From Where I Sit: Episode 3 With Sucharita Kodali Transcript

Tom McGee: 

Welcome to From Where I Sit, I’m your host, Tom McGee, President and CEO of ICSC, the preeminent membership organization serving the commercial real estate and retail industries. Each episode, I’ll be joined by top experts to explore the trends impacting communities and commerce and the spaces where people shop, dine, work, play and gather. 

I'm excited to introduce Forrester Research Vice President and Principal Analyst, Sucharita Kodali, to the latest episode of From Where I Sit. Sucharita is a retail expert focusing on e-commerce, omnichannel and the role of technology and online commerce, among other sectors. Sucharita, welcome to the show.  

Sucharita Kodali: 

Thanks for having me, Tom.  

Tom: 

It's a real pleasure to get an opportunity to talk to you. You've had such a distinguished career in retail, have spent the majority of your career in the retail industry, Walt Disney, Toys”R”Us, Saks, and of course now your leadership position at Forrester. Over that period of time, retail is always, as a consumer facing industry, it's always central to a lot of the conversation that's going on around the economy and so forth. You've had the opportunity to see a lot of evolution in retail over your career. Just talk a little bit about some of the major changes you’ve seen over the course of your career.  

Sucharita:  

Well, certainly the pandemic was a big one. What I would say-  

Tom: 

We never saw something like that before, did we?  

Sucharita:  

My goodness, yeah. That was probably the single biggest disruption. But one of the things that I would say is very unique about the retail industry is that unlike so many other industries in the world, the concentration ratio hasn't necessarily changed, and it hasn't necessarily become more concentrated. And I'm going to get back to that in a second because there are nuances even there. 

I think it was Princeton. There were some researchers at Princeton that did a study of different businesses and different business sectors. And almost every other business sector in the world, when you look at the breakdown of GDP, almost everything else has become more concentrated, which means mergers have led to behemoths in every sector, whether it is pharmaceuticals or insurance or aviation, whatever the case may be. But retail has been this odd sector out in which there has been more competition and there are fewer barriers to entry in retail, which we have certainly seen through the internet and every type of company from marketplaces to marketplace enablers like Shopify and others. They have really empowered and enabled competition. 

You have the proliferation of commercial real estate, which has, and low interest rates, which has also allowed for the proliferation of retail. So that has created tremendous competition, which I would say is more, retail is probably the most competitive business sector in the world for that reason. Now, on the other side, people may listen to this and they're like, but wait, Walmart is getting bigger and Amazon's getting bigger. And yes, so at the very top end in the highly commoditized world, Costco, others, they have certainly grown faster than the retail industry and they have gained more share. But at the same time, there have been more entrants across the entire ecosystem. 

So, you know, we've been talking about the middle being squeezed for so long for exactly that reason, because in the commoditized sector, there's so much competition. And if you're somewhat specialized, you have an opportunity to go directly to shoppers as well. And if you're in that middle without anything differentiated, without a value proposition that leads on price, it's really hard to be in retail.  

Tom: 

Yeah. You have that barbell effect. The middle is the challenge and the two, the big and the small are specialized, are benefiting. Your observation is fascinating. I had not heard somebody explain it quite the way you just did, which, and if you do think about it, most mature industries do end up having a concentration of three, four big players. And that isn't the case in retail. I presume that's probably just because, I always say retail by its nature is the most consumer-facing industry. I mean, you have to appeal to the entire population. And so by that, there's a place for retailers to differentiate themselves because the population is so diverse and the number of products that are being offered are so diverse. Is there something unique about where we're at right now in history from a inflection point that's unique to what you've seen in the course of the last 25 years or so to this point of concentration or some other major kind of trend in retail?  

Sucharita: 

Well, certainly where we are with respect to just the digitization of our society has a big impact and has had an enormous impact on retail. I mean, it's led essentially to all of e-commerce. And even as an adjunct to that, it's mobile commerce and social commerce and every other variant within the digital sales of goods. And it's certainly led to more competition. It is what enables all of the sellers that exist across the internet to exist and all of the micro stores that exist to exist. It empowers businesses to reach a broader swath of customers than they ever have before. So these geographic boundaries are no longer there. It empowers and it has enabled manufacturers to connect directly with their end consumers. So there are definitely a lot of factors that now are different and that I would say e-commerce, the internet, digitization, all of that has enabled. And it is not a coincidence that we've seen retail growing in lockstep with that. I mean, it has outpaced inflation for the most part, and it continues to be a sector that grows. And that's part of the reason that I would say that the concentration hasn't necessarily, you don't have four players owning 80% of the retail industry because there is still so much opportunity for differentiation. There's so much choice and there are so many different things and opportunities that consumers have in their considerations for just about every product that they could possibly want to purchase.  

Tom: 

It's interesting. I mean, technology has really democratized the industry in some ways and in some ways has reduced the barriers of entry. But having scale helps quite a bit too, with the Amazons and the Walmarts of the world that have tremendous scale. I want to talk about technology in our discussion, but one thing I want to come back to, particularly from your perspective as somebody that studies the impact of technology upon retail, and that is, I mentioned scale and one of the benefits that a retailer like a Walmart has is while they built out their online business, they have a large store network and the benefits of a physical distribution network that comes with it. We are experiencing a real mismatch between supply and demand right now. There's a great demand for more physical space from growing retailers, really across the spectrum, but particularly that first ring suburb grocery anchor type of retail. And there's not enough supply of it. I mean, there just hasn't been a lot of new inventory put on the market really since the great financial crisis. Talk a little bit about just that intersection. We've done some studies around in, The Halo Report and so forth, around the intersection of e-commerce, online retail, and the store. How do you see the synergy between those relationships? 

Sucharita: 

E-commerce has only ever supported stores, I would argue. Even in the early days, we would always use your best shoppers or your omnichannel shoppers as the reason to get even store associates and local store managers bought into e-commerce. And that's very true. I mean, when you look at any, just even the destinations where e-commerce packages go to, they typically are in the trade areas of stores because people often are discovering things in a physical store and they may choose to purchase something that isn't in the store online or they just choose to purchase after having looked at something after they've had some time to ponder it when they decide they want to buy it at three in the morning or whenever is convenient for them. So e-comm has always been a complement to most physical stores.  

Now, the counter argument will be, but Amazon, how does that play? And Amazon, it is a company which is an exception in every possible way. It is a company that has been a force of nature or a force of business for several decades now, and it has defied gravity at every turn. I would argue that it has made commerce better. It has kept the retailers that have survived on their toes. It's probably for the better that the retailers that went away over time, whether it is Circuit City or Borders Books or whoever, they probably were past their prime. And Amazon has managed to lead behind those that are best able to compete.  

Tom: 

And retail has always been fiercely competitive, hasn't it? If you go back 100 years, the top brands in retail were different than they are today. And it's because it is a fiercely competitive industry. To your point, I often say something very similar to that. Amazon's kind of the exception, not the rule. I mean, they are a force of business and they have scale. I mean, they have that distribution network that not every retailer has. That's to some extent the importance of the store network that other retailers have, which is their way to deal with that last mile. Just before we finish on the concept of a store, at least from our perspective, one, we would totally agree in the synergy between the store and e-commerce, but that demand, supply and mismatch, that demand for space and the lack of supply to potentially meet at that demand. We don't particularly see that changing in the near term because there just isn't the opportunity to have a lot of new development. Even if you start a building today, it would take a number of years to get it out of line. Do you see that the same way?  

Sucharita: 

So, I think what you're pointing out, Tom, is that there's a dearth of good real estate. There is no dearth of bad real estate. In a perfect world, wouldn't it be so nice to take all of the commercial real estate that is unrented in Dallas or Cincinnati and make that somehow productive? And it's like, yes, it would be nice, but there's lots of supply of that. But there is no demand for that. And no retailer wants that real estate. No residential developer wants that real estate. Very few businesses even want that real estate now. 

And therein, I think, lies the challenge and the conundrum, which is there is not enough of that good real estate that is conveniently located, that's in the kinds of economically thriving areas where retailers want to be. I can use a city like Charlotte, which is where I live, as an example. It is a thriving, burgeoning city and the constant complaint I hear from real estate developers is that there's nowhere else to build. I mean, what else are you going to do? I mean, there's not even places for residential developers to build, much less commercial real estate developers. And there are a few that have been built over time, but they've all been built now, they're going to the perimeters and they're going outside of the city. They're essentially, they are increasing the diameter of the city by building where they can far from the centers where these regions may have started. And I suppose that may be essentially the American story, is let's take these tier two cities that are growing, that may have business and grow their radius farther out, but that takes time, right? That's not something that is going to happen instantaneously. 

So that's probably what ultimately happens. It's just, it's not something that happens overnight.  

Tom: 

Well, just to continue on this conversation around well-positioned real estate, I mean, the pandemic has had some impact upon that too. People's work habits have changed. They have more time to spend at home and I think to your point around some of the cities you mentioned so far, some of the central business districts are challenged, but the suburbs conversely are thriving right now. We found well-positioned suburban real estate to be on fire, suburban retail, particularly to be on fire.  

Let's continue on the conversation of technology. And one of the trends that we've certainly seen and talked about with others is the impact of social media on retail, things like TikTok and so forth, and how they have influenced shopping behavior, online shopping, discovery, new products, et cetera. How do you see social media playing into the retail ecosystem? 

Sucharita: 

So social media and social shopping is something that's not new. These are themes and concepts and ideas that have been around for a long time. And people have been talking about F-commerce and Facebook stores for as long as I can remember. You've had, it seems like every year, Pinterest and Instagram and YouTube and Snapchat, they all seem to have some press release or media article about how there's some new commerce strategy. And then just at the same time, you'll then see reports of, they decided to shut it down or it was an experiment that failed. So I think that what's happened is that social commerce does have its place and that place is often in the discovery aspect of goods. So it's very early in purchase cycles. It's like that top of funnel where social is really good. It's where, it's how people discover things. It's where they first often will get acquainted with brands or they may be able to see something for the first time. But as a purchase channel, that's where it often falls apart. And there are a number of reasons that are often very technical. It just has to do with product feeds can be sent over and ingested by these social shopping channels and who manages the customer service and who's dealing with like the shipping notifications and things like that that these social networks have never been built for and that is not what they're good at. And they don't need to be in that business. And I think that where the disconnect is this jamming of, but that's where people need to buy into those systems when in fact, all they really are is they're great for advertising and that's where their place is in the owned, earned, and paid advertising world.  

Now, TikTok is an interesting one because upon initial inspection, I would have just said, it's like all the others. It too suffers from the challenges with actually converting and all of the technical things that it cannot do that Facebook never was able to do and YouTube still doesn't do and blah, blah, blah. But one of the things that they did invest in, which I do think is a little bit different and will be interesting to see, is that they are pretty good at search. And what I mean by that is like when you want to look for something very specific, the way that you would use Google, we are now increasingly seeing more people using TikTok to actually look for items. 

And that has never been something that Facebook really invested in, not something that Snapchat invested in. Instagram was okay, but they're really still discovery. TikTok is, there was a data point that Adobe had from earlier in the year that something like 60% of Gen Zers are actually using TikTok for search. And you combine that with the fact that Google search is actually getting objectively worse because of all of the garbage internet content that's out there, you may actually see a transition and some of this social behavior changing as a result of that.  

Now, I'm not saying that it's going to necessarily happen because there's an awful lot of video content that would need to be created to support a great search experience. And right now it's a lot easier to create text-based content than it is video content. But maybe with AI, some of that changes over time.  

You're opening up all these very long-winded kind of Pandora's box.  

Tom: 

It's a fascinating topic in so many different dimensions, right? I mean, even the conversation around TikTok and the curation of what you see and it learns based on your behavior, what you the videos you like to see and you don't like to see and the concept of discovery in some ways sometimes is more limited because you start - I like golf. So it seems like I'm always getting golf-related stuff when I'm on social media. And so I can see how it can really influence shopping behavior. In some ways it's almost like it's a new form of marketing. It's a new form of product placement too. Like you used to see in movies and television shows and still do. One of the things you brought up that naturally flows from that is AI and just the impact of AI and the topic comes up in almost every business-related discussion. But it gets really hard when you try to say, okay, I get AI but how do I use AI in this case or in this industry? Just some observations you have around the use of AI in the retail industry and how retailers or consumer behavior could be impacted by it.  

Sucharita: 

There are a few different ways to answer that. It's a big question. I will start by saying AI is not new. It has been around for decades. It comprises many things. think the last few years has been very specific to the generative AI applications, the ChatGPT-like applications and their impact on retail. But what I will say is that when you talk about everything that could be considered AI, which is machine learning and deep learning and neural networks and robotics, even expert networks, AI has been around for a long time and it has had an impact on every part of retail for many years already. And it's one of the investments that has enabled this hyper competitive industry to still have profit because there is lots of data that every major retailer is ingesting every minute of every day, whether it is your sales data, your pricing data, your employee data, any location data that you have. And of course now e-commerce data that, where it's exploded to a whole new level of data inputs.  

But retailers have been using applications on top of that AI, whether it is pricing optimization or inventory optimization, warehouse management tools, labor scheduling tools, real estate optimization. The list goes on and on. Every single part of retail has been touched by AI already, and it continues to be optimized.  

Now, if the question is very specific to like some of these newer applications like Gen AI, I break it up into, let's break retail up into three buckets. There's the consumer-facing solution sets, there's field worker-facing solution sets, and that would be solutions that would touch store associates or warehouse workers. And then there's back office functionality. What we had generally found is that back office functionality is where most AI applications have their greatest power. And even where a lot of Gen AI even has tremendous power. 

Because when you look at things like, for instance, Gen AI chat bots as an example, because that's an easy use case that everybody likes to talk about, some of the most powerful use cases are you as an employee being able to use just natural language to search through all of your own internal disparate data sets to find an answer to something that may have taken you several hours before. And that's where some of the better power is, where the use is. You don't have to worry as much about hallucination there. Whereas anything you present to the consumer, you have to be just much more careful about because you never know if you're going to accidentally give the store away. You know, don't want to do that.  

So there's, I think, we get a little bit carried away with the things that are consumer-facing and flashy on that side, but a lot of the best use cases are in supporting the business users that are making the decisions that ultimately drive the success of a business on a day-to-day basis.  

Tom: 

Well, they create efficiency and better information to make decisions and actually assist in the decision making. Just before we leave AI, this is a somewhat of a hypothetical or in a difficult question, but do you see 10 years from now AI being more ingrained in the kind of market-facing or consumer-facing aspects? You mentioned the benefits of it in the back office realm and support realm, but do you see AI being more part of the consumer journey itself when they're actually making product selections or purchasing decisions? 

Sucharita: 

Sure. I mean, the answer is there's no question about that. I mean, we already see things like facial recognition and everything from payments to security to being able to personalize marketing messages based on your reaction to an ad. And that's just one use case. There's a lot that you don't even necessarily think of as a consumer-facing AI application, is hugely valued. Things like fraud detection. Fraud detection is highly dependent on AI algorithms. And that impacts every transaction that we make, but yet it's not like a robot that's talking to us. And it may not be necessarily visible. You definitely notice it in the interest rates that you experience and any issues that you may have with your credit card company. So there are definitely things that we experience already every day that we will continue to experience, some of which may not be overtly visible to us, most of which probably won't be overtly visible to us, but will absolutely be impacting our transactions. And I think that's, people like to talk about like the voices that will be speaking to us in stores and the robots that follow us around and exoskeletons that we can use to get boxes at Costco off of the top shelf or whatever. But I think that those are going to be less interesting than some of these other aspects that we'll be experiencing that just make your day to day easier, better, and more efficient.  

Tom: 

Well, one thing's for sure. Technology continues to evolve and it's hard to predict exactly where some of these roads lead. I often say that predicting where AI will be 15 years from now is like predicting what the internet would have been in the mid-1990s, what it evolved to was something different than what we thought it was going to evolve to at that point in time. You mentioned something un-retail-related, but around facial recognition, you could see it being used in a retail environment. I travel a lot and now with TSA Precheck, they have facial recognition. You don’t have to give your driver's license or identification or even your boarding pass. You just look at the camera and away you go. And at least I fly out of Newark a lot. It's very prominent there. 

Sucharita: 

Have they stopped asking for your passport? That's the thing that they keep asking. I'm like, why do you need both?  

Tom:  

When you fly, I haven't done it on an international flight, but when I've flown domestic, they do not ask for your driver's license or your boarding pass for that matter. You just go up and they take a picture and they say, okay, Tom McGee, let's go.  

Sucharita: 

It may not be quite as sophisticated at the Charlotte airport, but Clear does exactly what you're describing. It's like, it's the same thing. 

Tom: 

Yeah, same thing. It's just that now with TSA, now it's going to become much more scalable over time, hopefully creates some efficiencies at the airport. Let's talk a little bit about the consumer. The consumer has been very resilient in the face of some concerns around the economy. On the surface, the economy looks pretty good. Unemployment's low. Inflation is beginning to moderate. But on the flip side is consumer confidence has been uneven over this period of time. But yet the consumers continue to spend. What's the disconnect here between the basic economic conditions, consumer spending and consumer confidence all seem to be not aligned?  

Sucharita: 

Politics. When you look at the consumer confidence broken down by political affiliation, it's astounding. It's a pendulum swing back and forth. And I have no doubt that what will happen in January is that you'll have the people who think that the economy is terrible, almost overnight, they'll think the economy is fantastic. And the people who think the economy is fantastic are going to think that the economy is terrible because that is what happened when Obama was president. That's what happened when Trump was president. Then it happened when Biden was president. And now it's going to happen again when Trump was president. And when there is a Republican president, Republicans think the economy is fantastic. When there's Democratic president, the Democrats think the economy is fantastic. And what you end up with is an average, which is relatively low, of people being confident in the economy, but yet, you still have people spending. And the reason people are spending is because they've got money. All of the other economic indicators are that the economy is doing well. Growth is still positive, unemployment to your point is low, wages are high. All of those are good economic indicators. We are not in a recession right now. The IMF has no projections for a global recession at all in 2025. I mean, every major global economy is projected to have growth, maybe not robust growth, but growth. You need to be negative to be in a recession. So retail should be resilient, it may not knock anyone's socks off in 2025, and will probably keep pace with inflation, but it's not doing poorly.  

Tom: 

Well, perception often becomes reality depending upon what your perception is for sure. And we often say that if the employment market continues to be strong and people feel confident in their jobs, they'll continue to spend. I mean, that's historically, that's been generally the case and we're at historically low unemployment rates. 

In our time left, we haven't talked about the holiday yet. We're having a conversation here in November. So first, before your outlook on the holiday, just the holiday season has changed quite a bit over the course of your career in retail. In our view, it's gotten longer. It's a longer period of time. Do you agree with that? And do you think days like Black Friday, Super Saturday and so forth are still of the importance that they once were?  

Sucharita: 

People certainly shop on those days, but you make a good observation. They're certainly not as important and they're not as large as the burst isn't as big on those days. And the analogy I'll use, because we just came out of an election in the United States, and I would say that it's a similar thing that we're seeing with elections that we are seeing with the holiday season. And what I mean by that is that it used to be that in the past, everybody would vote on Election Day. Now we've introduced early voting, so the majority of people vote early. And the election season has drawn out and there are all these options and alternatives and provisional ballots and mail-in ballots and etc. And I would argue it's the same thing has happened in Q4 shopping where it is no longer just like a day or a few days. It is a whole series of days. And a lot of that is due to the internet and due to digitization and due to the fact that you can get everything you want. You can get the selection you're looking for. You can often get it ahead of time. That was always the thing. I used to work at Saks. And one of the things that was an advantage for the e-commerce site was that you could actually shop on Thanksgiving Day when the store was closed, or you could shop actually on Wednesday at midnight before Thanksgiving and that gave you a few extra hours over actually going to the physical store and potentially not finding whatever it is that you were looking for anyway.  

So those are the kinds of reasons and the things that we've seen is just more people using these alternative options that they have. So when we look overall, holiday spend continues to be at a record high every year, people still spend more than they ever have. And it's not as likely to be on Black Friday when people used to be in line at like 3 a.m. waiting for the door buster. You can just get that online now. Those are the differences that we're absolutely seeing. And then as you shop more online, you're accustomed to and habituated to the reality that, well, you can't shop too late because you may not get what you're looking for. So it's better to shop early anyway. So that's drawn out the holiday season too.  

Tom: 

A little bit of that perception becomes reality too. Oftentimes, you'll still see media focus upon the crowds, Black Friday, and somehow say that's a bellwether for the holiday season. I thought your analogy, by the way, of the holiday season and the voting season was a very good one. I mean, they're very similar, right? Technology and options are driving what's lengthening both of them. So it's an interesting analogy. Just closing out the holiday season, we see a solid holiday season, 3, 3.5% type of growth. Similar perspective? 

Sucharita: 

Yeah, there are probably about a half a dozen different organizations. Forrester, of course, has its projections, a number of consulting firms, PwC, the NRF, like I think everybody's projecting mid-threes and inflation should be about mid-twos. So there's growth, not huge growth, but even inflation adjusted. should be, it should be a solid holiday season. We should not have any supply chain dramas. Hopefully there's nothing else unforeseen that happens. It should be good.  

Tom: 

Well, we're at the end of our time, believe it or not. It went by very quickly. Thank you so much for joining me today.  

Sucharita: 

Oh, thanks for having me. 

Tom: 

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