Motley Fool Hidden Gems Investing - The Power of Place

Episode Date: March 16, 2024

Younger generations want more experiences and less stuff. That’s a problem for retailers. Deidre Woollard caught up with Kevin Ervin Kelley, architect, experience designer, and the author of “Irreplaceable: How to Create Extraordinary Places that Bring People Together.” They discuss: - The evolution of grocery stores, and how regional players can compete. - Why direct-to-consumer brands have a scaling problem. - How Harley Davidson stores became a social destination. Company discussed: HOG Host: Deidre Woollard Guest: Kevin Ervin Kelley Producer: Ricky Mulvey Engineers: Rick Engdahl, Desireé Jones Learn more about your ad choices. Visit megaphone.fm/adchoices

A lot of intellectuals, architects particularly, attack the Grove as fake or contrived. But more people visit the Grove than visit Disneyland, more than the Great Wall of China. And it's delivering something of value that those people want. In addition to delivering kind of a sense of escapism, it really delivers community. And again, I call that a temporary community. I'll acknowledge that's not a community that's there forever. but it's a community you can pop in and out of without any effort. I'm Mary Long, and that's Kevin Irvin Kelly, an architect, experienced designer, and the author of Irreplaceable, How to Create Extraordinary Places That Bring People Together.

My colleague, Deidre Wollard, caught up with Kelly to talk about the invisible forces that draw you to certain retailers, how a lost Main Street built modern shopping centers, and how Harley-Davidson stores transformed after designers watched The Parts Guy. I really enjoyed the book. Had me thinking a lot about place because it's about architecture, but not in a traditional sense. It's really about the way buildings make you feel and how businesses can be more intentional in cultivating feelings.

So share with us some of the cues that we may not even notice when we're entering retail spaces. is. Yeah, I think we forget we're in place. It's kind of like that old joke that says, he has a younger fish, you know, how's the water? And he says, what's water? I think we don't really think of the idea of place because we're always in a place no matter where we are. We're never unplaced. And so we don't really think about it. And as we get up in our day and walk around our world, we don't really have a walking plan. We just walk naturally and we look naturally, kind of what we call involuntary mechanisms. And we only kick in the voluntary things

when it makes sense to kick in. And so we're just not aware of how our environment affects us at all times. And at the most basic level, we're kind of looking for enhancements and impediments to life. And we move towards things that are good for us and we move away from things that are bad for That's how we survived as a species. So how does all that relate to retail? When we go into a retail environment, we're trying to digest it. We're trying to wrap our head around it, not consciously, but really subconsciously, and make decisions as we move towards that space. And the people that lay out retail stores historically have laid them out very logically and very rationally, almost like a math problem.

But that's not how the body moves. the body gravitates to things that make sense that have a a certain type of resolution that create visual harmony um kind of we swim towards visual anchors but we avoid things that have a sense of chaos and we step away from those things and we can see these behaviors over 31 years of tracking customers you know how they're moving and some people might ask you know why don't we consciously focus on things because our brain's operating off around the power of a 60 watt light bulb. And so we don't have the energy to study things all the time. So we let our subconscious sensory systems take over and make a lot of decisions for us automatically. If we didn't do

that, our conscious brain would get in the way. So many of you have had the experience where you've stepped into an intersection or crosswalk and almost gotten run over. Your conscious brain didn't get involved in that. Your sensory reflexes made a decision for that. Well, that's kind of what we're doing all day long. And so what do I really advocate? I really advocate for retailers and designers to spend more time studying the senses and how the body makes decisions subconsciously than what we do oftentimes, which is study

things either functionally or aesthetically in a very intellectual way, almost an artistic way. But that's not how we're making decisions. It's interesting how much happens in our brains that we're not aware of. Before we started recording, you and I were talking a little bit about Los Angeles. And in the book, you talk about developer Rick Caruso, who's created what I would call kind of fake main streets. You've got the Grove in Los Angeles. And I've seen that other places too. You see it in Florida. We've seen it with the growth of the Margaritaville communities. I wonder about this longing we have for sort of an idealized version of Main Street now that we don't really have traditional Main Streets. It seems like that is something that

we're really craving in some way. Yeah. My business partner, Terry Shook, is really the expert on kind of mixed-use developments and mixed-use planning. but I'm lucky in that I get to tag along and get to add insights onto this. And I certainly spent so much time studying consumers. I live right down the road from Rick Caruso's third, not the Grove, sorry. And what happens is, is that as human beings, we're really good at course correcting. We don't settle for one fate entirely. And as we move through our life, we start to decide, well, was suburbia a good idea? Was modernism a good idea? Was giant, large-scale buildings a good idea? And people start to think, no, I'd rather have the corner barbershop or the local

market. And they start craving those things, and the smartest developers tap into that and start creating those kinds of places. Whenever we survey customers, which we do a lot, they constantly tell us how they want something they can just walk down the street to or pop into. And a lot of the references they use are cultural references. And culture through movies or media has great impressions on us and leaves imprints on us. And so Miracle 34th Street continues to leave an impression on people about what America's like, our Main Street America. But so do hundreds of other shows. Anytime there's a great drama, it generally happens at a place. Even shows like Friends and Seinfeld show these communal places.

And what Rick Caruso really kind of did, he did two things profoundly. He kind of created a nostalgic America, but he also created the romance of Europe. And by pulling those two things together, and the one thing we all need as humans and as consumers is a sense of escape. Sometimes we can just be working too much or have too much at home time, particularly during the pandemic. and we need to get out and exercise our senses and we need to see other people it's actually how we stay sharp and that form of escapism is oftentimes a a form of make-believe we go to see movies and they're not real we could turn around any second and look at the projector and say well that's not real it's okay to have this make-believe for a while we're there for an hour

or two in a temporary community a lot of intellectuals architects particularly attack the grove is fake or contrived. But more people visit the grove than visit Disneyland, more than the Great Wall of China. And it's delivering something of value that those people want. In addition to delivering kind of a sense of escapism, it really delivers community. And again, I call that a temporary community. I'll acknowledge that's not a community that's there forever, but it's a community you can pop in and out of without any effort. You know, if i want to join a new class it takes a bit of effort to plug in and get into the rhythm say a martial arts class might take me two years to get up to speed but at the grove i can pop into the

rhythm the the kind of social bliss and social synchronicity immediately and that that again has to do with our human body knows where that happens interesting yeah we sort of we want we You want the experience of community without necessarily the work of building it. Absolutely. Smorgasbord community. Exactly. A la carte. Yeah.

As I was reading your book, you know, you talked earlier about not being aware of where you go. It sort of cued me in a bit. And, you know, doing my grocery shopping and, you know, the grocery store used to be sort of uniform experience. Now it's very different. I was thinking about the difference between something like Walmart or something like a Costco or even an Aldi. You know, on the one hand, you've got the efficiency. You know it's not going to be fun. And on the other side, you have discovery.

Like when you go to Trader Joe's or when you go to Costco, part of the experience is you've got this sort of anticipation thing going on. It's a very different experience. Is it ever possible to get both of those right in a retail experience? Yeah, absolutely. I mean, the fascinating thing about kind of branding and marketing and commerce, particularly in America, is that it's always getting more sophisticated. It's always getting more advanced. And if you go to other countries that aren't as developed as America, you'll see kind of retail at a very crude level. And retail at a crude level oftentimes is just trying to get a place to go to.

But then if you get another competitor, another competitor, then the argument starts to get down to price. But eventually, when you get enough price-driven places, then we need something else. So it starts to become price plus differentiation or price plus niching or specialty. And that's kind of where we're at in grocery. We all grew up with grocery stores that were kind of binary. They're either low price or gourmet. Well, our palate and our lifestyle is far more sophisticated now. And do we want our cake and eat it too?

Absolutely. That's precisely what we want. And so there are many ways to succeed in grocery. I think the one thing that's risky is for the older school retailers to just rely on, I'll make it on price, because that game is going increasingly more to the technology companies, online vendors, which is really making places fall under massive threat and potential extinction. And so if places are going to make it, they're going to have to deliver an equation beyond price. And they're going to have to look at issues like escapism, community experience, deliciousness, other factors that bring people together. And so that's what you're starting to see. And some of those price-driven brands are having a harder time. But I don't – that will exist.

A brand like Aldi's just announced 800 new stores. that game is going to become an even bigger slugfest it's not a fun game the price game it's it's a very ruthless game and so small local shops can't play it and and if i could extend this answers that's kind of my biggest concern about where we're at in our economy and our culture and our and our kind of free market ideas is is that if everything goes to price and scale which is happening, we're going to lose our ability to walk out of our houses down to a place. And then that kicks in systemic effects. Crime sets up shop, property values go down, people will never leave their homes, and then they will be terrified of the other.

So, I mean, I know that sounds awfully big, but we need some sense of the ability of local and regional players to survive and not have to play the who's got the cheapest price. I don't suggest offering anybody handouts. I think local and regional places have to learn how to fight on different features and they have to run a different race than just the price race. I want to ask you a little bit about department stores, too, because those are changing. One of the things that Macy's is doing, those big traditional department stores, seems like they're going away.

We're seeing more smaller stores. How does that relate to the experience of place? Yeah, I think, you know, there's a lot of headlines that will say, you know, retail is dead, software eats retail, you know, on and on. You hear the apocalypse, the retail apocalypse, and they'll use examples of department stores or Bed Bath & Beyond or Sears. You know, these are kind of relics from the past, and they were really relics of the past that when retailers didn't have to compete on the issue of demand. they had plenty of demand. Their biggest challenge was just supply, was actually having a place. And going back to this kind of like crude sophistication to very advanced sophistication in retail, the department store inherent in its name, which we often forget is department store.

So you went into a building that had different departments because you could get all your needs met in one place. That's just not how we work today. We don't think of departments, We think of niches and we want the absolute expert in basketball shoes or the absolute expert in mattresses or the absolute expert in leather couches. And so we don't we don't really have the confidence that a department store is going to have all those things. And so the reason that they're really struggling is they don't own a top of minded position in the customer's mind. We are a society now that, you know, we need to be extreme and we don't like kind of a little bit of everything. So if whatever position you're going to play in, you better be extreme at that position and the best at it. And so we're going to have more shakeout in department stores. And, you know, where it gets even more complicated is if you add in the issue of private equity, which is, you know, filled in all of these retailers of the past, which really wasn't about, you know, benefiting the customer or a love of fashion or a love of retail. Those are financial engineering games that some people win no matter even if they lose. And that's heartbreaking.

Yeah, yeah, it is. You talked in the book a lot about some of the branding exercises that you do with companies. And it reminded me of when I used to design websites and going through those exercises with customers. And I'm wondering about the sort of the mix between the online experience and the offline. You know, we keep hearing omni-channel, right? That's the big buzzword or fidgetal, the line between the... I know it's such a silly word, but that line between the physical and the digital, how do we make the two kind of sync up a little more? Because they're very different when you have this experience online. It's very different from when you're inside the store. The branding doesn't always line up. Yeah, it's a really interesting dynamic that we're starting to see where it's going to land. Um, obviously, you know, 2007 was a pivotal year that changed everything because the iPhone came out, social media, Twitter, all of these things just really took off on a mass adoption level.

And, uh, not only did consumers get online, tons of entrepreneurs got online. The barriers to entry were so low. You could be in your garage, which I knew lots of my retail clients worked out of the garage, pretty sophisticated companies, you know, building, building advanced systems. And so they direct-to-consumer and all of those kind of types of retailers took off. But they ran into a challenge that nobody totally expected, and that is the type of shopper that shops in a line is very price-driven, and that's it. They're not looking for much else, so they switch a lot. Secondly, the customer acquisition cost for direct-to-consumer brands is very high. It's higher than actually building a store.

So every time a direct-to-consumer brand grows, their actual customer acquisition cost goes up, and that includes Google ads and all kinds of things, which is very costly. That's why Facebook and Google are doing so incredibly well, and it hasn't stopped all of the people from trying to get in that game. Where we have settled out now is that physical stores actually have much higher loyalty, increased basket size, higher frequency. That means they're coming back, and customers really like to go in and buy what's there, and they tend to buy other items not on their list. So we're now starting to see where physical is doing a whole lot better than direct-to-consumer. Now, where does that leave things? Do I think digital's gone and physical makes it? Those kind of arguments really aren't working anymore.

We are definitely seeing a merging of that. But I think where we're landing is not that digital is going to be the master and maybe they'll do some physical. We're flipping it around. The physical stores are figuring out how to bring digital in. And the store is serving less as a this is what we're making sales per square foot, but more as a platform and medium for digital to come in. And that includes digital advertising, media, all types of things. And so now the store, again, I'll stress that word, think of the store as a platform or a medium for a whole lot of things to happen. And that is changing the mindset of where we're heading with retail and physical retail in particular. Ten years from now, I don't think we'll even make a separation. We won't even think of it. And there are many other comparisons like that, but we won't be walking around talking about physical and digital. We'll just assume it all is. Yeah, yeah. Good point there. I wanted to dive into your work with Harley-Davidson because I think it connects to that idea of it's less about how many motorcycles you can sell for every person that comes in and more about building the experience of the brand.

And one of the things I loved that you talked about was having the parts area be sort of a little bit like a bar or a clubhouse. So as you're working with that brand, how do you convince a company like that to spend the money on the store when it's not necessarily directly related to more sales per square foot? I was so impressed that you picked up on that, Deidre. That is great because I almost wanted to write a whole lot more about that part because it is one of the more fascinating insights we had. We had uncovered 21 insights around Harley-Davidson

stores. And that was one of the ones that all of the dealers, you know, thousands of them just leaped on because they got it. And one of the things we take for granted is the impact that the online world had to the parts accessory business, which you think about your car, getting it fixed. And if you needed a decal, a bumper, you have to go to the dealership to get that. Well, the same with a Harley. And Harley motorcycle riders like to upgrade their motorcycles. They like to customize them and make it their own bike, a statement of them. But online really changed that game, which made it harder for the physical dealers to actually support a department like that. So that's one dynamic. And they wanted me to see if I could fix that. And I thought,

well, this is pretty challenging. And so one of the things we do is we don't ask customers what they want, which is kind of the worst answers we get. We just watch customers. And we kept watching customers in the beginning stage come into the store and pass by a hostess. The Harley dealers used to love to put somebody up there in front, an attractive person that would kind of talk to the customer. And within the Harley world, you have different layers of customers. You have the brand new writer, you have the medium writer and you have the expert and you have the fanatic. And they were trying to stop the beginner and medium writer to try to help guide them. But these people just blow past them. And then they would go out and hang

out by the parts guy. And I thought it was really interesting. The parts guy was kind of what we called the Maytag repairman. He hadn't talked to anybody in a while. He's had his head in a bunch of parts and they kept trying to talk to him. And no matter what store we went to, we're like, what's going on? Who, who are these people? And why are they trying to buddy up to the parts guy? And all of a sudden, well, we listened to stories. That's how we heard it. And they would always tell a famous story about so-and-so got in a wreck. Somebody almost wiped him off the road and his gas tank lid came off and the bike caught on fire. And they, you, I'd be in shock listening to this eavesdropping. And then they, they dropped the bomb. They would, they would say, and he's still

riding we would drill into those stories and we'd find out oh these are heroic stories these are these are tales these are archetypes of people that face danger survive danger and and where we go to the second level is we realize that a certain type of rider was trying to figure out how to move up in the harley world and really didn't have anybody could help him move up and i say him because it's a lot of males although many females ride but we kind of have a joke it's midlife crisis, males fading in strength, trying to come to these dealerships. And so they would go back and talk to these parts guys who could tell you everything about a bike. They were like a MacGyver. And so they would move up in the world. So that all of a sudden

clicked to us. We were thinking, where else does that happen? And we thought, well, in bars, you go to a bar and the bartender knows everybody and what happened. He knows who got a drink in interface, who got slapped, who got fired. And a bartender is like a therapist. And, you know, you can, sometimes you're on a tab and it's really to be in with a bartender, it gives you a certain power. And we thought, why don't we change the parts department to a bar department and put stools around and let everybody sit there? Because at a regular bar, you can't just sit there. You have to buy a drink. And we thought, what if we sold stuff? What if we sold, and I'm joking, the fuzzy dice and cards and CDs and key chains. We could justify that. And that all of a sudden

just clicked for us. And we changed it. And we got the parts people out of the back and changed their title to Parts Tender. And their job is to socially facilitate other writers to get to know each other. It is fascinating. The dealers jumped on it immediately. building on the harley thing um i kind of wanted to get your take on what some of the sports brands are doing because you have like nike lululemon dick's sporting goods they're all sort of doing more experiential stuff like i know with with dick's sporting goods they're like putting in climbing walls and things like that is that sort of similar to what you saw with harley where uh these companies are really investing in the experience and trying to build sort of brand

identity and make it exciting to go into the stores because people could buy, buy online, but you know, it may, it may feel better to them to go to actually go to the store. Yeah. I'll give you a couple of answers to that because normally whenever we're looking at an issue, it's not one simple answer, but kind of a couple of vectors. And then one vector that's really been happening is that, um, as I mentioned earlier, the supply demand equation has really changed before, you know, you only had a couple of places where you could get shoes or sports equipment. Now we have thousands, if not millions, if we go online, we have 24 million retail websites around the world. And so we can get product anywhere. And so the challenge that a

lot of these lifestyle brands and sport brands face is creating demand. And so one way to create demand is to create a sense of community and to create activities that and programs that get people in and they are extremely effective the the second vector that's really at work is that our younger generations and when i say younger 40 and under aren't buying the way we bought you know and generations past for better or worse the way you kind of moved up in the world and showed others including your in-laws that you were doing okay was buying stuff a car a house a suit you know different things you would show people new furniture our younger generations aren't moving up in the world that way they don't want more stuff they want more experiences and this is

creating a big problem for retailers because um they're in the business of selling stuff so the the retailers that are really having a hard time are the ones that don't have an experience, a distinctive experience. And when I say experience, it can't be a themed experience like Planet Hollywood was way back in the eighties. It has to be a meaningful, purposeful experience. And the third vector that kind of comes into that is, you know, we used to go to brands because of their identity. We loved their identity. And now the younger customer is saying, no, I'm not really interested in your identity. I'm interested in how you extend my identity and how you make me look better. And so this issue of social identity is very important to us. And

we're looking to brands to extend that social identity. I would say not all retailers are getting this. You know, they're still waiting for the old world to come back, which is not going to happen. I think it's a thing that you even see with something like like the trend for for social media settings, like companies having like like even McDonald's has Instagram walls and things like that is that people want to see themselves inside the space and, and talk about that experience. It's part of, it's part of their relationship with the brand. It's our new way of communicating our new dialogue. And, um, but it is, it is this way of moving up in the world, right? We all know that when we see somebody traveling, we're like, wow, wish I was doing

that now. And, and sometimes I guess to write it as, um, you know, uh, vanity and shallowness, But really, they're letting you know that this is what we value in life, you know, and that's that's changing the old cigarette boat or the, you know, Big Mansion or the Rolls Royce. All of those things is really, really changed now. And we live in a new time. As always, people on the program may have interest in the stocks they talk about. And The Motley Fool may have formal recommendations for or against. So don't buy or sell stocks based solely on what you hear. I'm Mary Long.

Thanks for listening. We'll see you tomorrow.