From Where I Sit: Episode 4 With Colleen Baum 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.

Well, I'm excited to introduce Colleen Baum, Senior Partner at McKinsey, to the latest episode of From Where I Sit. Colleen is a leader of McKinsey’s retail operations and retail real estate initiatives for the Americas – specializing in store network optimization, supply chain, inventory planning, store operations, and procurement.

Colleen, welcome to the show.

Colleen Baum:

Thanks for having me, Tom. Really looking forward to it.

Tom:

I am too. You know, I'm fascinated by your background and your focus on store operations, supply chain, obviously a lot happening in retail. ICSC, should say at the start, has dubbed 2024 the Year of the Store. We really think that retailers and now the broader community has understood the importance of the store in servicing customers. Before we talk about hardcore retail and consumers and so forth, I want to talk a little bit about the supply chain and maybe taking a step back and helping our listeners understand the complexity of the supply chain that a large national retailer, a Target or a Costco or a Walmart, all the intricacies of the supply chain. Maybe just explain how those are designed just to begin the conversation.

Colleen:

Yeah, I'm happy to. And you're hitting on a topic that's very close to my heart. So before I came to McKinsey, I worked at Home Depot in their supply chain organization, I was responsible for strategy. And I always remind my clients that people can't buy things if the supply chain isn't operating well and increasingly, the role of real estate in stores is being mixed with supply chain in a way that I think is quite important.

And so most kind of large retail organizations will think about supply chain across three or four dimensions. So the first is the distribution centers that they operate. Those are almost all retailer-rented, so leased, but operated with their own labor. And they'll have somewhere between 20 and 40 locations. They might segment their supply chain a bit, but ultimately they're operating a large number of regional distribution centers and those distribution centers will stock product. They also may do some flow through, which I'll come to in a second.

Then the supply chain is responsible for managing all aspects of transportation. And so that is direct importing goods from overseas, transporting from domestic ports into the distribution centers, from distribution centers to store or distribution centers to the end consumer.

We're also seeing an increasing trend around real density and last mile or market delivery centers. So as an example, if you delivered like appliances or furniture, you probably have one or two distribution centers in each major metropolitan center where you're doing the last mile delivery from.

Then there's inventory management. That's the third kind of pillar, which is the very fun crystal ball aspect of how much are people going to buy? You have to predict that pretty far in advance and then ultimately how you're allocating inventory or replenishing inventory into each of the stores and the e-comm channel.

And then finally, there's generally a strategy component and this is increasingly becoming advanced analytics enabled. Really thoughtful retailers have started to bring data scientists into their supply chain organization to better predict what will be required – building out digital twins of their supply chain and really taking that analytics side of things.

And so the end-to-end process really starts with how much am I going to sell – the forecasting component. It flows through the inbound transportation. You're having some of that processing at the distribution center and then ultimately replenishing your end demand, whether that's stores or e-comm. And I think stores in particular have now morphed into half distribution center, half store.

And so as you think about 2024 is the Year of the Store, some of it is, 100% agree, that physical presence is so important to building brand, building brand affinity and loyalty and fulfilling customer requirements, but also has become a really critical cog in the supply chain to find ways to effectively fulfill last mile or e-comm out of the backup stores.

Tom:

I often say that the store has become, in addition to be used for traditional shopping, it's almost become a mini fulfillment center. And that, you know, that last mile, it's obviously a much more cost-effective way to preserve margin. Obviously, it's best if you can get the customer to come into the store to pick it up because then you've saved the entire margin.

Colleen:

Save the entire margin. And, I mean, obviously using the store is a mini-fulfillment hub also helps you rebalance inventory. So that's really helpful from a gross margin perspective. I am positive we will get to this, but also think about stores as a, you know, a nice billboard, a way to build customer awareness. In the marketing component of new customer acquisition, I think we have long misunderstood how critical physical presence in market is. And my retail clients, and as a result, owner operators that I work with are increasingly understanding that the really important role that stores play in customer acquisition.

Tom:

We've published a series of reports called the Halo Report, which speaks specifically to that and your analogy to a billboard is so true. We found, and I know your own research has indicated this too, that when a retailer opens up a store in a certain geographic area, that not only increases the physical sales, obviously through the store, but it increases the online sales in that geographic area. And then the reverse happens when you close a store.

Colleen:

100%. And I think obviously you're building more loyal consumers as you've gone through that effort. And we've, we've studied quite a bit how much more loyal an omnichannel consumer, so someone who shops both in store and online, is relative to someone that just shops online or just shops in store. So that connection is really, really powerful.

Tom:

Retail is a fascinating. The industry is dynamic. But one of the things that I think is timeless is, one, great customer service, but you also have to have the right merchandise to serve your customer. And that goes back to the supply chain conversation, which was just the complexity of what you described, right? And particularly if there's an international, you know, supply component of that, just the level of synergy that needs to happen between all those different legs of the stool.

Talk to me a little bit about, obviously the worst-case scenario is somebody walks into the store to buy something and the shelf's empty. The product isn't there that they wanted. So there was something that didn't work, wasn't optimized in the supply chain, whether it was the forecast of future sales or future demand, or the product just didn't get there on time. What are the typical challenges that retailers have in that supply chain that will ultimately potentially manifest itself in just not having the product there to serve your customer?

Colleen:

Exactly. And you go into a grocery store or a specialty retailer, if there's a hole on the shelf to the product's not there, you know, somewhere between 50% and 75% of the time, that's going to translate to a lost sale. There's obviously, sometimes folks will substitute another item, but one of the single biggest levers for driving revenue for retailers to always be in stock and consistently be in stock.

And so a couple levers or ways that retailers think about managing out of stock and the inverse of product availability. The first is making sure that you have, kind of, the right settings on shelf. So I'm wearing a kind of simple black sweatshirt, basic apparel item. There is some base level of what we call safety stock or buffer stock that should always be there. And that buffer stock is because sometimes you're going to sell a lot more than you thought, or it might take a little bit longer than you thought for that product to come in supply chain-wise. So having the right kind of order to level, which is a combination of safety stock and how much you think you are going to sell, is critically, critically important. So we always think a lot about those replenishment parameters, inventory parameters that drives shelf stock first.

The second other big one, and this is highly controllable for retailers, is are they running efficient store operations? This is a surprising statistic, but about 20% of the time that you have a hole on the shelf, you have that product somewhere in the store. It just hasn't made its way to the shelf. And so it is really important that you're pairing supply chain and stores together to get products to where people can buy them.

Tom:

That's a fascinating statistic, by the way. I'd never heard that before. I mean, just the coordination that's needed among different groups is pretty staggering. When mishaps happen, when you have those inventory shortages or the supply isn't there, is it often due to miscommunication, just a lack of coordination?

Colleen:

It definitely can. And so it’s both, has the store signal to the supply chain organization, to the distribution center that they need that product urgently, and is it moving through the supply chain as quickly as possible? So delays in the upstream supply chain are fundamentally a miscommunication issue. And then the other is if the retailer doesn't have it within their own distribution centers, it is either a dramatic misforecast or there could be constraint from a vendor perspective where the vendor didn't have the product available to fulfill the retailer who then couldn't send it to the store.

And that again comes back to, you know, the best retailers have really collaborative planning and forecasting with their vendors to reduce the amount of situations where they're out of stock because the vendor didn't have it. And so you do think about it multi-pronged, as a coordination with the vendor, coordination with the supply chain organization, and then the store ultimately and labor within the store has to be kind of on point to get that product to the final saleable point, which is on shelf.

Tom:

I mean, it strikes me, this is really the lifeblood of a retailer in so many ways. You got to get this right. Are there best practices in regards to retailers? How often they should be kind of evaluating their supply chain and how effective it is, what changes they should make, that kind of thing? And how often should a retailer look at that and what should they look at?

Colleen:

What should they look at? One of my favorite questions. So I’d to say, a large scale step back every two or three years, you want to be thinking aligned with capital planning timelines that all retailers run. Do I have the right distribution centers with the right amount of space? Do I have the right kind of inventory term projection? You're doing this kind of larger scale strategic planning every two or three years. And during that process, you will make decisions about, do I need more distribution center capacity? Do I need it in different places? And then how should I be thinking about inventory positioning through the supply chain?

And then ultimately you're continuing to keep that strategy up to date. I think on a quarterly to, you know, twice a year basis. And that's everything from, I had projected to turn my inventory five times this year. So turning on about a five. If I'm only turning four, why is that? And what does that imply about something I need to do differently? Or I planned a 1% comp and we're now seeing closer to 3.5%. Is my supply chain equipped to keep up with that difference in sales? And so tracking kind of really nice sets of measures around not only efficiency, so all of the supply chain costs, inventory productivity, but I think most importantly, particularly for this conversation, is some of the components around service level. So am I in stock? When I go out of stock, how quickly can I replenish? Am I serving my stores effectively so that they can effectively serve my customers?

But kind of those three chunks, the cost, inventory, and then service.

Tom:

You had mentioned at the start that a lot of retailers are increasingly hiring data scientists and the importance of data analytics. I mean, I can only imagine the level of precision necessary really beginning at the very beginning stage of just forecasting, right? I mean, if you get that wrong kind of everything else is going to suffer.

Colleen:

Exactly. And also the level of granularity that you have to plan with. I was at Home Depot many, many moons ago before I came to the firm, but over 2,000 stores with 80,000 SKUs on average, that's a lot of times that you can get that wrong. And so continuing to keep in mind for big box retail, for specialty retail, they're managing a huge amount of SKU complexity because assortments have only gotten wider and wider, together with it's not enough just to be right half of the time. You have to be right in every store for every SKU. It's like when you're wrong, you're either out of stock, as you said, you're disappointing a consumer or you've started to build up excess inventory, which, you know, may have to be cleared through a promotion or other markdown.

Tom:

One of the other areas that you are part of in the supply chain conversation, but a subcomponent of that, that you are very much an expert in is just store operations, store optimization, etc. It strikes me, we talk a lot about omnichannel, stores and mini-fulfillment centers, etc., curbside pickup, click-and-collect, all the terminology that rolls off my tongue and your tongue, I'm sure as well. But that changes the nature of how a store should be organized optimally. Now, not all retailers do that well, I get it, but optimally, they should be really evaluating the layout of a store differently in this omnichannel world, shouldn't they?

Colleen:

Exactly right. And that is partially because as you're doing more omnichannel activities, you need more space in the back room to effectively stage an organized product. And it's preferable from a customer's perspective for things like pick up in store, click-and-collect to be picked from the back room versus having a, you know, the Instacart shopper that's shopping alongside of you. But the challenge is 15 years ago, 20 years ago, we all decided, for quite good reasons, in order to maximize the sales per square foot, you wanted to have smaller back rooms. And so those things now are really big contradictions. You also need dedicated space for people to be able to come in and pick up orders or to stage delivery orders, which are in effect non-selling.

And so retailers responded in different ways. So some as they're going through, let's call it the once every five to 10 year reset schedule as they're reformatting stores and giving them a little bit of the, you know, polish and shine. They think about a shift of some selling space into more tasking or, or backroom space, which I think is great, particularly in a world where you don't have to do that for every single store. It could be done for maybe three or four stores within a market. And that helps to make things a little bit more effective for ship from store type activities.

You know, I think the other is in a world where consumers are wanting something slightly different when they come in store, which is to touch, experience, feel product, try things on. You can also just reallocate the selling space to make a little bit more room for some experiential components that touch and feel and product education, demonstrations in store, etc., while also making some space for those omnichannel support activities.

Tom:

Back to this Year of the Store concept and even the phrase mini-fulfillment center, one of the things that I don't think is particularly well understood is that demand for physical space is really super high right now. Retailers generally, particularly mature retailers as well, Walmart wants to open up 100 new stores. The demand for that space is so significant because of this, in this omnichannel environment of the multiple use of stores. But the supply of space right now is actually very constrained, particularly in the open-air space.

Colleen:

It really is. And I think getting the right size box or the right amount of space has really been a challenge for trying to find the 3,000 to 4,000 square foot boxes and some of the slightly large ones. It is really constrained. think it's exciting that we've seen over the last couple of years more openings and closures for the first time in many, many years. And it's a priority for long-established omnichannel retailers. It's also a big priority for digitally native retailers to get into open-air space. That's, I don't know, it's part of what makes our job fun is that people want to get out there and to be in communities and be part of the neighborhoods where their consumers are.

Tom:

We often say retail brings life to a community. I mean, it's kind of that stickiness that comes together. I do a lot of media. I know you do too. And every time there's a retail announcement, they're going to close, a major retailer announcement that they're going to close stores, oftentimes there's kind of an hysteria around it that that means, you know, the demise of physical retail and so forth. I try to educate folks that that space is likely going to be leased right away. There might be multiple buy orders on that space.

Colleen:

Exactly right. I've had a lot of clients like, so many drugstores are closing. Like, they're rationalizing footprint, like what's going to happen? I'm like, what's going to happen? Someone's going to pick that up in a second. And particularly in more residential neighborhoods or mixed neighborhoods where I am in New York, there's a huge difference in demand for space in the West Village in Manhattan or parts of Brooklyn that are a bit more residential. Some declines in Midtown but it is really closely tied to the consumer behavior of, I want to shop where I live. I want it to be close. I want it to be convenient, but I also want it to be a really nice representation of the brand and retailers are responding in really fun and exciting ways and supported by owner operators of those spaces, developers of the space that have really made big investments in place making and making shopping feel fun and exciting again.

Tom:

It’s one of the byproducts of the pandemic, you know, with more people working from home, obviously that creates more opportunities for people to go shopping, local dining, and then you have the whole omnichannel component of using your store for the last mile.

I want to ask you two other questions on this topic and then I want to transition to experiential retail, but you know, it also strikes me that in this omnichannel world, mini-fulfillment centers, stores as mini-fulfillment centers, etc., it impacts the layout of the store. It also can impact the layout of a retail center in general. You think of like traffic flows, curbside pickup. The developer, the owner, manager of that property has to think about those things too, don't they?

Colleen:

Absolutely. And in an omnichannel world, do you want the pick up in store, some of the ship from store to be as convenient as possible? And so that means having parking spots up front or very quick ways that you can come in to get into the store. At the same time, for retailers, anytime someone comes into my store, whether they're picking up an online order or returning something, you want to make best use of that traffic and also give them an opportunity to add on to the basket. So thinking through how you shift use of space to number one, enable convenience, and number two, enable some of those impulse buys or basket building is really critical.

And so as mall owners, operators, particularly power centers and neighborhood centers, thinking through the parking aspect of it, also making sure you have enough space for pickup from UPS and FedEx. All of a sudden, if you're shipping a bunch of packages out of the back of the store, you'll have different logistics components as well. All of that needs to be taken into consideration.

Tom:

It's a good issue to have, but it's a complex issue to have for sure. Just before we leave supply chain, I mentioned COVID. So much happened during that period of time, trends accelerated and so forth. But one of the things that we lived through in the pandemic was supply shortages. Obviously, there was inflationary impacts and all that, etc. This is a complex question and I'm asking for a simple answer, so I recognize this is totally unfair.

Colleen:

I'll do my best.

Tom:

What was the driver of just the significant number of inventory shortages, lack of product availability. I know, stay at home orders and so forth had an impact on it. Is it that simple or was there more to it than that?

Colleen:

I think it's two or three things, maybe three things. And I'll try to make it as simple as possible. The first is it's important to remember how long the total lead time or total supply chain is. My clients that are vertically integrated apparel players that also have retail store footprints are buying 50 to 54 weeks in advance of when you go into the store. It'll be similar for furniture as well. And so the first thing that happened is all of a sudden the demand signals really turned off and retailers became quite worried about working through the inventory that they currently had or was on the way that they had bought a year ago. And so that meant that they were doing a lot of sales, they were doing a lot of markdowns, but also canceled any order that they could with vendors. So there was just a real shift in all of the product that retailers had and how they were trying to move through it.

The second thing that happened is people's behavior and what categories they were buying dramatically shifted. If you're a footwear retailer for women, you probably planned some mix of sandals to wear to a wedding and like pumps or dress shoes to wear to the office and, I don't know, some casual flat sandals. All of a sudden people are wearing sneakers and slippers. So you got too much of some stuff and not near enough of the things that people wanted and so there was this big shift in the just demand patterns.

And then the third aspect was just fundamentally this is a global supply chain. As rounds of COVID were impacting countries at different rates, factories were being shut down overseas, ports were slowing the amount of their activity, just like literally in response to outbreaks of COVID, which just meant that when it used to take 21 days to get a container from X to Y, it was taking two or three times that because you had a lot more variability in manufacturing capacity, logistics capacity, and then obviously the distribution centers here in the U.S. could also be impacted by outages.

So those three things came together in kind of the perfect storm of like we just don't have the product available, let alone the product that people really wanted to buy. And so it is hopefully a once in our lifetime shock that impacted retailer supply chains, but it really was that rapid, how do I move through stuff? People buying really different things that we hadn't planned for together with just a real slowdown in global infrastructure and manufacturing.

Tom:

You're right. I mean, it really was the perfect storm. And back to that point around forecasting, it's hard to forecast that you're going to have a global pandemic and people's demand for products is going to fundamentally change overnight. Right? I mean, that was not something that was built into most people's playbooks.

Colleen:

Not at all. And I think, it just also, and I'm sure you remember, a Friday before New York had started to shut down, that was, I got the calls from two or three different clients where like, we have to shut down our full store network. If they were discretionary at all, just think about someone that sold 80% of their product over stores and stores were closed for somewhere between two and three months. Just, nobody could have guessed that, not in a million years, so.

Tom:

That wasn't in the manager playbook, for sure.

Colleen:

Yeah, exactly.

Tom:

You had a fascinating interview recently around experiential retail and, and the importance of it, the movement towards it, retailers building relationships with consumers. And I was fascinated by your definition of experiential retail too. Let's start with that, at the most basic, what does experiential retail mean to you?

Colleen:

Well, I'm going to use experiential way too many times in this explanation, Tom. So you'll have to forgive me.

Tom:

It's a good, it's a good word.

Colleen:

Exactly. It is, at least to me, it's a retail or store format that allows consumers to experience and drive affinity with a brand in a slightly different way, a brand or a retailer. And some of that is an occasion to go shopping, which, you again, it starts to feel a little bit more special. You get to see how a brand or retailer physically manifests and it drives your emotional connection to them. And you're also getting to touch and experience the product in a really fun way. And that is everything from understanding more about the technical aspects of fabric, as an example, or getting to try on shoes and run on AstroTurf, whatever it is, and having that ability to really get to know a brand, to get to know products, and to feel like you're having a very special retail experience or shopping experience, is everything that experiential formats bring together.

Tom:

To me, it seems like the most, one of the most dramatic examples of experiential retail would be like a DICK’S House of Sports or, or something of that nature, which is an incredible experience, not just a product experience.

Colleen:

Exactly. And you get to come in, like truly experience all of the components of, you know, if I'm buying sneakers, how do they feel on a basketball court versus on a track, which is amazing and so much fun. We also see kind of interesting and different examples. We’re always looking for things that my three year old is going to want to do. And we spend a lot of time in retail because toy stores and clothing stores have been doing these really fun collaborations that bring to life, I don't know, a particular show that she might be watching and you get to see the manifestation of or partnership between that retailer and character IP licensing. And my daughter is a chip off the old block. She loves shopping, can always point her way towards the most expensive thing in a clothing store. It has opened up this new occasion for shopping, which is, I'm going to go, I'm going to make a day of it. I'm going to have fun experiencing what old school retail is, great service, exciting product. That placemaking piece, we're seeing owner operators get in on it and help to bring to life pop-ups from food-and-beverage and other things that will increase dwell time. And you've taken something that could have been a five-minute shopping adventure on Amazon into a two or three hour way to build a tremendous amount of customer loyalty to that particular brand. It's amazing. I think it's hugely innovative for retail.

Tom:

You mentioned owner operator participating in it, supporting it. Talk a little bit more about that. Like we have a big constituency of stakeholders that own and operate all types of retail centers. What are some of the things they should be thinking about to enable experiential retail in their centers?

Colleen:

So I think it's a couple things. So the first is one of the biggest barriers to getting experiential retail formats up and running is really the capital associated with the build-out within the store. And so I have seen some of the most successful owner operators in REITs start to think about how can I have space that's a little bit more white box and you can build out and invest in these experiential formats a little bit more quickly. So I think, one, is there's the tenant improvement allowances, but how do you make best use of the space that you have available to be as turnkey as possible for experiential format? So that's one.

The second is being really thoughtful about, and this is a place where advanced analytics have made a big difference, is grouping of tenants that can start to build a virtuous cycle or complimentary traffic. And so as you start to think through, let me get an experiential retailer in, can I find one or two other brands or retailers that consumers that shop there would also like? And so, doing all of that in high traffic ground level areas, help to attract customers and also attract the right tenants.

And then the final piece is thinking through the, you have the high-quality traffic coming to these experiential locations. How do you make the most of it, expand dwell time and help to increase the amount of purchases that are made across that power center or high street as an example?

And those are things, like in New York, we see a lot of like decorations around Halloween, Thanksgiving, Christmas that I go to shop at the Seaport area here in New York. They have a pumpkin arch. We'll spend time there. We go and get two or three food items. You can get a pumpkin coffee. You're getting a special orange ice cream. Like how do you start to bring to life all the things that make a shopping trip into more of an occasion, which is a combination of those pop-up events, Instagrammable activities, as well as the food-and-beverage.

Tom:

That's fascinating. You know, one of the things that you said just about, you know, the mix, the curation of, of the retailers that are in a center. And I often say that, just like a retailer has to merchandise its store appropriately, an owner or operator needs to merchandise, you know, the center to make sure that they have the right mix of offerings for that community. And it's not a one size fits all.

It also struck me when you're talking about investment and capital requirements. And one of the things that I often say is that, you know, owner operators often are, particularly for local retailers or emerging retailers, they're almost like a venture capitalist in some way. By investing in that, in that brand and the build out and so forth, they're giving life to this concept and they're kind of investing capital on the front end hoping it pays off in the back end, right? So.

Colleen:

Exactly. And I think placing, as you said, you know, you're placing bets on how much money am I going to put forward for this concept? Is it going to generate the type of traffic that I want? And then in some ways are the, you know, leasing structures in line with the risk that the owner operator is also taking? And I think that's probably one of the harder things for REITs and owner operators right now is. you can do a percentage sales model, but in an experiential type format, there are so many more components that drive value for the retailer that go beyond just the sales of the four walls. That's the omnichannel sales, it's the increase in customer awareness, it is the increase in loyalty. And finding right ways to set up leasing structures that are in line with that, particularly given the risk that owner operators are taking, I think becomes really important.

Tom:

I mean, all the changes that are taking place in the industry do have an impact upon lease structuring and negotiation. Even just the conversation we had earlier about shipping from the store and fulfilling an online order from the store, etc. How does all that get captured in a lease? We could have, we could have a whole podcast on that conversation.

Colleen:

Absolutely. I think that is one we have not cracked yet, but it doesn't stop me from having a perspective.

Tom:

The example I used, for example, was DICK’s House of Sports. The entire store is experiential in that regard. Are there elements of experiential retail where you lean in on the experiential aspect in one part of the store while the other part of the store is much more of a traditional transactional experience?

Colleen:

Absolutely. You absolutely can. And so I think when we talk about experiential retailer, it's usually one of those like I've transformed a space, it is all experiential. I have put millions and millions of dollars of capital into it. But it's important to keep in mind those kind of showroom stores or flagship stores, there aren't that many of them because there aren't as many places that both the return on the capital that you're putting in is commiserate with the cost of it. So we're increasingly seeing components of experience. And so that might be, as opposed to the whole build out of all of the different sports facilities, you might have a half court or quarter court, or you have a strip of AstroTurf. Still, it's something to do. It's a way to build brand affinity. It's a way for people to understand the specialness and distinctiveness of products, but it reduces that total amount of build out.

You also see more things, like particularly within grocery is, could you put a bar in? Are there more hot serve items? Can you think about, like a traditional coffee shop where people will come for different occasions. And at least to me, I think there are a bunch of ways to do experiential retail where it builds on the convenience and customer awareness of having a store, but also allows people to still make shopping an occasion. And you don't have to build a $5, $6 million box to be able to do that. There are a lot of different ways.

Tom:

Are there demographic differences in regards to the consumer and what their expectations are and who navigates more towards experiential retail?

Colleen:

I think there are definitely customer segmentation and probably translates, you as you generalize into demographic pieces. There's a whole subset of consumers that are very convenience oriented. They want to find what they're looking for at the price that they want and they want to get in and get out. That consumer is probably not coming into an experiential format or if they have they're doing more of a pick up in store, click and collect type model. They tend to be a bit older, so 40s, 50s and Baby Boomers. They just have less appreciation for an in-service or in-store kind of experiential format.

On the flip side, Gen Z and some younger consumers really want to have an emotional connection to brands and retailers that they're buying from. And so that starts for younger millennials and Gen Z consumers to be the sweet spot of experiential formats because you are both building affinity to the brand. You're able to convey your values and focus and mission as a retailer or apparel brand. And you're also able to help those consumers get to know the products that they may want to buy. And so I do think younger consumers are a bit of that sweet spot.

But again, there are whole sets of consumers across all ages and incomes that think about shopping as an opportunity to discover newness, to discover brands that they may not have previously bought, to find something that feels very authentic to them versus the, you know, the same pair of shoes or same shirt that they see everybody else buying. So what that experiential format is really best geared to younger consumers, and then those that are really on, what I call, discover missions where they know they want something. They're quite open to what it would be and they want to feel a little bit inspired as they go in.

Tom:

It's kind of that treasure hunt kind of idea, right? I know I want to buy something, but I want to discover what it is. I don't go in with a preconceived determination. It's fascinating to me.

The other element of this and it's not right on point, but it is experiential, is the whole aspect of social media and how that all plays into kind of this omnichannel environment. It strikes me as, when we've said omnichannel in the past, omnichannel has always been like an either physical retail or e-commerce. And, and really there's a lot of other channels out there, particularly Gen Z are buying things on TikTok and on Instagram, etc., directly from the site. Maybe fulfilled by the store, but certainly being influenced by it.

Colleen:

Exactly right. And we're starting to see some of the statistics for Thanksgiving week, Black Friday, Cyber Monday, and it remains shocking to me as a person who loves to go in store, something like 50%, 60%, depending, again, on the measure of online sales are now coming from mobile devices, much in the apps that you described. It shows you the increasingly important of having a full ecosystem as a retailer or brand that is reaching consumers through email, serving up the right set of digital ads with products that resonate with them, and then supplementing those moments of digital engagement with more authentic in-store connections, whether those are events, really thoughtful service, click-and-collect, all of the different ways that you can continue to drive loyalty.

Tom:

There's one other area I want to talk a little bit about. Consumers have, they've been so resilient, but their confidence level or anxiety levels been very variable. And I know you guys recently did a study that showed that 70% of consumers plan to continue to shop at off-price retailers, etc. In your mind, is that a sign of pessimism? Is it a sign of concerns around inflation and just the trajectory of pricing? What's driving that in your mind?

Colleen:

I think it's overall trade down behavior. This is obviously across categories and McKinsey has measured this kind of going back to the very beginning of the pandemic through our consumer insights hub. About 77% of consumers are trading down and trading down could be some combination of going to a less expensive retailer, like off-price I think is a classic example. It could be buying a lower quantity. It could be waiting for promotions and sales. It could be switching to private label brands or store brands. All of that behavior, I think, is a combination of consumer uncertainty. So it's more, we don't know when inflation is going to truly cool and when I'm going to be in a place where I'm confident that I can buy what I need to for my family. And so it is more that I think insecurity or the lack of continuing confidence, I think has been a big contributor.

You know, the other component is there've been a lot of deals to be had. And so I think we've also trained consumers over the last two years to look for the 30% off to save up and buy on big shopping occasions or big sale occasions. And so there is some component of softness and demand together with wanting to get value and responding to an environment where there are a lot of values, which have all come together and somewhat retrained to consumers on how they buy.

I think there's a lot of reasons to feel good. My biggest hope is if we come out of Q1 with stabilized inflation, we continue to see some rate cuts. All of a sudden, folks will start to feel a lot more comfortable and excited about making purchases versus delaying them.

Tom:

It's understandable why there's an anxiety level. We've been through a lot. They've been through a lot. And the compounding impact of inflation, even though the inflation rate is, has moderated, you still have a number of years of price increases. Any other comments around just the strength of the consumer at this point as we end ‘24 and enter ‘25?

Colleen:

I think we'll see like a good pickup in apparel. We obviously have seen through the back half of the year and McKinsey just finished their State of Fashion Report, which I think you referenced, we do that in partnership with the Business of Fashion and studied both luxury and non-luxury spend in apparel, footwear and handbags. And I think that's a category that will be pretty robust and looked quite nice from early Black Friday, Cyber Monday results. Toys have been stronger, electronics always good. But the bit that I'm watching in particular is a shift back into apparel and footwear as folks continue to balance services and out of home spend with some apparel and discretionary.

Tom:

Yeah. And a little bit of, you're seeing a slight uptick in people spending more time back in the office and so forth. And that obviously impacts apparel.

Well, Colleen, I want to thank you for being on today and I could talk to you for another couple hours.

Colleen:

Exactly.

Tom:

There are so many topics that we scratched the surface on and I'd love to continue the conversation with you in a future date as well. But thank you so much for joining From Where I Sit.

Colleen:

Amazing. Thank you, Tom, for having me. And very excited to continue the discussion. I could also talk for days and days and days on these topics. It's just fascinating and feel really lucky to spend my time in retail operations in real estate.

Tom:

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