Matt Alexander (Neighorhood Goods) - How They Are Reimaging The Department Store

0:13Hello, I'm your host, Mike Gallup, and this is the Consumer VC. podcast, where we discuss the intersection of venture capital and consumer innovation. If you're enjoying the show, also subscribe to my newsletter at theconsumervc.com, where you'll receive all new episodes straight to your inbox and a weekly recap of all the consumer deals that are happening. All content episodes are for informational and entertainment purposes only and is not investment advice. Our guest today is Matt Alexander, founder and CEO of Neighborhood Goods. Neighborhood Goods is a new type of department store featuring an ever-changing landscape of the world's most thoughtful, progressive, and exciting brands.

0:49This was actually a live podcast episode that we did in Dallas a few weeks ago. It was really great meeting Matt in person. I really appreciate him with his time considering that he was just that week opening a new neighborhood goods department store in Newport Beach. So I'm sure it was pretty hectic. So really, really appreciate him squeezing us in and him being available for this interview. This was a lot of fun. Really want to thank RevTech Ventures for hosting us. It was really great seeing everyone that came out. Thanks again for coming if you're at our event in Dallas. Without further ado, here's Matt.

1:26Thank you all very, very much, especially our moderator, Lindsay, who's also our co-host. She's fantastic. We're bringing up Mike to the stage. Mike Gelb is, as I said earlier, the founder of the Consumer VC podcast. It's a pretty good podcast. I was listening to it during COVID and I called them up. We got to talking and all of a sudden I realized we were kind of thinking about the same thing. Let's actually have a real system to teach people about CPG that doesn't exist online. So great job, Greg. Thank you so much. Ultimately, we met online during COVID and we started the Consumer VC Summit.

2:03This was back in 2020. Nobody knew anything. They could actually handle taking a three-day Zoom call. Can you imagine doing a 30-minute Zoom call now? No. So those days are long gone, but which is why we do it live. And the ultimate goal, as I said earlier, is to connect with each other, build the fabric of this community, not just here in Dallas, but all over Texas and really all over the Southwest. There's an enormous amount of money, capital, power, and human ideology that makes so much sense for the CPG business. I love being in it. And with that, I'm going to give you my gail. Thank you all.

2:35Thanks, everyone, for coming out. As Mark said, we started doing virtual summits, in 2020. I'm really excited because I actually tried to get Matt to speak at one of our virtual summits back in the day, but I think we have like a conflict or something all the time. And so this is way better. Really excited to do this in person. And also in Dallas is our first event that we've done in Dallas. So we're looking forward to it. And also really want to thank Matt for being here of all days because you're launching location number four. Is that right? That's right. Yeah, this week in Newport Beach, right?

3:10In Newport Beach, yeah. Yeah, so I'm sure things are super just launching and everything like that. So thanks so much for being here. Well, hey, no worries. I mean, nothing's ever particularly calm. So, you know, no better time than present. So in case no one's been, what is Neighborhood Goods? And what is a little bit of the founding story of it? Yeah, so we describe Neighborhood Goods as being a new type of department store of sorts. So rather than, you know, featuring a, you know, fairly static sort of seasonal landscape of product on racks, like you would find in a traditional department store in like 100 ,000 square foot space in a traditional department store.

3:47Our spaces are about 10 ,000 feet. They change constantly. So we're launching anywhere from three to 10 brands each Thursday. Those brands rotate in and out. We're capturing a huge amount of data. so for some of those brands it's not just about um selling product to you it's about how they engage with you how they acquire you as a customer how they do product sampling all sorts of different bits and pieces so from a consumer perspective it presents as a relatively traditional sort of boutique retail experience where you have most different product categories represented we have our own restaurants in the space it's our staff our design but beyond that it's brands that are traditionally sort of known to be direct consumer, digitally native brands that have never otherwise been in physical retail before.

4:34And they're there for radically different amounts of time. And so in terms of how we started it, we sort of all had the same recognition that for a lot of these direct consumer brands that were coming up sort of from 2010 onward, customer acquisition costs were rising rapidly and it was becoming really difficult to build a purely sustainable and profitable business that was online only. and you needed to start thinking about wholesale. You need to start thinking about all sorts of different considerations, but a really critical one is physical retail, which had sort of been written off as sort of this irrelevant sort of dying medium.

5:09But really the customers you can acquire and pick up through a physical channel can have five times the lifetime value of their digital counterparts. And so if you can get into physical in the right way and tell that story, not only can it be a lot less expensive than an ad campaign, but it can also yield a much more efficient, much more useful customer very inexpensively. And so we set out to try to create a platform that would allow for that in one cohesive format, because I think a lot of people were thinking about, oh, well, just white box of space and turn it into a grid and put a bunch of these brands in and that would be great.

5:42But I think that misses some of the sort of artistry of retail as it's sort of come to be over the past hundred years or so. And so we tried to sort of have something that would be very traditional from a front end perspective, easy to understand, but they would just run on a much more progressive backend. And I mean, it makes a lot of sense, especially when you started, when it comes to, you know, rising CACs and it being really hard to scale when it comes to D2C, just with your customer acquisition costs. And it makes sense to kind of, as maybe companies are thinking about, okay, what does retail look like maybe earlier than we did?

6:16But of course, then of course, COVID happens and I'd imagine that's a whole wrench into the system. How did you kind of go throughout COVID? Because it makes sense again, like that CACs have been rising over the past few years. And then of course it seems like brands really had, I mean, had to really shift, go all DTC, all online because retail, you weren't able to do retail in a lot of ways. So how did you, how'd you have to adjust through COVID? So many different ways. I mean, we had, launched our first location here just just north of dallas in november 2018 and we opened in new york in december 2019 and then we opened in austin on march 13th 2020 and then i closed all those stores on march 14th 2020 and so we earlier that week or the week before we had picked up fast company top 10 most innovative retail we were winning all these awards we just raised our series a we were on this real tear and suddenly i was doing furloughs and layoffs and it was brutal ridiculously difficult and so the way our model works is rather than buying it wholesale brands tend to pay to be in the store and then we take the product on consignment so first thing we did was we stopped charging brands fees because we were closed and we were just sort of worried what retention was going to look like and we were closed in texas for 90 days in new york for 130 and we didn't lose any brands.

7:43The team came back and in the intervening time, I redeveloped and rewrote our website myself. We had built this sort of unnecessarily complex front end that was running through an overly complex mechanism on Shopify. And Shopify at the time was rolling out really rapid feature releases for buy online, pick up in store and much more native improved functionality. so I did redid our whole site in that sort of April period I did it inside of like a two-week period and we relaunched it and digital that year grew it was like a thousand percent year of year we turned our kitchens into ghost kitchens as well and so we started to work with there were a lot of these pop-up restaurant concepts coming up so Sandoichi, 8 Mile Pies, a few of these others and we started letting them do activations and pop-ups out of our restaurants, even while we were closed.

8:36And so we were able to sort of build that excitement. And then once we reopened, we launched not-for-profit to give free space to brands that have been hard hit by the pandemic. And so we decided we would run that for the same amount of time as we were closed. So we ended up running it for three or four months or thereabouts. And a lot of those brands did so well that they remain in our ecosystem today. And, you know, some of those brands that launched in Austin, we have brands like, you know, Aesop, Argument, Sega, sort of not necessarily a threat to consumer, a digitally native brand, but they were meant to be with us for, I think, six months or thereabouts, but, you know, they're still with us, you know, three years and changed later.

9:13And so we've ended up sort of, through the pandemic, I think we had this really formative moment where we had to sort of slow down. I think we were all really high on, you know, a lot of really positive sort of attention. There was a huge amount of brands applying to work with us. A lot of investors reaching out just constantly and everything was really exciting. And then suddenly we just had to sort of slow way down. And a lot of our investors based in Europe and they were calling and basically saying, you should just close for a year and hope for the best and come back, just sit on the cash and come back in a year.

9:44And we really sort of had this sort of moment that forced us to sort of really, I think, sort of self-identify our own value system. Who did we want to be when we grew up how do we want to sort of operate um how would we handle a moment like that and so i don't think we did everything perfectly but we launched all sorts of initiatives right in that period we started giving equity to all store employees we started creating we created an initiative called summer mondays where you know a lot of white collar companies give uh summer fridays uh for corporate employees we started doing summer mondays where we do it for everyone inclusive of our stores so they can have every other monday off and we came up with a way of scheduling it so that we can sort of avoid disrupting the business overly.

10:26And we've run along from there. And so it's not been without challenges. There's been so many and there continue to be so many in this environment, anything from supply chain to capital and otherwise. But we made our way through. And so, you know, I think a really formative time, a difficult time to run restaurants and physical retail as your primary revenue. But I think we learned a lot and have grown up a lot as a result of it. And I think it built a lot of resilience into us for better or worse. No, I really appreciate you just like walking us through all the difficulties that you had to face and also like ways you had to pivot as well by using, you know, your storefronts to actually help brands when it comes to fulfillment or just whatever you could be doing for the brands that are working with you and still provide value to provide a service.

11:09I remember that you mentioned, and we kind of all know that Dallas was the first location. I know that you went to SMU. You've been in Dallas for a long period. Why was Dallas the first location to start? What makes Dallas to you special? Was it just that you knew the area very, very well and let's launch here? Or did you also consider other locations? Yeah, so I co-founded the business with a really prominent guy in the commercial real estate space called Mark Macinta. he had been approaching the similar idea from his own world in the real estate space where he was seeing a lot of these brands taking off and being really successful and physical but recognized how difficult it was to lease space go through that process and so he had this perspective that there was this opportunity to create a vehicle for that and i had arrived at a similar conclusion myself and we sort of teamed up to run along there and mark in his sort of more full-time day-to-day capacity was working on a multi-billion dollar mixed use development here in the suburbs called Legacy West.

12:08If you look at Dallas from a broad perspective, the whole Metroplex, it tends to be in the top five markets or at worst top 10 for most e-commerce brands, but there's very low representation for most of those brands here. So when they do eventually open a store here or otherwise, they tend to do extraordinarily well. I've lived in Dallas for 16 years or thereabouts and I love it but it doesn't have many geographically redemptive qualities right it's just sort of flat and it's hot and there's like a few man-made lakes and not much else and so you have a lot of people here that are sort of in banking energy and otherwise there's a lot of disposable income and people like to go shopping they like to go eating there was an article in the New York Times yesterday even referring to Dallas as the new Dubai where they're bringing so many luxury restaurant experiences here because it's a thing to do and there's the disposable income, right?

13:02And so people, you know, there's a reason why Neiman's is here and all these other great sort of retail companies. And so for us, it was about articulating the side of the business, which was helping work with all of these brands that were very focused on the coasts and showing them that there was real meaningful business and growth to be found in between. And so Plano, Texas isn't the first place that springs to mind for someone to go launch their first physical retail, but it was first physical retail for all sorts of big brands like HIMS and all sorts of others that are now anything from publicly traded to have dozens of their own stores and otherwise.

13:38And that was by virtue of running that experiment with us. And so I think Dallas is a strong market. It's also a great entrepreneurial market. And so for us, we always entertain different markets. we didn't know exactly where we were going to go next. We've always had the same list of essentially like 20 sishies that make perfect sense for us. But Dallas is a robust and good place for business. And so why not start here and do something a little bit different than would otherwise be expected? And I think that really served us favorably and sort of set us a little bit apart from the pack where we were trying to educate people that you don't just have to go open a pop-up in Soho, that you can go do something elsewhere and you can find, you know, a potentially more useful long-term customer than you would have otherwise expected.

14:25That makes a lot of sense, just all of the kind of characteristics that you say when it comes to Dallas and also why it could be like a great testing ground too if you're like a coastal brand, how Dallas could be like a first spot to really see if your product maybe could work between the coasts, for example. How do you think as well, can we talk a little bit about the monetization, how you think about the actual partnering with brands? I know it's obviously not traditional, department store where you, you know, the wholesale model and you ordering POs and what have you. Talk a little bit about how you think about partnering with brands.

14:55And it also seems like a little bit complex because you're constantly partnering with new and new brands and kind of onboarding brands. And talk a little bit about like the duration when it comes to like the minimum duration that you have with brands. Yeah. So the idea was to create something where we would have a different mix of brands and products on a per location basis. You want to have a feeling of relevance above all else. I think that's probably one of the biggest things that's been lost in retail, right, is that sense that you're going into something that's relevant to you and where you live and your general lifestyle.

15:25And so we wanted to have this focus on, even if we're working with the same brand across multiple locations, they might manifest quite differently in one location versus the next to suit those goals differently. And they may have different goals from one market to the next, where they may have complete saturation in New York, and it's really more about retention of a customer versus in plano it might be introduction to a whole swath of new customers that's exactly what we did with dollar shave club we were their first physical retail and they had a huge sort of expression to introduce themselves to the customer here whereas in new york they were just in a few shelves in a mixed category section we've done the same thing with all sorts of brands the thesis was to bring brands in for three to six months never more than 12 but as i mentioned earlier we've had brands that have been with us for years.

16:13The average duration in 2022 was about 12 months. And we've seen that increasing. I think it was nine months the year before. And so the average is slowly climbing upward. I think some of that is them rotating into different locations. We keep the product mix fresh. It's not just about having a static assortment and otherwise. And so it is complicated and it does have all sorts of complexity to how you think about it. But really it comes down to a fairly simple system, we tier our relationships with brands. So at the most basic, you're just in the space selling products. At the higher end, it could be anything.

16:48It could be all sorts of different creative mechanisms through which you want to introduce yourself to the customer, right? So we just did a bunch of activations with Rivian, for example, in the electric car space. So one of the things we get to do is we are a loophole to exclusives and leases. So in Plano, we're right next door to Tesla and Lucid. And so if you're an electric car company like Rivian, And there's literally no way for you to show up in that development and get in front of those customers. But with us, because it would be less than X percentage of our sales of our square footage or otherwise, it allows for a loophole where you can come in and do something interesting there.

17:24So in Austin, we have Aesop right next door to us. We have Lilabo has a store. Thus, Aesop couldn't open there even if they wanted to. But they can with us. Right. And so we sort of offer this interesting mechanism to bring brands into areas where we can sort of test things. It's useful for the landlord because they want to understand how the competition may work. And for us, it's useful to understand a better sense of what that category is going to do in a general area like that. But we work on it from all sorts of different objectives where they want to come in and review and they don't really care about selling cars.

17:56It's more about retaining people on their wait list. Right. and so they are much more focused on test drives and giving people free drinks and food and otherwise from the restaurants whereas a brand like ASOP just wants to sell a lot more it's distinct from one brand to the next and it is complicated but there is an underlying system that allows for us to run it in a fairly simple way that operates in something that isn't massively dissimilar from wholesale but you know we we filter back a huge amount of data as well anything from demographics to traffic and otherwise and so it's definitely more complicated but it's also something where you end up with a much richer, more dynamic relationship that I could think suits the customer a lot more and also suits certainly for a lot of these modern brands a lot more as well.

18:37Do you also think about when it comes to your criteria in terms of what would work in neighborhood goods, do you also think, okay, we have to have a mix maybe of like established brands and emerging brands and kind of what does that actually look like? Yeah. So when we launched, the plan was for Plano's 13 ,500 square feet, we thought we were going to have 15 brands at most in that space. Today, it hovers between 100 and 150 brands at any given time. And so when we launched, it had 26. And so it's still a pretty low number with larger sort of square footage per brand. We had assumed it was going to be everyone taking about 1 ,000 square feet, 500 to 1 ,000.

19:19And we would have the restaurant, and it would rotate every six months or so. And you would have one brand representing one cash career, essentially. And the assumption was that of those 15 brands, you'd have five that would be sort of big names, big sort of national high growth brands that would sort of subsidize probably four or five younger brands at the opposite end of the spectrum. And for the 10 or so in between, you would have, you know, five to 10 in between, you would have some of these more sort of growth oriented concepts. So you'd have a balance of local, high growth, big names. And in terms of the economics, you're then basically allowing for those really young, more local brands to get a free pathway into a space like that to get a platform and test.

20:02And you're allowing for those larger brands to do something more meaningful. I think that general ratio has proven to be accurate as just a hell of a lot more brands in the space than we would have otherwise anticipated. So these days, if you have 150 brands, you're going to have potentially dozens that you would categorize as these high growth venture backed concepts, as well as potentially dozens of really local concepts. We also have sub initiatives around black owned brands and otherwise. And so there's all sorts of different aspects to it. Can you talk a little bit about what the definition of success could be like for a brand?

20:34I know you kind of alluded to it in that it could be sales, but it could also be like be an activation. maybe within like an activation, how you also, when you talk to brands and what the brands are looking for, what actually is success when it comes like activation per se? Yeah, so like the Rivian example for them, it's really about how do you get people to come and show up and sort of get excited, walk away with positive impression and otherwise. Whereas for an apparel brand, it might be more just about selling products, right? And, you know, generating a good solid return. And so for those sorts of brands, we have a really robust ROI.

21:09It's probably more significant than what they would see from most other brands, special margin. We work in the CPG space and we allow for them to integrate into our restaurants and otherwise. And so we get really creative there as well. And then, you know, you have brands that may look at it more from a marketing perspective, in which case, if you're looking at it from a CAC sort of perspective, and you're looking at the volume of traffic you get versus the conversion rate. And otherwise you're looking at a conversion rate that's a customer acquisition cost that's extraordinarily inexpensive. You're talking about a few bucks per customer sort of thing.

21:40And so it really depends. Some brands are coming to us, they really want to understand how to train people, how to find leases, what real estate is going to be right for them, what retail is going to be right for them. Others are trying to learn the discipline of what it looks like to do wholesale. Others just want to sell a lot of products. We can suit all of those goals. And then for a lot of them, it's kind of all of them rolled into one. And so a lot of different pieces to it, but it sort of depends on the goals of the brand. I think to add like a further piece to it that I'd love to know is dealing with personalization when it comes to different locations.

22:10Just to add like another wrinkle into all this as well. How do you think about like what Dallas might be different to in Austin or New York or, you know, congratulations on Newport Beach coming soon. How do you think about what brands maybe work geographically in those different areas? Yeah. So there's probably, you know, five different types of real estate we would do. The sort of major metropolitan like we have in New York, the sort of up and coming like we have in Austin, the sort of suburban market like we have in Plano, soon to be Newport. Then you have malls, which we haven't done. And then you have sort of international and seasonal, which we also haven't done.

22:47If you map the objectives of those brands against those sort of different location types, you find a world in which major metropolitan and up and coming markets like in Austin are right at the top where you're getting to really influential customers, raw traffic, a lot of sales upfront. And then you're adding to that this different sort of component of how do you get to potentially lower traffic locations in the suburbs, but higher spending customers that are probably earlier in their life cycle and may have less built-in awareness of your brand than you would otherwise. And so we like to find a balance of finding suburban mixed with more urban and sort of up and coming where you can sort of tick tock between that customer type where you're getting these people that would otherwise be quite hard to advertise towards and to secure in the suburbs and you're also getting in front of this highly sought after customer in a market like Austin and so we really focus on it from that perspective and then when you think about that from a brand perspective and you start thinking about where you're gonna go like New York with us that space gets tens of thousands of people a week, right?

23:55And so you're not going to be able to have a really long in-depth activation experience in that space because it's just raw traffic passing through. Whereas in Austin or Plano, you can probably have more of a moment. And so it's about how you coach brands through what they're trying to accomplish. So a lot will come to us and say, well, we just want to do this thing in New York because it's New York. But realistically, they may do best share if they were in Austin, for argument's sake. So it's just about knowing that and understanding the general dimensions of it all. I appreciate you mentioning the different types of locations that you think about as well, where that market is like in New York, very, very busy rather than like maybe a suburb and then thinking about as well, okay, could this format also work in a mall too?

24:37What is, I know that you're opening Newport, but how many maybe destinations do you think that the neighborhood goods model could actually work in? And how do you think about retail expansion in the future in terms of number of stores you want to maybe introduce on a perennial basis? Yeah, I think it's a good question. I mean, I think we'll probably head in a similar direction to what you see from a lot of sort of higher end department stores that have 30 to 40 locations in the country that have a really sort of particular customer or they have a really particular focus. I think for us, we could easily open, like we have our location in Plano, we could definitely also have a location in Dallas proper.

25:16And so I think the same holds true for California, where we're opening in Newport, we could definitely also have a location in LA, we have a location in New York, we could definitely also have a location in Brooklyn. And so I think for us, it's about finding the metropolitan hub, and then having more of a suburban or adjacent satellite that can support it with a different customer type. So if you go down that sort of rabbit hole, you could easily end up with a few in each state, but it's obviously not quite that simple. So you have to really focus on, you know, the artistic side of it, not just the scientific side, because, you know, you can look at it from just generating raw sales and opening more locations and raising additional capital and having all this growth.

25:55But you also want to maintain something that feels special and is accretive for brands and is unique and otherwise. So you don't want to get over your skis on that front. So I think for us, it's about opening in the right locations that continue to feel brand right and elevating for everyone involved. I think international is a huge opportunity where a lot of brands in the US are trying to think about international, but it's really difficult. And we have a lot of great strategic investors in that regard that can help. And then I think it's also for us about tangential opportunities, whether it's acquiring brands or doing other various sort of different strategic and creative deals that can help augment what we do as an ecosystem beyond just the core stores.

26:34And so in the immediate, we're opening three this year. So we'll double a store count and then we'll probably head towards doing three to five next year or thereabouts. And we'll probably start to look pretty seriously at putting a flag in the ground in one or two international markets sooner rather than later. How do you think about maybe like your target customer, the different kind of qualities for that and how that maybe changes in terms of from a suburban storefront to maybe a mall storefront? Yeah, I mean, I think it's like, there's obviously the differences between someone shopping in Newport versus someone shopping in New York.