TFR | Strategy Consulting

My collaboration with Royal Bank of Canada (RBC) started a few years ago and this is an interesting interview about trends in retail. Ethan Chernofsky is the VP of Marketing at Placer.ai and is giving fresh insights around consumer behavior, omnichannel, retail formats or loyalty.

Placer.ai collects geolocation and proximity data from devices that are enabled to share that information by their users, and creates anonymized and aggregated consumer profiles.

RBC Expert Speaker call – Retail Outlook 2023 – Trends & Forecasts, with Ethan Chernofsky, Placer.ai, February 1, 2023

RBC: What were the key takeaways for you from the holiday season?

Ethan Chernofsky: The market has still not fully normalised but this year Placer.ai saw evidence of a trend towards an extended holiday shopping season. For example, although performance in October 2022 was slightly behind the 2021 run-rate, this was well above 2019 levels.

Furthermore, compared to in 2021 when retailers aggressively tried to push consumers to shop early to ensure availability, in 2022 the push came more from the group of consumers who actively chose to shop early. These consumers were willing to spend a little more to ensure they got exactly the product they wanted. Moving through the season, different factors came into play, as consumers started to look a bit more for deals.

Even in locations where there is evidence of a decline in the number of visits, Placer.ai has been seeing increases in dwell time. Increasingly, it is seeing that stores have become about discovery and experience. Online is more about speed, distribution and being able to reach consumers on the go. Even when comparing to the Omicron-impacted period last year, Placer.ai has seen that retailers like Target are seeing store visits down yoy but with average duration of shop up.

The beauty segment has been doing very well overall. This centres around the wide range of products in this category (everything from health & wellness to makeup ranges) which meant that it both got a huge boost from the pandemic (eg with trends towards health and wellness) but also benefitted from unlock post covid (eg as consumers returned to work and events resumed). Beauty is also a more experiential category (eg smelling the products, having your makeup done for you at retailers such as MAC).

RBC: Is the stronger beauty performance being reflected in the tenant mix in malls?

EC: Interestingly no. Looking at top tier malls, these are now performing at or near pre-pandemic levels. However, where apparel & beauty retailers have been 70-80% of the mall mix historically, this is moving closer to 50% now. These retailers are being replaced by more experiential tenants (eg restaurants, spas etc). With the beauty retailers, those that remain in the malls are now competing against a smaller peer group. Beauty players are also moving more towards the suburbs and interacting more with consumers who have moved out of the city during the pandemic.

RBC: How might the online vs store debate pan out this year?

EC: Increasingly these two channels are being combined into harmonized retailing. As such, surges in either channel should be viewed as complementary moves for retailers. Dividing the channels creates more friction in general.

RBC: What impact is the new normal for WFH/hybrid working having on shopping malls?

EC: The consumer context has changed and, for example, unique visitors to cities are still down c.20% versus before the pandemic. People are coming back into cities, but not as often as they used to. In general, they are coming back on Tuesday to Thursdays but not Mondays and Fridays.

Consumers now have three modes of working: workweek in the office, weekends and work from home days. Retail chains need to adapt to engage better with consumers in light of the change of context eg supermarkets are encouraging consumers to shop for groceries on Monday or Friday, instead of at the weekend. Retailers have to drive interest in engagement eg by using online to drive physical engagement.

RBC: Are you expecting to see any major wealth effects in the sector, given a recent fall in house prices and a tough year last year for stocks and bonds?

EC: Thus far, Placer.ai is only seeing shifts at the margin. The real question is who shifts and how sticky this consumer is. For example, if a consumer trades down and has a poor experience, they will switch back when their financial situation improves. If they have a good experience shopping at a lower end retailer, they may stay longer term.

The likes of Dollar General, Five Below and other discount players are starting to make interesting moves to attract a slightly more affluent consumer. We are also seeing a polarization in Retail, whereby there is less competition in the mid-market now. For example, part of Target’s strength are its ability to offer both very cheap but also very expensive items. Target understands that the midmarket shopper is willing to spend more in certain categories (eg electronics) but wants to spend less in other areas.

RBC: Do you expect an inventory abundance in apparel to lead to more discounting and/or a much tighter buy next year?

EC: In 2020, we saw retailers do more with less as people were willing to spend more because less was available. In the last year, we’ve been seeing retailers having to deal with having too much inventory. This year, I believes we will see something in the middle of these two environments. Retailers are starting to understand that people are willing to pay more for products they want and therefore are willing to take short-term pain now in order to secure a higher margin for the longer term. I also seeing strength in off price retailing which is well up both yoy and versus pre-pandemic.

RBC: Are landlords and retailers sharing more information?

EC: On the real estate side, Placer.ai is seeing that landlords and retailers are sharing information more as there is now more third party data available and as across the pandemic, landlords and retailers had to learn to work better together and with more flexibility.

RBC: Are retailers now using data more effectively to drive customer and brand loyalty?

EC: Retailers are now increasingly appreciating that there is an issue with data and fully understanding the consumer. One of the big takeaways from luxury retailing is that these players know who their customer is and they tailor the experience they offer to meet this consumer. The retailer needs to understand their consumer more in order to be able to understand what they need. For example, Macy’s is constantly innovating and trying new things, having been in a very challenged position previously.

Additionally, retailers need to make careful and smart decisions, driven by data eg closing stores based on their ability to maintain reach whilst also making efficiencies. The first example of a retailer doing this was Walmart, when it began closing stores which were cannibalizing other Walmart stores.

RBC: Are you starting to see outperformance in the budget sector vs midmarket? The midmarket seemed to be doing better last year but are you seeing a more classic pattern now with the budget sector outperforming due to cost of living pressures?

EC: Yes. The challenge is that it’s hard to understand what sets the midmarket apart from value. Value is about how to get great products at the best cost. Luxury is about a strong product and a great customer experience. The midmarket is difficult for retailers as figuring out where and when to go high end on pricing is difficult. This struggle is continuing and this is going to have an impact on the growth trajectory of that part of the sector.

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