Frode Gronvold, the CEO of the Baltic division of Linstow AS (one of Norway’s leading real estate companies and the owner of the Ülemiste Centre), talks about the Centre’s inception, people’s behaviour patterns, and combining shopping with experiences.
While preparing for our conversation, I found an article in The New York Times that asked in the headline: “What retail apocalypse?” Shopping centres are making a comeback in the United States and around the world, it said. Therefore, the predictions we heard during and after the COVID crisis, that shoppers have moved online and are shunning big Malls, are not actually true? What is your take?
Traditional retail was said to be doomed because of the e-commerce entry. But I think now there is the realization that e-commerce is not playing such a dominant role that many predicted. Sometimes, you have exaggerated expectations. But the equilibrium is somewhere in the middle. I think the retailers have realized that they can’t just move on to an e-commerce platform and believe that they’re going to make their business only for e-commerce. Some can, but most cannot. The question is about the hybrid format. I think that is happening now. That also means that many e-commerce stores are moving into the physical space and asking for space in shopping centres, for example. You also hear it in the investment community because everyone talked about retail being the challenging asset class and offices being the safe asset class. But after COVID, many investors are looking at retail as more promising, while offices are now more challenged because of how we work these days (More from home. NR).
But still, the way we shop and the reasons we visit shopping centres these days have somewhat changed. In addition to shopping, we are coming to be entertained. Do you agree?
I think, already before COVID set in, there was a clear realization shopping centres need to change. Those who did have been able to thrive and develop very positively. Those who haven’t have already lost their position in the market or even, in some cases, have been converted into another type of space, especially in the US, where many shopping centres are converted into logistics centres or other uses. Not so much in Europe. Europe has a very different structure of retail, and we also have a different way of living. We are more urban (as opposed to suburban – as in the US. NR).
I think Ülemiste is a good example of how retailers react to these new times. We saw that people were moving away from traditional retail, more and more into experiences. And we reacted by starting to include other types of stores, restaurants, and eventually also entertainment for kids, cinemas. The way Ülemiste looks today is a reaction to trends we saw 10 years ago. And the consumers answer to the changes we have done, has been very positive. Therefore, Ülemiste is performing very well now. If you just think that you can stand still and not change, of course, then you will be challenged because trends are changing. But if you adapt to changes, which I think retailers have largely done, then they can thrive and continue to develop. I think that’s what many people see today. I think financial analysts didn’t understand this fully, so they jumped to conclusions, which I believe they did ten years ago, thinking that retail would die out. It is the opposite discussion that we’re having now. It’s a retail revival that we are seeing despite quite a challenging economic situation globally, in Europe, Estonia, and Tallinn. Of course, you might say that I’m a bit biased since we have so much retail exposure. But I am optimistic about the future of retail if you do it right.
You already mentioned that office space is a risky category for investors since many people are not coming to their offices daily anymore. But maybe retail is thriving again because of this: people who work at home really need face time with others; they want to go out, shop, be entertained, and socialize.
When discussing our strategies in the group, we’re trying to look at the main fundamentals about people that drive their behaviour going forward. One fundamental thing about people is that they are social creatures, you don’t go away from that. During COVID, people realized that even more than before. The lack of social contact reminded about the need to socialize again. I think what you’re seeing today is a counterreaction: people socialize maybe more to some extent than they did before. And I think that is something that has bought people also back to shopping centres.
We, as a group, are also in the cruise industry and the hotel industry, and we see that leisure travel has been increasing a lot lately. Of course, it has to do with the desire to experience, and experience together in social contexts. I think this fundamental thing that drives travel, tourism, just as well drives retail. We want to see people. Even if you walk on the streets in an urban setting, why do people always want to sit where the flow is? Because we just like to enjoy other people and look at other people. That is why people come to shopping centres also – not just for shopping, but also to be around others. It’s a fundamental thing.
Let’s talk about behaviour a little more. How has the consumption side of our behaviour changed?
I think that is clear. It was clear already some time ago that the heavy consumption pattern that we saw as a strong trend some decades ago is no longer such a strong trend. I think it has to do with, partly, that at some point people have enough things. You don’t really need the three plasma screens. It might be enough with the three jackets; you don’t need the fourth and the fifth and so forth. I think this type of consumption has changed, a bit at least. I think it’s also partly because of sustainability questions, climatic questions – that people are more and more aware of the problems that the climate change leads to, and there’s a counterreaction to that. Some people claim that these fears are exaggerated and that the reality is not like that. But I do think it is. I think, especially the younger generation, thinks more and more in that direction. And it does change the way that we consume things. That all leads people to prioritize differently, and then people choose to experience rather than buy or consume. We think it is going to continue for some time. That is why retail must change and adapt. Shopping centres must change and must adapt. I think the leading shopping centres in the world, and I think also in Tallinn, have brought in much more entertainment. Another question is, how much entertainment can you build into a shopping centre? Because it needs to fly also financially. But the larger shopping centres can afford to bring in cinemas, restaurants, and bars. We are expanding the playground for kids here at Ülemiste now, and we have slides in the public rest area. And we think it’s important to add more design features, meaning that we create an environment where it is nice to be.
Then the question is: what is a nice design? What are the characteristics of that?
That is something which differs from market to market. If you go to Dubai, you will find a very different design pattern than if you go to probably New York. Or if you go to Tallinn. Here at Ülemiste, we’re trying to understand what triggers the Estonian consumer because it’s the Estonian consumer that will come here. We think that Estonian people are in some ways maybe a bit more Scandinavian than if you look at Latvian and Lithuanian consumers, that’s just our opinion, preferring more down-to-earth human scale, not so exaggerated, flashy things. We are small countries. Estonia and Norway. We are close to nature. I guess we are a bit humble and grounded, to some extent. I think we think similar in that sense. That is why we brought a lot of natural elements into Ülemiste – water, stone, flowers, and animals. We felt that is something that appeals to Estonians, of course, after discussions with local colleagues and designers.
Interestingly, when we discuss this with some people, they ask: is (design) so important? For shopping centres, it is essential to have the right stores. Yes, of course, I agree, the most important thing is to have the right stores. But if you want to keep people spending a long time in a shopping centre, you also need to ensure that they like their environment. If you like the environment, you spend more time, and then you spend more money also.
You also invested in sound in Ülemiste. How important is sound that surrounds visitors in the Mall?
Well, I think it is super important. How do you make people feel comfortable when they sit, walk in an environment? If I go into a restaurant and the music is too loud, well, I leave much earlier than if it’s like a subtle and nice down. There’s a lot you can do with ceilings, with walls, with furnishing, with a speaker system, with the music. We brought in specific sound features that are supposed to calm people down. Instead of stressing people. We want people to breathe and slow down. That was done consciously with a specialist in sound features, who we brought in from the UK to Ülemiste. It might not be something that people will be able to pinpoint when they walk around here – because, well, sound is just sound. But this is so important, an aspect which, I think, is often underestimated.
What about the pleasing smell? Many establishments are luring customers with a pleasant perfume.
We have had some features with the smell as well. That’s more on the marketing side. But it is something one needs to be a little bit more careful with. Because what smell people prefer can be a little bit more individual. But overall, to appeal to people’s senses, I guess that is what it all boils down to. How can you appeal to people’s senses in a retail environment by designing a shopping centre and bringing in these elements? I think it’s often something which is underestimated in not just shopping centres, but also in hotels, for example, and in other real estate as well. The funny thing about it is that it doesn’t really cost much. But the return on that investment is big. Because of sensory effects, the dwell time of customers at the shopping centre may be many percentages higher, and, accordingly, the turnover of the Centre could be much higher. But I think that still this is an underestimated concept – the smell and the sound, the appeal to senses in general. This is something that, I think, we probably were the first movers with.
Every time I come to Ülemiste Centre, I get a little bit confused—where should I go? There are so many different possibilities. And that confusion means that I spend more time there. Is that intentional—creating an environment that is not that straightforward—entrance-exit—to keep people inside?
Yeah. Well, you can also say that the challenge… The good thing about large shopping centres is that you can fill them with content that makes them not just a shopping centre but also an experience. It is harder to make money on concepts that cannot pay the same rent as a regular retailer can. But you can have them in larger shopping centres. Then, when you get to a certain size, you also need to think differently in terms of how to move, guide, and direct people around the Centre. When Ülemiste started, there was a very simple scheme with basically one rotation. But, when you get to the size that Ülemiste has now, you need to get an extra loop, because otherwise, you cannot fit in the stores. The good thing with Ülemiste is, even though it’s large and it’s a bit confusing sometimes, the corridors are logical because the extra loop connects to the future Rail Baltic station and to the public transport, and to the car park. But, of course, it is a bit complicated.
But it keeps me inside.
But then, of course, you spend more time.
I always thought that this was a strategy on your part.
It is a strategy. IKEA is famous for this. They have this path going on all the time through the whole store. In retail, of course, it has a lot to do with planning so that consumers see everything that you have to offer, both as a shopping centre and on an individual store level. It’s part of planning to keep you inside.
The Estonian market is rather small overall. We don’t have much luxury shopping here. Where are you positioning Ülemiste? Is it “High Street shopping” offering premium rather than outright luxury labels?
The markets are as big as they are. So, if you don’t appeal to the big consumer groups in those markets, then it’s very hard to make money. If you go to Dubai, you can have a separate shopping centre, which only has exclusive luxury goods, and there are enough people who can afford these things. But I think if you talk about the Scandinavian markets and the Baltic markets, you need to appeal to the big groups here. And I think people in this part of the world are less posh and not so concerned with extreme luxury. Our strategy has always been to position ourselves so that the centres we operate in Estonia and elsewhere are open for everyone. If you want to buy something very exclusive, then, logically, you will go down to the city centre where you have some of these stores located. I think the danger is that if you distance yourself too much from the client, with expensive luxury, for example, you will lose your clients. They need to feel comfortable here. They need to feel welcome. They need to feel that this is a place where they can afford to be, whether it’s about buying clothing or sitting down and having a cup of coffee. Therefore, we have our positioning on the middle level. But as the consumer’s affordability has grown in Tallinn, we have brought in concepts that earlier would have been a bit too expensive to have here—for example, Gant or Calvin Klein. Of course, these are not luxury stores, but they also have pretty expensive products.
The premium high market.
Yeah, you can say so. At the same time, we know that value retail is growing (e.g., discount stores, outlets. NR), so we also need to ensure that we have this segment here. So, yes, you can say that the width of stores has expanded in Ülemiste a little bit more than we originally thought. And that brings in more clients.
But let’s go back to history. When you, Norwegians, brought the land to the outskirts of Tallinn and started to develop Ülemiste Centre, it was in 2001, 20+ years ago, this area was outside of the city. The railroad nearby was a symbolic border of Tallinn. The airport, your neighbour, was thought to be already outside of the city perimeter. Now, the city has expanded. Looking back, did you have a vision that the city would follow you and expand – as it has happened – or did you take a risk?
At the time when we started to consider Ülemiste Centre, this location was a bit like out of town and out of the Centre. But when you looked at the proximity to the Centre just in terms of distance, we realized that this is still very central. It was obvious that all retail would not happen in the city centre, even though at that time, it was maybe more alluring to invest in the Centre because of the tourists that started to come in, at least from Finland. But having seen what had happened in Norway, which is our home market, we knew that the car-based larger shopping centres in the outskirts were the most prospective. Plus, the location of Ülemiste Centre was an important intersection, connecting all sides of the city. From a retail perspective, that represented a significant potential. What we also liked about the location was the size that allowed us to build a shopping centre of that scale. It was logical that around airport areas and important traffic intersections, other developments would be happening over time in that area. That was the vision we probably had.
Now you have Ülemiste City right next to you, as well as the future Rail Baltic Station. When you decide on development and expansion, how many years ahead do you try to look in your strategic vision?
The future is often hard to predict. But, I think the good thing about Linstow as a company is that we can basically take a generation perspective on what we do. We’re not a (stock market) listed company. We’re owned by a private family. We can easily think in terms of 20 years or 30 years in our development. Of course, we did not know exactly in 2001 what would happen here over the next 20 years. But you know, in real estate, it’s all about location. Also, if you have room to grow, there will be opportunities along the way. When we originally started to develop Ülemiste, we built 50,000 square meters at the time. There were many who criticized us, including actually our owners, asking, “Aren’t we building too much?” But few years later, we started to plan already the next expasion because we saw the demand was there. The good thing about being a long-term owner is that you can actually build on your previous successes over time instead of stepping out too early and then miss the opportunities that might come later. But, fundamentally, at that time, 20 years ago, we saw that there was a lack of professional retail space in the Baltics. We had already done quite a few developments in Riga, and we saw a similar situation in Tallinn. Some of these retailers we managed to bring to Riga, we brought also to Tallinn. In particular RIMI, who was the anchor tenant at Ülemiste from the start. The funny thing about RIMI, that’s a little bit off the point, but it doesn’t exist in Norway anymore, but now it’s the largest grocery chain in the Baltics.
Ülemiste Centre has a big competitor nearby, T1. Do we need so many huge shopping centres in Tallinn, in close proximity? You thoughts?
I think that T1 is going to continue to develop in a way that is complementary to what Ülemiste is. So that many of the people who come to Ülemiste, the 7,6 million visitors we have here annually, will also find a reason to cross the street and then take advantage of T1 being there. But at the end of the day, it boils down to content. The content is the stores that are in the shopping centre. The tenants that are with us in Ülemiste are very happy to be here. Today, we have a line of tenants that would like to come into Ülemiste. In a way, we could already expand today – another 5,000, 10,000 square meters. In retail, in the last ten years, it’s been that the stronger gets stronger and the weaker gets weaker. If you find yourself sitting on a weak property, then you have to think either to invest or maybe reposition or transform the property into something else. I believe that Ülemiste still has room to grow, but we need to grow in the right way. It’s not just growth for the purpose of growing, but it is growth for the purpose of serving people better and understanding what triggers people to come here.
It’s a science.
Yeah, it is a science. Ultimately, at the end of the day, it is about understanding consumer behavior. What triggers people. It changes constantly. I think the art of any business today is to be able to understand how these changes affect your business and trying to be ahead of the game. It might sound easy to say, but it takes a lot of work to understand and adapt your product to those trends, especially in real estate. Real estate, you see, has very long lead times. It’s not like you just change the computer software and update your product. Real estate is a bit more challenging. If you start building something and you want to then change it in the middle of the building process, it’s very, very difficult to make those changes. Some people might think that real estate is a great area to invest into. It is, if you succeed. But it’s also very painful if you fail. Correcting your failures is super painful, and it’s almost impossible sometimes to correct them.
How has the fact that Estonia is becoming so expensive factored into your business plans?
This is a challenge. We hope that by the time we are ready to take the next step in Ülemiste, the market has recalibrated itself. Because over time, the markets do recalibrate themselves, otherwise, nothing is going to be built. But in the short run, it is a challenge for the real estate sector in the Baltic markets overall and in Estonia, no question about it.
There is a lot of anxiety in Estonia right now. About the future. Many unknowns. But listening to you – you are really bullish on our future.
You need to be optimistic and have a vision that creates opportunities. We want to grow. We want to develop further. What I’m saying is: the Baltics will continue to grow no matter what, maybe not the way they used to, but still, there is room for growth. One thing which is very different today compared to 10 years ago, or in particular 20 years ago, is that the market is much more competitive, and the risk of failing is much higher. But if you talk about real estate, you can’t fail on your location, that’s for sure. In our case, we believe that when it comes to Ülemiste Centre, this area will continue to grow. We see Ülemiste City is growing. We see Rail Baltic is coming up. It will be a very central location, almost blending into the urban Centre of Tallinn. We at Ülemiste Centre are thinking about future expansion toward the Ülemiste City. We’re trying to open up all the facades and communicate with the people in a different way than you see in the front here, making the Centre more welcoming, a place where people will thrive in a square, at cafes, connecting to the railway station, connecting to the airport, and connecting to the Ülemiste city. We are optimistic.
Author: Neeme Raud
Photographer: Vallo Kruus
