May 24, 2018 - From the May, 2018 issue

Rick Caruso: The Future of Retail—Including Brick & Mortar—Is Bright!

At a recent Future Forum hosted by the LA County Economic Development Corporation, Rick Caruso’s keynote countered fears of the death of brick-and-mortar retail stores. He argued that online marketplaces like Amazon are compelling retail mall owners to transform into producers of an irreplaceable commodity: a wonderful guest experience. If anyone can make such a promise, it is Caruso—creator of retail venues like The Grove and The Americana that have outperformed any indoor mall. The Caruso model illuminates a path ahead for retail based on breaking the rules, following the data, and creating welcoming places for guests. TPR presents an excerpt of Caruso's remarks, along with an introduction by LAEDC CEO Bill Allen


Rick Caruso

"We’re inventing a completely different model: highly curated, highly efficient, very small, and very tailored to the surrounding community. I think it’s the new way that should be happening in retail." - Rick Caruso

Bill Allen: Rick Caruso is a nationally renowned, visionary industry leader with award-winning destinations that attract millions of guests and create thousands of local jobs for our residents. Destinations like The Grove, The Americana at Brand, The Waterside at Marina Del Rey, The Commons at Calabasas, and so many more, have created extraordinary opportunities for all of us to enjoy a great quality of life, and also to advance our economic interests as a region.

His eponymous firm, Caruso, is nationally recognized as one of the largest and most widely admired firms in the retail industry of the US today, and he is regularly sought out to provide insights around the country on where this industry is headed.

Rick Caruso: I want to start out by telling you that the future of retail is bright. Brick-and-mortar is healthy. It will do more than just survive; it will thrive.

We track the data from independent third parties and Green Street Advisors very closely, and we compare our performance against that of publicly traded REITs in the same sector. Here’s what we do: We develop the highest quality properties. We redefine every asset class. We strive to provide unparalleled guest service. We have strong community relations. We always own, and we never sell; we have never sold a project that we have built. We have no outside partners or investors; we do everything on our own balance sheet, and we take a 100-year view of the asset we’re building.

Concerns about the impacts of Amazon and online returns focus on retail productivity. We have the highest sales per square foot in the industry. 92 percent of the people who step on our property make a purchase; the average in the U.S. is 50 percent. Across our portfolio, our average sales per square foot is $1,200; the average mall’s is just under $400. My team takes great pride in the fact that we are the only development company with two properties listed in Fortune’s top 15 in the world.

2017 was our best year ever. In 2018, we’re on track to outperform 2017. Our company has grown at an annual CAGR of 19 percent since inception—even in the midst of the worst recessions.

Our properties are 100 percent leased across our portfolio. We are fortunate enough to have a waiting list to get in. We actually spend more time de-leasing than leasing. When we believe a retailer or restauranteur has lost its mojo, we want that space back—because every square inch of space and every door on our property is a critical component in creating the energy that we want to have onsite.

One of our flagship properties is The Grove. The Grove is an incredible little machine, but I want to point out one interesting metric: the movie theater. The theater highlights that retail is a commodity. We have the same movies, the same popcorn, and the same Raisinets as every other movie theater. Yet we’re the No. 1 theater in revenue proceeds—not in the city, not in the county, not in the state, but in North America. Why?

It’s because of the experience—from the minute you get out of your car, to walking into the movie theater, to how you’re greeted, to the environment around you. What makes the difference in creating wonderful retail is creating a wonderful experience.

We’re in the business of creating intimate streets and intimate places. I think I’m in one of the greatest businesses, because I get to create great environments that get populated by diverse sections of the community. What I care about doing every day is creating something that is so unique, so relevant, so consistent, and that relates to our customers so well, that it’s almost impossible for people to duplicate—and they’re compelled to return.

When you show up on my property, you are not my customer. My customers are Nordstrom, Tiffany, and Barnes & Noble, and I serve my customers by driving their revenue. When you step on my property, you’re my guest. At The Grove, you can come to our little park the size of a postage stamp that’s always full, and we’ll give you a blanket so you can lie down and be more comfortable. That’s a different mindset.

We like celebrating the community around us and infusing a lot of life into our properties. At The Grove and The Americana alone, there are 350 events per year—all free of charge. But here’s the trick: We never attach a cash register. If you do, it’s no longer an experience—it’s a transaction.

The trolleys at The Americana and The Grove are the two shortest railroads in the United States. The Grove’s goes 1,600 feet! Yet I bet I move more people per mile than any railroad in the world—millions per year. Now, if I were to charge a quarter for each trolley ride, I’d make a lot of money—but I’d be sending a whole different message.

With the blanket at the park, the free trolley ride, etc., what I’m telling you is this: I care about you. I like you. I want you to be here. I want you to enjoy your day. And I want you to be my guest. “Guest” doesn’t come with a price tag.

We’re all about the transaction becoming an experience. But people think if you just put a coffee shop inside a bookstore, all of a sudden you have an experience. That’s lazy. You have to make the guest experience pleasant at every juncture. I want you to come onto our properties and feel transformed, like you’re in a better time and place. I care about market share; I also care about heart share. If I have your heart, you’re going to return over and over again.

It’s an evolving approach; you can always do things better. The No. 1 thing I would have done differently at The Grove: We should have added residential. So, at the Americana at Brand, we added residential. We reinvented residential. We operate it like a five-star hotel, and our rental rates there are 30 percent above the competing market.

When we built the Americana at Brand, most of the great retail and restaurants had gone to Pasadena. How did Glendale get it back? By partnering with us on assembling the land and building this project—and it was a tough project to build.

The next-door mall, owned by General Growth, tried to stop the project. You see, indoor malls hate to compete. When you’re dying, it’s tough to compete—so their business plan is to stop competition. They tried to stop us in City Council. Then they sued us in every court in the state, including the California Supreme Court. Then they went for a referendum. Then they started blocking tenants, and we sued them for anti-trust violations.

We won it all. But before we put a shovel in the ground, we had invested $20 million in this project. It was a massive bet, and I wouldn’t have made that bet if the City of Glendale hadn’t been our partner through the whole thing. Because of the synergies between us, the mall is doing great, we’re doing great, and Glendale is doing great. It’s a wonderful case study of how government and the private sector should work together.

Several years ago, I made a controversial prediction that the indoor mall was dead unless completely reinvented. What we’re seeing today—and I don’t say this with great pride; I say it with sadness—is declining traffic and declining sales at indoor malls.

Indoor malls have so much space that they’ve become carnivals of retail. A traditional indoor mall is 1.5 million square feet; we build at about 600,000 square feet. As a result, we have the luxury of taking our time and finding the right tenants, rather than being forced to fill space. We are not space fillers. We provide destinations. We curate experiences.

We’re very precise and data-driven about who we want at our properties. I look at what will facilitate demand—not just what will accept it. Every retailer or restauranteur has to generate demand and traffic, rather than just feeding off of it.

What is the definition of my business? This is something we should always ask ourselves. As companies and individuals, we can get defined by others’ terms—locked into a bunker. Remember the bunkers of the Maginot Line during World War II? The French thought they were completely protected. But what did the enemy do? They never attacked the bunkers—they went around the bunkers. If you let your business get defined into a bunker, the competition is just going to go around you. They won’t even have to compete with you.

I want a big platform. I want to make it tough for my competition to go around me. So we’re not in the retail business, the hotel business, the residential business, or the office business. We’re in the business of enriching lives. We test everything against this question: Are we building a product that enriches lives—that will become part of the fabric of the community? Once it opens, will it be seamless, relevant, and complementary to the lifestyle around it?

I constantly challenge myself and my associates to push ourselves over our skis in terms of how we think about enriching lives. One way we do it is by giving the gift of time. There’s a concept called the second shift: All of us work all day long. On the way home, we stop at the market, pick up our dry cleaning, and get some gas. All those things take away critical time. If I can give you back that time, I think you’re going to like hanging out with us.

How do I give you that time? If you’re in our retail centers or offices, our concierges get your car fueled and washed. We pick up your laundry. We go grocery shopping for you; we refrigerate the food and put in your trunk before you go home. You need to get your guitar tuned? We get it tuned for you. There almost isn’t a request that our concierge won’t handle. We were rated the No. 1 concierge by the Wall Street Journal, beating everybody—the Four Seasons, the Waldorf, you name it. That happened because we’re in the business of enriching lives and nothing else.

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Recently, we got into the office business. We bought the old Masonic Temple, which had been empty for 50 years. It had no windows, no elevator, no water, and no power. CBRE was interested in leasing it, but it’s farther from their center of business. I told Lew Horne: “If you drive the extra 20 minutes, I’ll give everybody in your company an hour back. You’ll net 40 minutes.”

Every employee at CBRE, at no cost, can call our concierge for anything they need. We set up dinners and movies for the families and wives coming over. We have business programs. We provide translation services. All of it is free.

The other part of this story, again, is the partnership with the City of Glendale. I told the city manager at the time, “We have an opportunity to bring in a world-class corporate headquarters. I have a landmark-status building with no windows. We’ve got to get it done in nine months.” The city manager said, “I’ve got your back.” It was a spectacular effort by our design and construction teams, the City of Glendale, and CBRE.

Now we’re getting into residential. We’re reinventing residential. 8500 Burton Way is listed by Bloomberg as the most expensive building to live in outside of New York City. It’s all rental. We have a waiting list to get in. We average $10 per square foot on rent. We operate it like a hotel, including room service for breakfast, lunch, and dinner, plus poolside service. Based on its success, we have entitled 333 S. La Cienega. It will be a 17-story high-rise with 145 luxury residential units, which we’re very excited to start next year.

So what’s the future of retail?

Humans have never changed. The early man and woman sitting around the campfire represent what we like to have in our lives today. They wanted to feel warm, to feel a sense of community, to feel safe, and to feel camaraderie. It’s the same today.

The Internet is never going to affect places that create wonderful experiences for people. The Champs-Élysées is as crowded as ever; the restaurants and the retail around it are packed. Nothing is going to top that because of the unique experience it provides.

I’ve said it before: Amazon is the best thing that’s happened to retail. They re-taught us what’s truly important: Know your customer, service your customer the way they want to be serviced, and provide the right experience.

Amazon is now going to brick-and-mortar. Warby Parker, which started online, is going to brick-and-mortar. If you’re going to be successful in retail, you have to have both formats. It’s a hybrid model.

We’ve done two deals with Amazon, in the Pacific Palisades and in the Marina. Amazon is genius because they tailor every store to that community. Why do retailers think that if you open a store in LA, the product should be the same as in a store in Milwaukee?

What’s killing brick-and-mortar is bad retailers. When was the last time you woke up and wanted to go into a Toys “R” Us? They deserved to go out of business. That’s part of the evolution: You need to be either relevant or good at what you’re doing, or you need to move on. That’s what Amazon has taught us.

Remember the Sears building in Chicago? Sears built the tallest building in the United States. And even from that vantage point, they never saw Walmart coming. You have to wake up every morning and be worried about what you do, because you’re in the commodity business—anybody can do it. The only way you can change that is by wrapping it in an experience and servicing your customer the way they want to be serviced. If your swim lane is straight, you’re going to miss the customer. Swim to where the customer is.

And why worry about the rules? There are no rules. Follow what you like. I bet most of you go into the same restaurants and stores because the people there know you and treat you well. It’s not more complicated than that.

What’s next for us? We’re getting into the hotel business. We’re under construction on the Miramar Hotel in Montecito. The hotel has been there for 100 years; we knocked it down. It’s the only five-star hotel in Southern California that’s actually on a beach—and the beach is private. We’re challenging every rule of the hotel business, and in about a year, I’ll tell you whether or not that was a good idea.

Finally, we’re starting construction on the Palisades Village. We had a remarkable opportunity that rarely gets handed to a developer to buy most of the downtown in one of the greatest communities in the United States—the Pacific Palisades—and reinvent it from the ground up. This whole project is the size of East Hampton, coming up at once. Its square footage could fit inside the Nordstrom building at The Grove[e1] , but it will have twice as many stores.

This is a completely different model that we’re inventing: highly curated, highly efficient, very small, and very tailored to the surrounding community. It’s going to be such an important part of this community, and I think it’s the new way that should be happening in retail.

Felicia Williams (Kosmont Companies): What sorts of changes have you made in your projects in response to cities’ changing thinking on land use? For example, are you providing less parking in favor of walking, biking, and rideshare?

Rick Caruso: As a company, we want all our projects to be LEED Gold. Palisades Village will be the first LEED Gold retail/business destination in the state of California.

We spend a lot of time looking at mobility, walkability, and dwell time on our properties. We’re now designing to accommodate the driverless car because technology is changing so much. We have not reduced parking, but at some point, we will.

I think the driverless car will bring about a major shift in how the whole city, county, and region run. It raises the question of how many dollars we should put into rail versus into driverless buses, which are going to be much more efficient and flexible than being stuck on a line.

We’re trying to be ahead of the curve on all these things. We try to accomplish a checklist of about 100 items on every project. It makes the project much more expensive, but with my 100-year view, it's the investment that we want to make.

Brant Birkeland (City of West Hollywood): What can cities do to help retailers succeed? What do you look for in your city partners?

Rick Caruso: Give us a path that we can follow. If we know what the rules are, we’ll follow the rules. What frustrates us the most is when the rules change on us because of politics. My biggest frustration and gripe is this: Elected officials have to get out of the business of running for reelection, and stay in the business of doing what they’re hired to do.

The city of Los Angeles, in the Palisades, has been spectacular in giving us a roadmap and sticking to it. The Palisades project and 8500 Burton are both on Mitigated Negative Declarations, with no EIR required. I’d love to do more projects that way.

Environmental and CEQA issues are always complicated. I’ll follow the same rules; I’ll give you whatever you want, and I’ll deliver it on time and above your expectations. Just get me out of the morass.

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© 2018 The Planning Report | David Abel, Publisher, ABL, Inc.