Top five retail real estate trends of 2024 with Ethan Chernofsky

Guest: Ethan Chernofsky
Topics: Retail traffic trends, affordable luxury, store as a platform

In Today’s episode of Retail Retold, Chris sits down with Ethan Chernofsky, head of marketing at Placer.AI. Listen in to hear Ethan’s top five retail real estate trends for 2024, and Chris’s insight into what that means for the open-air retail real estate industry.

What You’ll Learn

1. What are the top five retail traffic trends for 2024?
2. What is “affordable luxury”
3. What context is necessary to accurately analyze segments of retail real estate?
4. How resilient has the grocery category been over the past five years?
5. Has return to the office had more of an impact on traffic than it is given credit for?
6. What does the term “the store as a platform” mean?

About Retail Retold

The Retail Retold Podcast highlights community retailer stories from across the country and gives a behind-the-scenes perspective from business leaders in both retail and real estate industries. The show’s episodes contain valuable insights that help solve the needs of entrepreneurs and real estate pros. Join host Chris Ressa and new guests weekly for amazing insights and thought-provoking stories.

Transcript:

Chris Ressa  00:00

This is Retail Retold, the story of how that store ended up in your neighborhood. I’m your host, Chris Ressa. And I invite you to join my conversation with some of the retail industry’s biggest influencers. This podcast is brought to you by DLC Management.

Chris Ressa  00:04

Welcome to retail retold everyone. I’m your host, Chris Ressa. Today I’m joined by Ethan Chernofsky from placer.ai. Welcome to the show.

Ethan Chernofsky  00:14

Hey, Chris, thanks so much for having me. It’s great to be here.

Chris Ressa  00:18

For I think most of the listeners, for those who don’t want to tell a little bit about who you are and what Placer is and what they do.

Ethan Chernofsky  00:28

Sure, so I lead Placer’s marketing, I’ve been here for about five years, which is essentially the the lifespan of the company at this stage. And Placer’s a location analytics company, what that means very, very simply, people are voting with their feet every single day, we’re showing you how they’re doing that across the country to retail locations, via location analytics, and, and giving some insight into what’s really happening in the physical world.

Chris Ressa  00:54

Excellent. And for those of you out there, I think we have a cool episode. So we have the top five traffic trends thus far in 2024. And with that, let’s jump right in Ethan. Give us number five.

01:15

All right, so So number five, we’re going a little obvious here, but I want to do a twist on it. So obviously, value is going to be a huge trend this year was a big trend last year, and that kind of chasing a value. But within that context, there’s something that gets overlooked. And in our mind, that is the affordable luxury. And we are seeing the power of that kind of group or subcategory of goods and services already have power early in 2024. So what do we mean by the affordable luxury?

01:44

 When we look at consumer spending patterns, we see that things are down and a lot of areas where we would normally want to splurge or treat ourselves. But even when that happens, there are still there is still that need to you know, give ourselves a little victory, a little reward for the hard work we’re putting in and find that area. And that’s what we’re calling the affordable luxury. So we think about the coffee out, right? Is that a value play? Of course not right? It’s far more expensive than the coffee you can make at home.

Yet our coffee category sales is it’s up 1% In January, and January was a tough month for many categories, and up three and a half percent year over year in February. And that’s by the way, we look at full service restaurants, they were down five and a half percent in January, and up just less than 1% in February. So we see the value there.

Other things that fit with that affordable luxury tag are things like health and beauty. So the Ulta’s the Sephora’s is the CVS and Walgreens even the grocery stores that have those products that make you feel better about yourself. The creams, that investment is something that we see as very powerful and potent in 2024.

Chris Ressa  02:50

So interesting. That’s not where I thought we were going with affordable luxury. I would call that disposable income more discretionary spending. I call that value discretionary spending is what I would call it.

03:08

So the inspiration actually came from when we were doing research ahead of this, right when this kind of economic challenge was kicking off a couple of years ago. If you look at categories that they were traditionally positioning as doing well within those periods, there were a handful of categories they were referring to and again, we will find the link for you. But we’re referring to as these kinds of extras. Places where we’re spending more than we could on a cheaper option. But it’s a more value oriented way of finding that kind of pursuit of of self. Selfish spend that still fits within budget. And I think these are the categories that check that box.

Chris Ressa  03:48

Totally and the reason I call it discretionary is because well like when I when I heard you say luxury I thought you were gonna say like a handbag company that like had a sale. But I think it’s an interesting point. So people are trying to provide value in their discretionary spending that’s not need based.

04:13

Exactly while keeping that discretionary spending.

Chris Ressa  04:15

Got it. Very interesting. And the example you gave was expensive coffee, traffic was up in January and February.

Ethan Chernofsky  04:28

Yeah, absolutely.

Chris Ressa  04:29

Up from where? Same period last year or up from the end of the year?

04:34

Up from same period last year, which by the way, was a strong period for the coffee category last year. So it’s strength on strength,

Chris Ressa  04:42

Strength on strength. All right. Excellent. What do you what’s your takeaway?

04:52

I honestly think that the places where it’s interesting to us are, hey, if I’m a shopping center owner and I know I have the These assets available, am I doing what I can to kind of lean in and push them in the right direction? And that’s especially true if I don’t have a big chain. Right? If I have a local player, are you kind of pushing your opportunity here extra because you rest within that space? And then the other place is when we talk to kind of retailers and product companies. Do you understand which of your products have an extra pull at the current moment in which things you want to emphasize? Because sometimes watching until they realize what is actually kind of driving extra demand, you’ve missed some of that window.

Chris Ressa  05:33

Sure. Okay that makes sense. All right. Moving on. Number four.

Ethan Chernofsky  05:41

All right. So number four is context. And the thing that triggered this for us was, we preach context quite a bit. But what triggered this, for us was some of the news that came out around the fitness category. So essentially, what came out was, hey, fitness is up year over year in January and February, but they’re only up a couple of percentage points compared to 2023, when that category was up as much as 10 to 15%, in certain months, year over year. And they were saying, Oh, this is a slowdown in fitness. And this is one of those players, areas where kind of the sirens go off of like, we need to have context here.

And the example we love to give is, you know, imagine a great basketball player who’s dropping 35 points a game one season, and the next season, he’s only dropping 36 points a game. And so that year over a year jump is smaller than it was before. But it’s only smaller, because they already made a huge jump. So there is an element where we need to remember that some of these segments that did exceptionally well in recent years, are going to have to almost inevitably flattened out even a little bit.

And so we see things like 5% growth for the fitness category, we should be standing up and applauding how well some of these chains are doing in terms of overall visits, because we’re comparing it to these periods where there was already huge visit jumps. So this brick and mortar fitness kick has been so powerful and so significant, especially when we consider what the conversation was June July of 2020 When we were convinced that the future of fitness was just peloton, a smartwatch and a mirror device in your house

Chris Ressa  07:26

And going for a run. Ethan, are you not hearing me?

07:38

Now I hear you, you kind of shut off for a second.

Chris Ressa  07:42

I said and going for a run we thought we were  gonna do that

Ethan Chernofsky  07:49

Why go for a run? It sounds like the worst

Chris Ressa  07:51

It does, so okay. So the next trend is we need context. And so the way I interpret what you’re saying is as follows, is that a lot of categories are up. But just because they’re not up as much as they were last year in terms of traffic, doesn’t mean they’re not doing well. They’re actually doing really well.

08:14

100%. And we we also need it when we think about downs, by the way. So look at the electronics sector or home improvement or even movie theaters. These were kind of all darlings at some point in the last few years. There are other things that play into visit declines, that don’t mean that the sky is falling, they mean that we’re in for a period that is different than what we just went through.

So we think about Home Improvement electronics, the pull forward of demand, the economic situation, do we really feel less positive about Home Depot, Lowe’s, etc? Because that sector is seeing not quite the heights that it hit in the years prior? I would argue no. And I think the same thing is true for other spaces. Look, movie theaters is a great example, stellar year in 2023. But there’s so many things working against that segment this year, that if we see visits down throughout the year, I don’t think that should fundamentally change whether we are bullish about the sector, as long as the underlying strategy doesn’t shift.

Chris Ressa  09:20

Alright, I like number four context about the numbers. Okay. What’s number three?

09:28

Number three is continued strength and it’s especially continued strength in an area. One area that I think if we kind of go back in our 2019 time machine, was getting pretty hard hit, and for me, that’s grocery. So when we look at the grocery sector, when we think about the split between superstores and discounted dollar, so the overall visit share, okay, in January of 2019, grocery held 45% of that overall visit share. superstore has held about 41% and discount and dollar held about just under 14%. As of January 2024, grocery have gone from 45.4% to 45.1%, superstores had gone down by about 1% and 2%, excuse me and dollar stores had grown by about 2%.

In terms of overall visit share the steadiness of grocery, when we think about how hard hit or the narrative around that segment of how hard hit it was supposed to be, is incredibly impressive. I think it speaks in part to the rise of some really impressive brands like Aldi, Lidl, Grocery Outlet and others, but also to the tremendous resiliency of some of these kind of classic anchors. So the Publix’s, the Albertsons, the Kroger’s, the different banners within them, and how strong they’ve been, even in this period of flux and also how they’ve been able to hold on to some of the gains they made during the pandemic, when they had a distinct advantage because of their essential retail status.

Chris Ressa  09:29

Okay, let’s stick on this one for a second. So let’s let’s define the terms. So for everyone, superstores are what?

Ethan Chernofsky  11:16

Superstore is our Target, Walmart, your big box giants that have everything all under one roof. Wholesale

Chris Ressa  11:23

Wholesale clubs in that?

Ethan Chernofsky  11:24

 Yep.

Chris Ressa  11:27

And department stores are not?

Ethan Chernofsky  11:29

Department stores are not.

Chris Ressa  11:31

Number two, grocery, that is Publix Shoprite, Kroger, Albertsons,

Ethan Chernofsky  11:37

Absolutely

Chris Ressa  11:38

And discount and dollar. I think we know what the dollar stores are, what are the discounters?

11:44

I mean, you know, Big Lots, Five Below, that wider category. Family Dollar obviously, Dollar General the like.

Chris Ressa  11:51

Got it. Okay. And you said that this, the tough time that you were speaking to, were you speaking that, to hold on to the market share that they had gained in 2020? And 21? Is that the period of time that was challenging?

12:10

If we think about, like, think about the conversation in 2019. And this doesn’t necessarily, you know, apply to everyone. But there was a very loud voice that said, and if you looked at it historically it was true. Grocery was losing wallet share over time, to QSR, to restaurants to a whole range of different things and, and the threat from grocery elements within Target and Walmart, grocery elements within kind of the dollar players was considered the next big bite.

That didn’t happen yet. And that’s not because those brands didn’t do things well, like Target and Walmart are doing some really brilliant things. You know, again, the wholesale clubs have done have made huge strides. The dollar players have made some really smart decisions and rapid expansion. So their ability to grab more visit share is significant. And so I think the capacity of grocery to hold their position is something that is especially noteworthy in this current environment.

Chris Ressa  13:05

Interesting. Okay, now, I’m picking up what you’re throwing down.I like that. I think it is pretty remarkable, actually. Because there was this period of time from a wallet share perspective, where I think it was like, the Great Recession in 08′ 09′, where it flipped and more dollars were spent in restaurants than they were in actual grocery stores. It was like close, but it was, it was for the first time in history. And obviously in COVID that shifted and for them to hang on to share is quite remarkable. I think we have some amazing grocers in America. So

13:43

By the way, I think that’s it’s a super important point of like how effective some of these players are. And when you think about the rate when you look at like the regional map of who the top grocery banners are within any given region, the diversity of it, I think is a big piece of why some of these players are so strong, because they can focus on being the local dominant player.

Chris Ressa  14:04

Yeah. All right. That leaves us to number two, traffic trend in ’24

14:12

Okay, this one, we’re going to call the return. Okay. So there are a handful of areas where we are seeing really significant and really interesting recoveries. The most notable is the return to office. So when we look at the overall recovery of visitors,

Chris Ressa  14:31

Are you saying people have to go back to work now?

14:34

I’m saying they’re going back and we are underestimating how much they’re going back. So So I think if you look at obviously when we look at Nationwide, we’re seeing visits somewhere about 40 to 30% down compared to where they were pre pandemic, but that’s weighed down heavily by cities that are harder to hit like San Francisco, and it’s pulled up by cities that are coming back faster. New York, Miami come to mind the Power of the office is, is a very significant piece that we need to discuss.

It doesn’t mean that hybrid work is in here. And it doesn’t mean that hybrid work isn’t having a significant impact, it just means that the expectations of we’re going to go back two days a week, it’s actually going to look a lot more like three to four days a week, on average at these major office buildings, then it’s going to look at kind of the further end of that of that spectrum. And what it has also shown us is that being the top buildings in a space really matters.

So being in a major city, there are obviously certain dynamics that play into this. So for example, if you have a family, you’re more likely to go into the office less than if you are single, if you obviously proximity plays a major role. So the amount of time you need to commute, the level of role you have within a company can play a role, the sector you work in can play a role. But overall, I think the power of the office recovery is more significant than we’re sometimes giving it credit for. And I think we’re gonna see things balanced out a lot closer that four days a week from the office than the two that maybe we were initially predicting a few years back.

Chris Ressa  16:10

Has the power of the office, or people’s return to work, brought down traffic anywhere?

Ethan Chernofsky  16:21

It is returning prior patterns of consumer behavior. So I don’t think that one of the things that we’re seeing is very interesting is at the peak of hybrid work, right? Obviously a lot more work at home and a lot less than the office, we were seeing much fewer grocery visits on the weekend, right from a proportion compared compared to pre pandemic, we’re seeing many more visits during the heart of the day, and much less between like six to 9pm. Those are all reverting back. So we’re seeing a lot more, you know, grocery or superstore visits on weekends or in the evenings compared to where they were just a year or two ago, we’re seeing midweek visits, and the balance between midweek and weekend visits start to balance out again. So I think those things are very highly correlated, where the patterns that we saw that were around centered around a certain magnitude of hybrid work, are starting to shift back and look a lot closer to what they look like pre pandemic.

Chris Ressa  17:19

Got it. But they’re not pre-pandemicyet. There’s still some people who were shopping at noon at the grocery store.

Ethan Chernofsky  17:27

Yeah, and I mean, I think what is interesting, one of the Clarion calls for us is if you benefit from that behavior, this is when you need to make sure you’re incentivizing it, because the opportunity could be slipping away from you.

Chris Ressa  17:43

Okay, interesting.

Ethan Chernofsky  17:46

Yeah. Second return. I think we have to give like, like a tip of the cap to malls at a certain point, right. I think there was this period where the mall is dying, the demise of the mall, the country is overhauled. And there are elements of truth to that. But if you look at top tier malls, their recoveries even compared to pre pandemic numbers, so we’re not just looking year over year, year over two year are getting stronger and stronger over time, when you look at 21′ to 22′ to 23′, that pace is consistent, and it’s getting stronger and stronger.

And I think we need to give a little bit of credit to the power of the mall, some of the great decisions that was made by a lot of these landlords and how they change their perspective. And by the way, this is way before the pandemic is 5-10 years ago to start saying, we need more diversification of tenants. We need to be less oriented towards apparel and beauty. We need to be more focused on experiences and dining and things like fitness within the mall space. And that’s all playing out in a really powerful way right now.

Chris Ressa  18:50

Ok interesting tidbits, I think, on the return to office, I think we’re going to hit some equilibrium. I’m not sure it’s ever going to be back to pre-pandemic levels. I think there’s some level of hybrid that is here to stay no doubt.

Ethan Chernofsky  19:13

Where do you think you have to pick your days? How many days is the average American office worker going back to the office?

Chris Ressa  19:24

I’m sure there’s actual stats. I’m sure there’s actual stats.

Ethan Chernofsky  19:28

Where do you think it’s gonna land?

Chris Ressa  19:29

I think it’ll land at three.

Ethan Chernofsky  19:33

So this is our gamble. This is Chris, is ahead of the next time we get to see each other this is you going three? I’m gonna go it’s going to be closer to four

Chris Ressa  19:47

Yeah, I’m gonna go three. I’m gonna go three. And I think how you I think one of the things that is important to that is how the math plays out because I think the amount of remote workers, that’s increased, and that’s changed forever. So those people go to zero. And they’re never going back. There’s some level of where the amount of people who have the ability to work remote has increased. And I think a significant portion of them are going to be able to work remote for a long period of time.

Ethan Chernofsky  20:35

I don’t I don’t disagree with you. I think the other thing that works in your favor is one of the clearest patterns when you look at office visitation data is Monday is down significantly from a proportion of visits. And Friday is down significantly. Tuesday, Wednesday, Thursday, are the closest. So people are saying, all right, if I got to start the week, maybe I want an extra long weekend where I can stay at the you know, the place I spent the weekend. Ease into my weekend on that Friday. There’s there’s a lot of rational, smart thinking to the way the office recovery is happening that shows you that hybrid isn’t going anywhere. I do think that question is, though, is the average three? Where does the average rest between three to four? Because I don’t think it’d be more than four, and I don’t think it’ll be less than three.

Chris Ressa  21:24

I think the math depends on how you include the remote workers. If we’re taking an average, is a remote worker zero in that equation? Or are  they not in the equation?

Ethan Chernofsky  21:34

It’s a great question. I think you you have to remove them. I think, no, you have to compare, you have to compare to pre what the visits were to the same buildings in 2019 versus today.

Chris Ressa  21:47

Yeah, and I think what you’re, I think there’s this conundrum that companies have where it’s like, alright, some people are remote, and some people are hybrid, you know, how does that work?

Ethan Chernofsky  22:04

Yeah, it’s a, we had one HR leader of a very large company tell us and this was two years ago. So it’s possible, this person’s opinion has changed. But he said remote work and hybrid work, or excuse me, working from a place where they don’t have a location, they don’t have an office, you can’t come in at all. He said, that’s always existed for our company, but it’s existed for a very small group. So that group is likely going to expand, but it’ll always remain a small portion. That was this one individuals perspective.

Chris Ressa  22:43

 So Placer has been around five years, right? How many people work remote?

Ethan Chernofsky  22:50

Our entire US team.

Chris Ressa  22:55

Okay, case closed. What’s the top trend in 2024?

Ethan Chernofsky  23:02

This is my favorite trend. And there’s, I’ve heard it called two things, I have a preference, I’ll tell you why. So the top trend for me is the store as a platform. Now it’s very often called the store as a medium, some people focus and there’s a lot of different areas in terms of where it’s focused on. So we think about things like retail media, right in the brick and mortar environment.

We’ve got colleagues that you know, who are attending, we’ve attended some of the, you know, big retail shows, it is all the buzz, obviously, the advertising shows, product shows as well. Everyone’s talking about retail media in a brick and mortar environment. Why? There’s massive amounts of eyeballs, there’s a unique ability to reach people while they’re in discovery mode close to the point of sale when there’s high intent. And it is about maximizing the store. But the second we realize that this is about taking the four walls of the store and saying it’s about a lot more than sales per square foot, we have to acknowledge all the other pieces that come here.

So buy online pick up in store and delivery from the location is part of this same trend. Every utilization of the store that goes beyond that pure sales per square foot perspective, is about the expansion of what we value from physical locations. And it’s one of the key elements that’s going to continue driving so many brands to expand their retail fleets, to go off offline when they had only been online prior because there are so many values to brick and mortar locations that we were not considering in the past. And I think the greater we recognize how significant those values are, that we’re able to measure them and understand their direct impact on the business, the more we’re gonna be able to lean into them.

Chris Ressa  24:45

So I agree. I’m going to give you a challenging response here, not to throw you off

Ethan Chernofsky  24:51

I love it

Chris Ressa  24:53

I’m not sure you will, how will that traffic trend?

Ethan Chernofsky  25:02

How will what traffic trend?

Chris Ressa  25:04

The store as a  platform.

Ethan Chernofsky  25:07

So there’s a couple of interesting things here. If you measure it improperly, it’s going to, it’s going to be misleading. So for example, if we measure, I open a new store in New York, I have no locations in New York. Am I just measuring how many visits come into that store? Am I measuring how many visits come into that store over time? Am I also measuring, have I seen an E-commerce uptick since I launched that store? So the store not just for the things it sells within that location? For the eyeballs, the visibility abroad. Am I measuring it where returns to the location are a benefit? Because I know that online returns are more expensive. Am I measuring it from the perspective of the distribution it’s enabled and how it’s brought down my costs of delivery or improved proved my speed of delivery. Because if I’m including all of those metrics into the into the mix, I think it’s going to trend in a very positive way.

Chris Ressa  26:06

I would say, My takeaway now that I understand what you’re talking about, is a single visit means a lot more than we thought it did.

Ethan Chernofsky  26:19

Excellent point.

Chris Ressa  26:20

That’s what I that’s, that’s my takeaway when I hear you say that a single visit to the store means a lot more than it once did.

Ethan Chernofsky  26:28

You know, it was really what I thought I walked into a retail location for untuckit, a couple of weeks ago. And I thought it was the perfect example of this. You walk into the store, it’s sparsely filled, there’s an entire rack that says try me on shirts, the entire, like, literally 25% of the things available for me to look at that were products that I could buy, were there with a tag, that syas try me on, which tells me, here’s a retailer that recognizes that a lot of their consumer base wants to find their fit, and then continue purchasing online in the future. So the store is a showroom, the store is a place to enable lifetime value. The store is not just about do I turn every person who walks in into a purchaser in that specific location.

Chris Ressa  27:19

Okay. I like purchases happening in stores, but I’ll take, I’ll take that. I’ll take it, I assume I’m picking up what you’re throwing down.

Ethan Chernofsky  27:30

But do you I mean, here’s the this is one of the things that I always find interesting, especially within the retail real estate community, it very often feels and this is as an outsider, it stores don’t get all the credit they deserve. And when we hear about things like returns coming off sales per square foot, like that’s, that’s silly. That’s, that’s not, that shouldn’t be the case. Because when I can do a return in a store, I have the chance for the person to upsell, I have the chance for the person to have a return that’s less costly than if they have to deliver it. I feel like we haven’t fully leaned in to just how valuable a brick and mortar presence really is for so many brands, and obviously this is different sector to sector.

Chris Ressa  28:17

I love that. I’ll see if in our next deal, we can try to get that in the lease. I love it. But I think  the landlord’s, you know, challenge you right and my response to someone not transacting in the store is a little ehh, because. We’ve been trained that that’s what the retailer cares about, if they tell us that success in the store is more than the transaction. But that hasn’t translated yet into at least documents and contracts where the success of the store is more than the transaction. When that happens. I’ll be like, great, but that really hasn’t translated yet, even though it might be happening.

Ethan Chernofsky  29:10

So I think that’s the key when we one of the things that’s been really interesting for us is when we speak to kind of folks in the advertising community who are starting to use, again, a product that was built for real estate and retail, who are using it to understand the impact of their billboards and are using it to understand the impact of, again, retail media within these physical locations is a metric that shows impressions like what’s the reach of this specific location, you start to realize that, oh, this is this is coming.

And the more we can put metrics behind it, the more powerful it’ll be. And again, just think about the world of online retail of online media. People were paying for impressions and those impressions. Again, an online visit is what a minute, two minutes. The conversion rate is maybe a percent if you’re Very, very good at what you do. What’s the percentage conversion rate for a store when someone walks into one of your centers Chris? It’s a lot higher than that. How much time are they spending there? What’s the impact of that interaction? And that’s why we’re so excited about

Chris Ressa  30:14

I’m glad we ended on this one. I like it. Okay. Ethan, this has been great. Thank you so much. So that’s a recap. Give us the five again, so everyone knows.

Ethan Chernofsky  30:29

Oh, my God, I gotta remember all the things we discussed for the last. So we’re one affordable luxuries.

Chris Ressa  30:35

That’s five

Ethan Chernofsky  30:36

Excuse me. Affordable luxuries. But we discretionary luxuries, discretionary, spend, whatever we decided. Fair enough. Two, context in data. Three, continued strength for grocery. I went fine. Whatever one second to last was the return and it was specifically focused on office and malls. And the last one was the store as a platform.

Chris Ressa  31:04

Awesome. Thanks so much, man. This has been great.

Ethan Chernofsky  31:09

Chris. Pleasure. As always, thanks so much for having me.

 Thank you for listening to retail retold. If you want to share a story about a retail real estate deal that you were a part of on our show. Please reach out to us at retail retold at DLC mgmt.com This show highlights the stories behind the deals from all perspectives. So it doesn’t matter if you are a retailer, broker, entrepreneur, architect or an attorney. Also, don’t forget to subscribe to retail retold so you don’t miss out on next Thursday’s episode