The Experience Economy Strikes Again

If the death of traditional retail shopping were to have a martyr, Toys R Us might be the perfect contender for such a role.  Once the go to place for toys, games, and children’s electronics, the brick-and-mortar retailer finds itself saddled with $5 billion of debt and depleted cash flows as Amazon, Walmart, and Target sap up market share like taking candy from a baby.[1]  The general public finds itself asking, “How could this happen?”, but I think we all know the answer: When was the last time Toys R Us was at the forefront of anything? When were we talking about Toys R Us like we were Amazon or Walmart or Target? The answer was decades ago, and it is not hard to see why.

Death by Innovation

The last time I walked into a Toys R Us, the lonely building sat by itself on a hill surrounded by a sea of empty parking spaces.  The year was sometime around 2006-2007, right after Bain Capital took the toy giant private in an effort to make some quick profit in a 3-5 year turnaround (more about that later).  The store, right outside of Lancaster City in Pennsylvania, is pretty big, but has a strange effect on shoppers: the colorful toys and games are dimly lit, and the slight twang of a pop song follows you around the store.  Here and there you hear a child scream, hopefully in delight, but the store is devoid of customers and maybe even salespeople. If I happened to find something in the store, I could not recall for you today what it was, just another example of the sorrowful show Toys R Us had on display.  I could describe for you the terrible experience, but not the actual toy I bought.

 

What I am getting at is that the last thing a consumer wants from a retailer selling something as exciting as toys is the experience I had as a child above.  Just like the products themselves, stores should mirror the type of experiences one has when using the product at home. Toys R Us wanted to do this after first filing for Chapter 11 bankruptcy protection last year.  The retailer had started to put Toy and Baby “labs” in some 200 of its stores, which would allow consumers to test and experiment with new products in creative games and showcases.[2] These types of experiences create positive memories for consumers to associate with a retailer’s offerings, bolstering their chances of buying the product or service and elevating the image of the brand.  However, debt servicing syphoned off much needed capital that Toys R Us would have used to modernize the brand and continue to innovate the consumer experience, so the retailer was handicapped from the start in competing with innovative giants like Amazon and Walmart.

The Worst is Yet to Come

When Joseph Pine and James Gilmore wrote their defining article for the Harvard Business Review in 1998 entitled “Welcome to the Experience Economy”, it is as if they were predicting the fall of retail right then and there.  Pine and Gilmore’s primary argument was that there has been a progression in economic value, from raw materials, to goods, to services, and now experiences as the highest source of economic value.

Progression of Economic Value

They go on to explain the implications: those organizations who do not enhance their economic offerings (for example, turning traditional retail shopping into retail experiences like those of Barnes & Noble’s partnership with Starbucks or Apple’s “town square” feel) are doomed to fail in this new economy.[3]

Toys R Us is one, but not the only brand, to fall under Pine and Gilmore’s prediction.  In the past we have seen the likes of Circuit City, Radio Shack, and others close due to this “experience” problem, and others including Sears/Kmart, Macy’s, Rue21, American Apparel, Bon Ton, and more are filing for bankruptcy and closing stores with the same set of problems: declining sales and poor brand images.[4]

 

Moreover, even brands built on experiences are struggling, as the recent bankruptcy of Claire’s demonstrates.  The teen accessory outlet specialized in combining products (earrings, head-ware and the like) with service offerings like ear-piercings.  But even Claire’s unique offerings are not enough to truly warrant the higher economic value in this day and age, and although they have reduced their debt by $2 billion in the past few years, it was not enough to save them.[5]

 

The story is similar to Toys R Us, which was saddled with $5 billion in debt from the Bain Capital buyout from early.  Payments on this debt amounted to $250 million a year and so what little cash Toys R Us did have coming in wasn’t enough to both pay down the debt and reinvest in new toy experiences.  Bain and others who invested in the company for their part weren’t able to turn the company around, a strategy which settled on growing the international portion of the business, cutting costs, and reconfiguring what stores they could [6].  It just wasn’t enough and the innovation and experiences weren’t there to lure new customers into the store.

 

So what does the future hold for retailers and service providers that do not shape up and adapt to the experience economy?  First and foremost, we will surely see more retailers file for bankruptcy and close, with the potential for huge consolidations in a variety of industries.  I am predicting grocery is ripe for disruptions and experience innovation, as evidenced by Amazon’s foray into grocery with their Whole Foods purchase and the aggressive expansion of Walmart’s “Neighborhood Market” grocery concept, both staging grounds for fantastic customer experiences.  However, it’s not just grocery; market players in brick-and-mortar retail in general need to put more emphasis on consumers experiencing their store and their products over simply getting in and getting out. I think we will see some retailers do this really well (Best Buy is a great example of both a business turnaround and an improvement to the consumer experience, with faster delivery and a better online interface)[7]  while others will try and fail or won’t try at all.

As consumers, we have come to expect more from our stores.  If brands do not give us the experiences we deserve, then they’ve doomed themselves already.

 

[1] https://www.usatoday.com/story/money/2018/03/18/toys-r-us-bankruptcy-liquidation/436176002/

[2] https://www.forbes.com/sites/neilstern/2018/03/15/toys-r-us-prepares-for-its-final-curtain/#760fbd232a0b

[3] https://hbr.org/1998/07/welcome-to-the-experience-economy

[4] https://www.cbinsights.com/research/retail-apocalypse-timeline-infographic/

[5] http://www.post-gazette.com/business/pittsburgh-company-news/2018/03/19/Claire-s-hair-accessories-preteen-ear-piercing-mall-chain-files-for-bankruptcy/stories/201803190101

[6] https://www.ft.com/content/02a5edbe-9d93-11e7-8cd4-932067fbf946

[7] https://www.reuters.com/article/us-best-buy-ceo/best-buy-ceo-says-turnaround-done-room-to-compete-with-amazon-idUSKCN1GL2Y8

Pittsburgh’s Relationship to Real Estate Development is Complicated

It is no surprise that Pittsburgh is on the upswing in various levels of prosperity: increases in tech jobs, a high quality of life, and some of the best systems (medical, education, etc.) in the country that are seemingly accessible to everyone.  A good indication of economic prosperity is overall real estate or property development in the region, defined as a business process encompassing many different activities involving land, buildings, and capital.   More specific activities include renovations and re-leasing to land acquisition and ground-up building of commercial, residential, and manufacturing facilities.  While this is not the only or even the best determinant of economic growth in a city like Pittsburgh, digging a little bit deeper into how cities handle property development can lead to broader conclusions about the future wellbeing of a city, particularly a city in transformation like Pittsburgh.

We all know the story: Steel city goes techno, built on a strong support system of universities, charitable foundations, and innovative companies like the University of Pittsburgh Medical Center (UPMC) that changed the fabric of how the city operated.  However, the development occurring today in Pittsburgh is distinctively different from that which got the city here.  The skyscraper boom that started with the U.S. Steel Tower in 1970 and lasted through the 1980’s and 1990’s is no more, with the only major skyscraper built in the last five years being the Tower at PNC Plaza (touted as the “greenest office building in the world”, achieving platinum LEED certification[1])  Universities have slowed their building and renovations recently, with the University of Pittsburgh (Pitt) having not built a major academic building in over ten years and Carnegie Mellon University (CMU) finally securing the funding necessary to build an undergraduate business school building (the Tepper Quad, to be completed in the fall of 2018) in addition to a mini boom in new acquisitions and potential developments[2].  Meanwhile, private developments in the city have skyrocketed, with various firms include Walnut Capital, the Davis Companies, Core Reality, and Millcraft Investments, completing or planning to complete hundreds of millions of dollars in a variety of development projects,  These include the various “Bakery Square” construction projects, the $100 million redevelopment of the Union Trust Building, and the mixed-use redevelopment of the old Kauffman’s/Macy’s department store in downtown into apartments, retail, hotel, and office suites (Walnut, Davis, and Core respectively).

To further complicate the story is the potential for Amazon or another large company placing a second headquarters or major facility in the city.  This creates a few issues: first we have the well-known problem of gentrification (which I’ve touched on before as an ongoing problem in Pittsburgh).  New developments of any type have the potential to displace citizens who can not afford to live in new apartments, shop at pricey new stores, or work jobs for which they do not have the qualifications.  We also have real estate speculation going on, which may or may not pay off for companies and individuals thinking Amazon will locate here.  Just a few weeks ago, an investor purchased 18 homes in the Hazelwood neighborhood (next to one of the potential locations for Amazon to develop, the 178-acre Hazelwood Green site) and spent over $1 million total on the properties, inflating their value by hundreds of thousands of dollars[3].  Finally, we have the actual proposal to attract Amazon itself, which has still not been released by the PGHQ2 team despite PA’s Office of Open Records order for the team to release the proposal to the public.  The proposal could have hundreds of millions of dollars in tax breaks and subsidies provided to Amazon, and that amount of money offered to one organization could set a dangerous precedent for companies and developers in the region looking to squeeze as much money out of their projects as possible[4].

So what is the picture we have?  We have a city with older companies and institutions who are not developing like they used to (with the possible exceptions of PNC, UPMC and CMU) and an influx of new developers catering to the potential arrival of companies and individuals with different needs and requirements.  This type of transition could upend an industry, especially if wild speculation takes hold or potential investments and people migration do not materialize.

There are examples of this type of problem, new waves of development from new developers that tank a local economy, in other cities that we can look at.  Phoenix, Arizona is a good example of a city close to Pittsburgh’s size whose overdevelopment without proper oversight and planning caused 20 properties to be under development at the same time, with no impetus for population growth to absorb that demand for residential and commercial complexes[5].  An extreme example that comes to mind is Seattle’s massive growth at the hands of Amazon’s development, causing jumps in the rental prices of apartments by 65% in the past five years, in addition to a host of other problems ranging from horrible traffic congestion to increases in the homeless population[6].

Even Pittsburgh can see the problems that improperly managed or rapidly changing development characteristics affect the city.  A good example is the recent hotel boom: between 2010 and 2016, there were over 10 hotels built in the city of Pittsburgh, prompted by the success of the Fairmont Pittsburgh which opened in 2010.  In 2017, there were 15 additional hotels under development or completed by year end[7], representing an additional 2,000 rooms potentially being added to the supply of Pittsburgh[8].  This creates incredible pains which hoteliers in Pittsburgh are all too familiar with, including drops in average daily rate and occupancy as hotels fight over the same base of travelers, pains that could have been mitigated with better city planning and oversight.

Another localized example in Pittsburgh is the redevelopment going on in East Liberty, which has already caused headaches for local residents.  It’s hard to place a beginning on East Liberty’s “re-emergence” but the profile of the neighborhood was raised significantly with Google taking up residence in Bakery Square in 2006[9].  Since then, a mix of apartments, restaurants, retailers, hotels, and office buildings have driven rents up for current residents and incited a costly legal battle between one developer and the City of Pittsburgh which cost $10 million by the end of case[10].  I provided positives and negatives for East Liberty’s redevelopment in my aforementioned gentrification article, but the ultimate conclusion I came to then and now is that development without proper planning and oversight means everyone loses in the end.

So what does the future hold for the state of Pittsburgh’s future development, and how should community leaders react?  It’s first and foremost about engaging in meaningful dialogue with city leaders about the purpose and aim of development and where the money is flowing.  Pittsburgh is already doing this, as the community forum on Amazon’s potential arrival last week sparked a more lively and broad debate about community development’s purpose in transforming a city[11].  More discussions like these need to happen, and community leaders shouldn’t just be focused on the big investments.  Smaller development projects add up, as we’ve seen in Phoenix and Seattle, and they have the potential to change the fabric of a community, sometimes for the worse.  Pittsburgh is a wonderful, growing metropolis, and as Pittsburghers, we should safeguard its development so that it continues to grow and remain wonderful.

 

[1] https://www.nextpittsburgh.com/city-design/the-tower-at-pnc-plaza-opens-as-the-greenest-office-building-in-the-world/

[2] https://www.bizjournals.com/pittsburgh/print-edition/2015/10/30/cmu-s-building-boom.html

[3] http://www.post-gazette.com/local/city/2018/01/26/Developer-buys-18-Hazelwood-properties-near-potential-Amazon-site/stories/201801250199

[4] http://triblive.com/local/allegheny/13220106-74/pittsburghs-amazon-hq2-proposal-should-be-made-public-state-rules

[5] http://www.multifamilyexecutive.com/design-development/the-overdevelopment-watch-three-cities-that-could-see-an-apartment-glut_o

[6] https://www.forbes.com/sites/zillow/2018/01/19/what-amazons-growth-has-meant-for-seattle/

[7] https://www.visitpittsburgh.com/media/news-releases/hotel-updates-2017-2019/

[8] https://www.hotelmanagement.net/development/pittsburgh-s-supply-boom-not-a-long-term-concern-for-hotels

[9] http://www.post-gazette.com/business/tech-news/2014/12/07/Google-effect-How-has-tech-giant-changed-Pittsburgh-s-commerce-and-culture/stories/201412040291

[10] https://technical.ly/2017/06/02/lawsuit-pittsburgh-development-cautionary-tale/

[11] https://www.geekwire.com/2018/community-forum-amazon-hq2-pittsburgh-looks-avoid-becoming-next-seattle/

 

Is Crowdfunding Helping or Hurting the Cause of the Sharing Economy?

The term crowdfunding, defined as a source of alternative finance where a project is funded through raising small amounts of money from a large population, usually through the internet, is taking off in a big way in the United States and throughout the world.  It is estimated that there are over 2,000 crowdfunding platforms for a variety of different purposes (real estate, consumer products, business ideas, etc.) with more than $34 billion raised through these combined platforms in 2015 alone.[1]  For reference, this is more than the $30 billion raised in venture capital each year and is, therefore, a force to be reckoned with in the world of investing.

There are a number of implications that pertain to all industries that utilize crowdfunding and implications that are more industry specific.  All industries, for example, utilize one of two primary methods for crowdfunding: equity and non-equity.  Naturally, equity crowdfunding involves the raising of capital and contributions through the disbursement of equity or shares in the organization.  Non-equity or “rewards-based” crowdfunding involves an exchange of financial contributions for non-equity things, which can include almost anything the fundraiser wants to give away.  Examples could include anything from physical items or non-physical rewards like naming rights or social media shout-outs.  Both equity and non-equity crowdfunding platforms have been effective in a variety of industries.

Moreover, both equity and non-equity strategies have been effective in their own ways depending on the platform.  The largest non-equity crowdfunding site, Kickstarter, has alone raised over $3 billion in financial contributions for thousands of organizations all over the world.[2]  Equity crowdfunding sites in 2013 alone have funded over 300 projects.[3]  That sort of power should have traditional investment platforms scared.  The ability of crowdfunding platforms to scale massively to meet the needs of worldwide projects and for capital allocations to come from anywhere in the world means crowdfunding platforms have a wider reach and more sources of capital than any other source of investment.  While this does not necessarily translate to a complete industry disrupter, like ride-sharing or home-sharing companies, industries once dependent on traditional sources of capital now have new means of funding their projects.

Take the real estate finance industry for example: there are many projects looking for funding all the time, and only so much traditional investment money to be allocated to those projects.  In addition, the barriers to entry for small businesses often prohibit smaller real estate projects from taking a seat at the table and working with larger investment banking institutions.[4]  However, platforms like AngelList, EquityNet, EarlyShares, and other equity crowdfunding companies remove some of the barriers to entry, like capital requirements and professional experience/credentials.  Each organization still has some restrictions in place, including some form of minimum committed investment (usually around $25,000) or some documentation filed with the SEC.  On the whole, platforms like these allow projects to become financed where there may not have been the opportunity before.  These include projects like YOTEL San Francisco, a high-tech, mid-market property with 203 rooms and an onsite restaurant that sought a portion of its equity (10-15%) through equity crowdfunding.  AKA United Nations Hotel-Condo is another project, a $95 million extended-stay hotel and condo project with around $12 million in contributions from equity crowdfunding.[5]

Another industry being disrupted is the technology market, both on the consumer level (remember the Fidget Cube?  That project was crowdfunded for $6.5 million[6]), to larger projects focused on advanced manufacturing and robotics.  There is now a community of startup incubators, consultants, thought-leaders, and of course, crowdfunding platforms, solely dedicated to crowdfunding technology startups.  With such a tight knit but expansive community, startups often eschew Wall Street in favor of crowdfunding platforms; they can do it all from the comfort of their couch (provided they have access to WiFi).

Moreover, it is important to note that not every project has to be successful for the idea of crowdfunding to continue to eat into the market share of traditional financing institutions.  TechCrunch identifies many tech startups that have failed for one reason or another (poor leadership, too little funding, competition, etc.)[7]  One of the most dramatic examples is Star Citizen, one of the most funded projects in Kickstarter history, which to date has amassed more than $150 million since the campaign launched in 2012.  However, that sort of money has been more hurtful than helpful, pushing back the launch date of the game as the creators kept expanding the scope and features of the game.  With no declared publish date for the game as of this writing, the question still remains if the game will ever launch[8]. There are hundreds more examples of projects falling through despite substantial monetary backing via crowdfunding.  However, the point is that a community for these niche projects exists, and that community has a much deeper pool of “investors” and capital than traditional investment institutes thought possible.

Finally, let us not forget the additional benefit that crowdfunding provides: a sense of ownership in the project.  When individuals participate in crowdfunding a project, they do not just send their money away without having the opportunity to get to know the project.  Crowdfunders have the choice to become an active supporter and champion of any particular project should they want to.         

One prominent Pittsburgh example of non-equity crowdfunding is the Superior Motors restaurant project by acclaimed chef Kevin Sousa.  The project raised $310,225 from over 2 thousand backers over a period of one year.  Tiers of rewards were used, varying from $25 dollars for a twitter “shout out” to $10,000 dollars for a fully funded function of the contributor’s choice.[9]  This type of project, with local community support and rewards that give back, is why crowdfunding is taking off.

There has never been this level of personal involvement in large-scale projects like these in my lifetime.  Giving individuals a voice in this way allows people’s dreams to come true, and allows project contributors to help them come true.  The disruption we see in this industry is a good thing, and instead of killing off or threatening traditional enterprises like Uber did to taxis or Airbnb did to hotels, I think more opportunities will come out of crowdfunding, not less.

[1] https://www.forbes.com/sites/chancebarnett/2015/06/09/trends-show-crowdfunding-to-surpass-vc-in-2016/#7aa3e9914547

[2] http://crowdsourcingweek.com/blog/top-10-usa-crowdfunding-platforms/

[3] https://www.cnbc.com/2015/10/02/hotels-join-the-crowdfunding-craze.html

[4] https://www.entrepreneur.com/article/289213

[5] http://time.com/money/4019013/crowdfunded-condo-aka-united-nations-new-york/

[6] https://www.kickstarter.com/projects/antsylabs/fidget-cube-a-vinyl-desk-toy

[7] https://techcrunch.com/2017/02/27/2017-crowdfunding-guide/

[8] https://www.nytimes.com/2017/05/10/technology/personaltech/video-game-raised-148-million-from-fans-now-its-raising-issues.html

[9] https://www.kickstarter.com/projects/379429428/superior-motors-community-restaurant-and-farm-ecos