Topics: Net leases, Banks, Drugstores, Movie theaters

In this episode of ‘What’s in Store with Karly and Chris,’ hosts Karly Iacono and Chris Ressa delve into the ongoing relevance of banks, drugstores, and movie theaters within the net lease sector. They explore why banks are opening more branches, the challenges facing drugstores amid health care system complexities, and the sustained appeal of movie theaters despite rising entertainment costs. By examining these hotly debated categories, Carly and Chris aim to dispel common misconceptions and highlight the critical role of physical retail locations in today’s brick-and-mortar society.

00:00 Introduction and Catching Up
01:15 Hot Topics in Net Lease Sector
01:48 The Resilience of Banks
09:13 The Future of Drugstores
18:27 The Evolution of Movie Theaters
27:32 Conclusion and Farewell20:59 Conclusion and Final Thoughts

About Retail Retold:

The Retail Retold Podcast highlights community retailer stories from across the country and gives a behind-the-scenes perspective from business leaders in both retail and real estate industries. The show’s episodes contain valuable insights that help solve the needs of entrepreneurs and real estate pros. Join host Chris Ressa and new guests weekly for amazing insights and thought-provoking stories.

Transcript:

[00:00:00] Karly Iacono: Welcome to what’s in store with Karly and Chris, the show where we cover hot topics at the cross section of retail and real estate. I’m Karly Iacono and I’m joined by my cohost, Chris Ressa. Chris, great to see you. How’s life?

[00:00:21] Chris Ressa: Life is good. How are you?

[00:00:23] Karly Iacono: I am rocking and rolling. It’s back-to-school season.

[00:00:25] Karly Iacono: We’re back in the office on Fridays. I mean, you know, summer fun is over. How about you?

[00:00:33] Chris Ressa: Same, but I am excited to have the household in routine.

[00:00:40] Karly Iacono: Definitely easier.

[00:00:41] Chris Ressa: I agree. You know, summer routine like goes away. It’s like hard to be in routine. Things are very different. I like the concept that the household is in routine.

[00:00:52] Karly Iacono: Okay. So you have structure to your days. Yes. I agree.

[00:00:57] Chris Ressa: Structure to the household days.

[00:00:59] Karly Iacono: Okay.

[00:01:00] Chris Ressa: I think that impacts everything.

[00:01:03] Karly Iacono: Yeah. I agree. I agree. It’s a few weeks to figure out the structure, but once it’s in place and things are rolling, I agree. It gets a little bit easier. So I’m sure we’re all going through the same thing beginning of the year.

So today’s episode is going to be an interesting one. We are talking about three categories that are pretty hotly debated right now in the net lease sector. And that is banks, drugstores, and theaters. So we’re going to go through our thoughts on Why these are not necessarily as challenged as most people think and bring up some points that are just not as widely talked about in all of the media.

[00:01:44] Karly Iacono: So I’m excited. You’re ready to go.

[00:01:46] Chris Ressa: Yes.

[00:01:47] Karly Iacono: Awesome. Let’s do it. So we’re going to start with banks and I’m just going to throw it out there to set the stage for those of you who, who don’t realize this trend. Banks are opening More locations than they are closing. I mean, that’s it, right? Do we even need to say anything else?

[00:02:06] Karly Iacono: No, of course we do. I’m kidding, but that’s the framework, right? There’s been so much time in the last years that we’ve been saying, gosh, why do we have bank branches? They don’t need to exist. They’re all going to disappear. Everything’s online. And we have proven that that is just frankly, not the case. So why don’t you kick us off with your initial thoughts on why.

Banks are an interesting category and why they’re opening more locations than they’re closing.

[00:02:35] Chris Ressa: Yeah, we’re, we’re doing bank deals, leasing space in our centers. We’ve done as recently as this year, and I think it’s super fascinating. And the thing I think is most fascinating about a lot of real estate categories, including office, you’re in your company’s office. I’m in my company’s office right now. Yeah. Is that I think we’ve, we’ve come to the place where we need to optimize real estate, but we have also come to a place where we have realized that real estate for just about most businesses is a need and not a want. And, you know, there’s headline news about offices are going away.

There used to be about banks going away in this going away. I think the answer is like a lot of, there are very few categories, very few business things that don’t need some level of real estate. Do people need to optimize their real estate more efficiently to get better productivity in the office sector to get better, cost savings to get better revenue from a retail sector.

Sure. That doesn’t mean they don’t need real estate. They need to optimize it.

[00:04:05] Karly Iacono: We very much live in a bricks-and-mortar society, right? Our whole lives are not digital. We don’t live in this electronic world all the time. Of course, that’s an important piece, but there are touchpoints in the world that remain extremely important.

Office, physical retail, all of that is just, you know, fabric of our day to day life, like it or not, hopefully most people like it. So I think that’s a great point that, you know, this is still a relevant consumer. Touch point. I think taking that one step further. One thing we’ve talked about a lot of our episodes regarding other retailers is the cost of customer acquisition online.

[00:04:44] Karly Iacono: It’s really, really difficult, very expensive. And I think that’s even more so the case for banks, right? Would you agree that they need the physical locations to have that interaction with their existing consumers and customers, and then to attract future customers in a real environment.

[00:05:03] Chris Ressa: I think that’s so true.

Or, you know, I think, you know, especially when you’re talking about people’s money, you know, they, I think a lot of the smart banks want to build a relationship with their consumer. And I think that’s hard to do online. And the cost of customer acquisition, I think is, It’s even higher than we might think, right?

[00:05:31] Chris Ressa: Like we often get these ads like free $400 if you open a checking account and get direct deposit started in this new bank and whatnot. And I think, you know, that’s, that’s costly. That’s first they had to do the ad, pay for the ad. Then they have this significant offer of real money going back to you.

To me, I, I think. You know, this speaks to how important physical presence is when you’re seeing things like that.

[00:06:02] Karly Iacono: Completely agree. And I think if you take it a step further, there’s an opportunity when you have that physical presence to expand the product offering, right? Traditional retail does this all the time.

You go into a store for one thing, you end up with 20 others, right? Because of good product placement and enticing, offerings. Same thing with a bank, although in a different vertical, you go in to do your checking and then maybe you have a relationship and someone’s asking you about wealth management or retirement, all these other services that are high trust services and are very difficult to build that relationship online so I think that’s a really important piece of the overall strategy is adding on these ancillary services or additional income streams for the bank that they they wouldn’t be as successful They didn’t have that location a

[00:06:51] Chris Ressa: 100 percent. I think we’ve come to this point, and banks have spent a lot of money trying to realize this and researching it. I guess I should say that not having a bank presence is not nearly as effective.

It’s much more effective to have a bank’s physical presence to acquire new and keep existing customers than not to have a physical presence. I think, and this is proven by the number of bank branches starting to open. We had closed a lot of branches. Clearly, we took it a bridge too far, and now they’re starting to grow again.

[00:07:39] Karly Iacono: And I think there’s, you know, obviously truth that every location does not need to exist, that there’s still be some closures, but that’s with. Any sort of real estate right there. If it’s an underperforming location, maybe the deposits are low. Maybe the demographics are thin, or you’ve had some shifts in population density that’s going to factor into whether that’s a long term successful location or not.

[00:08:03] Karly Iacono: So I think we would be remiss. To not mention that, yes, some branches are still closing with the optimization of real estate and that would be expected, but the trend has shifted. And that’s really the interesting point here that I think Chase is a perfect example of this. They’re opening significantly more branches than they’re closing because they’re seeing the longterm opportunity.

[00:08:26] Chris Ressa: Nailed it.

[00:08:28] Karly Iacono: The last thing I want to mention on this before we move on, and this was something that you had brought up in one of our earlier discussions, and that was the difficulty of banks in particular to grow organically because of regulations, right? Inorganically.

[00:08:43] Chris Ressa: Inorganically.

[00:08:43] Karly Iacono: Inorganically. Thank you. We see a lot of mergers and acquisitions and all the other verticals, but that’s much more difficult because of regulations in the bank space, so I just wanted to highlight that because you had mentioned it previously that there is a unique challenges to growing through mergers and acquisitions for this space, so the physical presence and acquisitions.

[00:09:06] Karly Iacono: Um, organic growth is, is even more important

[00:09:10] Chris Ressa: for sure.

[00:09:12] Karly Iacono: Excellent. All right, let’s move on to our next category, which is drug stores. Now this one has been in the news quite a bit with the right aid bankruptcy, and then some shifts in strategy with CVS and Walgreens. It’s just, definitely hotly discussed, let’s say, um, But I know you and I, I believe you and I share a similar perspective that this is not a category that is disappearing.

[00:09:39] Karly Iacono: Right? Like so many of the headlines, I think that is very over inflated. It’s certainly having a period of change overall, but we still need physical drug stores. Why don’t you tell us your perspective?

[00:09:53] Chris Ressa: Mine is simple. Like it’s great real estate. They have great real estate. It’s not a real estate. issue.

[00:10:02] Chris Ressa: Not only that, the consumer, most consumers still want and do physically go to a drugstore to get drugs, to get medicine. So the reality is this is not a real estate issue. And this is not a consumer challenge that some of these groups are going through. What this is about is the, the real challenge of the, the structure in which they’re paid Uh, the drugstores are paid, you know, through our healthcare system from the insurance companies and the benefit managers.

[00:10:42] Chris Ressa: And so at the end of the day, there’s obviously going to be some optimization, but in a place where consumers want and need to physically go to get medicine at a drugstore and drugstores have great real estate. I don’t think this is going away and listen, they’re still opening up locations. There’s still all the M and a that’s happened in this space.

[00:11:10] Chris Ressa: Right. I mean, the Walgreens and right aid, they, they, they were getting more locations by going through things, right? Not less locations. And so groups thought they needed more physical presence. In order to, you know, grow the business. I think the reality is the landscape of how a drugstore profits from selling pharmaceuticals is super complicated, super messy, and is evolving.

[00:11:46] Chris Ressa: And that’s putting pressure on the store’s P& L. I, I think, I think, So I start with the basics of it’s great real estate and people want to go to that great real estate to pick up the product and buy the product. So at that, so that’s different than Blockbuster. Blockbuster had great real estate, but nobody needed or wanted the product anymore because it moved, right?

[00:12:15] Chris Ressa: It, the product evaporated. There was no, do VCR?

[00:12:21] Karly Iacono: Of course not.

[00:12:22] Chris Ressa: Right. I don’t see us getting to a place where we don’t need medicine.

[00:12:25] Karly Iacono: Right. And you have that trust factor too, right? Yeah. People want to go in and pick up the medicine directly from the pharmacy. There’s a bit of apprehension about having it shipped through the mail, even if it is from a national company.

[00:12:37] Chris Ressa: I ask a million questions when I go to the pharmacy. I ask the pharmacist a million questions I get, you know, I I’m getting antibiotics I ask the pharmacy people about the antibiotics and, um, that’s, I feel better when I, they’re telling me then if I’m reading it on online, so again, people want and need the product they want and need to go to the store to get the product and it’s low. The product is located in very convenient, awesome real estate.

To me, that’s the start of fundamental success.

[00:13:30] Karly Iacono: And then you have the question of what needs to change then to make the stores more profitable. One trend that I thought was very interesting is the move towards more private label products is if what you’re selling is being squeezed on margins, but you can have the same product under your private label brand for a much higher margin and the consumer doesn’t seem to care in a lot of categories, whether it’s private label or, or main brand. Um, why not go that way? So I’ve seen a big push with, I think both CBS and Walgreens boosting their private label offerings in a, an effort to make the front of the store more profitable. I thought that was an interesting trend.

[00:14:11] Chris Ressa: For sure. I think, I think for me, like in dispelling like any myths out there, I think it’s really about like, if you went to the general consumer on the street, why have you seen some pharmacies close? And, and I think the common response would be like, Oh, people are buying more pharmaceutical drugs online.

[00:14:32] Chris Ressa: And that’s just not why that’s happening. And to me, it’s

[00:14:37] Karly Iacono: a very small

[00:14:39] Chris Ressa: percentage of people buy pharmaceutical drugs online. It’s very small. Most people need and want to go to the store and we’re not, as Americans, we’re not taking Less medicine than we were 30 years ago. So there, we need more medicine, majority still going to the store.

[00:15:03] Chris Ressa: And so my point is it’s not about the real estate and it’s not about people’s desire to change channel, the purchase. And that’s what it gets lumped into. Any challenges in the space gets lumped into that. And that’s where my, when, when, when I was talking to you, it was like that earlier, that’s my point is like.

[00:15:24] Chris Ressa: The why matters, I think, and the why is more to do with our health care system than it does to do about people’s buying habits and the real estate. That’s not what this, any of these closures are really about.

[00:15:39] Karly Iacono: Right. Now we have seen some, Testing of different formats. I’m sure you’re familiar with the Walgreens Mini Cooper.

[00:15:46] Karly Iacono: They’re very small format stores. I know they’re opening. I think it’s 100 next year of that new format. So we might, I believe we might see a shift in square footage, but I don’t think the front of the store is irrelevant. I think that is serious. Still a profit center and we may find that the mini Cooper’s too small.

[00:16:04] Karly Iacono: Maybe it’s somewhere in between. I think that’s what they’re solving for. It’s not, do we need these physical locations and are drug scores going to disappear? It’s how do we rework the space? We have to make it as profitable as possible, and that’s what’s in my mind up for discussion right now.

[00:16:22] Chris Ressa: Do you make any trips to the pharmacy intentionally to buy something that is not.

[00:16:29] Chris Ressa: From the actual pharmacy itself.

[00:16:31] Karly Iacono: Yes.

[00:16:33] Chris Ressa: Me too. All the time. They’re super conveniently located stores. Um, and I do all the time, right? Like the one that comes to mind the most. Is an outside of over the counter medicine too, right? That that’s not in the pharmacy. So obviously over the counter medicine, you know, and band aids and things like that, but, um, greeting cards, like that’s my go to for greeting cards, every holiday, birthday, um, and I feel like there’s that like monthly, so I’m in there buying greeting cards all the time.

[00:17:10] Karly Iacono: That are 8 each now. So there’s got to be some profitability in that, but where else are you going to buy those? So you, you have to go there for all the birthday parties and so forth. No, that’s a perfect example. And then the random items that, you know, the kids forgot they were out of a need immediately.

[00:17:25] Karly Iacono: And there’s always something.

[00:17:26] Chris Ressa: So immediately,

[00:17:28] Karly Iacono: immediately. Yeah. Yeah. But in panic mode,

[00:17:30] Chris Ressa: I do have a question because this was a huge trend. Do you use the drive thru at the pharmacy?

[00:17:37] Karly Iacono: My current pharmacy does not have one. So no.

[00:17:42] Chris Ressa: Mine does, we don’t, and I don’t know why. But that’s probably good for them because then I’m more apt to buy other products, right?

But I mean almost of our hygiene products come from the pharmacy.

[00:18:05] Karly Iacono: All right. So they’re going to continue to exist. We just need to work on some of the issues in the American healthcare system, which is far reaching and complex, but we know the real estate matters.

It’s very straightforward. Everybody loves health insurance. It’s great. It’s a great system. Please. That’s another episode out of our realm. Thank God. All right. Let’s go on to our third category, which has been again, very hotly discussed, but for completely different reasons, and that is movie theaters.

[00:18:36] Karly Iacono: What a ride the last four years have been for movie theaters. So I’m just going to lay the stage on this one. And, we were reading, I’m going to give you the exact stat cause it’s crazy. This is from Statista that it is a $79. 2 billion industry in 2024. And they’re projecting an annual growth rate of 5.68 percent per year. So I don’t know. I mean, just data-wise, right? That kind of puts the kibosh on no one’s going to the theaters.

[00:19:13] Chris Ressa: So I think that is easily dispelled. I think this issue is again, structure. So if we look at Barbenheimer from last year, right. What. is clear that Americans want, are, Americans love the theatrical experience, and Americans love when there’s a big blockbuster mega film to go see in the theatrical experience.

[00:19:53] Chris Ressa: And I think the challenge that the theater industry faces is when there are all these things that happen in Hollywood that disrupt the flow of product. theaters. Again, typically these are regionally located in places that are convenient to get to. The theaters have done a great job in renovating the real estate and Americans just look at Barben Heimer want to go to the theaters and experience the theatrical experience.

[00:20:29] Chris Ressa: My kids, they’re young six and seven love the movie theater, love it. They love going to the movie theater. Um, but there has to be the right product in the theater, and I think they don’t, there’s a lack less control. Right. It’s hard for them to go to private label of

[00:20:52] Karly Iacono: course. Right,

[00:20:53] Chris Ressa: right. They, they, it’s hard for them to go to a private label.

[00:20:56] Chris Ressa: So I think the reality is that, you know, they’re really, really subject to what’s happening in Hollywood and that causes these ebbs and flows. But if we’ve learned anything from what’s happened is that people want a reason. We got to give them a reason they want a reason to go to the theater.

[00:21:24] Karly Iacono: What do you think about the price point?

[00:21:28] Karly Iacono: Just a little bit of a challenge here on your perspective. Do you think we are close to a tipping point where the price, 20, 23 in some theaters, if you want reserve seats per ticket, do you think we’re close to a tipping point where that doesn’t become the Friday, Saturday night go to for Americans, because if you multiply that out with a family of four or five, you add in popcorn, you add in just basics, that’s a big night out now, which, you know, might be out of reach for.

[00:21:58] Chris Ressa: So my initial gut reaction is compared to what? We’re doing the movies versus what, instead of the movies, what would we do?

[00:22:05] Karly Iacono: Watch the movie, watch a different movie on TV, not go out. Right. So, but if I want the experience of

[00:22:11] Chris Ressa: going out, okay. You mentioned going bowling. If I want the experience of going out and entertaining, I think compared to other venues.

[00:22:23] Chris Ressa: It’s still on the lower side of the entertainment realm.

[00:22:27] Karly Iacono: Okay. So you’re not comparing it to staying home and streaming a movie. You’re saying,

[00:22:33] Chris Ressa: no, you’re going

[00:22:33] Karly Iacono: to go out. So are we going to Topgolf? Are we going to a movie theater? Are we going out to a nice dinner? What, what form of entertainment is the family?

[00:22:39] Karly Iacono: If

[00:22:40] Chris Ressa: the family’s going out, right, right. We decide we’ve got to get out of the house. We’re going to go somewhere. It’s the theater, it’s the trampoline park, it’s bowling, and none of those are like wildly less expensive than going to theater, right? It’s going to the Yankee game. You want expensive, go to, go to a sports game.

[00:23:01] Karly Iacono: The different category. Yeah.

[00:23:03] Chris Ressa: So, but is it though? It’s going out and entertaining.

[00:23:07] Karly Iacono: Yeah. Okay.

[00:23:09] Chris Ressa: Okay. I don’t think, I don’t think streaming and going to the movies are comparable in the sense that we want to make them comparable. It’s either right. I’m doing the same thing. That’s like saying to me, that’s like saying I’m going to run at home instead of going to the gym.

[00:23:29] Karly Iacono: Okay. You don’t think that’s valid.

[00:23:32] Chris Ressa: I do make that

[00:23:32] Karly Iacono: calculation in my head all the time.

[00:23:34] Chris Ressa: I don’t think most, I think most people are going. Most people want to have a gym membership who are interested in having a healthier lifestyle. That’s why their gyms are so successful that as they are, even

[00:23:45] Karly Iacono: if they could run at home, which obviously they can run outside.

[00:23:49] Karly Iacono: Okay. Interesting. I like why, why, why

[00:23:52] Chris Ressa: are treadmills wired? When someone from the theater industry came into our offices and did a presentation before, and. They were not trying to compete with the person who doesn’t want to go out and spend money. What they had on the screen is competition was going to the sporting game, going to the trampoline park, going bowling, going to top golf.

[00:24:18] Chris Ressa: These were the competition venues plus other theaters, not someone who’s sitting home. I think, I think when we make that comparison, we’re like really missing how the family dynamic works. We’re not deciding of. Because most times the movie in the theater isn’t home. It’s not about, it’s about going out and being entertained.

[00:24:42] Karly Iacono: So you don’t think we’re close to a tipping point, even if you’re just comparing it to other entertainment, you think there’s more room to run and the 20, 25 ticket is going to be absorbed. And in fact, maybe theaters could spend more on renovations, good food, drinks. You know, there’s a lot of different theater concepts out there and still have, uh, Runway.

[00:25:03] Chris Ressa: I think the price of entertaining generally has gotten high and I think people are making a decision of do I have, do I have the ability to afford to be entertained this weekend versus not? I don’t think it’s unique to theaters. I think entertainment in America has costs a lot higher. Uh, a lot of money and I think that in general, that’s the distinction less about specific to movie theaters, because on a comparative basis, I think you’ll, you would see they fall.

[00:25:42] Chris Ressa: Like, I don’t know if I go bowling with my family, my wallet’s not any more full than if I go to the theaters,

[00:25:50] Karly Iacono: right? That’s true. And there’s a lot of high end bullying concepts, you know, to, to stick with that idea. So,

[00:25:55] Chris Ressa: yeah, so do you, do you, can you afford to be entertained or not? It’s no difference then it’s the same as it’s the same distinction.

[00:26:08] Chris Ressa: Like, can I afford to go out to eat or do I need to make dinner at home? Or maybe it’s, I’ve already made the distinction. We’re not cooking, but can I afford to have it delivered? Or do I need to go to the, go pick it up because it costs so much to have it delivered.

[00:26:24] Karly Iacono: Right. So do you think by that line of reasoning that we will see, I guess, more elaborate theater concepts, like I was mentioning more food options, not just popcorn, the drinks.

[00:26:36] Karly Iacono: Do you think we’re going to go that way in the industry and have it be more of a full experience? Or do you think it’ll start to segment kind of like the gym industry does with your budget options, your lifetime luxury options, and they’ll, they’re kind of going to target different consumer verticals.

[00:26:53] Chris Ressa: I, I am not, uh, Nostradamus, so I don’t know, but I would say, you always

[00:27:00] Karly Iacono: have an opinion.

[00:27:00] Karly Iacono: Come on,

[00:27:01] Chris Ressa: but I would say my, my thought, I think it’s more likely that it gets segmented than not. Right. I think it’s already kind of there. It might get further segmentation. But I think there is a lot of opportunity to have affordable entertainment for Americans. Um, and it, I think, you know, there’s, yeah, there’s opportunity in doing that.

[00:27:32] Karly Iacono: I think this was great. I love all these kinds of contrarian but very truthful, realistic viewpoints that we ran through today on categories that have been unfairly and negatively talked about, in my opinion.

Really good information. Chris, always a pleasure. Thanks so much. And everyone listening, that was another episode of what’s in store with Karly and Chris.

[00:27:57] Karly Iacono: We really appreciate you tuning in and we hope to see you very soon. Have a great day, everyone.