Recovery of Retail
Rachel Elias Wein joins Richard K. Green to discuss the retail sectors returning as states continue to reopen and vaccine rates climb. Wein traces the pandemic’s impact on retail, including growth in grocery delivery, pet stores, and ecommerce as well as areas that struggled like malls and mid-sized brands. As for the future of retail, Wein notes that an overall decrease in restaurant sales towards lower-cost grocery foods puts more cash in the average consumer's pocket, which may open an opportunity for post-pandemic spending in retail, hospitality, and travel.
Green and Wein discuss how work-from-home will impact retail, particularly weekday spending habits in urban and office hubs as an estimated 20% of the average work week (one day per week) may take place from home. Additionally, they also cover how an aging population’s spending habits may favor geographic regions, the feasibility of transitioning customer-based retail locations to more industrial-style fulfillment centers, and how the ubiquity of malls will continue to decline.
- Good morning, everybody. My name is Richard Green. I'm director of the USC Lusk Center for Real Estate and you're semi-regular host of "Lusk Perspectives" a series that we started in the immediate aftermath of going underground a year ago, March. I think we're up to about 60 that we've done. You can find past "Lusk Perspectives" on the Lusk website, lusk.usc.edu/perspectives. And it's my pleasure to welcome back to "Lusk Perspectives" Rachel Wein, the CEO and founder of a company called Wein Plus which is a consultancy firm that specially focuses on retail real estate. She has clients who would be very well known to all of you. She is also a fellow member of mine on CRC Gold Product Council for ULI. That's how I got to know Rachel and came to get to know about her wonderful insights, which she presents in a very straightforward and sophisticated manner. It's hard to do both of those things at the same time. The reason I asked Rachel to join us again and she wrote a, I thought, a wonderful piece a month or two ago on how what's happening in the Israel, where, because of their great success with vaccinations, they've been able to open up to their retail sector in the aftermath of this opening up. And I just thought it would be great to have her come back and talk to us about how she sees the retail sector going forward from where we are right now, California, as you know, fully reopened last week. And so I'm gonna ask Rachel to talk for about 20 minutes and then Rachel and I are gonna have a conversation for about 15, 20 minutes and then we will open it up to questions. And with that, Rachel, again, thanks so much for being with us today and look forward to what you have to say.
- Well, thanks, Richard. And thanks for having me back. I'm excited to spend some more time with this group and I'm excited to get to have this conversation with you later on and also to get everyone's questions. So please do ask a bunch of questions. I have a pretty particular perspective on some of these things. So I would hope that not everyone shares these perspectives. And we can maybe have a little bit of point-counterpoint here. So let's go ahead and jump right in. If I can get the clicker. You know what? Chase told me this might be a problem. Here we go. All right, so just a little bit of a recap where we are. This is as of yesterday, I'm setting the stage with some context, vaccination rates have contributed to a massive decline in COVID 19 cases. As of today, about 65% of Americans have had at least one dose of vaccine just shy of where President Biden wanted us to be by July 4th, which is 75%. So we'll see, maybe we can get that far. So we've really gone past the, where is the vaccine? And we're now, everyone that wants to get it can certainly get it. I'll let you guess which one of these handsome gentlemen is my husband but just to set the stage, when are we gonna be feeling like it's normal? I believe we're gonna be feeling like really normal come Labor Day, people in offices back to work like some semblance of normal. We'll talk about that a bit more but the assumptions in this presentation are based on a Labor Day normal. So let's take a walk down memory lane and examine some of the disruptions that happened in retail and industrial sectors over this last year. A lot of the story has been about the gains that have happened in the grocery sector as people were forced to stay at home. So taking a pre-COVID look, for the full year of 2018, Americans spent about 54% of their food spending was away from home in restaurants and that share of restaurant spend has been increasing for decades and it really is higher in the US relative to other peer countries. Actuals for 2020 saw a 27% decrease in restaurant spending. We had estimated back in April 2020 that we thought it might be as much as 25%. So we're a little bit late on that one. Let's break that down a bit. So in 2018, Americans spent $930 billion at restaurants and $780 billion at home. And what we saw for the full year of 2020 was roughly $240 billion leave the restaurant industry. That takes restaurant spending down to about $690 billion, but food at home costs about half as much as food away from home. So the restaurants lost $240 billion and the grocers gained $120 billion. They only gained the 50% share, the consumers got to keep that other 50%, that other $120 billion. So at the end of year in '18, 54% of food spend is away from home, that migrated to 43% of food spend away from home. That's an 11% shift in market share. Restaurants lost $240 billion, grocers and consumers each got $120 billion. So that sounds great, right? The problem is a lot of those sales were done online and US grocery delivery today is not profitable. How can we make it profitable? It's by reducing the labor expense through robotic distribution methods. So I'm gonna walk you through a couple of these options here. Here's the traditional distribution model, which goes from the farms and the manufacturing facility to the regional distribution center, finally to the retail DC and then the store and the home. We're gonna look at two alternatives. The first is centralized fulfillment centers which eliminates the retail DC and the store and delivers directly to the home. And the second one is micro fulfillment centers which have the flexibility to bypass the store or be incorporated into an existing store or retail DC. So let's look at the CFC. This is the basis of Ocado's e-grocery platform. Ocado is a UK based, e-commerce only grocery retailer that's partnered with Kroger in the US and this UK CFC does 85,000 orders a week. It's about 55,000 products and you're typically placing an order for next morning delivery by specially routed refrigerated trucks. And you can fulfill your full weekly shop here. We're talking about 70 or 170 different peanut butter choices. The alternative here is micro fulfillment. And this is an example from fabric, it's about seven, this one in particular is about 7,000 square feet with about 6,000 skews and it's not a full shop. It aims to have the top selling products for the most valuable shoppers at that store. This one here is in the basement of an office building in downtown Tel Aviv but they're now targeting about 10 to 40,000 square feet. And you're not gonna get a full weekly shop. It's maybe seven peanut butter choices not 170 peanut butters. So the narrative in the investment community has been a lot about which model is gonna win. Is it gonna be CFC and Ocado or it's gonna be MFC, which some of the other grocery competitors are utilizing. And I think it's ultimately gonna be some combination of both through a hub and spoke model but I actually think that that's the wrong question. I think the right question is will delivery win out over pickup? And here's what we now know that we didn't know at the beginning of this pandemic, it's that the delicate balance between delivery and curbside comes down to fresh. And when given a choice, roughly half a non-grocery orders will be picked up at the store, talking about Best Buy or Ulta, but for grocery orders, that percentage swells to 75% of grocery orders being picked up at the store. So it's really about ambient versus temperature-controlled orders. And that really changes the nature of convenience and speed depending on the type of order that you're picking up. So when you think about what are grocers thinking about today? There's a problem in that we need to let customers choose the channel that they want to shop in but we can't let it increase the expense for a given sale. And the fact is the more we spend in alternatives to the store, we need to be able to recoup that profitability somewhere. So let's walk through what that means in practicality for the real estate footprint for a grocer. Here's the traditional model, it was all about single store profitability. The decision to close a single store was based on four-wall EBITDA. And if the drag of a poorly performing store was enough that it was worth closing given the impact on sister stores having to shoulder a greater cost burden for the fulfillment network. So let's look at how that calculation changes when we add in micro fulfillment centers. So this is an example of how this works in practice. Let's call this a sample market with a traditional distribution network. Now we're gonna layer on some MFCs. One may be standalone. One may be co located with your traditional retail distribution. One may be co located within a store, and then you can start to examine which stores can be eliminated as profitable e-commerce takes hold. So let's take a closer look at what different forms an MFC might take. It could be a dark store that's only being used for order picking. It could be a hybrid where you use a robotic MFC for ambient products and then bring the order to the store for fresh to be added. Or you could have an MFC within some percentage of the existing store footprint. The takeaway here is that this is hard, it's easy or let's say easier to place a store at Main And Main it's much more complicated when you layer in the temperature control fulfillment network and grocery retailers are doing this now and they're really testing and learning in real time. So remember that the delivery versus pickup decision is largely based on if the order is temperature controlled. So plan-on operators with temperature controlled orders needing 50% more pickup space. We can't think about grocery as retail alone. The grocery is retail and industrial and that's gonna bring opportunities throughout the cold chain. And the largest retailers are going to grow, they have been and will continue to grow their market share. There's really no right way to implement this or we have not found a right way yet but it is harder for smaller grocery retailers to be able to compete at this scale. So it wasn't all about grocery. There were other retailers that had success over this pandemic period but it's important to remember that foot traffic certainly has suffered. What we found is that there were some stores and primarily obviously essential retailers, but the foot traffic has really become completely dis-aggregated from sales. It is no longer something that we can look at and we can talk about that in the Q and A portion. So one of the sectors that saw huge gains was pets. There's tons of new pet parents in America, myself included, and the pet industry highlights really that sales have not been uniformly distributed among the various categories and verticals in retail. So PetSmart in particular saw a significant year over year increases in sales. PetSmart also owns 70% of chewy.com. So really PetSmart plus Chewy is the big dog. They're the number one pet retailer in America. So when the supply chain started to go haywire, PetSmart was prioritized, their shelves remained full and consumers noticed. In fact, internally, they recognized that they got more than their fair share when it came to distribution. So not all pet stores benefited. It's too simplistic to say that PetSmart did well because pets overall did well. The pandemic has had a disparate impact even within these verticals. So PetSmart benefited in part because of its size. There are also a number of local pet stores that benefited when their community came out with shop local efforts it's really been the midsize chains that have struggled in large part due to supply chain and out of stocks. If you go to a regional operator and they don't have your Blue Buffalo dog food, and then you go to PetSmart and they have it, you're now a PetSmart customer. So I hate to say it this way but really PetSmart didn't do anything revolutionary but they have what you need when you need it and that's what matters in a pandemic. And that's really what led to their success. It would be impossible to talk about pandemic success without mentioning Target. They really started building capacity many, many years ago, and really been able to reap the benefits. They already had an active same-day system and then they were able to really increase that when they needed it they started this investment in 2017, when they announced that they were investing $7 billion in new stores and stronger digital capabilities. And I'm not sure if you all remember, but when they announced that in 2017, the market went crazy. They thought Target was nuts and it's really paid off for them. So they already have more than 45 owned brands and a strong history of building billion-dollar brands. And there's not another retailer or CPG that can build a billion dollar brand overnight like Target. They launched Good and Gather in September of 2019 which became a $2 billion brand in less than a year. And to give some context, no direct to consumer brand has reached the billion-dollar annual sales mark. So Target already had grocery before the pandemic hit, of course, but grocery was already 20% of their pre-pandemic sales. And I haven't seen a breakdown now for 2021 but they already had a healthy share of sales in grocery. They already had partnerships starting with Michael Greaves back in 1999, expanding to larger partnerships and licensing agreements with CVS and Starbucks. And so this recently announced partnership with Ulta is really just a continuation of what they were already doing well. So what's the lesson? If you need a crisis to do new things, fine, but what's even better is if you're already innovating and you're able to pull ahead of the competition when it's harder to compete. And that's really what Target is doing now because they were already ready. So a couple of takeaways here, foot traffic does not equate to sales. It's one more piece of data but certainly not equivalent and we need to think about that independently. What's even more important than foot traffic not being equal to sales, is that sales are not equal to profitability and we'd love to get into that some more in the Q and A. For PetSmart, it was about size and scale. That was the differentiating factor. But for Target, the success really came from their investments and the store and with drive-up and digital and partnerships. And that was really about having conviction around what the customer wants and really giving it to them. So let's take a look forward and see a couple of economic indicators, I just want to point out as we go forward. Still impacting our day-to-day job losses in largely concentrated and low-wage employment sectors. Job losses significantly hit women and people of color, still clawing our way back with employment numbers. Information is a bit dated and I just want to, I feel that we can't talk about it enough that mothers have really been unable to return to work. And that is where we're seeing significant impacts in the workforce and labor participation. We're at about 1988 levels of participation for women in the workforce. Automation was already a negative impact on jobs and specifically low wage employment sectors. I spoke with the chief investment strategist from a leading private equity firm recently and he told me that they surveyed their portfolio company CEOs and found that 85% of them expected in a normal post-COVID world they'll be reducing their workforce by 10% to 15%. So daily decisions are still being impacted by the pandemic. I know we're opening up, but we haven't completely gone back to normal. It's probably quite different for you all in California than it is for me in Florida but we're still continuing to eat at home more. I think we're gonna have a snapback. We're gonna see a real positive increase in restaurant sales. And then we're gonna settle back into having more opportunities compared to pre-COVID, having more opportunities to eat at home. I think it's gonna work out to about two additional meals at home per week. For a typical family, that average is $10 per meal. you get to a thousand dollars more grocery spending, for $132 billion for the country. Remember that that grocery gain is restaurants pain, it's also consumers gain. So it's not just $132 billion more for grocers. It's also $132 billion more in consumer spending power. That's more for retail and that's on top of the stimulus that we had already. And that's added up to an awful lot of money in the bank. And Richard has informed me that we probably call normal about $12 trillion. So that means we've got $5 trillion of cash on hand to spend when consumers are ready. Up until now, it's been an awful lot of spending on goods over services. We're gonna come back to this chart in a bit, but for now expect that that these changes to our spending patterns are gonna be fairly sustained into this third quarter. And hopefully start to turn the corner after Labor Day. So a couple of takeaways here, more food at home means more money to spend for consumers, expect that low-wage unemployment is gonna be a long-term issue that will persist and plan for higher income consumers to open the spending flood gates in the back half of 2021. So a couple of things that I'm watching, the first one is is stimulus. Getting to the people that need it? Is it going to Delta or is it going to Debra? And to answer that question, I keep my eyes on food scarcity and hunger. From August to December of 2020 the number of food insecure Americans rose by 5 million people to 27 million Americans. We're gonna be looking to see how that number declines as stimulants gets in the economy and what's gonna happen after the stimulus burns off. The second is, is the economy healing in a sustainable way? And for that, I'm gonna look back at that goods versus services chart and I'm gonna hope that we see services increase and goods start to come down a bit. The prior chart showed the goods were up 12%, services down 6%, but services represent two times the spending of goods, and it's a major driver of low-wage employment. So it's gonna be important that we see that start to reverse a bit. And finally, how many of these shifts are gonna be permanent for commercial real estate. And for that, I'm gonna be looking at the architectural billings index, which tracks spending on design services. And so that's gonna be a leading indicator for if we have new construction coming about. And after nine straight months of decline we just saw a turn to be positive for a couple months in a row. So that's all a good sign. People ask me, "Okay, Rachel. That's an awful lot of indicators to look at. If I only wanted to think about one big thing, what's the one big thing?" And I got ya. It's schools and daycare centers opening 100% in September. This is the one thing that's gonna be able to tell us how normal we're gonna feel. It's one thing for the CEO of Morgan Stanley to say as he did yesterday, or the day before, if you can go to a restaurant, then you can come to the office. That's all well and good because he doesn't have to look after his school-aged kids but until school's open a hundred percent and daycare facilities, we cannot have a normal functioning economy. So how does that impact spending and consumers and retailers? Well, they've come back, but they've come back differently. So let's look a bit in the crystal ball. We've already started to see revenge spending especially in travel and leisure bookings. I love this picture of Miami where there clearly was no COVID here in Florida but broader than spring break, the combination of this extra $5 trillion in the bank and the pent up demand means, I believe, we are entering a supercycle for travel and leisure spending that's gonna last for several years and that's also gonna really help this rebound in services and low-wage employment in hospitality and leisure. We are seeing a tremendous rise in resale. A lot of people are thinking about how they're consuming in terms of sustainability and just being a more conscious consumer. And so that's really given rise to sites like Thred Up, Poshmark, The RealReal, where we were doing peer-to-peer of sales through Craigslist and Facebook Marketplace in the past, but it was always more friction than what we have today. And so I'm really gonna keep an eye on this. It's not just these marketplaces, brands that we all know and love are joining in, not just who you would expect like REI and North Face and Patagonia, but also Stella McCartney and Eileen Fisher and it's really created an opportunity for these more higher end or luxury brands to have a direct connection with their customer and a new entry point. And I think this is finally a formidable competitor to TJX and Ross and The Discounter. So we'll see how this endless aisle online compares to their treasure hunt in-store. So retailers are rethinking what it means to be relevant and people have been doing that for, retailers have been doing that since the dawn of time but now they're doing it again. It used to be taboo to say that people were leaving malls but it isn't just GAP and Bath & Body Works, it's also other smaller retailers. One case study here is just Bluemercury. And they've been doing this now for several years. They first started as a street-front neighborhood retailer in Washington, DC, and early on in their expansion, they signed a deal with Simon to be in 40 of their malls. And several years later, their founder said it was the worst decision that they made. And it was because their shopper wanted to discover them in the neighborhood not in the mall. And so been unraveling those locations ever since. And really the bottom line here is not the malls are dead, it's that retailers have better information about their individual customers now than they ever had before. And it's allowing them to make much more informed and targeted decisions about location. We've got a number of new formats and footprints and it feels like everyone needs a drive through which of course made sense for these fast casual restaurants but maybe Walgreens, you wouldn't expect. So this example here with Walgreens is the nature of convenience has really evolved over the last few years especially when Amazon or Shift or Instacart can get you something in a couple of hours. So it used to be that a 14,000-square-foot box on the corner of Main And Main was the definition of convenience. And now it's really changed. So perhaps instead of having a two-and-a-half-acre site with a 14,000 square foot box, now there's a new prototype with a call it 2,500 square foot pharmacy with a drive-through on half an acre. If you can keep your primary business pharmacy, you can hold onto all of that business and you can do it in a fraction of the operating expense, that's gonna be great for profitability. And that's really what Walgreens is testing out now. And finally, we're gonna completely rethink the notion of retail and industrial space. We already see the majority of Target sales touch a store and over half of Home Depos online orders are fulfilled by a store. And that's really leading to a convergence of retail and last-mile fulfillment. So we've got retailers that have a smaller retail store footprint need but have a larger last mile and industrial need, how are they gonna accommodate this? And we think it's gonna look something like this. So this is a typical mass retailer. The vast majority of the footprint is customer facing with a minority of space dedicated to back of house. We think over time, we're gonna start to see large portions of customer facing retail space dedicated to fulfillment, especially with micro fulfillment. And it's moving pickers, whether they're humans or robots, away from the customers. And here's the retailers that are already testing and learning here in this capacity. So final thoughts to wrap up our time together, expect the customer to prioritize travel and leisure spending for years to come. They're gonna take a new look at sustainability in the form of resale and they're gonna redefine convenience based on the impact of delivery and pickup. And it's gonna cause retailers to rethink the way they meet those consumers. And that means making targeted location decisions, changing their prototype to balance selling space and dwell time and finally reconsidering their overall portfolio footprint by transforming existing retail space to fulfill industrial needs. And I'm gonna leave you there and stop sharing my screen.
- Well again, Rachel, thank you very much for an informative presentation, very dense presentation. You've covered a lot of ground in 30 minutes. I almost don't know where to begin but I'm gonna begin any way. And by the way, please, we have a question from Sonia Sibilian in Q and A and Sonia I'll come to that in a few minutes. Others who wish to ask questions of Rachel please type your question into the Q and A but I want to go back to a graph you had fairly early on in your presentation, which was year over year sales and you ended that graph in February for the obvious reason that the previous March was the first March where sales were very depressed as a result of the pandemic. If we looked at March of this year compared to March two years ago, what would that look like?
- Yeah, how much recovery would they have? So that's sort of, would be your benchmark for recovery, is March of two years ago, what would that graph look like? Do you have a sense of that?
- It's up a bit, not as much as you would expect but it actually is up a bit. And these are for like the largest grocery retailers, the ones that we have publicly available information for, but coming off of '19 was not, everyone thought it was gonna be just awful. And people are still, they're at home, I think more than maybe we expected even right now but remember that it's not like restaurant sales went to zero. We still had a lot of restaurants that shifted to delivery. The fast food restaurants never closed. So, and there were a lot of those that just had to be out about. What I'm less sure about right now is I think we're gonna see this year a whipsaw back to the restaurants. But what I think we're gonna settle in on is those two extra times opportunities to eat at home because pre pandemic, if you think about no, not everyone has the opportunity to work from home, of course, but pre pandemic, the number of full work days and I think the University of Chicago did the study, the number of full work days that we're at home, it's about 5%. And the estimate is that going forward, it's gonna be about 20% of full work days will be at home. So that's one day a week. If you're not driving in, you're not taking the train, you're not getting that Dunkin' Donuts coffee in the train station. You're not going to that lunch spot downtown. The pain is gonna be felt in those places. It's gonna be those downtown lunch locations. It's gonna be downtown fine dining and who's gonna get the benefit of that? Well, you know, I'm working from home, but maybe I will go to Panera or I'll go to The Pizza Place for lunch. I don't have to stay at home all the time. It's too soon to tell, it's too soon to tell.
- So, this raises a larger point and I was going to move from how things are now compared to two years ago, to have you talking about Israel for a bit but I'm gonna pause on that for a minute because I want to come to the issue of automobiles. It's something you implicitly referred to in your second or third to last slide where you said drive-ins are key to retail success. I think we saw ourselves as evolving to having cities that were pedestrian friendly by friendly people walking to restaurants more often, a reduction of use of automobiles. We were, if you looked at BMTs, they were falling. But now one of the things we're seeing in the aftermath of the pandemic or maybe aftermath is not quite the right word yet but we're seeing this enormous uptick in auto sales. And so we see, I mean, used car prices are up 30% from a year ago, new car prices are up. Nobody has inventory available to them. Do you think we're going to go back to a more car-based society as a result of this? With pretty profound implications again for where retailers are located.
- So I think those are two different questions and I want to answer both of them. I haven't driven anywhere in like a year and a half, but when I order online and Shift brings my Target to me someone does that in a car. So I didn't drive those miles but someone drove those miles. So, and we have not yet come to a way of routing delivery so that people can do them effectively with multiple stops. It's just not cost-effective. I think there's a lot of other things at play with car sales and use cars and the rental car companies all had had all these challenges. They fire sold all of their inventory. Now you can't rent a car, but you also can't buy a car because the semiconductor shortage. So I think there's a lot going on there. I think it comes to it. There's a different conclusion that can be made also about are the locations, are the retailers locations in the right place. You spent a lot of time, if you are a restaurant figuring out where you should locate based on where your customers were on any given day. And if those customers spend 25% of their time or 20% or 15% in a different place, now, all of a sudden your restaurant's in the wrong location. So that's a big deal, when a good-performing restaurant is gonna have 8% margins, like that's a big deal when 20% of your customers are gone. So I think the confluence of those two things, the question is when we have the opportunity now and now California is open, I mean, we've been, here in Florida, pretty open for a long time. Now that we have the opportunity to live life as normal will we choose to go back to that same commute when we don't have to? And I think we're gonna largely go back to it but 20% of full days working at home, it doesn't seem crazy. 20% of grocery sales online, that doesn't seem crazy. One in five orders online, that doesn't seem crazy. I think we're gonna get there.
- So let's talk about a place that is closer to being fully open, which is Israel. Again, their success with vaccinating people is quite remarkable. We saw the plunge in cases of mortality pretty quickly once they hit about 50% vaccination levels. And I think they're about 65% fully vaccinated now. Now there's a complication in that there was a conflict in the middle of this recovery but what have you seen in retail in Israel? Has it recovered to pre-COVID levels yet or it's still in a lag? And recognize, there are things about Israel that are just very different than the US, it's smaller so on, but still.
- So I would say, our initial kind of soft numbers are pretty positive there, with a pretty significant uptake. And then settling into pretty strong numbers something that's important to remember there is you have a relatively small population. I mean, what is it? Seven, eight, nine million people, it's fully universal healthcare. There's four different healthcare systems. Every citizen has one of them, someone calls and says, "All right, come tomorrow and get your vaccine at two o'clock." I've been looking into some of the behavioral economics around getting people to take the vaccine and apparently the only thing that matters is to say, "We've reserved a dose for you. Please come tomorrow at two o'clock." It makes a big difference. Not just saying it's safe or you should do it because you should go back to concerts. Apparently saying we've reserved dose for you really makes a difference. So that's what they did over there. And so people got, they did also have a passport system and the green pass system, the vaccine passport system, it really prevented unvaccinated people from functioning in normal society. So if you wanted to go to a restaurant, if you wanted to go to just about anything, you had to show your green pass and they've now had enough vaccinations that they do not require the green pass. I would say one other thing that I think we spoke about before though, is early on in the pandemic, if there's something that I really got wrong, it was in February and in March saying, okay, well, Asia locked down 90 days before us. Certainly we are as capable of handling this as Asian countries. And so 90 days after they open up is when we will open up. And I will say that obviously that was wrong , obviously that was wrong but it's partly wrong just because culturally, we have certain limitations in the American culture around individuality and personal liberties and freedoms that other countries don't enjoy. And so I think that we have to take it a little bit with a grain of salt of what happens in Israel, because they have a much more homogenous population that does not have vaccine hesitancy that has really just taken the shot and gone for it.
- So, I want to go back to the mix of groceries and restaurants for a bit. And first of all, something that's striking me. So Americans spend about one and a half trillion dollars a year on food, if I did my addition in my head correctly. First of all, I just find it astonishing, we have a $20 trillion economy that how little we spend on food in this country is kind of amazing and a wonderful triumph. And it just says how inexpensive food is here. So that's only 7% to 8% of the economy going to food, but on the picking up versus delivery, I'm curious about fresh products versus packaged products. And again, I am not data. I am me, but I actually enjoy going to the grocery store to pick out the fresh products. The other stuff can be delivered to me, that's totally fine. And part of it is I want, not only do I enjoy it, I just want to do it. I don't trust somebody else to pick out my pepper for me. So how much does that matter? Is this just such a small share of grocery shopping that it's sort of a rounding error when you think about these things or does this matter in terms of what the composition of shopping is going to look like in the years to come?
- So I think it matters. I don't think it's just a rounding error. I would say, if I was giving this presentation 18 months ago pre-COVID, I would have had to convince you that people would be willing to have someone else pick out their peppers and tomatoes and avocados. It was still so foreign. The idea that large swaths of America would be okay with that. So early on in the pandemic, and I live in Florida, as I mentioned, there's a lot of older folks here, my two next door neighbors.
- I've heard Carl.
- Yeah, you've heard, yeah. I said, "Hey, Mel and Ted and David and Lenore, I'm going to Publix. Do you need me to get anything for you?" Early on in the pandemic, they say, "Oh no, no, we use Instacart." I was like, if my 70-year-old neighbors can use Instacart like every grandma knows how to use Zoom now. So the uptick and just there's preference and then there's necessity. So you prefer to have someone pick out your pepper but you were willing to let someone do it over the last 15 months. And I think there's a lot of friction that has been reduced where people say, "Eh, sometimes I don't get the avocado I want." But net, net, I might get a couple hours of my time back. Is it worth it? Yes. There's also a lot of opportunity for mass retailers and grocery retailers and large online retailers to get you for those nonperishable recurring items. Amazon subscribe and save for paper towels and toilet paper and shampoo and toothbrushes and things like that is a real formidable business for them. And there's no reason why Kroger and Publix and Safeway Albertsons can't do the same thing. There's also no reason why the CPGs can't get it to me directly. And this is where I think we're gonna start to see that, is why do I have to have a relationship with Amazon or Kroger to deliver my Tide or my Huggies? Why wouldn't I just have P&G send it to me? So I do think that we're in the early days of that. And then there's also like those fulfillment models are gonna continue to change. So one of the images that I had was of ambient fulfillment being done elsewhere and then driving to the store for freshly picked up Walmart is turning this with Gatik, is they're autonomous vehicles, they're like these little minivans that are refrigerated, bigger than a minivan but they're not an 18-wheeler, refrigerated trucks and they'll have certain things that are picked at the store, certain things that are picked up at the micro fulfillment center. And it creates an opportunity where you can also say pick all my other stuff and I'm gonna walk into a store and just get my peppers, was a long-winded answer, I apologize
- No that was good, I'm gonna ask one more question. Then we're going to go to the audience but since you raised the age of your neighbors, a phenomenon that we're seeing is a lot of people not returning to work. And you hit on a very important group which is mothers with children at home. But the other thing we're observing is just lots of people retiring. And so that savings that you're talking about, that $5 trillion of dry powder, to the extent that some of that is held by people who are retiring, they may not want to spend it. They are seeing it as a thing that actually bridges them over and allows them to extend the number of years that they are retired. Do you think that's going to have a big influence on retail spending? And even more generically, people are getting old, I'm 62, I'm planning on retiring when I'm 70 something, but most people are my age are three years from retiring. And there are a lot of people my age and I'm the tail end of the baby boom. So how is that gonna influence spending in the years going forward, do you think?
- There's a lot to unpack there. I think, obviously, as people age and become part of fixed incomes, that's a challenge. I think you also have a number of folks that if you had money in the bank this last 18 months there's more of it now. Just simply because of the way the economy has performed despite COVID, so, I think some of those new car sales and new home sales are being fueled by potentially people downsizing or moving to the downtown where they can get a good deal or relocating to Denver or Austin or wherever they're going. So I think a lot of those consumers, there's going to be, we used to work and now we don't work and we're in the same place and we're spending differently but a lot of it's actually gonna be geographic. So in where I am, I might be getting some of your retirees from your area, and so here in the Tampa, we call this the other bay area on the other west coast. So here in the Tampa Bay area, we probably will see a significant increase in spending because we will probably get a lot of the Midwestern retirees and the Northeastern retirees. And so I think we're gonna see a lot of the pain that you're describing in Northern cities as people retire and continue to move south. And as people move from higher barrier to entry locations I mean, the only way you win this housing game is by selling your house in Chicago and moving to Phoenix, like that's how you win. So I do think that that's possible. I also think that perhaps, perhaps, some boomers are gonna stick around longer than expected because working from home, maybe, it's not so bad. I don't have to commute in. It's not so hard, I can take a nap if I want to, whatever it is. I think there might be a delay. And we see some frustration with millennials, Gen Z, where some of the folks that we thought might've retired already have not because after the Great Recession, they felt like they they weren't quite where they wanted to be now and then we have COVID and now they get to work from home. So I'm not sure, I think there's a competing narrative there of people accelerating or decelerating their plans for retirement.
- So I should also note that there's a very famous bridge on your bay area as well. So from Sonia Sibilian, "From a city's perspective, how are retail sales tax dollars calculated from grocery distribution centers? Will cities collect sales tax based on delivery location?"
- So I am not the right one to answer this question. My understanding is that it is based on the delivery zip code but I would say that I'm not the expert on that. That would be one I'd like to defer a bit. It is a challenge, I mean.
- Well, let's expand the question, and ask you when the leases are signed and there is overage rent in the lease, how is that computed if somebody orders online or over the phone but fulfills it at the store is, does that count as store sales or not and what happens with returns and so on?
- It is generally an online sale is not counted as a store sale. Generally, I would say generally across the board and the apparel retailers that really started this 15, 20 years ago, they really started that. And it became a bit of a problem. And I would say, the GAP is a good case study on this, where if you walked into a GAP store and you saw the red sweater but you wanted the blue sweater and they placed the order online, that store manager did not get credit for that sale of the blue sweater because they didn't have it in the store. And it led to these kind of perverse incentives for store managers because they really wanted to push you to buy something in the store because they didn't get the credit. And I would say that is a lesson that has not been learned by the grocery retailers. By and large, the online business is separate from the in-store business. So if you go into your local, I'm gonna call it Ralphs because Kroger has a client and their Ralphs are in California. If you go into Ralphs and you get, three quarters of the time, you're going into the store and you're buying but sometimes you go online and you order, that local manager that keeps that store perfect for you does not get credit for that one in four shops that you do online. And that's how it sits today. I would say my hope is that the grocery retailers fix that because I do think that your tendency to vote with your dollars online is because you had a good experience in store. And that is because of the local management team. So you don't want to disincentivize them.
- So from Brad Rabel on turning parts of grocery stores into fulfillment centers, "You expect antiquated zoning codes to impact the retailer's ability to modify store formats be a larger percentage of fulfillment and lower percentage of traditional customer-facing retail?"
- So I would say it's largely going to be, when people talk about the challenge of converting retail to industrial, they typically mean taking a mall and making it an Amazon Fulfillment Center and that is really hard, does involve zoning problems. Also, the malls have all these other weird problems with the anchor tenants are typically owning their box and their land. And then the mall owner owns the small shops. What I would say is the more likely scenario which is the one that I presented is a retailer that has a call it 90-10 or 80-20 split between retail and industrial. And will now move to a 60-40 or 50-50 split, that will likely not trigger any zoning issues. The issue you're gonna have is when you flip the whole box, then you have not only zoning but you also have the REAs and OEA agreements within a shopping center which is to say that the spaces have to be used for retail. They cannot be used for other purposes. And so when you tweak the ratios within the footprint as long as you have customer facing normal store hours you should not trigger those RAs and OEAs but so I think that's where we're gonna see it the most likely and Amazon has had significant success replacing dead malls. They have two actually outside of Cleveland with their million plus square foot fulfillment centers
- You know what occurs to me most zoning probably wasn't clever enough to even anticipate that this might be an issue. Cause clearly, grocery stores have always been partially fulfillment centers. There's always been a back grocery store. So I can't imagine maybe I'm wrong about this but there's zoning text that says and no more than X percentage of the square footage may be used for backroom functions. And I think the issue would be if you start using your fulfillment to fulfill other stores, then the local government might pay attention to that. But if it's basically part of throughput, I can't imagine that.
- I mean, I haven't seen a challenge. I mean, Kroger even has a dark store that they fulfill. So I want to, and full disclosure, but Walgreens and Kroger are clients of mine. There's a partnership where there's two tests markets right now, one outside of Cincinnati and one outside of Knoxville where there's about a dozen Walgreens locations that have a Kroger Express in those Walgreens. So it's maybe 4,000 square feet. So it's about a quarter of a Walgreens that really like a beautiful mini Kroger. And you can pick out your tomato you can also get your Simple Truth organic milk and eggs and you can do a Kroger online order that you can pick up there at the Loggers, in Cincinnati, those are being fulfilled by a dark Kroger store. So it's not open for customers. It's only for order picking with associates. There's been no zoning problems there. There's just not that many of them and many whole foods close the handful to fulfill during the pandemic but when people are allowed to go back in stores and they feel like opening it are they gonna challenge it? I don't think that they will. There's also a difference between fulfilling boxes and like heavy duty industrial. We're not talking about manufacturing facilities and like emissions and whatnot.
- So from David Sloan, "We have heard dire prophecies about the loss of 30 to 40% of retail properties worldwide, with huge effects on retail, construction, rentals. You seem to be agreeing that this will happen. Is that a correct inference from your remarks?"
- Whoa, so let's break retail into its component parts. We've got malls, we've got power centers, we've got grocery neighborhood shopping centers, we've got single tenant restaurant, gas station, drugstores. I think huge swaths of the mall sector will be gone. There was simply no reason why we need to have 1200 malls. I used to really think that our, we can FUPU Tampa, but it's still a top 20 media market. We have major league sports and whatnot, there's like six malls here but there's only two good malls. Why do we need six malls? We don't need six malls. And if everywhere in the country is like this market where LA is different. But what if Nashville and Raleigh and the like, really they need a couple of malls and then the rest they don't need. Yeah, those are gonna go away. What they will be? I think it's gonna be space dependent. I think for grocery stores, we're gonna need most of them. I would have said pre pandemic that we would see a commensurate set of closures with the percentage of online sales. If 20% of grocery sales are online, 20% of stores go away. There's not a lot, but if 20% of sales go online and we increase the amount of grocery spending by 20% now we don't need to close any stores. So we have to think about it kind of that way, in terms of did the pie get bigger? But ultimately we can't spend any more on a given sale and so we have to find the money for building those micro fulfillment and centralized fulfillment centers. They have to come from somewhere. So I see grocery neighborhood centers being pretty static. I think I'm with you, Richard. I think the car remains vital and important and I think those single tenant assets are gonna continue to be strong performers going forward. So do not paint retail with a broad brush, really look at the more individual subsets. And then generally favor south over north.
- You mentioned somebody who you'd normally think of as an inline retailer. And I don't remember the name of the retailer but it started with blue in your presentation.
- Oh, Bluemercury.
- Thank you and they decided they didn't want to be in malls that they wanted to be in neighborhoods close to their customers. And that almost implies to me that sort of the model of retail anchors is also along with malls, being fewer of them, anchors just are not really a thing anymore where you basically, you have the small tenant subsidizing the anchor to be there in order to generate foot traffic. Is the model of the anchor and the inline storage just more generically, is that gone?
- Is the model of the anchor gone?
- And particularly where the inline tenants subsidized the anchor to be there because the anchor is bringing in tenants for the inline guys.
- So I think no, but, I think if you have a large tenant that is a regular traffic driver you should be willing to subsidize that tenant. You should pay for that. The problem is department stores are not that daily driver that they used to be or some of them are, fewer of them are, now it's an Apple Store or a Tesla Store. It's not Macy's, it's not Dillard's. And so the notion of who's gonna be that dependable daily driver, it's become the grocery store. It's become, I mean, it was always Target and Walmart but now it's even more so. And I think now looking back at it, we can see that the very, very necessary restrictions that we put on movement in the country to pause the spread of this virus had a real disruptive effect on smaller retailers. They said, you have to close and all of your regular shoppers are forced to go to your biggest box competition. You have to use Walmart, you have to use Target, you have to use Amazon. And if you're a small retailer that sells cute little pet things, but you're not big enough to be considered an essential retailer 'cause you're not selling enough dog food, well now you lost nine months of business or 15 in California. I don't know what it was, but-
- Yeah, I'm always amused that cannabis sales was considered an essential business here in California.
- I just feel like these are things that we had to do and I'm not trying to make a political statement that we should've all just been open, we had to do it but we created this scenario where we made these already very large dominant retailers, we made them that much larger and that much more dominant.
- So, Rachel, where we're coming up at the top of the hour and then can we keep you for about two more minutes? I usually end right on time, but there's two questions. And I think I can sort of put them together. And I'm curious about your take is, does retail retain its role as sort of being the town square for community as just a place that people want to gather in the years to come? And what might be the features of these gathering places that make them appealing?
- So I think, yes. And we're gonna see more open air gathering spaces than we did before. It's gonna be less about enclosed entertainment spaces, less of the Dave & Busters and Pinstripes whatever the bowling places were and whatnot. I think people are much more comfortable being outside in every climate now than they were before. Not just in big climates like ours but I do think that retail is gonna still have that role. Retail is, of all the food groups, it's the only one that you can really see, is it working? Is it not working? If you built an office building and nobody occupied it, nobody knows, if you built a multi-family building, maybe you can tell that nobody's in it because there's no balcony, chairs and tables. But retail, you know if it works and if it doesn't and if you're a consumer, you want to be where there's action, where there's vibrancy and you're gonna go to those places and the ones that don't have it, they're gone.
- And with that, Rachel Wein, always a pleasure to have you with us. Thanks again so much for joining us, again, thanks you all for joining us, less perspectives today. And yeah, we are sort of going to go into a bit of a hiatus for the summer because most of you will be on hiatuses in the summer and we will have a full lineup of people again, starting in the fall for sure. But we may do one or more things before the summer is over. So again, thanks everybody so much for joining us, again, Rachel always great to see you, have a good rest of your summer.
- Thanks everyone.