Ethan Chernofsky of Placer.ai joins Terry Montesi for his second appearance on Leaning In to discuss the proven return of retail in ’21-’22, how retailers should shift their marketing strategies and ways top-tier malls are setting themselves apart. Ethan describes how open-air and indoor shopping centers are reflecting this success and current world events’ effect on consumer behavior in the retail market. The two also evaluate the biggest industry changes since the pandemic, and Ethan shares why he is bullish on department stores.

Leaning In is published every second and fourth Wednesday of the month. Be sure to follow the show on your preferred podcast app to hear Part 2 of Ethan and Terry’s discussion.

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Links:
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Transcript

Terry Montesi: This is Terry Montesi, CEO of Trademark Property Company. Welcome to Trademark’s podcast Leaning In, where we look at the future of retail and mixed use and how we can lean into it while others are leaning out. This is part one of a two-part episode. Thanks for tuning in.

On today’s episode, Placer.ai’s VP of Marketing Ethan Chernofsky returns to Leaning In, and we discuss changes in the retail real estate environment and Ethan’s predictions for top tier, open air, and indoor malls. We also compared today’s industry to that of pre COVID and dive into how current events are impacting consumer behavior in different markets.

So, Ethan, what are the major changes you’ve seen in retail since we chatted last year?

Ethan Chernofsky: There’s a few, but let’s break it into two. So the first is this kind of wider mindset shift where I think last year when we spoke, it was the summer, we were starting to see some traction and recovery, but there was a certain degree of uncertainty about how far along we were going to come. Whereas now, there has been this change in perspective in terms of how we view physical retail. So, there was a question of how resilient will it be, what will eCommerce’s future look like, and a lot of that has kind of been answered in the sense that this perspective that everything’s going to change, we’re going to stop going to stores, that has been completely overrun. And we’re now in this really healthy space of asking, what does the future of retail look like from a combination of online and offline sets? So that’s the first thing. And I think it’s really important because there seems to be a wide degree of agreement around that.

And the second element, and it’s kind of an offshoot of this, is this idea of empowered retail and specifically empowered brick and mortar retail. So, what we’re seeing is that retailers and those within the retail real estate space are recognizing that consumer demand has been really resilient, that it’s been capable of overcoming some really significant and consistent obstacles, and as a result, there is a feeling like as hopefully more of the kind of craziness around us begins to settle, there’ll be this unique opportunity. And I think those two are kind of the foundation for a very optimistic perspective on what retail could look like in the coming year and beyond.

Montesi: Well, that’s good news for those of us that have their business tied to retail real estate and physical retail. So, the next, from your perspective, how do you think that Trademark and other companies across the sector should pivot our vision and strategy as we head into ’22 and beyond?

Chernofsky: So, I think pivot is the perfect word here because it’s about pivoting to being able to pivot. And so, it’s adaptability. It’s are you ready for the fact that more changes are coming, and you want to have a business that’s agile enough to thrive as the environments shift. So have you invested in omni? And that could mean buy online, pickup in store. It could mean digital delivery. It could mean a whole range of different things. Have you focused on new tenant types? So, do you recognize that it’s not going to be the same retail world as it was in the past, and there are newer kind of types of tenants, whether they be more service oriented, whether they be co-working spaces or health tenants that are going to drive the agenda? Do you have an understanding of your role in driving urgency? So, whether that be events, pop-ups, things that are going to create excitement in periods that otherwise might be quieter. Do you have the flexibility to deal with uncertainty? So, have you invested in having these different assets and ideas and tactics that you can use?

A really good example comes from the holiday season. We saw a lot of concern from retailers, mall owners alike about what the combination of supply chain challenges and labor shortages and COVID was going to mean for Black Friday and those key shopping days. But what they did, they didn’t do anything traumatic. They simply messaged very effectively that this is going to be a different season, please try to come earlier than before, so we can do everything we can to give you the best holiday experience possible. And that worked. People came earlier. And so, this recognition that you have this wide toolkit of everything from the largest event to the simplest message and communicating that effectively to drive this win-win is so important, but it starts with that am I ready for the changes that are almost guaranteed to come at me?

Montesi: Great. That’s good advice I believe. I saw you recently post about 2022 and how it might be a great year for top tier malls, which you don’t hear many people say nice things about malls. So, can you explain why you think that and what sets those apart and how you define a top tier mall?

Chernofsky: It’s a great question. I think, to kind of start with the first piece of this, which is why I kind of feel more bullish about this sector than some others do, I think, one, it’s in the data. You see the recovery and how strong it’s been. And you see the pull and you kind of look at earnings reports and you see how strong a lot of these have been and how well they performed. It gives you a lot of confidence. The question is why. So, the first is I think there’s been this longer-term focus, and this isn’t a recent thing, this is several years ago, if not more, of getting smarter about that merchandising tenant mix. Like what do I have in my mall, and does it need to change? So, we spoke to mall owners who talk about shrinking the amount of apparel and beauty-oriented retailers and including other types of tenants, like health tenants, co-working spaces, like we mentioned. And why is that exciting? Because it means that for the apparel and beauty tenants, you’re competing with less players for those eyeballs that are coming to the mall. You’re using those other tenants to augment strength in off peak periods. So, these are places that you go to in the middle of the week, in the middle of the day, or in the morning, and not necessarily on a weekend for like a big shopping trip. And so, I think that shift in tenant mix perspective is really important.

The second element is that there’s more retail optionality, whether it be digitally native brands coming offline, whether it be product-oriented companies like Nike, Adidas expanding their own retail foot. There is this growing long tail of retail where you’re not having as many people with 900 stores, you’re having many more with 50 to 100, maybe more. And that means that as the mall, you have the ability to kind of pick through and put together your ideal mix in a way that wasn’t necessarily there before when it was a lot more players who had a lot more spaces, and therefore, it felt a little bit more copy and paste. And I think that’s really exciting. I do think there’s also more of a draw for retail because of it not having been present consistently for a two-year period. And that has kind of re-excited us about what the mall experience is and why we love it.

And I think the last bit of it is it’s oriented towards an experience. You go to a mall and you’re looking for that full day out. And because of the change so many of these mall owners have made, you’re getting that experience. There are service oriented, entertainment-oriented tenants to take part in. There is the great shopping experience still. There are great restaurants. And that ability to provide this holistic full day I think is really exciting, and it’s going to be a really significant draw, and people appear to really miss that experience. And I think that combination is creating something exciting.

Montesi: So, you’d say top tier malls, do you have a way that Placer or you look at where the drop-off point is? What is top tier and what’s not?

Chernofsky: We specifically, we did this with our mall index, where we looked for a hundred that we felt like were real significant players, had strong traffic, doesn’t mean the strongest, they had a significant pull within their area. So, it wasn’t like a very super local mall. And part of the reason we say top tier is because I think a lot of the mall conversation has been impacted by the fact that there’s a lot of B, B minus, C class mall has dominated a lot of the conversation, when I don’t think that’s what most of us are thinking about when we think about the overall mall experience. So, we say top tier, we’re talking about those that are doing well, have the opportunity to do much better still, but it’s not that lower tier where you’re like, well, why are they even here anymore?

Montesi: Got it. A lot happening in the world right now, Ethan. How do you see the major world global events, and we’re having a global conversation today, happening right now? Sky high inflation, a lot more folks thinking there might be a global recession, the pandemic waning, and a war in Europe, how do you see that impacting consumer behavior mindsets and then impacting retail performance in the short term and medium term?

Chernofsky: I think there’s going to be many short bursts of uncertainty. I think we need to come to terms with the fact that generally very often really challenging situations can create opportunities and really positive situations can create bubbles that actually have some longer-term damage. But for the most part, when you think about the last almost 20 years, you see pretty quick rebounds from even very difficult situations. And so, I think the only thing you can expect is more unexpected challenges and, again, these bursts of difficulty. But so long as we keep focusing on the customer and empowering the customer and creating positive experiences and serving the customer as effectively as possible, I think you’re going to see a continued resiliency of that demand.

Montesi: Let’s talk about the urban versus suburban thing and what you guys are tracking and seeing relative to urban center daytime populations, streets and urban areas that are heavily populated by large office populations. Where do you see that today compared to pre COVID? Has it ticked up a lot recently? I know a lot of companies talked about going back to work early March, some going back, that I know of, this week, next week. Is that daytime traffic in these areas returning, and what do you see in that regard?

Chernofsky: It’s returning, but it’s not back yet. It’s got some time to go. And so, there’s two things that are really challenging here. So, one, you have that almost consistent, every two to three months, there’s another COVID wave or there’s some challenge that kind of blocks the progress that was made. And then it’s also really difficult to understand how much of the lack of full recovery is the “new normal” and how much is just, again, there’s another COVID wave, so it hasn’t been able to recover as fully as it should. And so, I do think work from home is going to play a role and greater work flexibility is going to play a role. I don’t think we’re going to know the full extent of it and what it really means until much later in the year. And until we have that fuller recovery, I don’t think it’s possible for these urban areas to look like they were pre COVID. They’ve got to find new ways and different ways to create that traffic. And I think many are doing that.

Montesi: Interesting. I saw some thoughts you recently shared about the home improvement business and how it experienced a very strong period during the last two years. Do you think that continues? Was it pent up demand? Will it normalize, go back to pre-COVID trends once people are out doing the other things and not trapped at home? And what other retail sectors saw big changes, up or down, during the pandemic, and do you think there’s any trends there?

Chernofsky: It’s a great example, and I think there’s some really interesting factors around it. So, one, you see this huge boom for home improvement because of this combination of essential retail, they are the only thing that’s open, we’re stuck at home, we have time to do these projects we didn’t have, we’re sitting in our home for a long time, realizing all the things we hate about it. But there’s two factors that are really important here. One is the migration shift of people to different areas of the country, and let’s say that mid-thirties plus move away from the cities and into the suburbs, and the nature of do-it-yourself. So, the push to the suburbs creates this sort of first-time demand and increased space. So, if I’m going from an apartment on the Upper West Side of New York City to a suburb in New Jersey or Connecticut, not only am I moving and potentially having more disposable income, I’ve got more space to fill. And so, that’s not going to go away so fast.

The other piece is, let’s say, 10% of the people who got into do-it-yourself over the pandemic took a real liking to it. There’s a longevity to that. And I think when we look at other sectors that have succeeded and that we kind of call out, they have a similar pattern. So, look at grocery or wholesale clubs. Part of it is driven by essential retail and it’s open and I need to eat. But part of it is driven by I was home, I really wanted to learn how to cook, and I learned how to make, I don’t know, sourdough bread or whatever item was big for me. That’s not going to go away completely. And there’s some people who found this new hobby or kind of culinary passion, and they’re going to continue doing it.

I think other spaces that were more, I don’t want to say they were surprising, but off-price retail, value-oriented retail, so think dollar stores, Five Below, Big Lots, they obviously saw a really successful period. I think that’s an interesting one to track because there’s been a lot of expansions there. There’s clearly a lot of demand in that space, but there’s also increased competition. So, if a lot of players in a single space expand very rapidly, there’s going to be some head to head. And I think that’s going to make the space interesting, and it’s why a move like Dollar General’s pop shelf may be the most interesting thing that’s happening in that space, not just the expansion of locations.

And I think the last one is actually, let’s call it the relative jump of the fitness space. So, if you think of what we were saying two years ago, or what was being said in a lot of the media two years ago, it was basically goodbye gyms, hello Peloton. That’s it, we’re never going to leave our houses to work out again. Now, clearly that narrative has flipped. But I think the really exciting thing for fitness is it was almost this distance makes the heart grow fonder moment of we actually like the gym, we want to work out around people, that creates a positive environment, it can be part of our mix. And so, I think that’s a space that we actually have a lot of excitement for moving forward.

Montesi: Yeah, it’s interesting. I think in a lot of retail, we were oversupplied in a lot of areas. I think theaters, gyms. And so, even though they both had brutal, brutal consequences from COVID, we also see that, even though there were too many and some are gone, they’re not all going away and the ones that survive may very likely come back stronger than ever. The pandemic is waning, hopefully, although I just heard- this morning, my wife sent me an article from the New York Times about how it’s coming back in certain parts of the world and even in north Texas, Ethan, it’s up a third in what they find when they test the water system. But let’s assume the pandemic is waning and comes to a close soon. What are the things that were learned, that we just talked about a little, learned about consumer behavior during the last two years? And what are some of the trends that are sort of new that you think might stick?

Chernofsky: So, I think consumer demand is resilient, and that’s a really important thing. So, to realize that people don’t fall out of love with retail experiences that fast is really important. So, when we see demand, and it’s not like this quick fad, it’s over an extended period, even if something happens to disrupt it in the short term, we don’t have to give up. And this is not just a pandemic thing. How many times have we seen a retailer run into some trouble and everyone’s willing to give up on them, and then they rebound really impressively? So, I think that’s a really important thing, not just within the pandemic environment, but beyond.

The other thing that has been really fascinating is how routine oriented or routine dependent our behaviors are. So, if I’m going back to work five days a week, the coffee stop that I make is going to be at 7:30 or 8:00 AM. If I’m going back to work three days a week, I’m getting that coffee at 11:00 AM, 2:00 PM, sometime in the day. And so, the nature of our routines are going to dictate a lot of retail success, and it’s something really important to keep in mind. Again, take this, just a scenario I know better, take that New York City technology professional who lives in New Jersey or Connecticut. If I’m working in an area where I have a coffee shop or a retail location in an area that has that audience, I’m thinking about how do I attract them on a Tuesday and a Wednesday and not just that early morning visit on the way to work. Because I think a lot of those behaviors are going to stick because of the shifts in routine.

And I think maybe the last and the most important thing is consumers are reasonable and they can be communicated with. This is like a weird one. But I think one of the things is this idea that the consumer is always right, and you need to meet the consumer where they always want to be met is true, but there’s a major caveat if you can have a conversation with the consumer and they will shift their behavior if there is a win-win to be found somewhere else. And I go back to that holiday experience. People didn’t just flood stores on Black Friday because they had traditionally done so. They weren’t furious that stores weren’t open on Thanksgiving because that had been the tradition. Retailers were able to communicate in this environment and explain this new situation and explain how to create a better win-win. And that drove different behaviors from consumers. And ultimately, probably led to a lot of very happy consumers and very happy retailers. And I think this idea that we can have a conversation is unbelievably important because it forces brands to be more authentic. It forces brands to be clearer with their messaging. And I think that creates some really exciting opportunities as a result of that conversation. Even thinking about something as social responsibility from retailers, how significant that is and how big of a piece that has become for younger audiences. So, I think this idea that there’s this ongoing conversation happening between the audience and the retailer is really, really exciting and something that offers a lot of interesting, new avenues for how we deal with challenges moving forward.

Montesi: Those are some great observations. And I think a lot of innovation was forced to happen during COVID. And it’s going to make things a lot better post COVID for a lot of consumers, but even a lot of retailers, it’s amazing. I’ll ask you one that we didn’t think of before, but what I find so amazing is the department store thing that’s happening. We went into this and Nordstrom was the darling. Everybody thought Macy’s and Dillard’s and department stores like that were just on their way out. It’s just a slow death. Two years later, after a shut down in the economy, shut down of the consumer, Dillard’s is hot as a firecracker, Macy’s really appears to be very strong, and Nordstrom isn’t quite the darling that it was pre COVID. And so, a lot of things have changed. I was thinking about Sur la Table the other day, Ethan, how they closed down it seems like 15 minutes before a lot of retailers that were teetering at the time that made it another 15 minutes. And many of those retailers that barely made it through have come out of it just super strong. And that Sur la Table, because of cooking at home, et cetera, had they been able to keep those stores open, they’d probably be on fire as a chain. But anyway, as we come out of COVID and look at how innovation and some of this necessity is the mother of invention, how with supply chain and different pricing and communicating with customers, how those big department store chains have come out of this, what have you seen and learned and what observations do you have about that?

Chernofsky: I’m super bullish about department stores. And I think one of the things, to take an example from that Dallas area, is we spoke to the CEO of Neighborhood Goods about a year ago, and he was talking about discovery as a brand and the idea that you trust the department store to have the things you’re looking for and to give you a positive shopping experience to find those items. And I think one of the things we forgot about was that there is a brand to Macy’s, and there’s a brand to Nordstrom, there’s a brand to Dillard’s, and even Kohl’s, who’s taking a little bit of heat right now. That brand is a really significant asset.

And so, yes, there are struggles and challenges and there are I think in the department store space especially, there’s a lot of evolutions necessary for this group to continue to be a key part of the retail conversation, but they have a major advantage moving forward. We sometimes forget how difficult it is to build a brand, how many retailers never got close to the level that these retailers hit, and to have that kind of name awareness. So, the ability to evolve from that place is a huge advantage. And I think so long as they’re committed to continuing to find it, there’s a really good chance they succeed. Macy’s is a great example. We’ve always looked at the things they’ve done, even when they don’t succeed, as a really positive sign. So, was Backstage the greatest thing in the world? Maybe not. Was Market By Macy’s the most resounding success we’ve ever seen in retail? Not necessarily. But Macy’s is always willing to try new things, to figure out how to move forward, and a brand and a retailer that’s willing to test and try and push the agenda is one that’s going to land on the right answer. And so, I think the more we see that innovative spirit within the department store space, we’re going to see some really interesting concepts and ideas come out.

Montesi: Interesting. Super bullish on department stores says Chernofsky. Put that on the front page of the Wall Street Journal.