It's South by Southwest week, and in this interview, Vincent Shen welcomes Scott Lachut, President of Research and Strategy at PSFK, to Industry Focus.

Scott spoke at SXSW about the "future of the shopping center", and the Motley Fool is sitting him down to learn more about the discovery, experimentation, and data gathering that retailers of all sizes are employing to make the brick-and-mortar store more appealing to modern day consumers.

A full transcript follows the video.

This video was recorded on March 13, 2018.

Vincent Shen: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. It's Tuesday, March 13th, and I'm your host, Vincent Shen. Right now, we have a team of Fools in Austin, Texas, attending the South by Southwest conference, and that's the focus of all our episodes this week.

For today, I'm pleased to welcome Scott Lachut to Industry Focus. Scott is the President of Research and Strategy at PSFK, a business intelligence platform based in New York City. He was also a speaker at South by Southwest. His presentation focused on a topic that we cover often on Consumer Goods Industry Focus, and that's the future of brick-and-mortar retail and how the in-store shopping experience is evolving.

Scott, welcome to Industry Focus. I was catching up with Dylan earlier, and he said you've been doing a lot of traveling. Thanks a lot again for setting aside time to join us today. Before we dive into the business and more company-focused portion of this discussion, I was looking at your bio. For the benefit of our listeners, it would be great if you could tell us a little bit about your background and the work you do at PSFK.

Scott Lachut: Yeah, absolutely. Thanks so much for having me on the program. The company that I work for, PSFK, has over the past, let's say 18 to 24 months, shifted a bit in terms of our focus. We've always had two core aspects of the business, one being an online publication that focuses on innovation across industries, from retail to finance to automotive, etc. and sharing that through various capacities with our readers, from a newsletter to daily articles and interviews and everything across the board. Supporting that in the background has been a consulting business where we do bespoke services for brands, helping them understand the future of their business, identify where those opportunities are, and then apply that in terms of longer-term strategies for them. 

We're now combining the two forces a bit and thinking more in terms of a membership platform that people can come to. We have a growing library of research reports. One of the core topics that we touch on is retail, and that's a report that we've been doing, the Future of Retail report, over the past 10 years or so, along with a whole host of other topics, some big, some small. We're really trying to take that Netflix approach, so to speak, where we have a great content library of daily content as well as more focused reports, and alongside that, a research service where people can chat with us, ask us questions, and then we'll turn around a bespoke report to them in 48 to 72 hours. My role is basically leading more of that thought leadership content, so all the reporting that goes on there, and then any of the client work that we still do to support on a more bespoke basis.

Shen: Awesome. We're really excited to pick your brain a little bit here, especially on that future of retail topic that you mentioned. Something else I saw mentioned when I was looking at your bio is that you have experience working a lot of different jobs. I think it was described as ranging from blue collar to suit and tie environments. I was wondering if you feel like that kind of diversity in your career has helped you with some of the research and other work that you're doing right now.

Lachut: Yeah, absolutely, and I appreciate you digging deep there. I took a non-traditional approach to get to the point where I am now. I think some of that was youthful idealism, not wanting to get to this point now, but I guess I don't necessarily have to wear a suit and tie to work every day, so maybe I've combined those two areas. 

I think for me, we get a lot of kids that are coming in today that have a very specific focus of what it is that they want to do right out of the box. And I think having that broader experience has given me the opportunity to touch base with a lot of people, have a lot of different experiences. And I think just generally, that worldly experience, if it at all has done anything besides maybe create an interesting bio, it's enabled me to take that into our approach, which is very much looking out into the world, seeing where emerging change is happening, and trying to make sense of that in various ways. Outside of that, hopefully it makes me an interesting dinner table companion as well.

Shen: [laughs] Awesome. Let's turn our attention now to South by Southwest. How was your trip and time in Austin?

Lachut: It was great. I hadn't been back for a few years. I think there's a lot of conversation, obviously, that people have about how valuable the time is that you have there. I made the rookie mistake that I continue to make, which is not really preparing my agenda ahead of time, so I was a little bit flying blind when I got in there. That said, there's something nice about just being able to go in and see what's happening, talk to people, and get a sense of the bigger shifts that are happening. 

This year, I really tried to focus less so on a lot of the branded activations, although I was lucky enough to go see the Westworld activation that I think owned at least the interactive portion of South by Southwest, in terms of something that was super successful. I tried to focus a little bit more on some of the content that was being offered there. For me, I run the gamut. There's a lot of great content around entertainment and things of that nature, as well as the stuff that's more important to my day to day. There's a lot for me. The main focus, however, was a lot of retail conversations that were happening. I gave the presentation that we're perhaps going to be touching on today multiple times. I had multiple conversations with people across different industries that are all really trying to figure out where either their businesses or their clients should be thinking about these spaces, as well.

Shen: Your presentation, if I have it correct, was called The Future of the Shopping Center. You covered topics that come up on this podcast all the time -- brand building, new store formats, customer data and insights, how companies are collecting that and leveraging it. Of course, what's driving all of this in terms of the future of retail is the consumer.

First off, I'd like to get some high-level context and guidance for the rest of our conversation in terms of what your thoughts are in terms of expectations from consumers that you think have become the most important driving force in terms of how retailers think about their strategies and their stores.

Lachut: Yeah, absolutely. I think it's really interesting to see the big shift that's happening in terms of retail across the board. I think, to get to the consumer piece, I'll dive in with the larger thesis of how we were approaching the report this year, which is what we were calling the single channel, or unified channel approach to retail, so to speak. That's an evolution, I think, of how the industry was talking about multi-channel. When e-commerce became such a huge industry focus, the recognition was that we need to have a bricks-and-mortar strategy, we need to have a mobile strategy, we need to have an online strategy. But those are also thought of as very silo-ed approaches. 

Now, to get into the consumer, over all of that time, the consumer has maintained this expectation that retail is just retail. Regardless of all the tools that are at my disposal and the things that you offer, there's an expectation that I expect a consistent level of experience, regardless of where I choose to shop. So what that means for the industry at large is that they need to stop thinking about these as separate entities but all as one unified approach which then helps them understand who that customer is, regardless of where they're choosing to shop, and can then complement one another in lots of interesting ways.

Shen: When it comes down to it, my experience as a consumer, too, regardless of whether I go to the store or I sit down at my computer, I'm still shopping. I don't see it as these distinct silos, like you described. So blending that together, making sure that it jives, right?

Lachut: Yeah. And alongside of that, there is that, because of the way that digital has shifted across the board how consumers approach services in general, I think we're seeing that there's that expectation for on-demand, everything available, and one click if possible, but as few clicks. Any of that friction that you associate with that process is one more opportunity that someone's going to leave that process. I think the personalization is obviously another huge component of that, in terms of how you understand who I am as an individual, recognizing what history I have with your brand, building on that, and using that to elevate the experience in interesting ways. 

Then, if we talk specifically about the offline experience, I think what we're seeing is that in general, experience for consumers is such a core thing. In terms of discretionary spending, we're seeing that experience is really replacing product as what people want to spend their money on, whether that's going out to eat, traveling, entertainment, it's really a part and parcel to that whole social media experience that's driving so much of our behavior nowadays. Both, I need to go offline to actually go live life, but once I'm there, I want to share what I'm doing and actually use that to increase the status and how people view me online.

Translating that into the business world is, we're seeing a bump up in terms of the retailers that are able to offer some interesting experience to their customer, whether that's a brand experience come to life within the context of the store, or a deeper understanding of how to use that product, how it fits into my life, what it can do for me. All of those things are hugely important now, and it's really bringing some of that theater back to that physical retail experience, which I think is how we see the function of the store going forward. It's almost, it will still be a place of transaction, but it very much will be a marketing channel as well and a way to really build these relationships with consumers.

Shen: Yeah. You mentioned that theater analogy in your presentation. I really liked that, in terms of contextualizing retail. I think you described it as, it used to be that Hollywood was the guiding force in defining the retail experience, but eventually it shifted more so to operations-minded people. And now, companies have to reembrace the idea of theater, like you said, or showmanship, to make a better connection with the consumers. I think that's something we already see and has been consistent with luxury brands, because they've always needed to craft that story, establish a deeper connection with their customers. So it makes sense that companies operating in those high-end segments have often been more resilient, often outperformed the broader sector overall in recent history. 

So we have some of the high-level background there and the context that we've been talking about in terms of expectations from consumers. How are some of these things actually manifesting themselves at your local shopping mall, your shopping center? How is that actually taking shape at the store?

Lachut: Absolutely. I think the easiest way to talk about this is to highlight some of the things from our report that I think are quite interesting, in terms of how some of these companies are perhaps approaching that. And I think for us, more broadly, the way that we think about this is, there is that experiential lifestyle component, which has been backed up by a smarter operating system, which is all of the technology components, most of which I don't think necessarily are consumer-focused but more operationally focused. And the two working together to, again, make that physical experience really interesting and more efficient at the same time while connecting that to the other channels as well. 

But in terms of bringing that experience to life, I think there's some keywords that I can highlight here. One is this notion of discovery. I think so much of how retailers perhaps approach stores was from a seasonal point of view, where merchandise didn't really change over very often. The store was just a store, it was a place to go in and transact and then leave. Now, we're really seeing it more so as a platform, a place where you're going to have some transactions, but you're going to be able to offer all of these other experiences on top of that, whether that's events, whether that's partnerships with other brands, whether that's a level of education. Again, thinking about how the product comes to life, in helping people elevate that ownership experience and/or what that means more broadly in their own lives. 

One of the companies that we see leading this, and it's starting to be replicated across the board, is a company called STORY, which is based in New York City. They have a pretty unique business model in the sense that they essentially sell in partnerships with other brands and will recreate their physical experience around what it is that brand is trying to accomplish. They treat themselves more as that marketing channel, where every four to six weeks, they're partnering with a brand. I'm trying to think of a partnership. I know they partnered with Target around the holidays one year, and Target essentially paid for that partnership. They brought in a whole curated selection of inventory, they did programming around that, they brought in interesting partnerships. The idea here is, it's really giving the consumer a reason to continually check back in with that store. They're not necessarily relying on sales per square foot. They're thinking about experience per square foot, in terms of their business model. 

But it's been successful enough that you see a brand like Timberland begin to experiment with a similar idea. They have a new store in the King of Prussia Mall that they called their Tree Lab. Similar type of approach, where it's every two months, we're going to completely change up what we're thinking about in terms of the store. Some of the product might be the same, but what happens around that is going to be different. Again, it's a content approach alongside that retail push.

A lot of the conversation that we're seeing is how community plays a big role within that physical retail experience. Again, you have this dedicated space. A lot of it is sitting unused, so there's a lot of potential within the context of that store space, if you will. One of the things that makes physical in general so interesting is this emotional connection that you can begin to form with your customer. And then, if you can bring in that like-minded fan community around the halo of your brand or your store, that's even that much more interesting. 

So you have a company like, it's called Game, in the U.K. which is similar to GameStop in the U.S. They see the writing on the wall: "We're going to be selling video games. Pretty soon, if not already, that's going to be something that people are able to buy and stream through a connected platform anyway. How do we elevate that experience? Let's recreate the arcade, so to speak, within the context of our stores."

People pay to play on the latest game rigs. They bring in partnerships with new technology providers, so you can go in there and actually experience the latest VR technology in the best possible environment. Then, they're creating, what's already a community that exists online, in many cases but bringing that to the physical store. There's been some really compelling numbers in terms of how long people are spending in the stores, how much they're actually spending when they're there. That has been successful enough as a small strategy that they're beginning to spin that out, they plan to use this as their store strategy going forward, so to speak.

Shen: That's great. Those are some really good examples. For listeners, in terms of the investing stories and the public companies out there, we've seen examples recently, too, at a greater scale, for bigger names. You have department stores and big box stores adopting some of these similar concepts in terms of discovery, keeping the inventory fresh or the experience fresh. Something that I think is a good example of this is the store-within-a-store concept, in terms of companies like JC Penney who are partnering with Sephora, Nordstrom partnering with names like Everlane and Chanel. Amazon is testing stuff like this with its Whole Foods locations, where they have the electronics component with their smart home speakers and assistants. 

This experimentation is really cool to follow right now. I think even for bigger names out there, chains, brands that I think a lot of our listeners are familiar with, shop with on a regular basis, they're already starting to see in their own experience some of the experimentation bleeding over and being applied, even with this huge national footprint.

I'd like to change gears a little bit and pick your brain on customer data. I know you mentioned, more on the infrastructure side, when you were providing the framework for our discussion. We've seen a lot of companies praise the data insights that they get into their customers' shopping habits from things that have existed for a long time like loyalty programs, mobile apps, their online storefronts. But it seems like companies now are able to get more granular and specific. Can you tell us about some notable examples of what companies are learning about with their shoppers, and how they're leveraging that information now that it's become even more robust?

Lachut: Yeah, absolutely. I think to your point, there traditionally has been this gap where one of the advantages of having an online presence is the fact that you're able to gather information that you weren't necessarily able to capture about a customer in store. I think what we're seeing now is, with that unified approach, there's an opportunity to begin to close that gap, understand the customer both in-store and online, and then start to do interesting things about it. 

I think the most compelling, perhaps, example of this is something that Alibaba is doing. For me, where it all starts with them is, you have a marketplace in China where you have a consumer who's very comfortable, and in many cases is only using mobile payments as how they transact across the board. In the case of Alibaba, they have their Alipay platform, which is the de facto way that people are transacting, whether that's through any of Alibaba's online properties, like a Tmall, or more largely now within the context of that store experience.

This is all part and parcel of what they're calling their new retail model. If you look at one of their grocery stores, which is called Hema, it's basically trying to bring the best of both of the online and offline worlds together in a very seamless way. Everything that you're doing within the context of that store is driven by an app. You're scanning products into your shopping cart. You're learning information about those products as well. It's all connected to your Alipay app. They've bumped up some experiential elements within the store alongside of that, but I think once you're able to understand very specific transactional data, understand what's being picked up and what isn't, what's going into that shopping cart and ultimately being transacted across, it enables you to do a lot of really interesting things about not only optimizing that store experience but then thinking about how you begin to market to that customer across the board.

I think another interesting example of a company that's thinking about this from more of a shopping center point of view is Westfield. For them, one of their big investments right now is thinking about how they understand more about who's coming into their particular properties. They have 450 new digital advertising screens across half of their properties, their 33 properties in the U.S. That's able to track, within 20 feet, demographic data about who the customers are that are looking at the screens. It's even able to capture emotional responses, whether you're smiling or frowning depending on what you're looking at, dwell times. That information they can use to better serve their ads but then also sell that information or provide that as intel back to their customers to say, based on these things and what we understand about who's coming in and what they're looking at, you should think about marketing to them in these ways. 

Then, they've recently begun to experiment, I think this was within the past six to eight months, they've renamed their retail lab OneMarket. What they're essentially trying to do is become a one-stop shop for the retailers who might have space within their physical malls, and they're trying to create partnerships between multiple stores to begin to share the data and the information that they're capturing, again, about who's coming into their stores, how much time they're spending there, what merchandise is being sold. Obviously, a lot of that is anonymized or, by its very nature, is anonymized. But then, once you have all of that information in a broader context, then it becomes really interesting in terms of thinking about what that means in terms of how you're thinking about your business as a whole.

And I can keep going on, but I'll pause there and see if you have any additional follow-ups.

Shen: Those are some really cool examples. Especially with Westfield taking that OneMarket approach that you mentioned at the shopping mall. I think it leverages some of the benefits and the scale that a huge online marketplace like Amazon already sees in terms of how people interact with different brands across different product categories, and how they can leverage that to increase basket sizes and recommend the right products for customers. They're able to apply that whole concept, that idea, to a physical space now. And that can be very powerful for these properties and for the companies in that space.

We have a few more minutes here. I want to wrap up. I'd like to extend our time horizon a little bit, look out maybe five or 10 years. You've talked about a lot of the changes and trends that have an impact on brick-and-mortar retail. There's tons of experimentation going on now. What are the big takeaways for you? What do you think will eventually become standard to the shopping experience going forward that investors can look out for, and if they see a management team, for example, talking about it during an earnings call or a conference call, know in their minds, where they think, this management team is thinking about the future, they're looking at things in a proactive way to tackle the online-offline channels the right way.

Lachut: Absolutely. I think there's some bigger things for sure that will power a lot of what's going to be happening going forward. To start, a sophisticated CRM system, which again, is beginning to understand customers across channels. Capturing that data, making it available in compelling ways, either to decision-makers or more so how that manifests in the hands of store associates or customer service representatives, or whatever the case might be. I think that would be No. 1.

No. 2, I think, is rethinking the supply chain. One of the ways that we really see the store functioning going forward is, again, beyond being an experience center and a part of the marketing channel. It's also being part of a distributed supply chain, so as much a place where people come in to buy products off the shelf as it is a place to fulfill online orders and build out the efficiency of that broader delivery network or fulfillment network as well. 

What's required there is for companies to have a much more sophisticated understanding of their inventory, and again, be able to tap into that to figure out where those efficiencies are in terms of that fulfillment. To give you an example, Zara, I was reading an article recently, one-third of their total orders are all click and collect orders. They recognize that was a great aspect of their business, but they were falling down in terms of the experience within the store when people came to pick up orders. You have somebody in the store. You don't want to give them a terrible experience as they're going through those final few transactional moments. So they're rethinking their business around that and how that store actually functions. I think that's a huge component as well.

I think, again, to go alongside both of those is to think about -- you need to have some sort of a mobile strategy and really think long and hard about what type of experience and what type of utility you're providing to that consumer, again, regardless of whether they're coming to you to shop directly through that app or how that impacts that store experience for them. I think there's a lot of ways that can manifest. And that also connects through to what I mentioned before, which is that mobile payments space, which I think is a huge opportunity as well. Really, that sort of thinking about the end-to-end experience of, you can see what people are looking at in various capacities, perhaps they're going to use that mobile to engage within the store and log into that store, and then connecting that through to that payment data, which I think is a Holy Grail, to use a hackneyed term, but I think it's quite compelling, as well.

Shen: Absolutely. Well, thank you very much, Scott. I think the big takeaway for me here is the idea that, we talk all the time on the show about companies, retailers taking on this omnichannel strategy, trying to fulfill customers' needs when and where and however they want to place their orders, do their shopping. But the important thing here, it seems like, is not letting that be this kind of distinct, silo-ed effort, like you said, but to make sure everything integrates well. And to consider, not just in terms of operations and logistics, but how that also blends in terms of some of the softer things, the intangibles like your brand and the overall experience and connection that customers have with your company. Again, Scott, thanks again for joining us today, and letting us pick your brain, get some of these ideas out.

Lachut: Yeah, absolutely. Thanks so much, Vince. I hope to be able to continue the conversation at another point. I appreciate it.

Shen: Absolutely. Thanks for listening, Fools. Austin Morgan is the producer for Industry Focus. People on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against stocks mentioned, so don't buy or sell anything based solely on what you hear during the program. Fool on!

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Vincent Shen has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon and Netflix. The Motley Fool owns shares of GameStop and has the following options: short April 2018 $18 calls on GameStop. The Motley Fool recommends Nordstrom. The Motley Fool has a disclosure policy.