next – but do you think we’re moving toward a model where if the store is being used as the main awareness and engagement channel, that there will increasingly be a focus on the flagship store?
So that these retailers will typically have fewer sites, perhaps than retailers in the past?
Or do you think this concept can be rolled out across, you know, dozens, perhaps hundreds of sites within a given market?
[Doug] I think we have to look at this as something that would be something other than just a flagship experience.
And, in fact, I’m not I’m not a huge proponent of the concept of flagship stores.
I find that all too often, as a consumer, you’re sort of drawn into a flagship experience that is just so far in a way different than the more localised experience that that brand might be able to deliver to you that it creates a sense of dissonance.
So, I prefer to think of this as a standard operating model across an entire chain of stores that you realise as a chain.
And I’ll give you an example:
I’ve spoken to people since Re-Engineering Retail came out.
I have spoken to a lot of folks over at Nike.
And a lot of what Nike was doing over the last four years, as I learned, was sort of patterned on this thinking.
Around their physical stores being a media play.
And their media being a product distribution play.
So, for example, they have, they’ve built the Nike House of Innovation, which is, you know, sort of almost a theme park sort of experience.
A tribute to athletic performance and the products that they make.
But they’ve rolled out other concepts.
Local concepts.
Nike by Melrose in Los Angeles is a small store concept it’s probably only about 3000 or 4000 square feet.
But it’s all focused on the consumer experience.
It’s all focused on being a gallery for consumers to enjoy a meeting place for their running clubs, you know, kind of a focal point for the brand in the marketplace.
And what we also know is that the presence of a store – just the sheer presence of a store – in the marketplace can generate anywhere between 27 and 35% in terms of incremental in online sales.
So, clearly, there’s a media effect of a physical store.
And so, I think that it’s not a concept that has to reside in some wildly expensive concept store or flagship store.
It’s certainly something that can be applied to every location.
[Tim] This is a very general question, because I’m sure the answer will vary tremendously from one retailer to the next.
But do you have a sense of, you know, what, at a minimum, retailers need to be offering in-store if they’re to deliver, you know, the sort of requisite level of engagement, entertainment, etc, that is needed to achieve the sort of results you’re talking about?
[Doug] That’s a great question.
And I’ll sort of take it from the other side of that question.
If we ask the question, what is the typical way that retailers have traditionally planned their retail locations?
From my experience – and I’ve been in this situation working with design companies trying to build new concepts – it’s always about the product.
Where are we going to put the product?
Where are we going to store the product?
How are we going to merchandise the product?
Retail is – and has been – a product obsessed category.
In order to make this intellectual leap, though, what retailers need to do is they need to clear their minds of product.
Don’t worry about the product.
But what they should be asking is: how many experiences per square foot are we going to have in this location?
How can we translate what we sell into a story that consumers can walk in and become a part of?
That they can that they can interact with?
That they can become immersed in?
So it’s not about product per square foot or sales per square foot.
It should be about experiences per square foot.
And of course your products feature into those experiences.
But just simply thinking about it in terms of racks and shelving and linear footage of displays is not the way to go about this.
So it’s a complete paradigm shift in terms of how you consider the role of the store.
And what the primary product is.
And in this case, the primary product you’re trying to deliver to every consumer that walks in is a remarkable experience.
[Tim] And is there a kind of checklist of experiences that a certain kind of retailer should be looking to deliver inside their store? Or does it really need to vary tremendously from one operation to the next?
[Doug] It would vary tremendously.
And I’ll give you a couple of examples.
I was working with a partner of ours recently and one of their projects was with Verizon, the telco based out of the US.
And their remit to Verizon was to re-imagine what a Verizon store could look like.
And so, you know, the process ultimately is sitting down with that brand and understanding what is the story.
Let’s try and craft the story.
So we know what you sell: you sell phones, you sell internet plans and mobile plans.
But what’s the deeper story?
What is it that you’re actually doing for consumers?
And they came to the conclusion that Verizon sells things that the consumer can use to sort of unlock or activate parts of their lives.
And so they began thinking about this more in terms of what does the consumers life look like?
So, you know, how does Verizon play into their time at work?
Or how could Verizon and improve their time at home, you know, enjoying entertainment?
Or what about for those that are fitness conscious?
Is there anything that Verizon is providing that can help with that?
And so what they did was they built a store that created these experiences across all these elements of someone’s life.
So a totally different kind of play on a telco retailer.
But one that creates a story that the consumer can go in and be a visceral part of.
We did work a couple of years ago – a few years ago now – for IKEA.
And that was an extremely different kind of project.
IKEA came to us and they said, for the first time in 2015, IKEA had no growth.
Their revenue was flat.
And so they became quite concerned that something was going wrong.
And they suspected that it had something to do with their format just sort of running out of gas.
The big box format.
And so they were interested to know what they should be doing.
And so we did a deep dive into the research.
And we discovered that IKEA was just simply missing an important part of the market:
That being urban markets.
Especially connecting with young upwardly mobile people in urban markets.
And so what we proposed to them – and what we help them to design – is a concept now that is called the IKEA Planning Studio.
Basically taking an IKEA down to 14,000 square feet, putting it right into the fabric of an urban environment, and creating a place where people go – not to walk out with flat packs and go home and make their own furniture – but to go in and design their kitchen, bath and storage products with the help of an IKEA advisor.
And again, so now this is a store filled with displays that consumers can actually go in and interact with.
And they can have a great service experience.
So it depends.
If someone ever tells you that there is a cookie cutter model for how every experiential store should look, I think that that’s a mistake.
We really should go back to the DNA of the brand.
[Tim] You talked about the example of Verizon there.
One of the challenges, I think that brands looking to set up experiential retail spaces sometimes have, particularly in cities like London and New York, is that typically you’ve got a series of absolutely outstanding Apple stores in the centre of those cities.
And it seems to me that quite often when somebody opens up, particularly a business that is associated with digital in some way, shape or form – perhaps a telco company or a company that manufactures computer hardware – inevitably, the experience tends to be compared with whatever Apple’s doing down the road.
And often the comparison seems a little unfair.
Is that a problem do you think?
That people are going to face they set up an experiential thing.
It sounded fantastic during the whole planning phase.
It’s created.
And suddenly people start comparing it with something absolutely incredible down the road.
[Doug] Yeah, I think that happens when you’re trying to achieve parity with something else, you know.
A good example being if we go back maybe six, seven years, Microsoft was really trying to establish its own unique footprint in the marketplace in physical stores.
And they were opening Microsoft stores.
And the knock on those stores at the time was that it was just so abundantly clear that they were trying to be like the Apple store, you know?
I mean, it was down to the uniforms people were wearing, the look and feel of the store, the layout of things.
And I think the message in there is that you can’t imitate other brands.
It becomes obvious to consumers.
So, all the more reason to really dig deep into your own brand story.
And understand what that genuine authentic story is about, who you are and what you do.
And then begin to translate that in a unique way into the kinds of experiences that consumers can be part of.
I’ll give you another example:
Canada Goose is obviously a big international brand that sells outerwear, a very storied legendary brand with a lot of history.
They just rolled out a concept store – unfortunately just pre pandemic as fate would have it – but the story is called the Canada Goose Journey.
There is not a stitch of product that is sold from within the confines of the store.
It’s hard to even really call it a store.
I’ll just call it an experience.
But essentially you walk in and you’re immediately part of the Canada Goose story.
You’re treated to media experiences.
You are treated to kind of gallery experiences that show you the history of the brand.
They have an amazing cold room with snow where you can try on a garment and go in and actually experience what it’s like in sub zero temperatures.
And the whole thing might take 20-25 minutes.
And if you wish, yes, you can buy a garment and they’ll assist you with an online order and have it delivered to your home in a day.
But you’re literally walking into a very unique story that couldn’t be, in my estimation, about any other brand but Canada Goose.
And I think that’s the way to go about it.
[Tim] You mentioned a couple of moments ago how you’ve worked with IKEA to develop small concepts targeting young urbanites, particularly in the centre of larger cities.
And that kind of speaks to a bigger question, which is how engaging are these experiences that you’re talking about to a younger shopper?
[Doug] Well, it’s a great question.
And I really believe it’s younger demographics that are driving this sense of experience.
You know, when you look at surveys among baby boomers, baby boomers come from a world where the primary occupation around shopping is about getting the product that they want.
Experience is sort of a garnish that they get on top of the acquisition of the product.
But when we survey young consumers, they look at the experience as being either as important – and in some cases more important – than the product.
There’s this sense that product parody is abound.
You know, if it’s a Samsung phone or an Apple phone, they probably have very much the same features.
The question is, where am I going to get the better experience, both when I buy the product and if I have a service issue and over the long term.
So young consumers have a greater sense of priority around experience to begin with.
But there’s another aspect to it as well.
And I’ve brought it down to this:
I believe that young consumers come from a place now where experiences equal social currency.
In my generation, it was about the product.
It was about what you were driving or you know, where you bought your furniture, or how much your shoes might have cost.
You know, everything revolved around the product itself.
But this is a generation of younger consumers – millennials, Gen Zed – are consumers for whom experiences themselves have become social currency.
It’s not so much about what you own, as it is about where you are, who you’re with and what you’re doing.
And so, in that light, it’s abundantly important for retailers to consider that for those young consumers, the products that they’re selling in their stores, the value isn’t negated, but the experience is what will be posted online.
The experience is what’s going to be commented on or photo taken of, or a video posted of, not the product itself.
And so when you start to think about it from that standpoint that for this generation experiences are their social currency, it’s what gets them noticed online.
All the more important then for retail to be a part of that equation.
[Tim] Thinking about the kind of experiences that are going to work best with that younger consumer, are there certain sizes of retail space that you think might work better moving forwards?
Or is it really just a case of different retailers will need different spaces to deliver different experiences?
[Doug] Yeah – we get that question a lot.
Because I think when you when you start talking about experiential concepts, oftentimes the client’s mind rushes to “Okay, so you’re talking about a flagship store, or you know, kind of a flagship scale experience.”.
But not necessarily.
As I said, the Canada Goose Journey store is probably about 6000 or 7000 square feet.
So it’s not a 60,000 or 70,000 square foot facility.
It’s a relatively small experience.
But it’s potent, you know.
So the question is not “How big should the space be?”.
The question is, “How big is the story?”.
It’s sort of like, you know, if Cirque du Soleil was planning a new show, they wouldn’t start with the question “How big should the tent be?”.
The question is, “How big is the show?”.
How big is the story?
How much space does that story require to be told properly?
To move consumers through that story in a way that is comfortable?
That allows them to fully enjoy it?
If you start with that and work your way back to the square footage that you need in order to execute that story, I think that’s the way to go.
So yeah, these can be remarkably small spaces, or in some cases, they may be huge, you know.
And there’s also this perception that if we take the product out of the equation, if we don’t show as much product on the floor, then we can shrink the size of the location.
And I would argue against that, as I said.
Maybe that’s the case.
But maybe when you really start telling your brand story, you might find that you require a larger space.
But it all starts with the story.
[Tim] One of the things you’ve touched on is that in some instances, the in-store experience may not include the opportunity for the customer to actually buy something that in fact, the transaction may take place, as you mentioned, on other platforms.
I’m interested to get your thoughts on what that might actually mean in terms of how rents are set.
And how they’re charged.
What formulas might be used, etc, moving forwards.
Because historically, rents have been essentially fixed on a given property but – particularly with the arrival of Covid – there’s been a lot of discussion about extending the idea of landlords taking a share of revenue.
But if there are no revenues, I’m just kind of really keen to get your thoughts on how retailers think this might all play out in terms of rent.
[Doug] That’s another good question.
So I’ve done a lot of thinking around this.
And if you think about this in a really just a kind of simple pragmatic way:
If we live in a world where online sales globally, are increasing by upwards of 20% per year – and that’s in a pre-pandemic world – in a post-pandemic world, I haven’t even seen a global figure, but we can expect that it’s going to be on some order of magnitude of that 20%.
But it’s growing exponentially fast.
If we contrast that against the same world where physical retail – or the retail sector in general – grows at a rate of anywhere between four and 6% per year, it stands to reason that as we move forward in time, more and more and more of our daily consumption is going to move online, and less and less and less of that is going to be transacted in stores.
So, what does that mean for the landlord tenant relationship?
Well, it means that the whole concept of percent rent goes completely out the window.
How are you going to continue to charge more and more and more rent, if it’s based purely on a retailer selling less and less than less out of a location?
So what is the new model?
And this is where I really tried to apply some foresight.
But if we accept the idea that physical retail is indeed a powerful and effective media channel.
And if we accept the idea that we can generate and deliver impactful consumer impressions within physical space.
Then the question becomes what is the value to the brand of those impressions?
And what I mean by that is, if we look at the way media works today, we go out on the open market and we buy media.
We know what the cost of a Facebook ad is.
We know what it costs to buy an Instagram ad.
Or to get my pre-roll ad clicked on YouTube.
We know that there’s a market value for those things.
And when we buy media in the marketplace, it hits our p&l as a company.
However, what we’re not accounting for is the value of the media impressions that are being created in physical space.
So the question becomes, how do you in a world where the productivity and the throughput of physical locations may be declining, how do you arrive at an equation for the productivity of that store?
If you’re only measuring it on the basis of sales per square feet or comp store growth, you’re going to be sadly disappointed.
But in fact, I think we need to look at the productivity question in a more complete way.
And so, are sales inside the store important?
Sure. Perhaps.
You know, we’re not going to discount those.
So if you’re selling things within the four walls of your store, certainly that works to the productivity of the store.
But we also know that there can be an influence of the store on online sales within the catchment area that that store happens to reside in.
So you may find that within a 10 kilometre radius of the store itself, you’re actually generating online sales by virtue of the presence of that store in the marketplace.
And we are now able, thankfully, to begin to connect those dots and link those two events.
So now we’ve got what sells inside the store, we’ve got what sells online from within the catchment area where we can attribute to the store.
But we’re missing one last piece.
And that is the value of that store as a media property in the marketplace.
So how do we arrive at a media value?
Well, I think it’s maybe painfully simple.
We have a certain number of consumers that come into a store each year.
We can accept the fact that each of those consumers is exposed to some sort of brand experience – some sort of media experience.
What we have to do is try and understand what would be the value of that positive media experience within a physical store.
And it’s not an exact science, but we could sort of estimate based on what the cost of other media formats are.
And we arrive at an internally accepted value for a consumer impression.
So if I see a million consumers a year in a given location, and I’ve determined that a positive media impression for my brand for each of those consumers would cost me something like $1 on the open market, let’s say, then, okay, we’ve got a million dollars worth of media impressions.
The only thing that can affect that one way or the other is this question: are they good impressions or are they negative?
And the only way you can really determine that is through Net Promoter Score.
So if you know how many people get an impression, and you know what the market value of the impression would be, and you know that the bulk of those were vastly positive experiences, we just added a million dollars in revenue.
Or at least value to the bottom line of that store.
And so now once we start considering these, considering the media value of physical spaces, now we have something that we can base rent on.
If I happen to be operating a store where I am simply not getting many media impressions by virtue of low traffic levels, then that tells me something as a tenant.
You know, why should my rent go up if the value – from a media standpoint – of the property is going down?
As a landlord, your obligation now is not simply to turn the lights on in the morning and keep the place clean and collect rent.
It’s to act as a network, whose role is to bring consumers to those stores to create those media impressions.
And so it’s really more of a collaborative effort now.
[Tim] Can you speak a little more to that, you know, what can landlords do to drive more footfall into their tenants’ properties?
[Doug] I think it begins with ceasing to think of your business as being that of commercial real estate.
You know, it would be, again, to use a Cirque du Soleil reference, it would be sort of like Cirque du Soleil thinking we’re in the business of tents.
You know, we put people in tents.
No, you don’t.
The tent is important. That’s the vehicle where we stage the show.
But it’s the show that people are coming for.
It’s the show that matters.
And so mall owners and developers and managers have to realise that you’re not in the commercial real estate business anymore.
That’s, that’s an industrial era business that’s dying.
You’re in the hospitality and entertainment business.
And your job in that centre is to create a flywheel of activity a flywheel of memorable experiences that revolve around newness and service.
The idea of a 10 year lease – locking someone into a 10 year lease – it’s completely outmoded.
We need to think of this as a revolving door of amazing new brands, experiences, services.
And so it’s a totally different kind of activity.
[Tim] This is interesting.
You’ve talked before about Mark Toro from North American properties and some of the some of the work that he’s done.
I know that he sees North American properties now not as a property developer in the traditional way that you’ve described, but rather, as you say, as a hospitality business.
What is it specifically about the work that he’s done that you think is getting it right?
[Doug] Mark is a good friend and I really respect his way of thinking about what he does.
And this is this goes back – gosh – I think maybe six or seven years.
But I asked Mark, at one point: so how long have you been in commercial real estate?
And he said “I’m not in commercial real estate. I’m in the entertainment and hospitality business.”.
And that’s what sort of made me think wow, okay.
So there’s a paradigm shift.
Mark believes that, you know, really his job and the job of his team is to manage human energy.
And he really believes that the success of a centre revolves around this notion of human energy.
That we, as human beings, we seek energy from other human beings.
Or from spaces.
Or from events.
And so, his philosophy is that the centre is a vessel, really, to convey these events to consumers.
To involve the community.
To give them reasons that are non commercial, to actually come and commune and be part of something.
And so, Mark, for example, will do things like movie nights at his Avalon complex outside of Atlanta in Alpharetta, Georgia, where, you know, families will just roll up and they’ll get their lawn chairs out and they will be out on the grounds outside in the middle of the night watching a movie together.
You know, five thousand people watching a movie.
He’ll do tree lighting ceremonies at Christmas where he’ll pile in – again thousands of people.
And it’s a never ending revolving door of events.
So he has people dedicated constantly to just figuring out what’s the next thing?
What’s the next great thing that we’re going to bring people together for?
And so it creates sort of a collective energy around the centre.
It becomes a place that people just like to be.
They just like to go.
They don’t think of it as a place that I have to go to buy something.
It’s just a place I want to go and spend time.
So, you know, if we think about it that way that your role is really to create positive human energy.
And it may sound sort of esoteric, but, you know, it’s really just about giving people great opportunities to spend valued time.
[Tim] Now, the interesting thing about Avalon is it’s obviously a relatively large, mixed use development.
You’ve got retail there, you’ve got office there, you’ve got residential there, you’ve got hotels there.
Mark and his team at North American Properties obviously control the entire development.
And so I can understand how, as you say, he’s turned into this hospitality business.
He’s taking the lead in terms of driving people into the space.
And, therefore, playing a key role in helping his retailers thrive.
If we take a different situation all together a situation that I face, you know, I have a number of buildings on a busy retail strip in the centre of Dublin.
There are loads and loads of other landlords and other things taking place run by a variety of private and government organisations.
So I have very little direct control over the total user experience, if you like, in my neighbourhood.
Is there something that I can take from Mark’s approach, perhaps in conjunction with my fellow landlords and retailers and our neighbourhood to activate the area along the same lines that he has?
[Doug] It’s a wonderful question.
And your right: it presents a challenge when you can’t control the entire stage as it were.
It’s difficult, you know, to sort of be off in one corner of the stage doing your own monologue when you have the noise of other actors around you.
So what can we do?
Well, I think one of the central ingredients to what Mark does and what other developers who have successfully pulled this off have done is that they managed to create a sense of place.
And I think we as humans respond favourably to that, to that that sense of place.
We like cities that have a very distinct sense of place.
We like restaurants that have a very distinct sense of place.
And we like neighbourhoods that have that as well.
So by grouping together, at least having these conversations, you know, what could we do collectively, that would give people coming to the area a greater sense of arriving at a very unique place within the city.
I think that’s a really primary positive step toward what you’re talking about – to developing some sort of cohesiveness in the area.
Sometimes this happens very organically.
You know, there are areas of New York that nobody sat down and planned, they just kind of happened.
And then in some cases, we also know that this can be something that is more deliberate – that is that is more by design.
And so, yeah, these kinds of conversations could be vital.
[Tim] Do you think one or other of those approaches is ultimately more effective from a retailer’s perspective? The organic versus the planned?
[Doug] Well, I think that what we know is that consumers do appreciate authenticity.
So, you know, there’s sometimes a kind of grittiness to something that has evolved very organically – or that has a history that’s very authentic and kind of rooted in a sense of authenticity.
Where consumers can be turned off is if they feel that things are contrived or manufactured or trying to pretend to be something that they’re not.
And so part of the exercise, again, is not necessarily sitting down and saying “Okay, what can we dream up? What can we come up with here that would be, you know, impressive or somehow interesting?”.
I think it’s really about what do we know about this area?
What is genuine?
What is the history of the area that we find ourselves in?
And what are the aspects of that history that we could collectively celebrate – or kind of dust off and polish up again in this new era that we’re in.
So it really goes back to, you know, in the same way that we said it’s all about the story for the retailer that sense of authentic genuine story – I think the same is true for cities.
And for areas within cities.
What what’s the genuine history of this of this area?
I was in London not that long ago, looking at the Coal Drops Yard.
And you know, Kings Cross obviously has a very storied and somewhat chequered past.
That really makes it all the more intriguing, you know.
And so that is something that the Coal Drops Yard celebrates
[Tim] Do you think Thomas Heatherwick has got it with that development?
[Doug] You know, I hate to sort of look at things from a right and wrong standpoint.
Design – you know – it’s art.
And in the same way that I could look at a Jackson Pollock and look at it and think well, he was clearly out of his mind, someone else might look at that and say, well, you’re missing all the beauty in that.
You’re missing the intricacy and the subtlety of it.
And perhaps I am.
So, I think that developments are the same way.
I think what Heatherwick did is he created something that was visually compelling.
That really did sort of resurrect the history and the roots of Coal Drops Yard.
Whether or not it’s the ideal, that’s a matter of judgement.
[Tim] What’s your take on his work at Hudson Yards?
Mixed reviews on Hudson Yards.
I think his work, from a design standpoint, everyone seems to agree that it’s a remarkably visually compelling space.
It’s quite beautiful.
What I think could have maybe been thought through with a little bit more care as the tenant mix.
And the kinds of brands that are there.
And, really the experienciality of the space.
What I have heard is that it’s kind of a repackaging, if you will, of a lot of the same old, same old in retail.
And so we have to think this right through, not just from the the aesthetics of the experience, but also the mechanics.
It’s not just how the centre looks.
It’s what the centre does.
And it’s the tenancies that are included in that.
And I will say, too, that’s another thing that mark Toro and his team look at painstakingly.
So it’s not just a matter of getting on the phone and calling the GAPs of the world and – you know – the Tommy Hilfigers and kind of bringing in the same cast of characters.
Mark and his team are kind of scouring the universe for what’s new, what’s cool, what’s happening.
And those are the kinds of tenants that they will oftentimes attract.
[Tim] We’ve gone in summary form through the key points of Re-Engineering Retail, obviously published in 2017.
We now find ourselves in 2020 and the world is a very different place, particularly thanks to the arrival of COVID.
And I recently did a podcast interview with Professor Barbara Lawson at Northeastern University who’s an expert in remote working.
And the focus of our conversation was the future of office working in the heart of our biggest cities.
And essentially her thesis was that certainly when it came to the workplace, that a significant number of white collar workers were likely to move out of these incredibly expensive cities like London, New York, Paris, Tokyo, etc, etc – and move to lower cost areas around the globe.
Which is why I was particularly interested when I had a look online at The Business of Fashion the other day and spotted an article written by yourself entitled How an Exodus from Cities Will Reshape Retail.
And I’m really keen to get your take, Doug, on which people you think are most likely to start leaving these big cities.
[Doug] I would concur with Barbara in saying that we’re really talking about people whose work is largely portable.
So, you know, yes, it’s largely white collar workers, technology, banking, insurance, etc.
If you just look at technology workers alone – and take an area like the Bay Area of San Francisco – what we know is that, essentially, these people are the economic engine of that city.
And we know that tech workers, for example, make about 50% more in income then financial sector workers in New York City.
So there extremely powerful.
Their incomes generate a lot of economic activity.
When surveyed, post COVID-19, 66% of those Bay Area technology workers express the fact that they would certainly consider leaving if their employers gave them the opportunity to leave and do their work from wherever they wish.
And to that point, Facebook, Twitter, I believe Salesforce and a myriad of other companies – not just from the tech sector – but also banking – Barclays and other banks – Bank of Montreal – have basically now said, we don’t see ourselves going back to this kind of office environment where we try and put 7000 people in a building every day.
Part of that is COVID driven.
I mean if you have to get your people up two at a time in an in an elevator that becomes an impediment to functioning.
But beyond that, it’s really that this notion of subjecting people to these sometimes excruciating commutes: the cost involved, the disruption to family life that’s involved.
And the lack of productivity.
You know, people are reporting that “I’m more productive when I work from home. I’m happier when I work from home.”.
Of course, some people miss some of the social aspects of work.
But companies are managing to even fill that gap with things like regular Zoom chats between employees and groups and cocktail hours and that sort of thing.
So, if you sort of extrapolate that out, if even a quarter of the technology workers in the Bay Area of San Francisco were to leave for parts unknown, that would be 200,000 technology workers.
But that’s not the only hit…
Every single one of those tech workers in the Bay Area supports five services workers in the Bay Area.
Whether it’s a waiter at a restaurant or a bartender, or someone that sells shoes, people in the service sector depend on those people.
So when you add it all up, it’s actually hitting the incomes of – or hitting the situations at least – of over a million people in the Bay Area, if only 25% of the tech workers relocate.
So, we’re talking really literally about a vast reshaping of the landscape.
[Tim] And what do you think the impact on a city like San Francisco – if we use that as our example – would be on the nature of retail in that city, should that number of people choose to leave?
[Doug] If we accept that thesis that, you know, each one of these tech workers somehow supports five service workers, that would mean a loss of employment that would be significant.
You would have local shops and restaurants and cafes and bars closing.
Derek Thompson wrote an article for The Atlantic – I love Derek Thompson’s thoughts and his writing – but he said, you know, it’s these places that really make a city unique.
It’s not the department stores and the chain stores and the fast food restaurants.
It’s the unique little shops and entrepreneurial ventures and cafes and restaurants that add texture, you know, to the fabric of a city.
And when you start losing those, you lose the essence of place.
Again, we come back to this idea of place – and what makes the Bay Area unique relative to Chicago or London or Paris.
And so once you start to lose those unique aspects, people would lose even more interest in being there and start to really ask themselves “Why am I paying these exorbitant rents to be in a city that’s really lost a lot of its character?”.
[Tim] Do you think Derek is right in saying that the biggest hit would be to independent operators as opposed to chains?
[Doug] I do.
He quite rightly, I think, points out that it’s all about how deep the pockets are.
I mean, we know that there are also some extremely large retailers that are struggling against massive amounts of debt, cash shortages and just ailing brands.
We know that that is the case for sure.
But when we turn to small privately owned restaurants and shops, many of those owners report that they can’t go more than three or four months without pre-pandemic sales levels before they go out of business.
[Tim] But do you think that, to take a counter-argument, there might actually be something of a renaissance?
Perhaps not now but down the track in the life of the independent operator?
Because, obviously, fewer operators in these great cities is likely to lead to lower rents.
Do you think that’s potentially an opportunity?
[Doug] I do.
And I not only believe it, I’m hopeful for it.
I do think that this is, in some ways, like the burn in a forest:
You’re going to lose some healthy trees, there’s no question.
But you’re also going to burn down a lot of dead wood.
And that will create, you know, the fertility for new, dynamic, entrepreneurial and creative concepts to come into those markets that may not have come into those markets simply because the rents were prohibitive.
And we’ve seen those kinds of Renaissance taking place in other places.
I mean, you know, there was a time when even the police wouldn’t go into Brooklyn.
It was just simply too dangerous.
And you could say the same of many areas.
In fact, I live near an area outside of Toronto that was an old, tired industrial area that is now being completely rejuvenated by virtue of a lot of young entrepreneurs and artists and musicians coming here to live.
So, yeah, I am hopeful that that will be the case for sure. Tim,
[Tim] I’ve got a question for you:
As we start to see people move out of these larger cities, and we start to see some of these retailers close, do you think that there is a certain kind of retail space – or retail area -which is going to be more protected, if you like, against this sort of shift in the way that people work?
Or are we going to see these sort of initial negatives pretty evenly spread across the whole retail landscape in big cities?
[Doug] Some of this comes down to do you believe that data?
Ultimately, if you believe what people in these markets are saying – and you can’t always, of course, trust what consumers say they will do or what they won’t do, you have to just base it on what do they do and measure those actions.
But the sentiment, at least, is that for many people now – for a significant swath of society who are facing a world where the affordability of a home is out of reach, where the day-to-day drudgery of trying to get from point A to point B in crowded cities is weighing on them, where family life maybe more difficult.
And now, of course, we have streets that used to be vibrant with people at cafes and shops are now vibrant, but with protest.
All of it is giving people the opportunity to sort of rethink lifestyle.
And so what they are saying is that in a world where the city used to be my backyard, well, it’s not my backyard anymore.
My backyard is within the four walls of my apartment.
And now my apartment that used to seem bigger than it does seems incredibly small and confined.
It’s my office.
It’s my house.
And I’m not going out as much.
And so when you put all of that together, what people are saying is that they feel the need for space.
They feel the need for affordability.
And if the work piece comes into play, if these employers truly do say “hey, spin a globe, tell us where you want to go live. We don’t care as long as you do what we’re paying you to do. It doesn’t matter where you do it” – then absolutely, we could see a real shift.
I mean, people will sometimes say, Tim, they’ll say “but cities will always prevail. You know, cities will always be the place where employment is. Cities will always be the place of culture and commerce. And just look at the 1918 pandemic. People didn’t leave cities after 1918.”
No, they didn’t – but they didn’t have a choice.
And that’s the fundamental thing.
We have a choice now.
We have the ability through technology to truly function, day-to-day and do the things that we need to do and we want to do.
And that’s a wholly different situation.
[Tim] Do you have a sense of where people are going to be heading to?
[Doug] There will be, I think, a percentage of those people that migrate out of cities will travel to more far flung places.
You know, the Jackson holes and places in Colorado or Hawaii, for example.
Sure, there will be those people that say this is an opportunity to really work from Paradise.
But I think a lot of people will probably just say, “look, if I have to go into the office one day, a week or two days a week, fine, no problem. I can do that commute. So I’ll just get out to the perimeter of the city. I’ll just maybe go get a place with more space in the suburbs where I feel like I can breathe again”.
And so that’s going to potentially catalyse a rebirth of the suburbs.
You know, we saw this migration through the ‘70s ‘80s and ‘90s into cities.
And we may see sort of a correlating migration out of cities and back to the suburbs.
And so our conversation is around what do you build in the suburbs in order to satisfy people?
And I think what you build in the suburbs is a city.
And you inject the same sort of dynamism and energy into these kind of cities within cities out in the suburbs.
And give people that sense of place.
[Tim] A little along the lines of Avalon
[Doug] Very much so.
[Tim] Doug, I just want to ask you a few more questions before we wrap up.
But the most significant one is I know you’ve got a new book, on the way out, it’s called Resurrecting Retail.
Can you give me a summary of what that’s going to be focused on?
[Doug] Yeah, absolutely.
I should say, too, that before COVID-19, I was writing a book, but it had nothing to do, obviously, with the pandemic.
It was a book that was going to be focused on much of what we’re talking about – this intersection of art and retail.
And how retailers can get back to the art of retail.
And I was working away diligently on that.
And then COVID-19 erupted.
And on March 3rd, I phoned my publisher and I said “Man, you probably know why I’m calling. There’s no point me writing a book about art and retail – that is not the conversation to have. It’s really going to be about charting the course of this virus and its impact on the retail category”.
I have a great publisher and so they said go for it.
Just do what you need to do.
Write the book you need to write.
And so I’ve been working for the last number of months now on a book called “Resurrecting Retail: The Future of Business in a Post-Pandemic World” scheduled to come out this Spring.
And the book is going to – first of all – really try and quantify the damage done to the retail sector to sort of put into contrast the magnitude of this crisis.
It will then look at what can we expect between now and the time that there’s actually a vaccine for this virus?
What does the world of retail look like?
And what sort of mitigating steps could retailers take to sort of cushion the blow during that time and remain alive during this time?
But to me, the bigger story is the long-term change.
It’s how will COVID-19 change our lives?
Because if we accept the idea that we don’t build our lives around retail, retail builds itself around our lives.
And so the fundamental question is not “Will we social distance? Will people still want to touch touchscreens?”.
I think some of those things are pretty obvious in the short term.
The question is, will it change the way we work?
Will it change where we live?
Will it change the nature of education?
And communication?
And online experiences?
And if those things change, what does that mean for the retail sector?
Because again, if we only focus on the short term, we are going to make, in some cases, potentially fatal errors in the interest of short term gain.
That will really negate our ability to capitalise on long term changes.
And so the book is really going to try and dig into those longer term broader changes.
[Tim] Are there any themes in that book which will be of particular relevance to commercial retail owners?
[Doug] The primary message in this in this book is this…
COVID-19 is a lot of things.
It’s been called a lot of things.
It’s been called an accelerator.
That it’s kind of pushing us into the future.
It’s been called a catastrophe, obviously, by many in the sector.
But I think really what it is is a force that is once and for all going to push the retail industry out of the industrial age and into the digital era.
And I think it’s an industry that’s been straddling the line for a long time.
And kind of hedging its bets against both of those worlds.
But if the things happen that I suspect are going to happen, then, collectively, we are going to be different consumers operating in a very different era once this is done.
And that’s going to have wide ranging implications for everyone – from brands to retailers to developers.
[Tim] Doug, it’s been a truly fascinating conversation.
One last question: if people want to learn more about you, where can they find you online?
[Doug] The mothership is RetailProphet.com.
If you go there, everything you need to know is right there.
We try to keep robust content happening all the time.
And, in fact, one thing that your listeners may be interested in – depending on when this publishes – we are also doing a series of live streams.
We’re exploring some of these topics: the future of physical retail, the future of online experiences.
In fact, Mark Toro is going to be one of our guests talking about the commercial real estate market.
So, by all means, again, information regarding those live streams is there and we’d love to have your listeners join in
[Tim] Doug, it’s been a fantastic conversation.
That leaves me simply to say thank you very much for joining me on the Floorplate podcast.
[Doug] My pleasure, indeed, Tim – thanks for having me.
TRANSCRIPT END.
