It's a time of transition and adaptation for the industry.
September 2, 2021
The pandemic has taught us an awful lot about the retail industry. We’ve learned which companies can adapt to a challenging operating environment and we’ve seen how incredibly valuable investing in supply chain and logistics can be.
In addition, we’ve learned that brick-and-mortar retail still plays an incredibly important role despite the growth of digital sales. In fact, the pandemic has proven that, at least for now, people like to shop in stores but they also want the full range of omnichannel options. Consumers will shop in a physical store when they can, but they also want curbside pickup, delivery, buy online, pickup in-store, and in-store returns of online sales.
The pandemic has certainly accelerated trends including the rich getting richer. Companies that have not invested in adapting to market demands have struggled while those who have invested heavily saw those expenditures pay off as they were ready to handle the unexpected when it hit very hard last year.
Dan Kline slides in the guest chair and Simon Erickson took over hosting on the August 30 edition of “7investing Now” to take a deep dive into the state of retail.
A full transcript follows the video.
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Dan Kline: Let’s get back to the program. And as we do that, we would love your questions and comments. But as I did last week with Anirban, I am going to turn around and hand at the hosting duties over to Simon occasionally we cover something or it’s in my field. And it’s weird to ask myself questions. So we’re gonna hand this over for Simon to be the host for a little while here.
Simon Erickson 33:23: 180 degrees shift here, Dan, but you know, we talked about Amazon and Affirm in the first part of the program. I talked a little bit about what kind of what that’s going to mean company by company. But bringing us to the higher level for me, Dan, I mean, what is the buy now pay later and the deals like this are what does this kind of tell us about what’s going on in retail today?
Dan Kline 33:39: So it shows us that most retailers be they online, be they in stores, not all retailers because there are going to be outliers, like say a Five Below or a Marshall’s where they can have just certain experiences. But almost all major retailers are going to have to give consumers exactly what they want, how they want it when they want it. We saw this first with omnichannel. What is omnichannel? Omnichannel is this mix of buy online pay in store, buy it in the store, have it delivered to home, have it delivered to your home but drive it over in your car to return it sort of whatever you want.
So we always had that sort of trite saying the customer is always right. That’s actually more true now that I worked retail that’s never that’s not actually true. Like the customer is often wrong and usually you have handed them something that details what they’re getting wrong when it’s like we had policies on certain things at the toy store like no returns directly through us on model car and RC cars not we didn’t want to take them we just couldn’t you had to go through the manufacturer. We handed that to you on a piece of paper so we didn’t have to deal with it later. But now wherever a retailer can bend over and help the customer and really do what they want, they’re trying to do that. We’ve seen Walmart, Amazon, Target, Best Buy, Dick’s people like that really be leaders in this. So I think that’s really been the Number one lesson, we’ve learned that you constantly have to say, what does my customer want? How do I give it to them? That’s exactly what Amazon is doing here with Affirm.
Simon Erickson 35:10: So okay, Dan. So that’s a great point, you pointed out to some leaders that, you know, have done well, with this retail has changed a lot in the last decade. Do you think that there’s anything that we can consistently see as a towel or a mark of a retailer who set to succeed further in the future?
Dan Kline 35:25: Yeah, absolutely. And I think Amazon led the way with this and, and it took Walmart and Target a while to catch up, and certainly other players, but you have to constantly be thinking about what’s next. It’s not really about what’s now. So you know, Amazon is working on probably five things we’ve never thought of. When they announced, same-day delivery, they didn’t announce that we’re gonna have same-day delivery in nine months. They’re like, hey, in select areas, we have same-day delivery. We see my Walmart pushing the boundaries with go local. It’s a new third-party delivery service, which Anirban and I talked about, on a show next week, our last week. We saw Dick’s Sporting Goods, which is a really surprise winner. They’re trying out like a whole bunch of different formats and owned and operated brands. And Target has been really, really innovative.
So you know, this applies in restaurants as well. You know, there’s a few that can sit back and just kind of wait, but for the most part, you know, you have to be at the cutting edge. So, of course, there’s exceptions. If you’re Costco and your membership-driven, you can wait until you see if customers really want it. And if it’s, you know, become something they really use at Amazon or Walmart or Target, and then go Okay, we’ll offer some limited version of this to meet but that’s kind of the exception. You are probably not going to go to your local grocery chain, if they don’t offer curbside pickup or home delivery, because you want those things. So this has become a much more customer-centric business.
And look, it was easy. In the old days, when everyone had to come to you to have a life we smile and we’re nice. Like that’s kind of how Publix the grocery chain here works. But hitting all these other like wait, you want like delivery via a rowboat at four in the morning, like, Alright, I guess like we’ll hire a rowboat guy. I’m teasing a little bit. But that’s sort of what’s draw, you know, what, what I look for. And if it’s not that I look for what makes this business model unique. You can have unique business models, I throw it Five Below. A Five Below is not going to spend a lot of money on like, you know, delivery, because the whole purpose is driving you to the store. But they will keep an eye on it and make sure like, okay, like we have to have some sort of website and maybe we’ll you know, we’ll start to offer our best of or grab bag who knows what it is. So good companies just like good investors are constantly challenging themselves.
Simon Erickson 37:39: So it’s a good point that consumers are becoming a little more demanding or what they want out of retailers. We you mentioned a couple of them. They’re the two-day shipping Of course, it’s kind of the table stakes now, for anybody doing business online that Amazon kind of pioneered go local. Like you mentioned, that was another one we just talked about buy now pay later. What are some of the new trends that you’re seeing out there, Dan? What is it that people are asking for right now who’s taking advantage of that?
Dan Kline 38:03: So I think store within a store. Now Best Buy (NYSE: BBY) was kind of quietly the secret leader of this. That part of their turnaround not all of it was going to like Verizon and Comcast and nationally, Microsoft and Apple and saying, Hey, would you put a nice little store in our area where if I go to Best Buy and I just want to look at Apple, I don’t have to like sift through all the laptops. I can just go right to the Apple or right to the Microsoft section. And that makes these kind of like the new department stores. Where are we seeing this? Well Target with Disney. I’ve been in a Target (NYSE: TGT) that has a Disney Store and it’s a really, really good experience. Target with Ulta beauty now those two brands are really complementary, but we’re seeing it as as sort of a prop up for some less successful retail brands.
Kohl’s (NYSE: KSS) partnered with Sephora. Well, if you’re a Sephora customer, you might then go to Kohl’s and maybe after your makeup done, you buy a new shirt or whatever it is. We’re seeing even struggling rate retailers, Nordstrom (NYSE: JWN) partnered with Total. Well what is total? Total is a really, really expensive exercise system. It’s $3500 something like that, you’re probably not going to buy a total without looking at it.
You’re also seeing brands like Untuckit’, Warby Parker, Third Love, Casper Mattress – we’re in the really early days of this just kind of being everywhere. And as a consumer, you know, if I go to Target, I am much more likely to go because like wait, there’s a Starbucks in my Target. Like I in fact, I have to go to Target later today. And I’m excited because it means I can get a green tea and I don’t have to make one myself. So I think you’re going to see an expansion of this because if I’m a digital-first brand, let’s think Warby Parker there’s a there’s a Warby Parker downtown in Alexandria, Virginia that I used to walk by all the time. But if that were be Parker was in my Target, I would probably be a Warby Parker customer, and it would certainly be a driver to get me to Target. Targets done this with pop-up shops as well. Walmart’s been really good at like hey, it’s tax season, there’s an H&R Block and your Walmart well that’s really good for everyone involved.
And right now not in every case, but in the old the mall made sense for these locations. And before the pandemic, you were seeing a sort of explosion of digital native retailers popping up in malls. You’re not going to see that disappear. Your A list malls, your top tier Simon and Brookfield malls are still going to have standalone Peloton and Tesla stores and, and Untuckit’s and Third Loves and Casper. But in a lot of cases, it’s going to be a much more cost effective deal for that company to go into JCPenney or Macy’s or whatever it is. And that’s kind of good for everybody. I mean, the the Amazon returned counter in Kohl’s is an example of this. And it’s all about efficiency.
Like if I have to return an Amazon package, wouldn’t it be nice to also buy those socks I’ve been putting off buying. You know, some people like to shop some people don’t. But I know that like if you put a Peloton store in a Macy’s, I might be like, oh go play with a Peloton for half an hour while my wife looks for outfit. Sorry to be stereotypical there because I spent way more time than my wife does. If I’m in a Macy’s looking for clothes. So it’s one of those things where, you know, absolutely I think this is going to grow. And I think we’ve learned that brick and mortar is really, really important. But the expense of opening your own store, staffing it doing all those pieces might not be worth it.
So you might see a future for say, a JC Penney as almost like a mini mall within the mall because you know, Simon Properties owns Brooks Brothers and some other brands, I’m forgetting which ones. Lucky Jeans would be another one that they could in theory, if that store is not in that mall, they could say, hey, let’s have a Brooks Brothers section in our JC Penney. Is that an overlapping customer? Not exactly but well I buy my suit and shirt like they sell belts, they sell socks, they sell, you know, generic dress shirts that maybe are way less expensive than a Brooks Brothers dress shirt. So I think there’s a lot of like, give the customers as much as you possibly can. And there’s a point you push that too far where you dilute your own brand. You know, McDonald’s salads turned out to not be necessary. But for the most part, I think this is an absolutely exciting, growing trend. And there’s a lot of players here.
Simon Erickson 42:08: So this is interesting, Dan, so rather than Simon Property Group who owns the malls and doesn’t really care who fills in the spots, because it doesn’t have any vacancies, it’s just charging people for the space there. You’re saying that large retailers like Target can set up shops within the shop and be much more selective about who they’re partnering with and who they’re offering because it might be complementary to what they’re selling to.
Dan Kline 42:28: Yeah, absolutely. So like, you know, you talk about Target and you look at the Disney Store. Well the one I’ve been in is near my condo that’s near Disney. So obviously a lot of the people there are in a Disney mindset. So I would expect that most Targets in Florida will have this partnership. Ulta beauty and Target are both sort of discount brands with a high level of cache, like, like someone who’s a little snooty, might shop at Target, but probably won’t shop at Walmart, and they would probably shop at Ulta beauty but maybe not a Target beauty section. So this really gives more.
And this isn’t a store within a store. But one of the Targets near me, the one that has the Disney Store, has a really nice liquor store with local beer and it really feels like it’s like a you know, a well-thought-out local liquor store. Now that makes sense. Because I’m in Target already maybe you know, I’m in a tourist area, so I’m probably buying alcohol or, you know. So you’re gonna see a lot more of that and generic things like Target optical, those might exist for a price point. But I think it’s much more likely that you see like a Warby Parker, or even like a standard optical, you know, something that’s similar to Target, but has a more, you know, a bigger footprint has more brand recognition, you know, you’re googling it.
Nobody’s Googling cheap glasses. They’re googling, you know, standard optical or they’re googling Warby Parker and Warby Parker has worked really hard to like mail you five frames, but that’s a tricky method of doing it compared to walking into a store, you know, and trying on 40 pairs of frames, you know, in front of my wife or son who will tell me which ones look good at me, hopefully not playing a prank on me.
Simon Erickson 44:03: Yours look nice, by the way.
Dan Kline 44:07: Yeah, it’s funny, Warby Parker’s are all rounded. And I’ve never been able, I love the durability aspect that you can’t break them. But none of their styles are flattering on me. So yeah, I think this is going to be a growing trend. It is important to point out that JT shared, we are not doing that segment. We’re gonna push that we pushed it like three times. But the segment on what’s changed since the pandemic, we will probably do that on Friday show with as much of the team as possible. Simon, back to you here.
Simon Erickson 44:32: Yeah. And then I’m going a bit off-script here. But I do know that you talked about this on market focus a couple of weeks ago is speaking of Simon Property Group. What’s happening with all of these malls that have been built all around the country? I mean, are they distribution centers now in the future or are they going to still keep the cornerstone you know, Targets and there’s what happens to all the malls across.
Dan Kline 44:51: So there’s multiple tiers of mall. You’re A list Simon mall, the nice mall in your community is going to adapt. You might see it might lose Dillards are a JC Penney or whatever it is that might become a distribution center or a skating rink or a gym or even a grocery store or a hotel or a co-work. But those top-tier malls still draw audience. It’s important to remember that the highest mall traffic at a list malls has happened during the pandemic, like it’s happened actually pretty recently, we’ve hit all-time highs. So people still go to the mall. The question is, what are they doing at the mall and how do we maximize that experience? So are we going to see things like of community event spaces and, and charity drives and theater performances? And, and so yeah, you’re gonna see a lot more that are destination eating experiences. Like we are still figuring out what that mix looks like.
We’re okay, like your JC Penney closes is half of it going to be condos and half of its going to be like a community pool? Like that’s actually a model that was proposed for one of our malls here. Now, your second and third tier malls are going to be disasters. I often joke like the mall you go to that has like a local restaurant. That’s not a famous local restaurant in the food court. That mall is in trouble. If 50% of the stores in your mall are kiosks that sell cell phone supplies, that mall is in trouble. Those are going to become Amazon distribution centers, they’re going to become Shopify warehouses. I’ll surface somewhere on Twitter, we covered this in a show.
So your really good mall and your outdoor top-tier outlet malls are absolutely thriving. The one near us, it’s about a half-mile from my house, which is a Simon mall. If a store closes, it’s almost always because the corporate chain is closed. And the what’s coming next sign goes up almost instantly. It probably has like a 97% occupancy rate. Why is that? It’s an outdoor mall. And in the current climate, pretty much everyone feels comfortable being outdoors. Obviously, it’s very, very hot here. My son and I went yesterday, we did not stay very long, because it was unbelievably uncomfortable. But there are mall models that work, but certainly at the edges and some of the strip malls are going to consolidate. You know, some of these malls that lost their toys r us to their Circuit City, there can only be so many pop up Halloween stores. So some of those are going to have to be you know, bulldozed. But we do have a bit of a housing shortage. So you know, certainly here in West Palm Beach, you are seeing like our old Macy’s is becoming a condo building. Some of our retail shopping just became a Class A office building, I don’t think is quite done yet. And it’s 100% rented. So we are in a shift, we do have too many stores. But remember, you do have like Amazon launching 1000s of grocery stores like there is some demand, you do have expanding retail businesses. So you know, retail is not a simple picture the way people always want to always want to paint it.
Simon Erickson 47:44: It is definitely dynamic. I’ve got two more questions for you Dan. I’m enjoying By the way, the switch of roles here. It’s kind of fun being the host of questions that have changed.
Dan Kline 47:52: So have I because it’s so often I want to say more than I have time to say so I’m glad. Thank you for letting me do this a little bit.
Simon Erickson 47:58: Absolutely. And Scott, we’re gonna get to your question too. We want to make sure we get some time to address the questions that you’re asking in the chat as well. But Dan, two more for you. My first one is holiday quarter is always important for retailers. COVID was a weird week, a year, a weird year last year, what are you expecting for the holiday quarter and 2021.
Dan Kline 48:14: So overall spending, I expect to be up. The National Retail Federation last I looked agreed with me. But that being said, what we actually buy may very heavily depend on availability. And it may depend on what we bought. So maybe I would have gotten my son a new laptop for Christmas or Hanukkah, wherever, whatever we’re calling the holiday. We’re a little bit of both in our house. But I bought him a new laptop at the beginning of the pandemic. My wife also got a new laptop. I upgraded. So maybe I’ll get my son concert tickets or a trip next summer or maybe it’s clothing. Some things like appliances are in relatively short supply. And a lot of people upgraded their refrigerator freezer to store more whatever during the pandemic. Televisions, which are traditionally a giant driver during the Black Friday season may cost a lot more because they are dependent on chips.
So I’ve talked about that last year, I bought a you know sub $300 65 inch television. I think those deals are going to be rare or nonexistent. But I think you might see really good pricing on experiences. I’ve talked about travel a lot. But if you’d like to book a cruise for next summer, it’s generally really inexpensive right now after it being expensive for a while because the industry just wants to fill up those slots and they’re they’re not willing to sort of hold out and say Geez, let’s charge more. That might not be true at Disney because Disney has a 50th anniversary. So there’s a big driver. They’re sort of like no matter what the market conditions are.
So I think you’re gonna see people buy stuff, but they may buy more necessities maybe in the reopening and going back to work, a lot of people have to replenish their wardrobes. We didn’t all stay tip-top shape during the pandemic, so maybe you need to buy some, you know, slightly bigger clothes or slightly smaller clothes if you were someone who used it. But so I’m confident in spending, I think there’s we’re in a really good place with employment. I know if you’re unemployed, it doesn’t feel like that. But overall, nationally, there are more job openings. And there are people looking for jobs.
We’ve seen wages rise at at least the lowest level of the economy, not necessarily at other levels of the economy. So there’s a lot of things. But we are looping a very strange year, we might see a lot of families where their big Christmas gift is a car because they haven’t been able to find the car. And if we hopefully have some pickup of chip production, it’s not going to be low end, you know, Kia Sportage is it’s going to be Ford F 150s, and high margin, more expensive cars, but at some point, you cannot put off buying a car. So Christmas, you know, if you need to get somewhere in your car doesn’t work. At some point. It’s not worth fixing at almost any cost. So I’m very excited for the holiday season. But I think making any specific predictions like you know, I wrote something about Peloton this week and like, I sort of expect it to be a good holiday season for Peloton. But if it wasn’t, I wouldn’t be shocked either. So, you know, there’s a lot more wildcards than there normally are here.
Simon Erickson 51:18: And a great point too, about the anticipation of prices going up for anything that’s got semiconductor chips in it. We just saw a Taiwan Semiconductor the world’s largest provider of semiconductors across the globe, increasing prices by 10 to 20%, you can almost certainly guarantee that there’s going to manifest as price increases for consumer electronic devices. One last question for you, Dan, is I know that you know a lot about retail, what’s a couple things that as investors we should be keeping an eye on right now.
Dan Kline 51:43: So stop watching earning report stories, because they’re generally not getting it right. The second line of multiple retailers reports use the term two years stack to talk about their results. What does that mean? It means that if you’re a grocery store, or Costco or Walmart or Target, you got an exceptional amount of sales because of the pandemic. Those weren’t necessarily high-margin sales, but they’re not duplicatable. People are eating out more, they can go farther to grocery stores. So what those companies are saying is, hey, yeah, we might be down year over year, but look how much up we are over two years ago. And that’s like judging it as a marathon not as just looking at a short piece of the race.
I talked about this on Friday show that if I run really hard in the marathon, and then crawl over the finish line, but still win, I won. And I know that’s an entirely apt analogy, because the retailer’s never get to keep stop running. But it doesn’t matter if say Netflix to pick a non-retail example, says we’re going to add 100 million subscribers this year, and that’s 92 million in the first quarter and then beats it gets to 110 million, but it looks wonky. Because a lot of the numbers were front-loaded. That’s what you need to do.
When you look at retail right now you need to dial out and go Okay, are these companies achieving their five-year plan or they’re at least their you know, their three year goals? Not what did they do quarter over quarter. I’ve talked a lot about this. You know, in my family business, if I made a big retail sale, we put that with an asterisk because it wasn’t necessarily duplicatable year, over a year. Simon, I know we have some questions on here. We wanted to get to as we run out of time.
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