Whole Foods + Daybreaker = Experiential Grocery

Dan McCombie is a Research Associate at Larisa Ortiz Associates

**The following blog post contains a brief discussion of the state of online grocery retail, and then turns to look at an experiential company (Daybreaker) that has partnered with a grocery chain (Whole Foods) in what is a unique example of experience-based retail. At root is an exploration about how we understand customers, what they want to see in today's brick-and-mortars, and how "experiential" can have a broad range of applications.**

Here we are now, almost a year out since Amazon officially announced its acquisition of Whole Foods Market, the chain known for its high-quality, natural, and organic grocery store model. This $13.7BN deal fueled speculation that the e-commerce giant was making a play for a larger share of the online grocery retail market, and could feasibly change the entire way we think about food access. Sure enough, we have seen some marked changes in the way Whole Foods functions, but has the trajectory of online grocery retail changed all that much?

Some insight can be gleaned from a recent article by Neil Stern, a contributing writer for Forbes, wherein he summarizes Forrester's "The State of Global Online Retail 2018" report. Here are some of the key findings from it:

• The global online grocery market is predicted to double from $150BN in 2017 to $334BN by 2022
• The online grocery market is still wide open "as retailers race to become the default provider"
• Countries differ in their adoption of online grocery based on factors like geography and economic maturity

To this last bullet point, Stern further explains that geographically concentrated (denser) markets are further ahead in their embrace of online grocery, primarily because their distribution systems are advantaged through economies of scale. They don't need nearly as much infrastructure to serve the same amount of people, whether that's based on home delivery (e.g. Fresh Direct, Peapod) or a click and collect pickup model.

So does this mean that urban markets might start to see brick and mortar grocery lose ground faster than less-urbanized markets? Possibly. If that is the case, it feels like an important one. Grocery stores help support a host of smaller neighborhood services and stores. In short, they're both commercial catalysts and anchors. So any trend in the markets that impact their health is liable to have huge ripple effects. To be completely honest, I find it highly unlikely that Kroger and Publix (shout out to my friends down south) are going to disappear overnight. Nor do I think they'll all turn into Amazon fulfillment centers (or maybe they will). In any event, this got me to thinking about ways grocery stores can adapt. And if we've learned anything in recent years, for retail its either death in the middle, or death for being boring.

Which brings me to Daybreaker.

For those not familiar, Daybreaker is maybe best understood as a company that organizes and manages large, high energy, highly-attended early morning dance parts with a deep health and wellness focus (read: no drugs, no alcohol, only natural adrenaline). Though not the only company peddling the pre-work experiential dance rave model, they've definitely risen to the top with a presence in more than 20 cities worldwide, including San Diego, DC, Vancouver, Sydney, Mexico City, Berlin, Tel Aviv, Stockholm, etc. 

And I bring them up because on May 10th, 2017, they held one of their dance raves at the Whole Foods flagship location on Lamar Boulevard in Austin, TX (a month prior to the Amazon acquisition, for those who are wondering). The itinerary for the event consisted of a 6am-7am yoga class, followed immediately by a raucous dance party from 7am-9am. Music was provided by both a record-spinning (or is it laptop-clicking?) DJ and a "legendary husband-wife hop hop duo." It really doesn't get less boring/more experiential than that for a grocery store. Did I mention Whole Foods provided breakfast? This all brings me to my next point...

Millennials. 

Daybreaker is perhaps the epitome of a company that is operated by and creates events for young Millennials. If you need further proof, one need only look at the event description (posted here). Give it a quick read and you'll notice the frequent use of emjois, the way "yoga session" becomes "yoga sesh" and "amazing" is spelled "uhmazing." If Gigi Hadid was a language, I think this would be it. 

To drive this home a little more, the following quote was culled from the Daybreaker website:

"DAYBREAKER IS CREATING AN ENTIRELY NEW GENRE OF EXPERIENCE. We are a global movement driven by incredible humans who turn crazy ideas - like sober early morning dance parties - into reality. What began as a social experiment and art project, Daybreaker is fueling a worldwide movement to increase mindfulness, camaraderie, wellness, self-expression, and mischief."  

Mindfulness. Camaraderie. Wellness. Self-expression. Mischief. These are the Daybreaker core values. And personally, I think these serve as a great shorthand way to describe the Millennial shopper (depending on how you slice the age brackets). Some might quibble with that statement for reading as reductive, especially the Daybreaker apparatus itself, but often times that's an inherent challenge to understanding any customer demographic. We always prefer to collect primary data when possible, whether through first-person testimonials, surveys, focus groups, etc, but comprehensive big picture analysis also requires we look at things like U.S. Census and Bureau of Labor Statistics data, secondary syndicated sources, and other aggregated information that necessarily obscures individual nuance.

To summarize, if you feel like you don't understand how Millennials shop, perhaps this is a good template. I don't have figures for direct economic impacts of the Daybreaker event, but without a doubt it created strong associations between an established retailer and an exciting experiential brand. Nor was this the first time Daybreaker had collaborated with a large retail brand, having also partnered with Saks, Nike, IBM, Samsung, Macy's, GE Electric, Clinique, etc.  It also raises an interesting paradox when you go back to Forrester report: dense urban centers where brick and mortars may be more imperiled by online retail is precisely where young Millennials concentrate, and thus where it makes more sense to explore experiential marketing opportunities.

Key takeaways:

• The Amazon acquisition has not impacted brick and mortar grocery the way many anticipated
• Regardless, online grocery is a growing share of the overall market
• With that in mind, retailers still need to think about how to differentiate themselves and not be boring
• That means understanding your customers and what gets them up in the morning (in this case kombucha and a dance party)

For those who were good enough to make it this far in the post, I definitely recommend revisiting a past post on this blog by Mike Berne of MJB Consulting, written in the days following the announcement of the Amazon acquisition of Whole Foods. One of Mike's main points is that Amazon's motivation for the deal was driven not so much as a way to "conquer the grocery space," but rather to gain valuable real estate in close proximity to their predominantly urban Amazon Prime customers.

Thanks for reading!

Instagram post from the Daybreaker Austin launch
Image: @dybrkr

Instagram post from an event at the National Building Museum, DC
Image: @dybrkr

What does Amazon's search for a new HQ mean for downtown?

Larisa Ortiz is Founder and Principal of Larisa Ortiz Associates

People are talking alot about Amazon today. If Wikipedia is to be believed, at least 118 cities in both Canada and the United States have expressed an interest in being the place where Amazon ends up putting its headquarters. The company's search, and more specifically their search criterion, has broader implications for what the next wave of business growth will require from our cities.

According to Citylab, the Amazon search is creating a "transit reckoning" for our cities. This is because Amazon has mentioned access to "rail, train, subway and bus routes" as among a few key site selection criterion. For many cities with limited mass transit options, this one requirement really puts a damper on their bid to bring Amazon to town. Atlanta, for example, seems to check all the boxes except for the unified transit system. When Atlanta officials took a look at the criterion, there was an call among many stakeholders for "real" solutions to the traffic congestion that plagues the City. Yet those solutions, as we all know, can only involve alternatives to the automobile. More cars and more roads won't help congestion, only transit of the "mass" kind can do that. Furthermore, mass transit without masses don't work - so density will be required. Cities looking to attract the businesses of the future would do well to heed this clarion call. Density and mass transit don't occur by happenstance. We need a few things to make this happen, including:

• zoning codes that allow for higher densities as-of-right 
• sufficient SF for the growth of commercial and/or industrial uses
• meaningful funding for alternative modes of transit that get residents to and from their jobs easily and efficiently
• investments walkable pedestrian environments and quality open space

In fact, some communities are already ahead of the curve on these issues, including the Brooklyn Tech Triangle, a planning effort led by three major stakeholders in downtown Brooklyn, New York: The Downtown Brooklyn Partnership, the Brooklyn Navy Yard and the DUMBO Improvement District. The plan sought to corral city investment towards improvements that would position downtown Brooklyn as a tech destination and ensure that the district included many of the amenities required by industry businesses. The plan included recommendations with significant emphasis on transportation (which is already the envy of many communities), improved waterfront connections (the City recently invested in an entire fleet of new ferry's and started a frequent and very popular ferry service), enhanced bike share, as well as connections to other growing tech destinations (such as Industry City in Sunset Park). The plan is a great starting point for other communities looking to pursue similar initiatives. In the end, this is all good news for transit connected, dense downtown environments. 

When skyrocketing rents don't always mean the death of a small business

Larisa Ortiz is founder and principal of Larisa Ortiz Associates.

Broadway between Houston and Canal Streets in
New York is one of the highest rent districts in the City. 

For many New Yorkers, Pearl River Mart was Pier 1 Imports before there was a Pier 1 Imports. The family run Asian-goods department store, founded in 1971, grew over many years until it occupied 30,000 sf on Broadway in Soho. When the lease was up in November of 2016, the landlord increased the rent from $1 million/year to $6 million/year and the family decided to close shop. At the time, the news reported that the "44-year-old store is the latest victim of rising rents on Broadway and increased competition from online retailers like Amazon and Alibaba." A simple explanation for what was likely a much more complex problem.

The old Pearl River Mart at 477 Broadway - among
the most sought after retail addresses in Manhattan, NYC.

So it came as a pleasant surprise to see an article in The Wall Street Journal chronicling the retailer's travails since closing their original Broadway location. It seems they have developed a streamlined formula - a store layout with 3,500 sf instead of 30,000 sf - and a new location four blocks south of their previous location where rents are significantly less. Now the WSJ reports they are expanding to Chelsea Market, a "sprawling urban food hall" in the Meathpacking District - and a "must see" stop along the very popular High Line. Clearly a rent hike wasn't enough to put Pearl River Mart out of business. But they did need to reinvent themselves and find a suitable spot to relocate.

The "new" Pearl River Mart at 395 Broadway,
about four blocks south of its previous location. 

Chelsea Market, soon to be
home to a second Pearl River Mart location.

The lessons here for other businesses - and the city planning officials who support them - are worth noting. It reminds me of what fellow panelist Tony Hernandez, Director of the Ryerson University Centre for the Study of Commercial Activity said last week during our pre-conference session at IDA, "change is not new". This seems like a trite point, but it is one we have to recognize as an enduring truth of retail. He pointed out that since the 1940's, retail concepts have come and gone, and retailers have had to reinvent themselves again and again and again. From the climate-controlled shopping centers that dominated during the 1970's to the Entertainment complexes of the 1980's to the Power Centers of the 1990's, fickle customers and their every changing shopping habits have always been a challenge for retailers. Today's online challenges may be scary, but they fit a trend of innovation and disruptive change that is not without precedent.

What comes next is likely to result in painful change for retailers, but the good news is that retailers like Pearl River Mart have found ways to survive and thrive. The rent hike trend that caused Pearl River to close has also affected other retailers. In early 2016 we completed a market study for the Broadway SOHO BID and projected a market correction that was only then just beginning. In 2015 the Commercial Observer quoted a local broker said "Everybody's asking for too much money. Nobody wants to pay. It's a very overrated market." So it should come as no surprise that the softening the brokers were anticipating then is having an effect now. The same WSJ report that announced the expansion of Pearl River Mart also found that vacancy rates of 23% and asking rents that have fallen 14% to $478/sf.

Yet high rent does not mean lack of opportunity for intrepid business owners. As the Pearl River Mart move suggests, not every street commands the same premium as Broadway between Houston and Canal and businesses should generally search for a better deal in up and coming markets. In fact, the ability to both market and sell on-line means that a high rent location may be as necessary as it once was. In fact, our study found that within the BID area, asking rents of $425/sf were more than double neighborhood asking rents of $195/sf. So moving off the main corridor to lower rent space, and perhaps even shrinking a floorplate, might be a good opportunity, rather than a death sentence. In Perhaps the answer for communities is to support small businesses in their efforts to relocate to lower priced alternatives as a way to help them stay in business for the long haul.

IDA Session Post-Mortem: The Future of Physical Retail in the Age of Online

Larisa Ortiz is a Principal at LOA

Last week I had the pleasure of speaking on a panel at the International Downtown Association Conference entitled The Future of Physical Retail in the Age of Online with colleagues Mike Berne of MJB Consulting and Tony Hernandez, Director of the Ryerson University Centre for the Study of Commercial Activity. I may have been a panelist, but I was as enraptured as the audience by both presentations. Each shared insight into their own research and offered some enlightened perspective on the future of downtown retail for attendees.

Tony Hernandez helped put the changes he has seen in context. Retail is always changing. Consider this - Outlet Centers started making waves in the 1990’s and have only grown in size and scale since then. But if you consider who the major shopping center tenants were in 1996 and now, you will find that the majority of those tenants no longer exist. Hey, no one said retail was an easy business. So when viewed from a historical perspective, today’s concerns about the impact of on-line shopping are part of the normal cycle of “creative destruction” that leads to innovation and improvement, not necessarily the end of the world. And while e-retail may be a small portion of sales at the moment, Tony made the point that on-line influenced sales are what we should really be talking about. Research by the JC Williams group found that 86% of Canadians researched their purchase online before cutting a check.

Mike Berne added that while the news is chock full of an impending “retail apocalypse”, pure play retailers still account for only 4.5% of market share. The future, Mike said, belongs to retailers who pursue omni-channel strategies. He suggested the Amazon’s purchase of Whole Foods was because Amazon needed Whole Foods, not the other way around. As he has written for this blog in the past, the Whole Foods acquisition was a response to the “last mile” challenge. The fact that Amazon has yet to turn a profit on e-commerce and makes nearly all of its profit on cloud computing suggests that e-commerce still has a ways to go before dominating the retail landscape. When you consider that the “last mile” challenge – i.e. the ability to get to and from the last point of distribution to someone’s home – is incredibly expensive and that off-price chains like T.J. Maxx have been doing quite well at getting customers to do that for them – Mike thinks the retail apocalypse concerns might be overblown.

My contribution to the conversation was targeted to the practitioner. How do we turn the data into something actionable? What should Business Improvement Districts and Business Improvement Associations (as they are known in Canada) do in light of this information? I suggested a few policy prescriptions and actionable interventions, much of it based on recent work we completed with the City of Cambridge, MA.

The first is to drive experience. It may sound cliche, but people are searching for things they can’t get on-line, so BIDs will increasingly need to activate streets and public spaces with activities that cannot be replicated on-line. That means making sure public spaces are well designed and maintained, and that those spaces allow for public gathering, activities and events. We simply must make our public spaces work harder for us. In San Francisco, the City has spearheaded an effort to engage local non-profits as formal stewards of public plazas, giving them the ability to generate revenue from activities and events. New York City has a similar program. These programs allow for the formal oversight of a public space by an entity that is best positioned to drive pedestrian traffic to an area.

The second is to build capacity of the organizations upon which all of this activity depends. Without organizations with capable staff and sustainable revenue sources, the ability to activate space, build brand recognition, and promote both activities and businesses is seriously hampered. In Cambridge we shared the example of Coro Neighborhood Leadership Program in New York City that trains 20-30 BID leaders every year and has created a network of well-trained advocates for place management. This highly trained network of practitioners now collaborate and cooperate on a regular basis, sharing information about best practices for everything from fundraising to leadership skills. 

The third intervention involved taking a deep dive look at the regulatory and zoning barriers that are making innovation by retailers and new business concepts much more difficult and challenging. Consider the small business that wants to start making some of their products on-site and triggers a change in use permit. Or a brewpub for whom there is no retail classification (who had heard of brewpubs forty+ years ago when the regulations were written?). Or the business that wants to offer in store educational classes and is now considered an “educational institution” with higher threshold building code and parking requirements. These rules and regulations are particularly vexing for small businesses with limited capital – precisely the kinds of businesses that many communities want to support. Another issue that falls under this heading is the fact that restaurants and eating establishments, one of the healthiest and growing sectors of the retail economy, are particularly hampered - higher parking regulations for eating establishments are not uncommon and can make opening a location in some cities nearly impossible. Add to this things like sidewalk cafes, which are proven profit drivers, yet these too require another layer of permitting that can be overwhelming for the small business owner. Overcoming these issues is critical to enabling new business ventures that will be so critical if downtown is to sustain a competitive advantage.

As my last point, I discussed the need to fill gaps in the pedestrian experience as the inevitable market corrections will result in vacancies. BIDs are well positioned to ensure that vacancies do not undermine the local pedestrian environment by advocating and supporting pop-up retail or pop-up temporary art installations (like those of New York based non-profit No Longer Empty). These are important stop gap measures that will help existing businesses. In the long term, softening demand for retail spaces may require a wholesale rethinking of how we manage downtown tenant mix. As retail spaces get taken up by less dynamic economic activity, including offices and services, how will we maintain a sufficient concentration of retail in close enough proximity to ensure corridor success?

I want to thank my fellow panelists and the fantastic IDA members who participated in our discussion. Clearly that this issue will not be going away anytime soon!

Follow us on twitter @cdadvisor and Facebook (cdadvisor) where we share timely articles and news related to downtown retail. 

Will Amazon Prime Restaurant kill the dining industry?

In 2015, Amazon started its slow roll out of Amazon Prime Restaurant in Seattle. Its food delivery service is unlike that of startup giants such as Grubhub and UberEats. The service has since quickly spread across a few markets including Dallas, San Francisco, Los Angeles, Chicago, San Diego, Austin, Atlanta, Miami, Baltimore, Portland, and of course New York City.

If you’re an Amazon Prime member in any one of these markets (and it’s highly likely you are since Consumer Intelligence Research Partners estimated over 63 million Prime members in 2016), then 1-hour food delivery service is available to you with no delivery fee.

Furthermore, Amazon Prime Restaurants boasts only the best, quality local restaurants on its platform and claims to be assisting small businesses that have never entered home delivery services to finally enter the online delivery market. I was surprised myself when I finally opened Amazon Prime Restaurant on my couch last night and found Aita Trattoria on the list of restaurants delivering to my address. Aita’s is a local Italian restaurant in Clinton Hill, Brooklyn widely known for fresh, seasonal ingredients – which makes it quite the neighborhood dinner destination. I’ve lived in Brooklyn for almost four years now and have never been able to get a table without waiting 40 minutes so to find out that I can simply just click a button to order their delicious bucatini and wait in the comforts of my home was simply astounding. Furthermore, once an order has been placed, a nifty little feature on Amazon Restaurants allows you to track your delivery on a real time map so you’re not waiting cluelessly on your couch.

This discovery, while exciting, also led to me to worry around what this latest proliferation of Amazon’s services might do to the foot traffic in commercial corridors, and consequently the dining industry. Especially restaurants in neighborhood commercial corridors that mainly rely on local residents to eat out on weekends and weekday nights. After all, many of today’s commercial districts continue to be anchored by food and drinking places. Amazon, without even accounting for Amazon Restaurants and its sales, has already led to some decline in overall foot traffic. In fact, foot traffic fell by 32 percent among users of the Amazon App according to research firm Sense360, who also claim it’s been two full years since restaurants could report a decent traffic month.

Sure, restaurants still make up 15 percent of all retail sales and the expenditure data shows that U.S. consumers are spending more on dining in restaurants than on buying groceries but how much of these sales are actually made in person at the restaurant versus made online on the couch via Grubhub or Ubereats or Amazon Restaurants? Also, if the National Restaurant Association surveys are right and 8 in 10 consumers are dining out due to perceptions of convenience from not having to cook or clean up, then ordering more food online to be delivered within an hour to our doorstep would certainly fit the convenience criteria – especially if friends and family already live nearby and if the weather is bad outside. (I was certainly not going out to dinner last Saturday while the summer storms were in full swing.)

The proliferation of online delivery services for restaurants also means that the industry’s profit margins are getting smaller and smaller. As it is, real estate, labor and taxes already make up some of the largest share of operating a restaurant. Now, businesses will also have to worry about being charged by Amazon to deliver their food to stay-at-home customers. As Amazon has pledged not to mark up the cost of menu items, it is instead shifting the burden to restaurants in the form of an undisclosed percent charge of each order. Of course we already knew this – Grubhub, Postmates and Seamless all charge restaurants roughly 12-24 percent of checks to use their delivery services, however, Amazon is reportedly taking 27.5 percent of checks from partnered restaurants.

So while Amazon aims to keep the gap between diners’ cost of buying groceries and ‘restaurant dining’ minimal, small restaurants and eateries will bear the brunt of the costs with smaller profit margins and fewer people walking into their establishments and their neighbors’.