From Where I Sit: Season 2, Episode 12 With Colleen Baum, Senior Partner, McKinsey & Company, Transcript

Tom McGee:

Welcome to From Where I Sit, the podcast where we explore the forces shaping America's built economy. I'm your host, Tom McGee, president and CEO of ICSC. In discussion with prominent leaders and innovators, we cut through the noise to explore the trends and innovations influencing the future of our communities.

Recently, ICSC partnered with McKinsey to launch the Shopping in the Age of AI report, which analyzed how AI is reshaping consumer decision making. I had the pleasure of working closely on this report with Colleen Baum, Senior Partner at McKinsey, and a returning podcast guest from season one. Colleen brings 20 years of experience in supply chain and retail, including the last 15 years in McKinsey, where she advises retailers and apparel brands on adapting to changing consumer behavior. She's a leader of McKinsey's retail operations and retail real estate initiatives for the Americas and is responsible for their work on store network optimization, supply chain, inventory planning, store operations, and procurement. Colleen also leads recruiting for McKinsey's New York office and women's recruiting across the Americas. Outside of work, Colleen serves on the board of the YMCA of Greater New York. With her extensive experience in the sector, Colleen has unique perspective on Shopping in the Age of AI, and I'm delighted to have her here to break down the findings of the report and explore what they mean for the future of retail. Colleen, welcome back to the show.

Colleen Baum:

Thank you, Tom. Thank you for having me back. And it is quite nice that our original podcast was in some ways the impetus for this broader research collaboration, which we really enjoyed with ICSC. So thank you for that.

Tom:

It really was and you and I have developed a good friendship and ICSC's developed a wonderful relationship with McKinsey. So it was a pleasure to work with both you and the firm in this report and this collaboration. Let's kind of start with maybe at the highest level. The report involved interviewing a large number of C-suite leaders in retail and real estate and also a survey of over 3,000 consumers. And let's start with the consumers first. I know we'll talk about the perspective from the C-suite in a moment, but just reactions to surprises from what you heard from the consumers or what we heard from the consumers, particularly around the role of the store in an increasingly digital world.

Colleen:

The survey that we did of more than 3,000 U.S. consumers was incredibly important in grounding what we learned. And for me, I am someone who deeply loves shopping and deeply loves going into a physical store. It's part of what I think, Tom, you and I really connected on during our first podcast. But the most surprising, I mean it's not surprising, but I think the most important thing that we learned from the consumer is the average U.S. consumer really loves the store as well. And as much as we talk about rising digital penetration, as much as we talk about more sales being omni, inherently sales being omni means that the vast majority of transactions and trips and research is still happening in conjunction, if not in a physical retail store. And so that's something that I loved seeing the importance of that insight and that consumer perspective pop through. So that was really critical.

The second is that the role of convenience is really evolving. And I know we'll talk about this in a second, but the piece that came back really strongly from consumers is just this idea of when they go into the store, they want to find what they think is supposed to be there. They want it to be available on the shelf, easy to find. They want to get in and get out quickly. And so the other big piece is the sharpness with which consumers are articulating their need for convenience and what convenience means in 2026, let alone five years from now. I also thought was quite surprising and interesting.

Tom:

And I want to talk about that. We're going to talk about convenience in some depth and actually speed too, because that was a theme that came up in a number of conversations. But just before we leave the consumer, one of the interesting things to me was just kind of the breakdown between different generations. And no matter whether it was a more mature generation or the younger generation, Gen Z, they still enjoyed the store. The vast majority of them did most of their shopping in the store. The younger folks were the more omnichannel they were. But I thought that was quite grounding as we look to the future.

Colleen:

Grounding, I think, is a really nice way to describe it, Tom, because in some ways it seems very counterintuitive or seems contrary to the narrative that we hear, which is agentic commerce and the fact that people are going to be using large language models and generative AI in different ways to support their shopping journey. That's true. But I think those two pieces are perhaps a little bit overhyped relative to the fact that nothing replaces that. When you're out of something and you need convenience, you're going into your closest store and you're going to try and make that a quick trip. That is the time spent is worth the effort of what you've received, or you're going in to really discover. And so, you know, I think for folks like you and I, and probably the folks that are listening that really think about stores as central, it was really, I think, validating and grounding to hear that reinforced directly by the voice of the consumer across generations, across categories, and across what we would say real estate types. So whether that was a mall, a power center, grocery anchored center, consistently consumers do want to come back to stores.

Tom:

Yeah, the store is still the focal point of an omnichannel journey. It is interesting. I mean, one of the observations, and this is just kind of a personal view, but in a world that's becoming increasingly digital, I think things that bring people together in a live setting that are ingrained in people's psychology become even more important. And certainly the store is one of those things that's kind of central to bringing life to communities. I think one of the central, perhaps the most central finding of the report, was talking about the role of stores, though, looking into the future and that every store needs to have a purpose. And those purposes, you know, could vary, but generally focused upon convenience versus discovery. Let's start with that a little bit. That central finding, give a high level perspective, and then we'll delve a little deeper into what each of them mean.

Colleen:

And I think that’s set up really nicely at the core. When you need a motivation for a trip to the store because there are a lot of online options. That what is motivating the trip is either I have an immediate need for something, and I think that the store is the most effective and efficient way for me to get in, get out, and buy that item that I need. That's at the heart of a convenience trip. Or the other is that I really want to explore, discover a different brand, discover a product that I didn't know that I needed, or test out a bunch of things and really experience the heart of the brand. Those seemed like the two big reasons that consumers have to go to the store. So as a result of it, if that's what's driving the trip, we want to make sure that when a consumer comes in, they are really delighted and their expectations are exceeded, whether that is we've made this a really, really effective convenience trip, the value was worth the time spent, which is how consumers are thinking about whether or not it was a good convenience trip. Did I get what I needed and it take as long as I think it should have? And then on the discovery side of things, they want something unexpected that they can't easily find online. And they probably have already done a bit of research on ChatGPT or Claude or one of the other large language models. They've done a little bit of research. They've thought about where they can go. They've thought about what they might want to buy.

But fundamentally, they want to go into a store where they can have support from a knowledgeable associate. They want to be inspired by the core beliefs of the brand and they want to find something that they may not have been able to define themselves. And so that anchoring back to why is a consumer going to the store, we think is the first step. And to your point, a store can be a great convenience store. It can be a great discovery store, but we've actually found as we did the research and talked with consumers and talked with the executives, it's really hard for a store to play every—you know, it can't be everything to everyone. It's got to be specialized in the needs and the occasions that it's serving.

Tom:

You know, Colleen, just to delve a little bit deeper on that, so could a retail brand, any major retail brand, could they have convenience-oriented stores in their fleet and also discovery-oriented stores in their fleet? So in other words, depending upon location, it may differ as regards to what its primary purpose is. Is that fair to say?

Colleen:

Completely right. And so as an example, I'm sitting in my office at World Trade Center 3. We find that a lot of the retail locations around here, whether it's a clothing store or a drug store or a mass store, is probably geared towards convenience. There's a large number of people that work right around here. It's a major transit hub. And then there are a number of residential neighborhoods that are fairly close by. So it's a nice like truly in between point. So as a result of it, when I'm popping into a drugstore or popping into a mass retailer, I probably know exactly what I want. I know whether or not they have it in stock and I know what price I should pay. And I want it all to be in the five to 10 minutes and I'm walking home. On the flip side, if I'm going to, I don't know, West Village or if I'm going up to the Upper East Side of New York on a like true destination shopping trip where I'm discovering different brands, you also may find that same mass retailer has a slightly different format geared towards a discovery trip. And so I think it's not this retailer's always convenience or this retailer's always discovery. It is really geared towards number one, the customer that they're serving and really in some ways as affect the neighborhood or the area in which they're serving.

Tom:

As a retailer and to a certain extent also the shopping center owner, there's another aspect to kind of site evaluation curation. So if I'm a retailer today, I should be evaluating not just the demographics of the area, but also how should I lay out my store to be most effective in that area as well? Not just does the demographics of the area support having my particular type of retail product in that area, but also how do I lay out the story that might differ from what I would do in a different area?

Colleen:

Exactly right. And it needs to flow through all of the elements of the physical store. So in some ways, I think this finding really, I hope for a retailer elevates the role that someone who's doing real estate or in-store design plays because as you are focusing on a convenience trip, it probably means a broader assortment. Like you need a broader in stock. You need more of each of the items that you have. You need to make sure that the layout is such that the things that are bought the most frequently or highest velocity items are closer to the front. Make it easy for people to get in and get out. The help that you have in the store is reactive to a customer question versus proactive customer service. Everything about that changes a little bit. And so as a result, the intent of the store, of this individual location is the first problem to solve. And then all of the elements of a retailer's value proposition then need to shift slightly to support that intent. And that intentionality is really important to delighting the consumer.

Tom:

It's actually quite interesting and multidimensional in many ways. But I would say one thing about at the core of being convenient probably means you better have the product in stock, right? That's part of being convenient. The actual inventory is there. When I we had a previous conversation, you had used a personal example, I think, of going to a store and you have a young family and you were looking for, I think, diapers. And I thought it was a wonderful illustration of how you might change the layout of a store that might be a multi-dimensional store. It might have a variety of products, but if it's more convenience-oriented, just share that example for a second, if you wouldn't mind.

Colleen:

Of course. And this is probably like the most classic example of a convenience trip, right? A working mom who's on her way home. I was, of course, running late, was probably on the phone, and I need to buy like a pack of diapers. So I'd done a tiny bit of research into this two or three stores that I'm walking by on the way home. So I knew they had the brand, the size that I wanted, and I checked the price. When I got to the store, the first thing I realized is it's a two-level store. Diapers and all things baby were not on the first floor. So all of a sudden now I've got to walk to the back of the store down the escalator to all the way back to find the diapers. And then I came to find out that the brand that I wanted didn't have the size that I needed. So then I had to buy a different size. And then I have to walk from the back of the store all the way to the front checkout and then up a level. And so a trip that I had mentally budgeted, and this is perhaps not reasonable, but I was like, this will be a three-minute thing. It ended up being closer to 20 minutes because of the multiple levels and I couldn't find what I needed and they ran to the back to check to see if they had it. And I had to buy the different size. And it left me with this feeling of I'm never going to do this again. Like this store wasted my time. Instead, I'm going to go across the street where I could, I mean, in effect the next time I order it in advance on the app. I checked in and then I had some very smiling store associate greet me just with the pack of diapers and off I went. And it was a three-minute trip. And so it is, I think our consumers' expectation of how long something should take has really decreased. Like we expect our coffee to be ready when we hit the button, we expect the diapers to be there when we're ready. And extra steps, extra effort can really detract a consumer, particularly on that convenience-oriented track.

Tom:

Yeah, they put friction into the shopping journey. That concept of speed, though, was a consistent theme that we heard in a lot of our interviews, both what we heard from the consumer survey, but also what many retail leaders were saying that they just have to learn to become faster and faster and faster because the consumer expects that, right? Logically so, because we have so much information at our fingertips.

Colleen:

Exactly right. And I think it's both the consumer, and I think what's one of the biggest things that have shifted in in this age of AI and shopping in the age of AI, the consumer is a much more educated consumer and it's very easy to do research. And so as a result, we have heightened expectations for how easy something's going to be to get it in store and we know exactly what we want, exactly what you know, like and you know it should be in stock and that level of kind of advanced preparation before you've made the trip to the store does really raise the expectations for how quickly I'm going to get it if it has to be shipped, how easy it is going to be to find it. Can I, you know, extra promotions, whatever the case is, the consumer expectations have only been rising in recent years relative to the quality of it in store experience.

Tom:

Yeah, the consumer is super well informed today. And both of our organizations, both as part of this report, but in in other reports and surveys and studies, have discovered how frequently consumers are using AI-enabled tools to assist in their shopping. I think in one of your guys' most recent reports, it was over two-thirds of consumers were using AI-enabled tools. I would presume most of those AI-enabled tools are associated with research and comparison and reviews. Is that fair to say?

Colleen:

Exactly right. Primarily related to research and reviews. And then also we are seeing in some categories pieces of using that for true discovery. I want to try new makeup brands. These are my requirements. What would you recommend? And it's a way for a consumer to begin a discovery trip as well online.

Tom:

As we're talking about the consumer, because I do want to go back to convenience versus discovery from a store perspective and tap into your expertise around store operations. But one of the findings of the report also was a significant expected growth in agentic commerce over the course of the next number of years, I think a trillion dollars by 2030, which is a big change from today. I mean, we just said that AI is primarily being used for research and information and a little bit of discovery. But agentic commerce is taking it to a different level, isn't it?

Colleen:

Exactly right. And the big question or the piece that we're watching is are some of the more routine trips the first one to go into agentic commerce? And so if you know that you need these household staples, are you going to have an agent set up to automatically do the ordering and the processing for you? And then the question is for like larger trips, is it possible to use agents as well? And that really the difference is how much of the decision making you've delegated to the agent versus you are interacting and ultimately still making the decision. So we know now that the consumer is very willing to use AI and large language models to inform the choices that they're making, but they're still making those choices. Over the next five years, we expect more of that to be fully delegated. I personally believe, and our research has indicated that some of the more routine, subscription type purchases are going to be the type that end up delegated first.

Tom:

It really does. And to me, one of the things that I just walked away from this process, really having a much more intense belief in is this concept of speed and how important that is. And agentic commerce is only going to make that even more significant. It's speed, efficiency. And I was heartened by hearing so many retail leaders talking about the need to serve the consumers in a faster, more efficient way. But I think those that are going to be the most successful, are going to be the ones that really lead the charge in that.

Colleen:

Exactly right. And I think that shopping in the age of AI means that you're going to get the product before you realize that you need it. That's the fastest speed possible. But, you know, if I put my retail supply chain hat on, you know, I do think that as expectations continue to grow from a speed perspective, the store is a forward location closest to your consumers. And so what will become important is that retailers continue to think about for this individual location, could this be a forward distribution hub? Can I fulfill online orders out of this? Is there a way to really drive buy online, pick up and store traffic to this location because you're, you know, you're meeting that speed and you're also getting someone to pop into the store? And in some ways, really thinking about physical footprint and stores as an unlock to support growth at more favorable economics versus the need to put a lot of capital in the ground. To support more distribution centers and all of the capital that comes along with something that's highly automated. And ultimately, retailers can't spend capital on everything. And so the folks that we were talking to in Las Vegas, the folks who are members of ICSC are balancing the capital. Does it go into the supply chain? Does it go into the distribution center? Does it go into store remodels? Or does it get spent back on AI and other technology that where capital is allocated? I think is one of the hardest choices for a retailer. And the really fun thing is that a store can be many things, and one of which is that convenience location for a consumer plus, in effect, a distribution center to meet speed requirements and to support a rise in, you know, agentic commerce, I think is really important and something that we continue to watch.

Tom:

Yeah, one of the phrases that I've kind of adopted is that the store is becoming a mini-fulfillment center as well as a means for traditional shopping. And while we all think that it's a constitutional right to get free shipping, actually somebody is paying for that. And so to the extent that you can either reduce the footprint of how far you need to deliver something or better, yeah, and have the consumer encourage the consumer to come to the store to pick it up, you're saving that margin. And so I think smart business people figure out a way to adapt.

To that point, though, as the store evolves to meet these new needs and tapping into your experience around supply chain and store optimization, the layout of the store will get impacted by all this too. Even your example about the diapers being on the second floor as opposed to the first floor, having different layouts in different stores, depending upon whether it's a convenience- or a discovery-oriented store, adds a different level of complexity to retail operations that don't exist today.

Colleen:

Exactly right. And I think in effect the different formats become more localized. So as an example, you know, Tom, if we want people to do buy online, pickup in store, they will do it, but particularly if they know they pop in, I turn to the left, it's right there. I know it's going to be a very quick trip, but if you similarly have to walk to the back of the store or go to the second level to get what you need, it's reducing some of that speed. And so the pieces that we think through are, you know, kind of a relay in how much space is spent on which activity. So how much is associated with customer service versus the space that's set up for assortment perhaps versus the back room. Just the macro space allocation becomes important. The actual flow, particularly how people move through the store is really important. And then finally where you can find help, like where store associates are deployed and what tools, what digital tools they have in order to enable support to consumers, all of that shifts a little bit, particularly on the convenience side of things. One piece I know we've talked a lot about shipping, and there is no such thing as free shipping. There also is no such thing as free returns. And particularly for my clients that are within the apparel space or discretionary categories, the amount of returns, particularly for online items, that it is most economical to clear those through the store. And so there are similarities about convenience. How do you make a return trip as convenient as possible? Both that you have a better chance of a consumer exchanging sizes or exchanging the color, but also how do you manage the economics of a return while getting that inventory back into saleable format as quickly as possible?

Tom:

I want to touch on talent in the store in a moment too. But one of the things that you said that really struck me is also the complexity about inventory management around that, depending upon, you know, the nature of the store, whether you want more inventory or inventory of a certain type in a convenience-oriented store than perhaps a discovery-oriented store. And that's an additional level of complexity as well.

Colleen:

It really is. And I think the hardest problem to solve, and it's actually what I spent my pre-McKinsey life doing is how much inventory do you need in a physical store to be able to both support effective inventory turnover, but also make sure that you're in stock? And consumers' expectations for in stock are only rising, particularly because they're checking whether or not it's in stock before they popped in. And so one of the pieces that I get most excited, as we talk about shopping in the age of AI, actually, AI applications to support improved inventory forecasting, planning, and deployment is one of the things I'm most excited about over the next five years for retailers, partially because it is such a hard issue to solve when I worked at Home Depot before I came to the firm. There's something like 100,000 SKUs across 2,000 locations. There's a ton of seasonality. Just think about how complicated forecasting one of those individual SKUs is. And when consumers expect you to be in stock every single time, it means that the use of large language models and AI tools should be a huge unlock to that balance between effective use of capital, effective inventory turnover, and you know, always having that pack of diapers in the right size available for people to buy.

Tom:

I think when people talk about AI and, myself, I think of AI in kind of this abstract way of, you know, this new age, robotics all over the place, you know, virtual reality. But AI also can be quite helpful in things that improving, you know, kind of core operations that already exist. And perhaps the most important use of AI, at least for the next five to ten years, is things like that. Inventory management. I mean, what a tool to use in trying to forecast and optimize, you know, inventory levels across a large fleet of stores. It's an amazing tool to use.

Colleen:

And I think we'll see AI in merchandising choices. So what products to carry and making it highly localized to the individual format and whether it's a convenience or discovery trip, we'll see it in those inventory applications that we just talked through. And then we're seeing quite a bit of it as well in moving a little bit to in-store and support for in-store associates. The quality of the schedule has improved dramatically with the use of AI. I also, once I schedule my labor, I can be much more focused on, hey, store manager, here's your one-stop shop dashboard for the types of things you need to keep an eye on today and be very directive with store managers, department managers, and even individual sales associated with both giving them information about the products, but also directing where they should be spending time in order to maximize labor productivity. And so I think the operations of retailers will really shift dramatically over the next five years. That's part of where I, you know, we hope in continued improvements and operating margin and inventory will be generated through AI, which then can be invested back in the consumer, can be invested back in the proposition.

Tom:

And you've touched on this a little bit, just the role of the sales associate in the store and maybe differentiate a little bit, you know, I know it's unique to the particular retail brand, but differentiate between what the kind of the core expectations of somebody in a convenience-oriented store might be versus a discovery-oriented store, what the consumer might expect when they're being assisted by the sales associate.

Colleen:

And this is something that in our consumer survey was incredibly clear. So if I as a consumer am coming in on a convenience trip, I'm coming in to grab that pack of diapers, they don't want a store associate to slow them down. So in some ways, I don't like if I'm coming in to get diapers, don't bother me until I know that I have a question. And so this pivot from proactive consumer service to very reactive answering questions and spending the labor. And having the fastest checkout possible and the fastest fulfillment for in-store pickup, that is the role of the store associated in convenience. It's much more behind-the-scenes support and reactive support. On the flip side, for a discovery trip where I'm coming in to browse for something and discover something that I didn't know, the store associate and unguided selling experience is the core reason why someone's come into the store. They want really proactive customer service. So as a result of it, when I come in, it's like ideally really thinking differently about what I might need or what I might be looking for relative, Tom, to what you may be looking for, and providing a personal perspective of why you might choose this product versus this product or making recommendations. And in this idea of a discovery trip, the customer service is not only proactive, but ideally it's personalized and highly targeted to make it into this very special experience. And we heard examples while we were in Las Vegas together of stores that are doing things in-store events as a huge supporter of a discovery mission or thinking about events and activities for kids while their parents are shopping. So balloon animals and having food and treats there while the parent is shopping. Just this idea of what customer service can be in discovery is much more expansive, both in providing expertise to make this shopping trip into a longer dwell, like true destination. It's an occasion, I think, is really important. And then the third is obviously supporting that connectivity. So both connection from the shopper to other shoppers, but also the shopper to the brand or to the retailer.

Tom:

One of the things that I think is somewhat timeless in the success of retailers, whether you go back 200 years ago or maybe look into the next number of years, you still have to have great customer service. How you might define great customer service might differentiate between a convenience- or discovery-oriented trip. You have to have the right merchandise and it has to be priced effectively. I mean, those are the things that I think, regardless of what tools are in place, and whether you buy something online or in the store, customers still expect great service, the right merchandise, and a fair price. I think that that's timeless.

Let's talk a little bit about the shopping center owner themselves, the shopping center itself. And so how does this concept of every store having a purpose, convenience versus discovery impact the shopping center owner and manager of a center?

Colleen:

So I think it's quite central because obviously the landlord, the owner operator is going to be critical to enabling whether this is a convenience trip or a discovery trip. So, as an example, a convenience location needs to have sufficient parking. There needs to be ways to get in and get out. The other really critical piece that we heard from consumers is that a convenience location is a location that is deeply embedded into their existing traffic flows and what they're doing kind of around that shopping trip. So it then becomes essential. The person who can do it the most effectively is the landlord or the owner operator is thinking about what mix of tenants is going to best support a convenience trip. Is it a place where I can run and grab a couple of groceries? I can pop in and get like a, you know, the next size up on kids' shoes. I can grab takeout that I'm bringing home for dinner. And along the way, I'm stopping at the bank to do the ABC thing that I couldn't do online. All of a sudden, that string together of four different errands into one, I park once, I hit everything that I need. I feel like I had maximized my time and it felt kind of frictionless. There's real power in that. So the individual retailers or tenants can't do that. But the landlord who has that full view of who is the shopper? What are the demographics around this area? What types of trips are we likely to serve? And how do I mix together those tenants to create density around a really easy set of convenience trips is very important. In addition to that, I'm thinking about the parking, thinking about the flow, I'm thinking about the access. Am I on the right side of the road? All of those pieces come together into a frictionless consumer experience.

On the flip side, you're doing similar process on discovery, but really discovery is about mixing together several tenants that the consumer is likely to shop. And we can do that based off of credit card data and predictive analytics, but also taking that mix of tenants with a much broader set of place making decisions, food and beverage offerings, things that actually feel like events or occasions to go to things that are experiential in nature. Then, you know, again, the sum of the parts is greater than the individual tenants in the case of a discovery trip.

Tom:

It makes good sense what you're saying and clustering kind of like minded things together. Could you foresee a situation where a center could be a little bit of both? Could you have convenience and discovery in the same center? Perhaps they're curated in different parts of the center, but could you see that exist?

Colleen:

I definitely can see that. It's actually been one of the conversations where at least landlords that I've been talking with over the last six weeks or so are going to intuitively. Do I have to decide if this center is a convenience or a discovery right up front? Or is this more about how you do the curation and frankly how you're actually assigning space and leasing space within a center that you would have perhaps a concentrated zone for convenience, which is like the access and how parking flows is really anchored around that? And then you have a broader set of space and locations that supports more discovery in a different type of trips. And particularly for A malls, the highest quality outdoor shopping centers and lifestyle centers, I think we will see more of that. Ultimately, you know, I would expect a grocery-anchored center to be much more about convenience, but that's intuitive based off of the types of retailers that go there.

Tom:

Sure. You mentioned parking. It's also traffic flow. If there's a whole lot of curbside pickup and click and collect and those types of things, it places an increased level of emphasis upon really thinking through those types of things because if speed is really important, particularly in convenience, then the things you can do to make the center more efficient for getting that consumer in and out of it, particularly if they're going to do things where they're going to pick up curbside. So you're not creating traffic jams by virtue of some customers doing that versus some parking and going into the store.

Colleen:

I can’t agree more. And maybe just the one other piece if I can, Tom, that I'd add in this idea of how landlords can help unlock value. Some of this I think is a shift for retailers, where retailers as they're approaching lease renewals, they think about, you know, lease negotiation as an adversarial process and we're sitting across from the table from each other. Real value is going to be created over the next five years in this idea of shopping the age of AI, where landlords and retailers or tenants are collaborating much more effectively. And that's sharing data, being far more digitally connected because it is of value to a retailer to have like-minded tenants around. But it's hard for a landlord to do that without getting information from each of its tenants on how to maximize the value. And so that is kind of one big hope that I have coming out of a lot of our recent conversations is that we'll see a lot more collaboration, partnership, data sharing in order to maximize the value of every single retail trip. Like let's get the most value and that comes from that close collaboration.

Tom:

Yeah, the sharing of information and data, I think, is critical. That's always been a little bit of a challenge, but I think as business momentum kind of forces an increased level of collaboration. Maybe the last topic to talk about, and it does kind of capture the essence of why it's so important for retailers and landlords to get this right, is one of the things that was estimated in the report is that the top 10% will capture 85% of sector profit going forward. Talk a little bit about that, how that number came about and really how that crystallizes the importance of the things that we've talked about today.

Colleen:

Yeah. I think we found as we looked across different types of retail that retail can really be a winner takes all industry. Some of that is obviously the benefits of scale, the benefits of return on capital and the investments that you're making. But as a result of it, I think it will be very important to watch the largest of Fortune 100 retailers and see the moves that they're making around AI investment and putting more money back into stores, putting money into the supply chain as important signaling. And then the smaller retailers can then be effective with their capital by being fast followers of what we're seeing the bigger players do. I also think the money into the store and capital spent back in the store generates significant value because it can play the role of an in-store, it can play the role of a DC. There are a lot of different ways to think about stores specifically. And so all to say, I think it is really important that retailers make the right choices on deployment of capital because of this winner takes all dynamic. And I personally advocate and would encourage to think about capital going into reformats to relays to modernizing the store environment in this world where we continue to see consumer behaviors adapt.

Tom:

The topic of capital allocation. That could be another podcast episode we could do at one point, because that's or another report we could do, because that's where the rubber hits the road. How are you going to allocate capital to make improvements? One of the interesting things too is I think to end where we began, which is the central and enduring role of the store. And the advance of AI is only going to, I think both of us agree, enhance the role of the store, but it needs to evolve as it always has. One of the challenges of course is there's just not a lot of physical retail space available today relative to the demand because there just hasn't been a lot of new development over the course of the last twenty years. So as these evolve, I think that supply demand mismatch or stress will continue to exist as retailers try to find that prime space in particular to fill the need of convenience versus discovery.

Colleen, thank you for taking the time today. We both deeply value and appreciate this industry that we both have the privilege of working in. So thank you for your time and the chance to develop a relationship with you and with McKinsey. ICSC has truly enjoyed working with McKinsey on this report and look forward to continuing to talk about it to as many audiences as we can because I think the findings are so critical to this industry, so central to the U.S. economy.

Colleen:

Completely agree. And I just want to share similar feelings of gratitude. Tom, I have tremendously enjoyed getting to know you personally and the friendship we've developed as well as just the power of this collaboration, bringing together the members of ICSC with some McKinsey research is something that I have hugely enjoyed over the last six to twelve months and I look forward to much more collaboration in the future.

Tom:

Same here. Well thank you, Colleen, and thank you to all of our listeners.

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