Retail Rundown – October 28, 2019 – with guests Sucharita Kodali and Shannon Ryan

Julia Raymond:
Our guest today includes Sucharita Kodali and Shannon Ryan. Sucharita is a retail analyst at Forrester Research where she’s an expert on eCommerce, omnichannel retail, consumer behavior, and trends in the online shopping space. She’s also an authority on technology developments that affect the online commerce industry and vendors that facilitate online marketing and merchandising.

Julia Raymond:
Shannon Ryan is the executive vice president of North America for Valtech. He is an expert in helping brands create digital and physical spaces to drive unparalleled connected experiences. Prior to his current role, Shannon was co founder and CEO of Non-Linear Creations. Sucharita, Shannon, thank you both for joining us today.

Sucharita Kodali:
Thanks for having us.

Shannon Ryan:
Thank you. That’s an impressive set of titles, Sucharita.

Sucharita Kodali:
You too Shannon, back at you.

Shannon Ryan:
I’m only an expert, you’re like a world expert.

Sucharita Kodali:
That’s what happens when you get to write your own bio.

Shannon Ryan:
Yes, exactly.

Julia Raymond:
So should we leave that in or take it out?

Shannon Ryan:
Definitely leave that in.

Julia Raymond:
For sure.

Shannon Ryan:
Sucharita and I are people with personalities. We’re not just talking heads.

Julia Raymond:
No, you want people to feel like we’re sitting at a round table together.

Shannon Ryan:
Everything Sucharita and I do is a fireside chat. Even if there’s no fire.

Julia Raymond:
There’s no fire. Maybe there’s marshmallows, I don’t know.

Shannon Ryan:
Exactly. All right, let’s roll.

Julia Raymond:
Let’s roll. Five Below is the first retailer we’re going to discuss today. And for those of you who are less familiar, it’s known for basically its diverse inventory of gadgets and quirky décor; Meme inspired accessories, because we all need more of those, and now it’s inviting the gamer community to come duke it out in its stores. It partnered with Nerd Street Gamers and they’re investing 12 million into piloting 3,000 square foot esports venues, and these venues will be connected to five select store locations next year.

Julia Raymond:
If this is successful, then the company has planned to open 70 or more according to reports over the coming years. So this is pretty big, this is a huge investment. Sucharita, with ICSC reporting an approximate 45% increase in this entertainment square footage in U.S. malls over the past decade, it kind of seems like a risky move for Five Below considering they’re typically in strip malls, do you agree?

Sucharita Kodali:
Well, I think that one of the strategies that retailers have looked to are what are alternative ways to get traffic to your stores? Are there services or activities that you can provide whether it’s like Michaels doing craft classes or you know, kind of Apple doing classes of some sort.

Sucharita Kodali:
So I think that this … it’s actually an interesting idea and we know that gaming and a lot of multiplayer gaming is becoming increasingly popular. There’s a social component to it. So, it makes a lot of sense and I’m frankly surprised that we’re hearing this from Five Below and not Game Stop and why we didn’t hear it from Game Stop like five years ago. Right?

Sucharita Kodali:
But I think that it … I’ll watch it very closely because this could be kind of a way to for retailers to look to innovate themselves out of the challenges of either challenged real estate or you know, just inventory problems. So I actually like it. I think it’s an interesting concept.

Shannon Ryan:
So, I mean I’m intrigued as well, for sure. I think yet again it demonstrates the fundamental challenge that retailers are facing these days in terms of customer acquisition. In terms of understanding new and novel ways to drive the proper audience to your store in order to achieve that overall game that you’re looking for.

Shannon Ryan:
I’m happy that Five Below didn’t do a pop up which seems to be the answer for most every other retailers, but yet again I think it shows that retailers are struggling to understand how to build community in the physical world. While I believe they’ve appropriately identified the right audience for their retail mix in terms of who that gamer is, although I would say it maybe skews a little bit to the older side than what they think, it’ll be interesting to see how they monetize that strategy within the environment that they’re building.

Shannon Ryan:
Gaming and gamers are very immersive when they’re in that moment and I wonder whether or not the crossover effect that they’re hoping for actually materializes. What do you think, Sucharita? Do you think it will happen?

Sucharita Kodali:
Well, I don’t know the purchasing behavior of that demographic, but what we do know is that getting bodies in a store or in any venue is generally a good thing in retail. I would look at even the Apple stores as a great example. A significant part of their foot traffic is not people purchasing anything but just people looking for service through the Genius Bar. I think that same idea of just getting people in and if you can get people there and they’re in the store, they’re browsing, this is the demographic. It’s a young millennial, Gen Z, tween demographic really that Five Below is most popular with.

Sucharita Kodali:
If they can get those people into the store and even browsing around the store for sometime in between games or as they go to get a snack, I think that would be a good thing for them and it would drive an energy to the store that supplements what they maybe already have.

Shannon Ryan:
Yeah, a lot of that brings me back to our good friend Doug Stephens who I believe has been on this podcast a few times already as well where you know, he is advocating for a new set of metrics around evaluating store success that is much more focused in terms of thinking about it the way we think about media in terms of exposure, brand impressions, et cetera. That the transaction by definition doesn’t need to take place in the physical store, and if as you mentioned, if they find a way to drive that community to the store, it brings an energy. It brings a certain vibe and hopefully that translates itself, again, to the positive net outcomes that they’re all looking for.

Shannon Ryan:
It’s just historically that’s a very fickle group, and I’d be interested to know in terms of what those setups look like. Sort of what the costs associated to those build outs are, because again, this brings up another question where a lot of what we see in the retail world is to build these immersive experiences, these sort of experience stores are super high and high touch, high sort of production value type equations.

Shannon Ryan:
If Five Below has found a way to do this, to tap into that sort of experience but do it in a very cost effective way, well then they might be on to something.

Julia Raymond:
Yeah, and that’s a good point Shannon. Actually I’ve looked into it a bit because I’m like, “I don’t know about that 12 million dollar number for expanding these completely new connected venues to Five Below.” Because just last year there was huge news about an esports stadium opening in Arlington, so it was a revamped old convention center, so the infrastructure was there. But they spent 10 million on just that one stadium, but it was 100,000 square feet, so the total of Five Below’s investment’s only 15% of that. But if you look at the cost per square foot we’re talking $800 per square foot for Five Below versus $100 cost per square foot for this huge esports center in Arlington.

Julia Raymond:
I do wonder if it’s the right size. 3,000 square feet seems really boutique compared to all the other esports stadiums that have opened recently.

Shannon Ryan:
Well, as the father of a 12-year-old who would look at it and say 12 million dollars for a gaming room is a bargain.

Julia Raymond:
Well, it will be good to see what happens there. I think there’s a lot of room for innovating the sports stadium, because they remain largely unchanged and kind of how they look and how they’re set up. So I think there’s definitely some opportunity there. So it’ll be interesting to see where Five Below goes.

Shannon Ryan:
Indeed.

Sucharita Kodali:
For sure, yeah.

Julia Raymond:
Some great thoughts on Five Below, and we’re flipping from discount to luxury with our next retailer in focus: luxury department store Barneys. After a few months of uncertainty, just last week Barneys reached a ‘stalking horse’ agreement to sell its assets to brand developer Authentic Brands Group, and investment bank B. Riley Financial, for $271 million.

Julia Raymond:
That deal is set to be finalized at auction in the coming days, however Reuters reported an 11th hour bid from Israeli businessman Samuel Ben-Avraham, though rejected he reportedly has until Oct. 31 to submit a new bid. If the deal goes through with Authentic Brands, Saks-owner Hudson’s Bay has announced plans to license the Barneys name, open Barneys-branded small shops inside several Saks locations and ultimately close the majority of the remaining 7 Barneys locations, though it’s unclear if its iconic Manhattan flagship would remain up and running.

Julia Raymond:
Shannon, what is your take on Barneys potentially living as a shop in shop inside of Saks?

Shannon Ryan:
I mean, I’m not surprised that they’re looking for a way to potentially still capitalize on the brand equity that is contained within the name of Barneys. Obviously in terms of a physical location with the seven stores and a struggling sort of online presence, they just didn’t find the magic formula to be able to allow themselves to be able to continue to push forward.

Shannon Ryan:
So you know, but there is still brand equity contained within the name of Barneys. So you know, the shop within the shop idea might be a way to keep that loyal customer base that always was and always will be a Barneys customer still accessible and prevalent, but at a much sort of more affordable cost base.

Sucharita Kodali:
Yeah, I mean I find it a little puzzling. I don’t know what it means to have a multi-brand multi-category brand within another multi-brand, multi-category, yeah. Right? I mean, it’d be putting like a Target shop in a Walmart and it’s like, “Well what does that mean?” Is it the private label stuff? Is it … because so much of the merchandise overlaps anyway.

Sucharita Kodali:
I mean, it would almost make more sense, and I know that we’ve slammed pop up stores already, but within the last few minutes but I think-

Shannon Ryan:
Within five minutes of the podcast yeah.

Sucharita Kodali:
Right, right, right. But I actually think that that’s a great way for a brand that resonates to continue to offer something. Or do something like … I mean, we’re hearing what Toys R Us is doing, right? I mean, they’re doing … they want to preserve the brand online or I guess they’re redirecting it to Target and then they’re going to have some small format experience-based stores.

Sucharita Kodali:
And maybe that’s a better … that’s potentially a better approach. But the challenges I don’t know what assets are going to be left. Is it just the inventory, is it the brand name? Because you know, obviously there’s no shortage of real estate right now with Barneys and the problem is is that they can’t pay their bills. So do they need to … do they really need more real estate when real estate is what got them to where they are now? Real estate problems are what got them to where they are now.

Shannon Ryan:
For sure. And maybe we’re thinking a little bit … maybe we’re not giving the benefit of the doubt to someone like Authentic Brands in terms of the way they’re thinking about what an in-store boutique would be.

Sucharita Kodali:
Fair enough, yeah.

Shannon Ryan:
Quite honestly, I think we all have this sort of vision of that per the makeup counters of what that actually is, right? A couple of display units and a sign hanging from the ceiling saying, “Welcome to Barneys.” But possibly if they add in this element of scarcity and timing that is the fundamental driver of a popup, and add it within the store footprint of those existing locations, then maybe there is something innovative to do with that brand equity.

Shannon Ryan:
But Sucharita, I agree, your comment was very prescient around a house of brands within a house of brands and you know, how do they go about the merchandising of that in their retail locations? I think that’s going to be a real challenge for them if that’s the route they take.

Sucharita Kodali:
Right, right, right. Or you know, I mean it seems like a lot of these brands that go bankrupt that still have equity, they essentially just live online and I don’t know that there’s a great solution for living offline unless you maybe license the brand to others and let others figure out how they want to take advantage of that name.

Julia Raymond:
Certainly, and I like what both of you said. I think Sucharita had some really good points on why it’s puzzling. A department store inside of a department store doesn’t make a whole lot of sense, especially when we see brands like Target having the Disney sections, that makes sense. Kohl’s is having its curated by Kohl’s sections where they’re switching out brands like every quarter. So I know LovePop and Adore Me were some of the brands they’re rolling out first, and that makes sense with what Shannon said about the scarcity and timing. “Oh it’s only going to be here for a certain amount of time.” So if they can execute it well in that sense, I think they’ll have some success but yeah, maybe they’ll end up just going online.

Sucharita Kodali:
Right, right. Or I mean, even if it’s like a department. I mean, Sephora did have shop in shops in JCPenney’s, and I think Kohl’s as well, right? And that made sense because Sephora didn’t necessarily have an overlapping inventory mix and it was the statement that that retailer was making for beauty. So that makes sense.

Sucharita Kodali:
So if there’s a vision and there’s really distinct clarity around what does this stand for, I think that there’s certainly potential.

Shannon Ryan:
I think one of the interesting things that something like an Authentic Brand goes … part of me thinks this is distressed money chasing bad assets. I mean, I’m not so sure I would want to be in the department store business these days at all and therefore, to buy another store that essentially has a similar format, I mean, there are way smarter people in the world than I am for sure who have thought through this problem but I really struggle to see how that works in a way that drives the bottom line.

Shannon Ryan:
And maybe I’m just missing something, but that’s a category that I would not want to be in these days.

Sucharita Kodali:
I agree. It’s a tough, tough space. And yeah, and I mean these particular department stores are heavily anchored in apparel, which is one of the most challenging sectors in retail.

Shannon Ryan:
Challenging categories, yeah for sure. I mean, as a Canadian we won’t even begin to talk about taking Hudson Bay private, we’ll just let that go.

Julia Raymond:
Well it will certainly be interesting to see what happens with Barneys and it’s just a waiting game for us, I guess, to follow that story.

Shannon Ryan:
Yep. We are spectators at the car crash.

Julia Raymond:
Speaking of waiting, that brings us to our next topic because I think we can all agree that waiting at the pharmacy is not something we are happy to do. Today people are getting prescriptions delivered and now we might have drones delivering prescriptions. So that comes with the announcement that UPS that it is partnering with CVS to launch home-drone delivery for prescriptions and convenience items. Interestingly, Walgreens is also already piloting a drone delivery program of its own with UPS competitor FedEx. It began offering drone deliveries in Christiansburg, Virginia, last week, that is a small town of 22,000 residents. So they’re a little ahead of the game.

Julia Raymond:
Right now they’re trialing the program with a limited number of items, so Walgreens is not delivering prescriptions yet but they plan to. So both programs are a game-changer, potentially, for U.S. drone delivery, which has stalled to lift off the ground since Amazon first announced its plans to launch Prime Air back in 2013.

Julia Raymond:
Sucharita, many claim that we’re still years away from delivering on half-hour shipping drone promises, at least in the US. Would you agree with this?

Sucharita Kodali:
I think we’re still quite a ways away. There are three different types of consumer delivery destinations, right? It’s either a rural delivery, it’s a suburban delivery, or it’s an urban delivery for the most part. There are probably other exceptions but that, I think, encompasses the vast majority of deliveries.

Sucharita Kodali:
Drone deliveries in urban environments, dense, urban environments are a non-starter right now. Right? I mean you need to figure out how you’re going to … essentially the only option is to land on a roof and the rooftop landing is just an ecosystem that is possible but it would take a while and it’s probably best suited for new cities or new buildings.

Sucharita Kodali:
The suburban environment makes some sense but the delivery ecosystem still needs to be built out. There are all kinds of rules and regulations about who owns how much of the airspace above a home, what are you going to do with treetops, what do you do with electrical wiring, sprinkler systems?

Sucharita Kodali:
I’ve heard of things like using tethers to release packages onto front yards and whatnot, which is possible, but I don’t know whether … I think that that’s still hypothetical. I don’t know how realistic that is.

Sucharita Kodali:
The rural use case is the one that probably makes the most sense because those are the most expensive deliveries to make and those are where you could … you’re not going to run into as many regulations and as many issues with finding a drop spot for a drone delivery.

Sucharita Kodali:
But the rural delivery space is also the smallest percent of all of your deliveries as well, so you know, kind of how mainstream is that? How much of the delivery ecosystem are you really solving for when you solve for that?

Sucharita Kodali:
So I think it’s still a ways away. I have some operational questions too, because there are a lot of really smart engineers and computer scientists that are building these drones, but I don’t know that they’re thinking about it from a logistics and an operations standpoint, because a lot of these drones go like five miles or less, although there’s some I think military grade drones that go further.

Sucharita Kodali:
Many of them don’t carry more than five pounds. And again, there’s some military grade drones that go quite fast and further and can carry things heavier, but they’re military grade so they’re going to be much more expensive.

Sucharita Kodali:
And drones only go with a package in one direction usually to one place. Right now, in delivery the trick to creating efficiency is density. So in an hour, you can have 20 deliveries an hour in a truck and kind of to deliver those same 20 packages by drone, you would need a lot of drones. And you know, and I don’t know that people have thought through that piece of the equation, and also kind of there’s a lot of … I mean, every time a drone drops off a package, unless you’re picking up something the return trip is going to be completely empty versus kind of carriers are able to route their packaging so that there’s only one return trip that’s empty and sometimes they can even pick up returns or other reverse logistics packages.

Shannon Ryan:
This is why you have Sucharita on the podcast, Julia.

Shannon Ryan:
I think the only thing that I would add in here is I fully agree with Sucharita that this is primarily an exercise in marketing hype in my opinion still. I don’t believe … there is not a viable business model here that makes sense at this stage for what we’re talking about.

Shannon Ryan:
We’re trying to solve the last mile problem, and I would suggest that where I see drones essentially operating is in the area of sort of depo or drop off point distribution.

Shannon Ryan:
The ability to get products closer to a customer such that they can be picked up or dropped off in a more economical fashion, but to be the last mile part of that equation, I don’t see that. So I see it kind of as an opportunity where you might have sort of drone station depos that are doing almost just in time type logistics for warehousing, for popular products based on algorithms and other such things that get them closer to where they need to go, but I don’t see it as a last mile solution.

Sucharita Kodali:
Right. And Shannon I think what you’re describing is actually in the one market where they do have some drone delivery, which is in China, where companies like jd.com actually do use drones, but it’s more sort of warehouse to warehouse. Like they’re going from their central distribution center and sending kind of packages to rural destinations where it would be otherwise very difficult to get a vehicle.

Sucharita Kodali:
So that’s exactly kind of the use case that other … that to the degree that it’s happening anywhere, that’s what is happening.

Shannon Ryan:
It’s that classic William Gibson quote of, “The future is already here, it’s just unevenly distributed.” Right? You know this idea that we need to iron out where the points of distribution are such that it serves all markets equally.

Sucharita Kodali:
Right, right. And I mean your point’s a really astute one which is that this is kind of a roundabout solution and not the most efficient one to last mile delivery. I mean, should we really just be spending time talking about lockers or pickup stations and or devilries in the night, you know?

Shannon Ryan:
I think a network of pneumatic tubes that shoot things directly into your house.

Julia Raymond:
Directly into your house, that would be awesome Shannon.

Shannon Ryan:
Exactly. God forbid we go outside and walk and pick up something.

Julia Raymond:
No, so inconvenient.

Sucharita Kodali:
Hyper loop from our home.

Shannon Ryan:
Exactly. Do not worry, Elon Musk will save us all.

Julia Raymond:
Yes, there you go. In Elon’s voice, I love it.

Julia Raymond:
Yeah, those are good points. You know, I think there’s another … it’s a PR play definitely a little bit because it’s not the whole story about these partnerships. I mean, in Walgreens you can go drop off your FedEx package and they’ll ship it for you. So I think there’s more-

Shannon Ryan:
I can’t help but think on the Walgreens of some sort of nefarious cartel just sitting there and plucking off medication in the sky as a business model for them.

Julia Raymond:
Right? Yeah, I mean to ship medications via drone, it just sounds so risky. There’s so many things that could go wrong.

Julia Raymond:
Well, that brings us to the end of today’s Rundown. So thank you very much Sucharita and Shannon for being on the show. I really appreciate it.

Sucharita Kodali:
Thanks for having us, Julia.

Shannon Ryan:
Absolutely, our pleasure.

Julia Raymond:
Excellent, love to have you back.

Sucharita Kodali:
Anytime.