From Clicks to Bricks: The Everyday Decisions Rebuilding Retail

- Hello, everybody, I'm Richard Green. I'm Director of the USC Lusk Center for Real Estate, and this is "Lusk Perspectives." We are really thrilled to welcome back to our podcast Rachel Wein. Rachel is a retail analyst who has worked for a number of very famous retailers that you have all heard of. Can I say that you're doing work for Costco or not?

- You can say that, yes.

- Yeah, yeah. Okay. Currently, she is advising Costco, which is, I think most of you are aware of, personally I love those $1.50 hotdog and drink combinations. And she has a really impressive background. She has several degrees from the University of Florida. She's one of the rare people I know who has an architecture degree and a business related degree. So she actually understands how things are designed, but also how things could be designed in a way that you don't make any money, and so that makes her very rare in terms of her insights. I got to meet her on a ULI product council probably about 15 years ago, something like that, and always am impressed with her insights. And so, Rachel, again, welcome to our podcast.

- Well, thank you, Richard, and I'm thrilled to be here.

- So let's just start with some general, talking about some general things, and then we'll dive deeper into more specific aspects of retail real estate and where it sits at the moment. So let's just start with how's the consumer doing right now?

- Well, I mean, I think a lot has been made about macroeconomic concerns, whether it's inflation or the wages not keeping up with it or tariffs or a variety of things, but you never wanna bet against the American consumer. So what I see is people, in some cases trading down, right? Maybe it's chicken instead of steak, but they're going out, they're trying to find value. And the greatest resiliency is really in the wealthy consumer, which is where the majority of our spending comes from. So it is a very barbell sort of lumpy spending, right? Folks on the lower end of that scale are certainly being squeezed and they're having a harder time, but we don't feel it in the aggregate as much because the wealthy consumer is so wealthy and spending so much that it helps to make up for the lower end consumer.

- And presumably, we're also talking about goods that have bigger margins than the goods that are at the higher end than they are at the lower end, or is that not true?

- Well, I mean, I think certainly luxury goods, right? With unlimited margins, because anyone will pay whatever they will for a Birkin bag or a Cartier watch or those kinds of things. But I think even the wealthy consumer wants to have a value, right? So this is a- I'm gonna take it back to Costco as many times as I can today, that the capped margin of 13 or 14% really makes a difference, and a wealthy consumer feeling like, "Well, I bought my membership and now I know I'm getting a good deal every time I walk into the warehouse," you know?

- So I guess a couple of things, and again, I suppose this spans, or it's different depending on where you're at on the income spectrum. So one of the things I like to watch is Steve Eisman's podcast. Steve Eisman was the fictional Mark Baum in the movie, "The Big Short," the guy played by Steve Carrell. He has a really good podcast. And he has been raising concern about auto loan defaults, which have risen pretty dramatically in the last year. Now that said, while they've about doubled, they are still, compared to pre-COVID levels, kind of average. But the other thing that occurs to me is, that, again, is probably concentrated on the lower end of the income distribution. And so if you're saying that the real driver of consumer spending right now is the upper end of the income distribution, that's probably not so, those car loan problems are probably not affecting that group, at least yet.

- I would think that they're not. What is it, 67% of GDP is consumer spending, right? And then of that, the higher end consumer is spending so much more, but if you are the person with a car loan that you can't pay, it impacts you, right? So I certainly don't wanna diminish that for a lot of people, they've seen prices go up, they've seen their wages, meh, kind of stagnate, maybe they went up a little bit and they're having to make do with effectively less. So I certainly wouldn't wanna understate that if that impacts you, then it's a really big deal, right? I would also wanna dial in on some of those auto loans just post COVID as we were getting out, the prices for new cars, for used cars even, they were so much higher than we had ever seen before. And I wonder, for folks that ended up with a variable loan in 2021 or 2022 on an already too expensive car, and then those interest rates went up and up and up in 2023, now they're sitting there saying, "I've got a car that's worth a lot less and a loan that is just so high, and maybe my best deal is to walk away from that."

- Well, especially since the way people coped with it is extending the term of the loans. So we go back 30 years and a typical car loan would be a three or four year loan, and now it's a seven year loan.

- Right?

- And so those cars are worth a whole lot less than the outstanding loan amount still. On the other hand, people say that after the rent, car payment is the next payment that people make if they're trying to decide what- 'Cause they have to get to work somehow. And as you know, in this- Well, where you live in St. Petersburg, where I live in Los Angeles, I wish transit were a more viable option, but it's-

- Yeah, you need a car.

- So just let's talk about it on the higher end. Are you following at all the impact of spending on AI and the value of AI stocks on consumption? Because one of the things that, again, a striking statistics to me is, let's say the economy grows by what 1.8% this year, which is sort of the consensus view. That's about half a trillion dollars. Of that, 400 billion is investment in AI. So as you said, typically two thirds of the economy is consumer spending, but at this particular moment, the growth is being driven by this investment and people being hired in this area, and so on. Do you hear of any concerns that should AI lose its starling status or should NVIDIA stock fall by X percent, and I'm not forecasting that that's gonna happen, I'm just putting it out there as a possibility, are retailers at all worried about the fallout if something like that happens?

- So let me try to take it in different pieces. My concern- If NVIDIA changes even on a minute basis, my mother gives me minute by minute updates, so just so you know, I'm gonna hear about it first. 'Cause Linda Weiss, my mother, is very well tied in on the NVIDIA stock. But, so let me think about it from a real estate perspective rather than from a retailer perspective. From a real estate perspective, I think about it with data centers, right? So you end up with lots and lots of jobs that come from the construction of these data centers and then very, very few jobs that you need to actually manage a data center, right? Someone to keep the lights on, to keep certainly the HVAC running, there's a very high energy-

- Yeah, you need something like six people per data center.

- Right.

- And that is through all three shifts, so yeah.

- Right, but they cost a billion dollars to build, right? So it's a large capital outflow, quite a bit of highly specialized engineering and construction, and then the repeated draw on energy is a significant burden. So when I think about real estate concerns, I loop it also into the utility effect. There are already certain pockets of America, I'm thinking about parts of Washington state especially. There are certain places where you would be more likely to want to locate a data center because of the availability of energy, and I think that's something that now, when I work for Walgreens and you talk about a 14,820 square foot box on any corner in America, the energy impacts of that are pretty minimal, right? But a Costco warehouse is pretty enormous, especially if you consider them going into a greenfield type of location. So energy is such a key component to the location strategy of these buildings that have very large demand on the grid. It impacts the availability of energy for other users, it impacts the cost for other users. That's certainly something that we're thinking about in the state of Florida. But just the regulated and unregulated states, how there is or is not competition for different utilities, what the impact means on the grid, how that impacts the consumer, I think is, we are at the beginning stages of that and it is only becoming more and more complicated. And we're real estate people, so don't expect us to solve those problems, right? Right, right, right.

- But I would say those are at some things that- I'm not worried about AI taking everybody's job today. I mean, I use ChatGPT extensively and I'm constantly amazed at how wrong it is, but I still use it. And I would say I use it a lot for things that are not mission critical, right?

- Well, just a quick story is, pretty much every class now I do a problem the old fashioned way and then do the same problem using AI, and AI gets it right about 70% of the time. And so I say to my students, if you want a 70, which is a C-, knock yourself out. You're not gonna do well in this course. There's this fear among faculty that students aren't gonna do homework anymore, they're not gonna do exams anymore 'cause they're going to be able to use AI. Now, maybe in five years it'll be a different story, but right now it's very hit or miss.

- Well, I like to think about it in terms of how important is the information to be right, and how important is it for you to learn the material and how to analyze it and really think critically about it in the future. And if it's, "Hey, I'm baking bread and I want a tutorial on the best way to handle that," that's not mission critical, you know? "Help me understand more about-" Ah, I'm on the board of my children's independent private school. "Help me understand more about K-12 independent private schools and some of the strategic initiatives happening at the best and brightest locations." So how do I take a lot of information, synthesize it, or how do I find something easy? But I would not try to calculate something in your class, I promise.

- Well, and the other thing is, what I've been finding is, with the appropriate prompts, AI always gets it right, but to know what the appropriate prompts are, you really have to know what you're doing in the absence of AI. So where it is great is things like, or getting better, is taking data sets from different places and trying to merge them together to create something uniform so you could do analysis. I think that, and there's some guys at Yale who are really focused on that and they reached a point where it gets at about 95% right, on getting the mergers correct. I think that's where it's gonna be very powerful and very useful, sort of the very painstaking work that coders had to do to merge data, I think that's gonna be taken over by it. It's sort of like going from a HP 12C calculator to a spreadsheet, right? Is instead of having to write out every cash flow, yeah, I know, you don't look that old, but... So that's very fascinating. I just wanna come back to one thing you said about Washington state being particularly attractive because of the way energy is there. I do know in California, we have a student in the econ department writing a dissertation on batteries in Southern California, and battery power cost is dropping precipitously. It's sort of like a Moore's Law long kind of thing. And we didn't have any rolling brownouts in California this summer, apparently because of batteries. I mean, are you hearing anything about that technology potentially overcoming the problem with more traditional methods of fueling power plants that will allow states to be on a more level playing field with each other? Or are we still a long way away from that mattering? Or is that something you don't wanna talk about?

- I will just, I would certainly say I'm not an expert in it, but my understanding is that it can augment certainly peak times and variability. The backup possibilities, like there are, data centers in particular, if you have a brownout, if you have to use backup generators and they're using other liquid fuel, it's a problem. And so if there's efficiency gained in having a consistent energy availability, then I certainly see that. In fact, there's a number of startups, I could send you one later, that are working on that. How do we find these? There's turbines, GE type turbines that are being used to generate and fuel these batteries in really interesting ways. And you think, "Well, maybe some of the problems that we've gotten into about the availability will fuel this innovation, and then we'll end up in a better space." And that tends to be what happens with innovation, and I can only hope that we'll see that here. And certainly Moore's Law has to help that, right?

- Yeah. Yeah. So let's shift to a more conventional conversation sort of about retail formats going forward. And I don't know if you remember this, but when I was first part of the product council, a guy named Brian Jones invited me as a guest, and Brian was a legendary guy. He did the Westfield on Market Street in San Francisco, which alas is no longer with us. But there was a brilliant project, he did the Victoria Gardens in Rancho Cucamonga, which people thought they were crazy to do it there, but it's been fabulously successful. But I remember at that first meeting, I gave a presentation and I was talking about how the regional shopping mall was just gonna die. And what surprised me is I was invited back despite the fact that there were retail people in that room. And of course, what we've had is now lots and lots of regional shopping centers have been torn down over the last 20 years or so. And there are exceptions. There are some very successful regional shopping malls that remain around the country, but many, many, many fewer of them. And sort of the Sears, Pennies, local middle class store anchor model of a shopping center is gone. I think well. 'Cause Sears and Pennies are gone. So the next step was sort of, well, people said necessity retail was gonna be fine. And so you have a drug store at one end, a grocery store at the other, and some inline stores, and that seemed to work. Okay, well, now we're going through this period where we see particularly drug stores are closing in reasonably large numbers. Are we past the point where the sort of standard necessity retail center is becoming obsolete and we're moving on to something else? And if so, what is that something else?

- Well, let me take a step back first and say, when we had these super regional and large malls, and we still do, of course. We have fewer of them, as you pointed out. It used to be that every community needed to have three or four of these department-store-heavy malls. And if you would've asked me, I think even just in 2018 and 2019, I would've said, "Well, sure, of course the San Francisco Bay Area and the Tampa Bay area both need three or four or five of these malls, right?" Because they serve different purposes. Some of them are new, maybe one of 'em has an outlook component, maybe demographically things have changed. And I think the COVID closures really showed us that you just don't need that many. And it really accelerated all of our, all of our, including multi-generational comfort level with buying things online, doing buy in-store pickup. So what that did is it allowed us to say, "Hey, if I'm a retailer, well, maybe I don't need 1,500 locations. Well, what would happen," and almost no retailers did this during COVID, "but what would've happened if instead of opening up all 1,500 stores that I had, I would've said, 'I'm just gonna open up the 60% of the stores that are the most profitable and let's see what happens,'" right? And I think we would've found much healthier retailers. But if I can just give one quote from Milton Cooper, the founder of Kimco, he says, "All I know for sure is eventually the retailer goes bankrupt." And you look at these old leases from Pennies, from Marshall Fields or Lord and Taylor, and you see this list of co-tenants, right? That people could... You know, you have co-tenancy rent clauses, right? And they're all referring to these names that nobody's ever heard of, right? Or contemporaries the young people these days haven't heard of. And so that just kind of comes from the natural evolution of, I guess, every business, but I think about it as a retailer. You have this product and you have this location, and it does really well and so you open up another one and you learn a little bit about what kinds of locations are better, what kinds of sizes are better, "Hey, let's make a bigger one. Let's call one a flagship. Let's test and learn and figure it out." And then eventually you get to have so many, and maybe there's other competitors and they're doing things a little bit similarly and a little bit differently, and you have a choice to make. Either you say, "I'm really good at this, I like what I do, my consumer likes what I do, and I'm not gonna change" and that works for you, or you say, "I'm not gonna change" and it doesn't work for you. And then you end up with this cycle of having to close stores, or you should always be trimming two or 3% of stores every few years, that's fine. So what I think we added into the mix, which you touched on with specifically the pharmacy operators, is convenience. So convenience means different things in different generations. It used to mean going to the mall. I can go one place, park my car once, I can get 75 different options for a black skirt and I can get a hat and my kid needs shoes. Great. Done. And then all of a sudden that was some combination of a regular old community shopping center with a Target or with a Walmart or with a large marketplace Kroger and a Walgreens or a Rite Aid or a CVS. The thing about many of those retailers, and I'll harp on the drugstore retailers in particular, is there's a real mix of items and margin and profitability. And you end up walking in to a Walgreens to get your prescription and you say, "You know what? I need a jug of milk, I need some eggs, and I needed one shampoo," and you are willing to pay more and have less choice because it's a small box and I had to get this other thing and it's convenient to just grab it. And in this post COVID, everyone's okay, shopping online world, that doesn't exist anymore. There's no reason for me to spend twice as much for a bottle of shampoo at CVS when Amazon can get it to me the same day in a couple of hours, or shipped through Target or Kroger's Ocado assisted delivery. And so now a lot of those high-margin items really have been eroded, right? 'Cause there's not as much of a reason to go and shop in that manner. And that's really hit the pharmacies in addition to the reimbursement rates really being eroded through a variety of healthcare things that I'm not smart enough to handle. But every day, they get less and less money to fulfill the same pharmacy order and it makes for a really challenging profitability scenario for those pharmacy retailers in particular. I think that may have caught most of your question.

- Yeah, yeah. So I guess then the follow up to that is, what is the next bricks and mortar play? Or is there one?

- Yeah. You know, I don't see neighborhood and community shopping centers going anywhere. I mean, when you talked about, you have a grocery retailer, you may have an inline or an on the corner pharmacy retailer, maybe that pharmacy retailer becomes a Chick-fil-A or a Panda Express or something, or gas stations aren't going anywhere yet, right? But the best owners of shopping centers really have found a way over time to evolve the offerings and the needs, right? 10 or 15 years ago it was, "Oh, Massage Envy," right? Oh, well we would never wanna have "massage" parlor in our shopping center, but now you've got these brands and franchises that make it acceptable, or Pure Barre and other kinds of fitness classes. And it used to be that a grocery didn't want something like that because a gym has this high traffic demand and people just sit there for hours on end with their parking space and they don't turn the parking spaces as much, and I would say many retailers are now really coming around to a more broad definition of competition and a more broad definition of mutually beneficial uses. And I would point to probably Publix as being a leader in that. So, out in California, you don't have Publix, but it is the sixth largest grocery retailer in America. There's 1,200 or 1,300 locations. And like many grocery retailers, they own about half of their locations. Publix decided maybe 15 years ago, and I worked with them on this, decided to start acquiring their shopping centers, right? If you have extra cash, what better to invest in than your physical footprint to have greater autonomy when the time comes to expand or enhance or any of these other things. And in doing so and in becoming a landlord of other tenants, they really got to learn a lot about, "Well, how does our store do when we are nearby a competitor in the name of Panera Bread or a Subway," right? "So we sell subs, they sell sandwiches, what does that impact?" And I would say they've learned an awful lot about gyms as well. And there are certainly other retailers that also are landlords, and I would say that that tends to be when I'm working with a retailer, is when they either on purpose or accidentally become a landlord. So Kroger has dozens of shopping centers, right? Predominantly through joint ventures. Costco is a very large landlord to other tenants, specifically in spaces adjacent to their warehouses that are potential expansion locations. And I would say for retailers that are, you see this in the department stores and it's actually become somewhat problematic, not somewhat, very problematic for redevelopments of Westfields or Simon's or other malls where you end up with the mall being owned by one entity and the different retailers owning their department stores. And it's really hindered a lot of redevelopments. But for the purposes of grocery and essential and even larger warehouses and Home Depots and Lowe's, it really provides a flexibility for those large retailers that are really driving the traffic that they need the small shop, maybe they don't need the small shop, but what they really want is the autonomy.

- So I thought you were gonna say the reason grocery stores don't want gyms nearby is when you're at the gym, you're reminded that you should eat less and so you buy less at the grocery store when you go there after you're done at the gym. But...

- If only.

- But maybe you're hungrier because you were just at the gym and so you buy more, I don't know. There's a lot to unpack there. I'm particularly interested in the sort of do you own or lease your space question, we're gonna come back to that. But I want to come back for a moment to your quote about, the only thing I know about retail is that it becomes bankrupt eventually. That actually could apply much more broadly than to retail. There is not a single company left from the original Dow Jones Industrial Average. The last one to exit was General Electric. And just think about, I mean, it's still around, but think about 20 years ago, who could have imagined that GE would no longer be in the Dow Jones Industrial Average, right? It was replaced by Salesforce. One of my favorite data points is that in 1950, the balance sheet of the Pennsylvania Railroad had more assets than any other company in America. And by 1966, it was bankers. So yeah, everything is fleeting is true of pretty much everything. Right now I think of, and I love Apple products, I'm wondering what the thing that's going to undo Apple is gonna be in 20 years or 50 years or 100 years or something like that. But I think of specific kinds of places, you were talking about gyms, you were talking about Massage Envy. People are betting a lot on, or installing a lot of restaurants now in shopping centers. And restaurants have always, I mean, I'm grateful for restaurants, I love restaurants. The restaurant business is, it's one of those, if you look at the consumer, you look at OpenTable's metrics of restaurant bookings, they're still very solid. They're about where they were a year ago, maybe a little higher, even depends on the city you're in. But restaurants are a terrible business, right? You have very expensive tenant improvements and they go outta business all the time. So you have to put a lot of, and they don't have enough capital to put in the money up front themselves. So you're doing some sort of loan arrangement with them or something like that. Have retailers figured out or owners of retail space, owners of retail real estate, figured out how to make restaurants work better over what I'll just call the last 20 years? Or does this continue to be a problem for them as a source of income? And I think of something Art Coppola who ran Meistrich for years once said, he said, "My best restaurant is worse than my worst real estate." And he said this 20, 25 years ago. He made less money on his best restaurant than anything else he could have done. But has the world changed in that regard?

- Oh, I think it's the same. I mean, I'd love to say that they figured it out, but I think what's hard is that- Well, first let's take apart shopping centers in America versus the best shopping centers in America. So there may be 60,000 shopping centers, right? But the best owners, institutional owners, publicly traded REITs and other institutions, pension funds, whatnot, they own a very, very small subset of that 60,000 pieces of real estate. And for them, the calculus of investing in a restaurant is very different than it is for the 95% of the owners that are not institutional grade owners. So a restaurant could be a quick serve Panda Express kind of setup, it could be a Panera, it could be a Chipotle, or it could be a chef-driven, farm-to-table anything. And what we find is the mix is really important, the mix of tenants, for the outcome that you want for that shopping center. So, would I make more money as a landlord if I didn't have restaurants constantly coming in and out and I just had jewelry stores that paid me three times what the chiropractor pays me? Sure. But you can't just have a shopping center full of jewelry stores because nobody's gonna go there. So if you have the, if you want your place, if you're placemaking and you want that to be a destination for live, work, play, and the place to see and be seen, and a place to dwell over multiple times during the month, you want to drive traffic coming back and forth, then you invest in those kinds of restaurants. And you hope that in driving that restaurant and investing, and then you really are investing in that restaurant either through subsidies, through free rent, through the idea that only one in 10 is gonna last, but you hope that that ends up coming back to you through increased foot traffic, increased dwell time, increased frequency of visits, and higher ticket sales in the other locations.

- So Panda Express is now what Nordstrom used to be.

- I suppose, I suppose.

- People go because there's a Panda Express. Panda Express is good, right?

- I mean, I've got nothing wrong with Panda Express. And I think broadly, more broadly than that even, is the way we eat now is different than the way we ate 20 years ago. And if I had the chart, I'd put it up on the screen right now. But when you think of share of wallet, share of stomach, the amount that we spend on food that we purchase at a grocery store that is ingredients that we bring home and put together to make a meal and feed, right? The proportion of food eaten inside the home versus outside the home has been changing really dramatically over the last 20 years. We used to consume significantly more in the home, and that switched just before COVID. We started eating more outside the home. And then it switched back, right? 'Cause there was no eating outside the home for a little while. And now it's kind of come back in the way of like, people missed going out, they missed being in these communal areas. And now, gosh, it's five years now, I can't believe we're still talking about it, but that has been part of the acceleration that I think the OpenTable data shows, is we have less time, we have more demands, we're able to get a large variety of food that seems good enough and is inexpensive enough that we're willing to eat it outside and take the burden off of ourselves from cooking it at home.

- So how about within the grocery store in terms of buying those ingredients and buying prepared meals? And I remember visiting a Whole Foods in Houston in the Galleria area, this is probably 10 years ago, so a while now, and the manager of the store saying that 65% of their sales in that particular location were prepared meals as opposed to people buying their own stuff. I mean, is that a trend? Is the share of grocery spending going to stuff that you just take home and warm it up increasing, or is that fairly stable?

- So it's really impacted by the service offerings of that particular retailer. So if you put it into buckets of, there's the main line grocer, like a Stop & Shop or a Safeway or a Kroger, right? Or Ralph's where you are.

- Ralph's is Kroger, yeah.

- Yeah, yeah, yeah. And then there's the Whole Foods, or Fresh Market that has more prepared. And then you end up with the Sprouts and the Trader Joe's that are a little bit different in terms of, "We've got some prepared, but it's a lot of like ingredients and stuff you can't find other places." And I would say there is generalizations for each retailer in each category. And then what I think is just so interesting about the grocery retail industry is there's so much variation from location to location. So I think the hardest job in this industry is being a store manager for a grocery store or a membership warehouse, or a Lowe's or Home Depot. The warehouse manager has quite a bit, or the store manager, has quite a bit of autonomy in terms of product placement, how many of this kind of sandwich versus that kind of sandwich versus this wrap, and they're really trying to cater to their micro community. I mean, you look at the international aisle at a given grocery retailer, right? It really should be focused on that community. You see that especially in some of the West coast locations in markets that are heavily dominated by the Asian community, right? So not just the Asian community, but is it a South Korean community? Is it a Chinese community? Is it a Taiwanese community, right? And it's why think about 99 Ranch Market or Sedano's, which is focused on the Hispanic community, it's not enough to just say, "This is what the Hispanic community wants, right?" Because the Cuban consumer wants something different than the Argentinian consumer wants something different than the Mexican consumer. And really great managers make a big difference there. And I would also say a landlord out there does not have profitability information for stores, period, end of story. We love to think that we can use certain data points as a proxy for profitability. So if I'm a landlord, I might say, "Well, I don't know how profitable that story is," but you know what? Every once in a while I get sales numbers and I'm gonna use sales as a proxy for profitability. And then let's just say I don't get as much sales as I'd like, or maybe I don't get sales at all. And so what can I use as a proxy for sales? Foot traffic. So now we say, "Okay, let's go look at some cell phone data," which I'd say Placer AI is probably the largest provider of this. They'll say, "Well, we can tell you if it's a good store because we can tell you how many visits that store gets." And I will tell you, putting my retailer hat on, it is basically useless. The number of people that walk into that store does not equate to the sales, and the sales do not equate to profitability. But if you wanted to know one thing that does relate to profitability, it is the tenure of the store manager. You wanna know how well that's done-

- That's really interesting.

- Find out how long that manager has been there. It is more likely that their team has been with them longer, that there is less turnover, that they are spending less on hiring and training and cycling through those employees, and the customer has a better experience, comes back, buys more.

- You're reminding me of, a reason I like Costco is some years ago some Wall Street analyst wrote a negative report on Costco's, calling it a sell, and he said, "The problem is they pay their people too much." And of course, because they paid more than other retailers, they keep their people, they don't have turnover. And so again, they are able to pivot and they're able to be retrained and they provide, again. I mean, even though Costco is, and full disclosure, I own some shares of Costco, but it won't break my retirement. They're kind of big ugly stores, but they're still a really good customer experience, right? And as long as those lines are at the checkout, they move really quickly. And so your point about having good workers in the store mattering is, I think, a really good one. I find that the length of tenure being an indicator of profitability just fascinating. I'm just curious, do managers then get headhunted after they've been at a store for 10 years, 15 years? Because a recruiter is gonna say, "Oh, they must be really good if they've been in that position for that period of time."

- Well, I wanna first caveat that I'm not speaking about a specific retailer. I would just say-

- No, I know you weren't. Yeah, yeah, yeah, yeah, yeah.

- Over that case of many retailers is that employee cost for a given store is a really large component in the overall cost, right? Rent is 1 or 2%. Rent is not an overwhelmingly high cost. So for landlords that you say, "Well, I gave him this rent deal," you cannot cut rent to profitability, period, end of story. If you're having that conversation, it's gone. But having long tenured employees does certainly make a difference. And you'll see that also in the discipline of expansions. And I would say, let's look at, and this actually goes back to the own versus lease conversation. You have retailers that have a really strong business, they provide a core needed function, they do it well, they have consistency, they are good stewards of the community, they are good employers, they're good for their customers, all of that. Those companies tend to have excess free cash flow. What might you wanna do with excess free cash flow? Ah, have innovation, maybe you're gonna explore some AI, maybe you're gonna have other efficiencies in your, I don't know, anything, right? Supply chain. But part of what you can do with that access free cash flow is to invest in your real estate and to either acquire existing locations, go out and do build to suit developments, or do new developments for expansions. It also creates a discipline where maybe you're not going out and buying 200 stores, like, acquiring another company, you're growing at the pace that your managers can grow. I would say it's a discipline that, I'll just take it back to Publix, it's a discipline that Publix has employed. They open up a certain number of stores only as quickly as they can train new store managers. You're not gonna see Publix go and acquire Paris Teeter, right? It's not gonna happen because they want their people to be grown in a way that continues with their ethos and their culture. And I think it makes a difference in the outcome. Now, let's take it the opposite way. If you have a business that is struggling, doesn't have product market fit anymore, it used to be great, maybe we missed an opportunity to adjust our business, maybe we don't have as much free cash flow as we'd like. We can't invest in RND. Where might we want to harvest money from? Our real estate portfolio, right? So this is where it kind of comes back to if things are really good, that's a story about owning our real estate because all else being equal, and all these retailers have a different cost of capital, but all else being equal, if you think you're going to be in that location for, again, the number is different for every retailer, but let's just say in general 20 years. If this is I think a 25 or a 30 year location, why would I pay a landlord rent for that location? I would be much better off owning that location. But if it's a, "Hey, we're not sure if this is a four-store market or a three-store market, or it's a little bit greenfield, or the market is changing, the demographics are a little bit weak, we're not quite sure," sure, lease it, you know? And that ideally you have enough cash on hand to be able to make those kinds of capital allocation decisions because they really do make a difference years and years and years later when your rental burden is less or it's more.

- So, we covered a lot on rent versus own, but the two things that people talk about is why have your capital tied up in real estate that maybe makes a 8% return when you do the math of the rent avoided, et cetera, et cetera, when you could be, again, innovating and putting your money in things that make, even on a risk adjusted basis, a greater return, number one. Number two is tax efficiency. Now, maybe when you say own, you're talking about sale leaseback deals. But rent is fully deductible. Debt service, only your interest is deductible. So there's usually a tax arbitrage between owning and renting. So when you say own, are you talking about on a sale leaseback arrangement to get tax efficiency, or not? And what about the argument that, you're not in the real estate business, you're in the retail business and your return on your retail investment is going to be greater than the return on a real estate investment?

- So when I say own, I mean I'm gonna go out and acquire 12 acres of land and build a Kroger. That's what I say, right? And maybe you have a developer that's gonna be your partner in that and help you do it, and maybe you don't employ the individual contractors, maybe you do, right? And then when I'm saying harvest, that's when I mean doing sale leasebacks, which I would say is largely operated by Walgreens, right? So Walgreens, this is no secret, 2021, '22, '23, executed over $3 billion of sale leaseback, we were part of that activity, to utilize that cash to then invest in the business, which they had a strategic initiative to invest in healthcare businesses, right? We all know how that went. However, the strategy was, "We're going to take-" And they owned 10% of their real estate at the time? Took it from 10% to 3%, right? 4%. But it is 10,000 locations, right? So only owning 10% is still a lot of locations.

- Yep, yep. So last topic, we can't finish this without talking about online retail, and we refer to it a little bit when we were talking about the convenience benefit of buying milk at- Well, maybe you still buy milk at Walgreens, but buying a shampoo at Walgreens, right? As opposed to you just order it online and it comes to you. Have we reached peak online penetration, or does it still level ways to go? And if it still has a way to go, what does that mean? And one of the really fascinating things you talked about some years ago was how stores were converting their space usage within the store and it was becoming much more of a distribution center as opposed to a showroom, let's call it. I mean, what do you see the evolution of that looking like in the years to come?

- Wow, we really did not see micro fulfillment happen in a way that was, I would say, technology-driven, okay? So the first question is, have we reached peak online? I think we still have a ways to go in terms of all retail together, and then let's separate it between ambient and temperature controlled. If I'm buying a sweater versus I'm buying milk and eggs, right? So I do think that we are more willing to buy things online that are ambient temperature, not temperature controlled. Because there is some... People have been more willing than I expected to allow Bob from Instacart to pick up a steak, put it in the back of their Civic, let it sit there for God-knows-how-long, and then put it on your front porch. I'm surprised that there hasn't been more concern about, I don't know, the temperature change and all those things.

- Salmonella.

- All of it, yeah, salmonella, I don't know. But it turns out the benefit to, "I didn't have to go and get it" far outweighs that Bob got it- Some ketchup. Just do it, right? And that used to be such a luxury to say, "Oh, my nanny can watch the kids while I go," right? And now it's really democratized the ability to have just another pair of hands, you know? I just need someone to get a birthday present for this 8-year-old at Target. "Can you just go bring me the Legos," right? That used to really be a luxury. And at that stage of life. Now, the people that have school aged kids are also younger, are also comfortable with the internet. So I don't think we're ever gonna be able to parse that, or certainly it'll take some time. On the flip side, I also was really surprised at how many folks that were older became a lot more comfortable buying things online, right? People that would not have put their credit card in online ever, all of a sudden several years ago-

- My dad is 94 and he buys things online, so.

- Who would've thought, right? But I think some of it has to do with the other constraints on your time. And also, it happens that when you have all those constraints on your time, you're also in your higher spending years. So there was this great article, oh, it must have been 20 years ago now, about how Target knows when you're pregnant before you do, right? And there was like the receipts that used to get printed out at Target with all the coupons and stuff, and a teenager is there with their mother and it prints out a receipt that has some prenatal vitamins or whatever. And Target had kind of figured out with the algorithm that they thought that that person was pregnant. Because if they can get you then, right? When you're 28 or you're 32 and you haven't had your first kid, but you're about to, then you're about to be spending on diapers and cribs and onesies and you're moving into this cycle that for the next 20 years is going to be your highest spending cycle. So what you're talking about is almost about the customer acquisition journey and how can we be as valuable and create as much value from that customer, and the truth is, for retailers, the customer that shops omnichannel both in store and online, is far more valuable than the customer that only online or the customer that only shops in the store. So they want to create an opportunity to keep you engaged and interested in buying whatever that journey looks like. And so it's not as much about, "I've got robots that can pick things off of shelves and make a bundle" as much as, "Hey, today Rachel's got a lot of stuff going on. She placed the order online, we've got a bunch of cold cases at the front of the grocery store, she's gonna pull up, we're gonna load it into the back. But tomorrow she's gonna browse and get just the right avocado." So I would say, and some retailers are very, very diligent about how they attribute the sales, the online sales for a given region versus a in-store sale, and some of them are less diligent. It's very difficult to figure out the, I guess, the place where the influence started. West Elm and Williams Sonoma, they do such a good job of this is, they've got the maple version of the stool in the store. And they'll show you a sample of what the white one looks like and what the walnut one looks like, and then you go and you order it online. So is that online sale attributed to the store? Is it not? Is it a showroom? Can you walk? Well, if you want the maple one, you can walk out with it. And I would say it still goes to the ecosystem of that buyer is part of that network. When they went to go see the stool, maybe they also saw some pillows and they walked out with those. And keeping the customer engaged and wanting to come back in an omnichannel way is the most valuable outcome for that retailer.

- So I'm gonna finish with sort of a philosophical question, and it comes back to what you were saying about restaurants, is there's a writer I really liked named Witold Rybczynski, he was a professor at Penn for many years, and again, he was both in the architecture faculty and the real estate faculty. So guy who gets it on both sides. And he wrote a wonderful book called "City Life." And this is a book that came out probably 40 years ago, something like that. And it was about how the Suburban shopping mall had taken the place of the town square. It is where people gathered, it's where teenagers hung out, it's where people saw their neighbors. And something that people are worried about, and I think correctly so, is how much more atomistic we're becoming as people. We are just not hanging out with other people as much as we used to. And retail was a really- The bookstore used to be where I would run into my neighbors in Madison, Wisconsin for years. Do you see a possibility of just that desire for people to have a place to come together changing the nature of retail, maybe moving it a little back to where it was some years ago? Or should we just think about, retail is not going to be the place that creates social interaction in the future?

- It's a great question. I mean, I think it's really, we have this pendulum, right? That goes back and forth. And we've withdrawn to a certain extent from that kind of communal gathering nature. And I think you really do see, especially with maybe Gen Z, Gen Alpha, younger people today, really wondering what they gave up when they got those phones, right? They got these phones and it just, it sucked them into this world. And it's really hard if you are a teenager or you're in your young twenties today, you've got trillion dollar companies, YouTube and Facebook and Apple that are really invested in you staying on that device, and it's pulled them away. And Jonathan Heights has the Anxious Generation, but the theory of we've replaced this play-based society with a screen-based society, and specifically how it's impacted childhood. And I do see green shoots of people trying to quietly quit their social media or their phones and saying, "What have I missed by being on that device, and what can I get?" I mean, you mentioned bookstores. I mean, there's been, who would've thought, a resurgence in independent bookstores as being one of those places to be. And just a greater appreciation. I mean, there's a lot of kids these days that never read a book. I don't know how that's possible! But there are others that are saying, "Look at all of this knowledge that exists out there, and we miss and we want these social interactions." So will the shopping center, will the mall create that place? Gosh, I don't have a good answer for that, but I certainly believe that we have moved too far to one end, too far into the ecosystem or the eco chamber of believing only what we follow, we follow the people that we like, that share our values. And it's made it much more difficult for us to have broad conversations with people that might disagree, right? Here we go, West Coast, East Coast, right? We have different universities, different political backgrounds. And I can talk all day long about all the different things in a nice civil way. I only hope that the young people of today will also get that. And I hope that they will continue to go out in the real world. And if retailers and landlords can be the place for that to happen and maybe make a couple bucks here and there, then I think we did our job

- Well, it occurs to me, Zoom does allow us to maintain our friendship from 3,000 miles apart, so it's a wonderful thing, it can be a wonderful thing, right?

- Absolutely.

- But I still like to see you in person every now and then, Rachel.

- [Rachel] Likewise. Likewise.

- So anyway, Rachel Wein, thank you so much for spending an hour with us today. You always have such great insights and are able to present them in such a clear and entertaining way. I'm sure our audience will enjoy what you have to say very much.