Carol Massar (2:04)

Welcome to the Bloomberg businessweek Week Weekend podcast. Tim is on assignment now. We've officially entered the final month of 2025. You know that and all eyes are on this Wednesday's FOMC interest rate decision. That meeting with market participants it is expected to bring another rate cut by the Fed, largely priced in some say, despite the FOMC committee working with less economic data than usual after that government sh for more than a month now. For the latest on what to expect from the Fed meeting, head on over to bloomberg.com or check it out on the Bloomberg terminal. Even without that data, we've got some really great reads this week into U.S. economic health. We have the CEO of Lending Club with an outlook on consumer credit. He joins us in just a moment. Plus, a deep dive into private credit with Christina Lee of Oaktree Capital Management, who also has a take on the health of the consumer that's actually impacting the firm's investment strategy. Also, why a recent downgrade in the cloud security company Zscaler is not phasing its CEO Jay Chaudhary we speak with him a little bit later on all of that to come. But first, the online lending marketplace and platform for loans, credit cards, deposit accounts, insurance and a lot more. We're talking about Lending Club. They announced recently a $100 million share buyback. It was just about one month ago, which was nearly 5% of the company's market value on the day of that announcement. Analysts have raising their price targets on the stock this year and even most recently since the company reported earnings late October and posted third quarter results that beat estimates and provided a guidance range for new fourth quarter originations with a midpoint above estimates. We caught up with Scott Sanborn, chief executive officer of Lending Club. He's been CEO for almost a decade and he's been at lending club for 15 years now. Also joining our chat, Herman Chan. He is Bloomberg Intelligence senior analyst for U.S. regional banks who help bring this conversation, this roundtable altogether.

Tim Stanweck (4:02)

Scott, I want to start with you and just give us some size and scope of the business, the consumers that you're working with, who's interacting with the platform.

Scott Sanborn (4:10)

Yeah, so we serve a customer base we call the middle majority. They are if you think about credit, which we are a credit centric bank. If you've got a lot of money, you don't need a lot of access to credit. You pay cash for car, you save up to send your kids to college. If you're on the other end of the spectrum, you can't really access credit. So there's this middle group that are high income heavy users of credit. So they can afford a car, they can afford to send their kids to school, but they need to use credit to do it. That's who we serve. It's a really big customer base. It represents about a third of the US Population, but it's close to half of the credit wallet. So they are more likely than average to have every form of credit. And that credit is with the exception of mortgages, also larger than average. That's who we serve.

Carol Massar (4:55)

How much do these people usually make.

Scott Sanborn (4:57)

Our average and you know, obviously misleading. Average is going to be misleading but average is about $125,000. But you can think of it of ranging between call it $80,000 in individual income to about 200,000 is where we really over index.

Herman Chan (5:12)

Great.

Tim Stanweck (5:13)

One of the real highlights of your recent investor day was the panel discussion with Marketplace Investors and we talked about this earlier before, before your appearance here on radio.

Jay Choudhary (5:24)

One of the panelists talked about being.

Tim Stanweck (5:27)

Aligning performance expectations, partnering with better operators. Are you seeing that with the private credit space.

Scott Sanborn (5:34)

Yeah, we do. So, you know, we were born as a marketplace. Initially, everything we originated, we sold. When we acquired the bank in 21, we started to hold a portion of our loans on our balance sheet that both gives us a stronger and more resilient earnings profile, also allows us to do other things, innovate using our balance sheet. And what we found is just by aligning our interest with our loan buyers. We're the largest eater of our own cooking. We're the largest holder of lending club loans. We care very deeply about the performance of the credit and credit is always evolving. It's very dynamic because we have a balance sheet. What we can do is when we want to test something new, we test it on our balance sheet. Let's try longer duration, let's try a larger loan size, let's try a new marketing channel. We hold that first, you own it, we own it. We make sure it performs the way we expect and then we release that to the marketplace. If you don't have a balance sheet, you can't really do that. And so that's visible in our results across every aspect of underwriting. So lower delinquencies than the rest of the industry, 30 or 40% below, lower roll rates, higher recovery rates, lower prepayments, lower fraud. Literally every aspect that you can measure of credit we're outperforming on.

Tim Stanweck (6:53)

Has that remained consistent this year in recent months, in recent weeks? Like you have a great real time view of the consumer in the form of how well they are doing in terms of paying back their loans.

Scott Sanborn (7:04)

That's right.

Tim Stanweck (7:05)

Looking good.

Scott Sanborn (7:06)

Yeah. So that's been consistent for, you know, we release four years of data we put out there. And so it's remain consistent, but you know, it's not, it's kind of like a duck on a pond. It's remained consistent because we're doing a lot of work underneath the COVID So, you know, something that we shared at Investor Day is at any given time we have more than 200 tests in the market where we're evaluating price points, changes to their credit. So we're constantly adjusting to reflect what's happening with the consumer and that's what's giving us the consistent results.

Carol Massar (7:39)

Well, so that to me says you're very picky about who you lend to.

Scott Sanborn (7:43)

That's true, we are.

Carol Massar (7:44)

So in terms of your test, so tell me what it is. I mean, and how many of people who apply or want to access your platform, you're like, I'm out.

Scott Sanborn (7:53)

Yeah. So we're pretty Good at selecting who we want to have in our portfolio and reaching out to those people and then both delivering the price and product experience, but also, let's call it the user experience that gets them all the way through. So we look for areas where, for example, we can control the use of the fund proceeds. If you come to me and say, I want $20,000 because I'm going to do whatever my, my kid needs braces or I'm moving across country.

Scott Sanborn (8:26)

Great. But unless I'm paying the orthodontist, I don't actually know that that's what you're using it for.

Herman Chan (8:31)

Yeah.

Scott Sanborn (8:31)

So we try to, you know, set ourselves up so that we are in some ways controlling the use of proceeds and then making the experience such that it makes it really easy. So our largest use cases for people who already have debt, credit card debt most notably, which at this point, more than half of all Americans are carrying, they're carrying it at really high rates, 23% interest rate. It's highest they've ever been in history. And we say, great, you should do this instead. It takes less than five minutes. We're going to save you 700 basis points. And by the way, check all the credit cards that you have that you want us to pay off. Like we see you have Chase or a cap one.

Ron Eliasaf (9:09)

Great.

Scott Sanborn (9:09)

Check those and we're going to pay them directly. So we know you are paying off your credit card debt. You're not just saying you're going to pay off your credit card debt and taking out more money. We are paying it off for you. Benefit for you is, you know, you've consolidated everything into one bill. Other benefit is your FICO score usually goes up by 30, 35 points.

Christina Lee (9:27)

Right.

Scott Sanborn (9:27)

Because you've lowered, you know, your, your utilization.

Carol Massar (9:30)

How much can you lower? Like, I gotta tell you, credit card rates just blow my mind about how high they are. And I'm just curious, why are they so high? Are people so bad? Is it to cover? No, I'm curious.

Scott Sanborn (9:40)

Yeah, no, it's a great question.

Carol Massar (9:41)

It just seems like it's out of control and I think it prevents people from becoming financially solvent or creating, you know, kind of getting ahead of the game, if you will.

Scott Sanborn (9:52)

Yeah, there's a lot to unpack in that. Sorry, it is. No, no, it's a great question. And, you know, there's a number of questions underneath. But I'd say the biggest thing is.

Scott Sanborn (10:02)

If you think about how people choose credit cards, it is not based on the interest rate.

Tim Stanweck (10:06)

Yeah, right.

Scott Sanborn (10:07)

It's my sky Miles card or my, whatever, my retail store card, I'm going to get rewards for this. They don't even know what the interest rate is or it's a promotional rate that resets. So that's one they don't choose based on that. Half of the people don't revolve on the card. They're collecting these rewards, but they're not carrying a balance. Well, guess who's paying for that? All the people that are carrying a balance. Those people don't know what their rates are. The research we've done is half of all customers don't say they don't know the interest rate on their credit cards. And the half that say they do, more than half of them are wrong. They think they know their rate, but they don't. And so cards have been able. And one of the big resets with the cards was driven by the Card act, which limited how much cards could increase rates so they factored in higher rates.

Tim Stanweck (10:57)

I just want to jump in real quick. We are speaking with Scott Sanborn, CEO of Lending Club. He's been CEO for close to a decade. We also have here with us Herman Chan, he's Bloomberg Intelligence senior analyst for U.S. regional banks. Thanks. Wanted to follow up with you, Scott, on some of the medium term expectations you laid out in Investor Day. You talked about doubling loan originations. We're talking about 18 to 20 billion dollars a year. What are some of the levers to.

Herman Chan (11:24)

Get you to that level?

Tim Stanweck (11:25)

You mentioned use cases. Maybe talk about home improvement as a use case. And how do you maintain solid credit.

Jay Choudhary (11:32)

Quality as you ramp up?

Carol Massar (11:33)

And home improvement is something you're getting into, right?

Scott Sanborn (11:35)

That's right, Yep. So first and foremost is, as I mentioned, you know, credit card refining. People out of their credit card debt into a fixed rate, lower rate loan is number one use case. It's, it's about 80, 80% of what we do. That market is the largest it's ever been. There's $1.3 trillion.

Carol Massar (11:53)

80% of what you do is that.

Ron Eliasaf (11:55)

Wow.

Carol Massar (11:55)

Go ahead. Sorry.

Scott Sanborn (11:57)

So that is, you know, $1.3 trillion in balances priced at really, really high rates. We, you know, when the rate environment shifted and the inflationary pressure shifted, we pulled back on a lot of our marketing. So we're currently running today at sort of below our historical volumes. So we're just going back into that market, turning back on marketing channels that we had turned off. And then the other areas, you know, personal loans can be used literally for anything.

Angus Thirlwell (12:26)

Right.

Scott Sanborn (12:26)

And before credit cards came around and came to be. They were the dominant way consumers accessed, you know, credit for everyday needs. So we have a major purchase finance business that's growing today, call it 50 plus percent year on year. That's allowing things like elective medical procedures, you know, Lasix braces for your kid, you know, all kinds of procedures, fertility treatments, teeth implants. So things that insurance doesn't pay for but you want to do and you want to do right away. Private school education, that's another one. So home improvement is sort of a next adjacency. People right now are staying in their homes longer. You know, 75% of Americans, their mortgage rate is under 5%. They're not going anywhere, right. And the homes are getting older. So the homes need to be invested in, they need to be improved. So effectively enabling home improvement through an unsecured loan where again, we are controlling the use of proceeds. We can pay the supplier, we can pay the contractor. We've got the capability through an acquisition we announced to, you know, disperse this in phases to multiple parties. So we're, we're really excited to kick that off.

Carol Massar (13:42)

Consumer doing okay, I'd say.

Scott Sanborn (13:44)

The consumer we serve is demonstrating themselves to be remarkably resilient despite hear that a lot.

Carol Massar (13:51)

It's a drinking game now, but we'll.

Scott Sanborn (13:54)

Acknowledge the sentiment isn't great.

Carol Massar (13:56)

Our thanks to Scott Sanborn, chief executive officer of Lending Club, alongside our own Herman Chan. He is Bloomberg Intelligence senior analyst for U.S. regional banks. Coming up, the split mood around private credit. Soaring inflows, rising risks, lots of questions.

Christina Lee (14:12)

One of the things to look out for is one of the questions, I think that we all talk about our valuation marks, right? Is there a transparency? Is there not transparency? I always tell people to ask them, what is your valuation methodology?

Carol Massar (14:25)

Christina Lee of Oaktree Capital Management joins us next. You're listening to Bloomberg Businessweek. This is Bloomberg.

Tim Stanweck (14:37)

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Scott Sanborn (15:13)

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Scott Sanborn (15:27)

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Tim Stanweck (15:31)

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Carol Massar (16:52)

In a recent opinion p for Bloomberg, Apollo Global Management CEO Mark Rowan argued that much of the fear around private credit is based on myths that the core of this market remains high quality and relatively safe. Even so, not everyone is so confident. Bloomberg opinion columnist Paul Davies argues that the lack of transparency in private credit is one reason that investors could be more fearful. He goes on to say that the outlook for repayment problems and bankruptcies is isn't great and that in fact, it's getting worse. Needless to say, a lot of questions have emerged in recent weeks about private credit. It all really goes back to that JP Morgan earnings call back in October when the head of JP Morgan, Jamie Dimon, made that comment about more cockroaches being out there. Kind of tapping into some of the concerns about the private lending world, the private credit world, the financial landscape, that there could be more problems out there.

Herman Chan (17:45)

Like you should assume that whenever something happens we scour all process all procedures.

Tim Stanweck (17:50)

All underwriting all everything.

Herman Chan (17:54)

And you know, we think we're okay in other stuff.

Jay Choudhary (17:56)

But I my, my antenna goes up.

Herman Chan (17:59)

When things like that happen. And I probably shouldn't say this, but when you see one cockroach, there are probably more, you know, and so we, we should, everyone should be forewarned of this one.

Carol Massar (18:09)

This past week we leaned on Christina Lee, managing director and co portfolio manager for Oaktree Capital Management's US Private Debt strategy, for some insight.

Christina Lee (18:18)

I think it's been called the great cockroach wars, you name it. I think one of the issues that I think people are having is there's been some high profile bankruptcies that have happened recently and people are saying, is this systemic? Is this a pattern of what's next? I think sometimes you do have to take a step back and remember we're doing sub investment grade credit. You are taking risks. There will be defaults, there will be restructuring. So you don't get 8 to 9% all in yields by not taking risk.

Carol Massar (18:48)

Okay. So having said that, when you guys especially, you know, in terms of private credit, I think what really tripped a lot of investors or investments up in the private world, private credit, private equity for that matter, is that there weren't the exits that were normally there. Right. We've seen them pushed off and I think it's starting to come back. But then you had terms renegotiated, you just like all these things started to happen and you just wonder whether it gets a little bit fuzzier and that there is more opportunities or more touch points for things to come undone. Roll that in and how we should be thinking about that part of it.

Christina Lee (19:22)

I think defaults have been very, very low in private credit. And if you were to look at various managers, their loss ratios, etc. Default rates would probably all be relatively similar. And that's because private credit hasn't really been through a downturn yet. Right. The advent of the class, when it really started booming was maybe 10 years ago. Right. I think Covid was too short. I think what you're seeing right now also is defaults will likely rise because a lot of these borrowers put in capital structures. Right. When it was a zero interest rate environment, which is, you know, now it's higher for longer. And I think that's why you're seeing defaults and some cracks emerge.

Carol Massar (19:59)

Does it get worse though? Because you're right, an investment in a zero rate where money costs nothing is very different from where we are today. Right. It's just the business dynamics and the financial dynamics of a deal looks very different. So do, do we see more cracks going forward? Is Jamie Dimon right, that there's never just one cockroach?

Christina Lee (20:19)

I think you likely will see some cracks, but what will be dependent as the cracks have been mass, the cracks have been around for a year or two is there's a lot of liquidity in private credit and even in private equity, they weren't necessarily deploying in new investments, but they were helping the resisting investments.

Carol Massar (20:35)

What, forgive me for when does too much liquidity though become a problem where you're chasing after. There's so much more folks involved in the private market world, private credit, private equity. And when there's a lot of money around, it's like people are chasing deals and maybe more likely to take on even more risk. So when does it get messy or does it not in this world? Maybe it's something different.

Christina Lee (20:58)

I think right now what you're seeing is there's still a supply demand imbalance, as you had mentioned, there's less exits, there's less M and A. And so private credit dry powder has increased. But if we were to look at kind of the exit piece that private equity needs to do, M and A should increase starting in 2026 and that supply demand imbalance should lessen. But right now what you're seeing is there's really an imbalance right now. And so you are seeing that competitive nature of private credit. And does that mean looser underwriting standards a lot of time? Yes, we should know.

Tim Stanweck (21:31)

Howard Marks, the co chairman, principal, co founder of Oaktree Capital Management, out just last month, it was in the beginning of November with a traditionally long memo about private credit. But in bold on the second page he writes. So no, I don't think this is necessarily the beginning of a trend. And by the way, it's called cockroaches in the coal mine. It's not an indictment of the whole sub investment grade debt market or the whole private credit market. Rather, it's just a reminder that the yield spreads people care about so much are there for a reason because sub investment grade debt entails credit risk. You agree this is essentially just part of investing in this type of debt.

Christina Lee (22:13)

Exactly. If you don't take on risk, that usually means that you're yielding something lower. Right. It goes hand in hand. And I think because we've been in such a benign market where you haven't seen a lot of defaults, etc. That's why people I think are surprised.

Tim Stanweck (22:27)

So then what's the, what's the, what are the products or what are, what's the credit that investors should avoid right now? Like, how do you separate? Because. Because another.

Tim Stanweck (22:39)

Criticism, I guess you could say, is that there's not a lot of transparency necessarily with this type of investment. So then how do investors know what they should invest in and what they should stay away from?

Christina Lee (22:49)

Yeah, I think one of the things to look out for is one of the questions, I think that we all talk about our valuation marks. Right. Is there a transparency? Is there not transparency? I always tell people to ask them, what is your valuation methodology? How often are you looking at your valuation? Because in the end, we are in a private, illiquid market. There's no mark to market. There is no market. And so there is a subjectiveness and a judgment on the manager. And I think a lot of it is, do they mark their investments aggressively or are they conservative?

Angus Thirlwell (23:21)

Right.

Tim Stanweck (23:21)

How do you know?

Christina Lee (23:22)

I think you have to ask your questions of how. What methodology to do discounted cash flow, how much does current deals matter?

Carol Massar (23:29)

But this is where, like I think about Christina, that a firm, whether it's oak tree or somebody else. Right. If you're. You're playing games in terms of valuations or not being so transparent or whatever for your investors, the deals aren't going to pay off.

Christina Lee (23:42)

Right.

Carol Massar (23:42)

And investors are not going to give you any more money. So is that kind of a checks and balance in some way in terms of ensuring you guys are doing the work? Like they trust a manager.

Christina Lee (23:55)

Yeah.

Carol Massar (23:55)

And that you guys are making sure you have the transparency before you go into a deal.

Christina Lee (24:00)

Exactly. Because if you are way too aggressive and all your marks are overinflated, you will have a really hard time with your investors. Right, Right. That is reputation risk. And also just inherently, as a creditor, you are always worried about kind of what's next, what's the next risk, because your upside is getting what's contractually due to you. Right. So a lot of. Just inherently, as a credit investor, you tend to be conservative because that's why.

Carol Massar (24:26)

Some, you know, and some of the conversations we've had in trying to figure out, like, is there more. Are there more cockroaches out there that maybe some of what some have said is smaller players that maybe do. Maybe don't do as much homework or something, that that's where we might see some problems. Talk to us about the market overall, where you guys are finding opportunities right now and what kind of. Kind of opportunities. And I'm curious if it tells you kind of what this investment environment, is it a healthy one? Is it a stressed one? Like, I'm just curious.

Christina Lee (24:57)

I would say right now it is. There's a supply, demand imbalance. So what does that mean? It's very competitive. If you think about the first nine months of the year with, with the tariffs. Right. With all of the uncertainty, M and A went to a screeching halt for the most part. Now M and A has kind of come back after Labor Day. And so now you're seeing what I call a little bit of fomo, where you're seeing a lot of lenders rush to get deals done. And I think this is the time that you want to be very selective. You want to be a credit picker because the terms are getting more aggressive, leverage is going up, pricing is going down. And so from like Oaktree's philosophy standpoint is you really need to be selective. It's. It's a yellow light. Proceed with caution. You're not going to stop investing, but you got to pick and choose your spots.

Tim Stanweck (25:41)

Do you think this type of asset class will end up in the 401ks of many Americans?

Christina Lee (25:48)

I think that is. I call it the next frontier. I think from a technology standpoint, if you think about private credit, it's a relative. I'm talking about more sponsored direct lending. It's a pretty mature asset class at this point. Right, right. And I think where you're going to see innovation is what I call technologies on reaching new investors or fund construction. And so I do think, for one case, will be the next horizon. But that's also where private equity is also going into. Right. And so will that help a little bit with the supply, demand?

Carol Massar (26:17)

Yes. Right, right.

Tim Stanweck (26:18)

Whether Whether people want it or not in their 401ks? I don't know.

Carol Massar (26:21)

Well, it does, though. It creates another demand. Right. For. For what's going on there. Just got about a minute left. Can you. Can you share with us, I don't know, an interesting deal that you recently did. I don't know how specific and get. But just give us an idea in terms of maybe the type of deal terms or whatever you can share.

Christina Lee (26:37)

Just not about a specific deal, but just what we're seeing in the market right now is it's counterintuitive, but as the interest rates go lower, you're seeing leverage creep up because borrowers can actually make their interest charges now. And so before, when interest rates were, say, 4% on SOFR, you didn't really see deals go over six times.

Carol Massar (26:56)

Yeah.

Christina Lee (26:56)

Because otherwise a borrower couldn't pay their interest. Now it's actually going the other way where you're getting lower yields but higher leverage, and that just notes the level of competition. So we're hoping that 2026, there will be a little bit more balance in deals. Yeah, but that's what we're seeing at the moment.

Carol Massar (27:11)

So does this assume too, that you think the Fed will continue to cut rates even into 2026?

Christina Lee (27:17)

I think it all depends on who gets a disappointed.

Ron Eliasaf (27:22)

You.

Carol Massar (27:22)

Really?

Tim Stanweck (27:23)

What about, what about Hasett?

Carol Massar (27:24)

So, yeah, do you think, is it, is it a dumb thing that if, if it's Kevin Hassett, that you can assume that there'll be lower rates? Just got about 30 seconds.

Christina Lee (27:32)

I'm not going to make an assumption around it, but we all have an understanding of what the administration wants is lower rates. Right.

Carol Massar (27:39)

Interesting time.

Christina Lee (27:40)

And we'll see where the underlying economy also says, but hopefully will also dictate where the rates land.

Carol Massar (27:45)

Right. That the Fed sticks to the mandate and what needs to be done. Thank you so much. Really appreciate it. Christine Ali, managing director and co portfolio manager for US Private Debt Strategy over at Oaktree Capital Management, joining us right here in our Bloomberg Interactive Broker Studio.

Tim Stanweck (28:01)

This is the Bloomberg Businessweek Daily Podcast. Listen live each weekday starting at 2pm Eastern on Apple CarPlay and Android Auto with the Bloomberg Business app. You can also listen live on Amazon Alexa from our flagship New York station. Just say Alexa. Play Bloomberg 11:30 this past week we.

Carol Massar (28:20)

Got an update about the Trump administration ending a pay incentive program intended to hire and retain experts in the federal government's primary civilian cybersecurity agency, which has already been depleted by firings, resignations and reassignments. Now the program, known as the Cybersecurity Retention Incentive Program, will be eliminated in 2026 and replaced with a different incentive program, the Cybersecurity Talent Management System. Cybersecurity experts warn that ending the extra pay will lead to more departures at the agency, further weakening the federal government's defenses against cyber attacks, with some employees facing a significant pay cut of as much as 25%. That story on the Bloomberg we know that cybersecurity experts have warned for years now that the rise of artificial intelligence and large language models will radically transform the way hackers operate and make devastating breaches easier to pull off, whether it's in the private or public sectors. Just last month, AI developer Anthropic said that it disrupted what it described as a highly sophisticated AI led espionage campaign from China that used the company's Claude Chatbot. Thwarting cyber risks of all kinds is the world of cloud security company Zscaler. The company released its operating results for its fiscal 2026 first quarter, which revealed accelerating revenue growth on the back of soaring demand for its products. However, the stock is still down roughly 30% from its 2021 record high when it reached what some analysts call an unsustainable valuation during a frenzy in the tech market. For more on the company, the outlook and the world of cybersecurity, we caught up with Zscaler CEO Jay Choudhary. Also joining our conversation, Bloomberg Intelligence Global head of technology research Mandeep Singh.

Jay Choudhary (30:02)

We had an outstanding quarter. Our ARR growth 26% revenue growth 26% free cash flow margin 52% operating margin 22%. We beat all the metrics that Wall street was looking for. In fact, if you take our free cash flow margin and add it to our revenue growth, that's 78%. That beats the rule of 40 that many investors look for very, very well. And this is at scale of $3 billion or higher. There are only about five pure play enterprise SaaS, companies that are in that unique class. So we've done extremely well. We are very proud of what we delivered and we passed a meaningful beat. We did and raised our annual target. So I think we're very pleased with it. I think investors get it wrong from time to time. This is one of those times.

Carol Massar (30:59)

That's what I was going to ask. What do you think investors just got it wrong? Because I mean 13% is a pretty big hit. So you think, I mean that's not like them wavering at all. They really wanted more from you guys. I mean the expectations were certainly high.

Jay Choudhary (31:15)

Look, markets do what they do. I have one focus, keep on innovating and serving our customers. And those innovations started with zero trust architecture which has changed the world of old school firewalls and VPNs. And now as AI security is coming, AI security is becoming a big concern and Zero Trust that we pioneered is the foundation of it. So we have amazing interest from our customers. That's why we're able to deliver these Strong numbers over 45%. Fortune 500 companies trust us, depend upon us. So I'm very bullish about our future.

Tim Stanweck (31:53)

So talking about AI security, I mean.

Jay Choudhary (31:56)

You have a business model that's reliant.

Tim Stanweck (31:59)

On companies, companies hiring more people and you have a seed based model.

Jay Choudhary (32:04)

How does that change with AI security? Because AI, you know, what we are.

Tim Stanweck (32:09)

Seeing out there is more consumption based. So how does that impact you and your business?

Jay Choudhary (32:14)

It's a good question. So we started out with bringing zero trust for users so users can access applications without being on the company network. And natural pricing for that is user based. Then we move the model to the architecture, the Next thing, how about Zero trust communication for workloads, cloud workloads. That's actually based on number of workloads and actually amount of traffic. So it's not just user based. If you think about AI security, there are many facets of AI security where one of the biggest thing our customers look for is as every company starts using a lot of agents, these agents are somewhat like people. They need to access certain applications, they need to talk to other agents. So we are extending our Zero Trust Exchange that are designed for users and workloads and branches now to Agentic Exchange so that right agent can talk to right agent and right application. So obviously there's an opportunity for us to secure that communication. Yes, the number of users may not grow significantly, but I believe every company will have scores of agents for every single employee and they need to be secured and we are extremely well positioned to handle that.

Tim Stanweck (33:38)

And talking about agents, it sounds like.

Jay Choudhary (33:40)

One of your biggest competitors is doubling.

Tim Stanweck (33:43)

Down on observability and identity, especially on the browser side.

Jay Choudhary (33:49)

As an area of focus for agent tech AI is that something you feel is very important to roll out agents?

Jay Choudhary (33:57)

So some companies try to go and buy. Many companies to create a collection of things. We are very focused on what we want. We will focus on zero trust and then we focused on AI Regarding observability, we actually do observability for the areas that matter to our customers. We sit between the user and the application. So today we have a sizable business, hundreds of millions of dollar business with a product we call Zscaler Digital Experience where we can tell our customers if any user is having any performance issues as they try to access those applications. It's integrated with our platform. While many companies have many point products and they are separate, we like to have integrated platform that serves our customers. So we not only provide secure and reliable experience, we make sure that it is fast and you can troubleshoot those things. But I am not going into broad observability which has become a broad area. We are focused on the areas that are relevant to our customers and identity. Is that something you care about?

Tim Stanweck (35:13)

The identity on the browser?

Jay Choudhary (35:16)

Identity is important. Think about identity for users. We have been working from day one with all leading ID provider for users whether it's Microsoft and Okta and others. Now when it comes to identity of agents, I believe there'll be many contenders. Microsoft, Google, aws, Okta of the world. Our philosophy is to federate those identity providers use that identity and we are the Zero trust Exchange, the switchboard to make sure the right AI agent talks to right agent in this world. I do not need to own everything. I need to do some of the things I do the best and integrate with partners with proper API integration so our customers get the biggest benefit. We believe in doing a few things, but do them extremely well and partner with others.

Carol Massar (36:13)

So I do feel like we're all learning as we go. And of course Mandeep and Jay, you guys are ahead of us in a big way. But we, when they talk Mandeep about zero trust this, never trust, always verify. I think about digital touch points, thinking that there are threats within an organization and outside and you've got to make sure there's security everywhere.

Tim Stanweck (36:31)

Yeah.

Carol Massar (36:31)

No matter where you are.

Jay Choudhary (36:33)

And that's where, you know, SASE is a term that gets thrown a lot.

Tim Stanweck (36:37)

And Zscaler is in the leading position in that magic quadrant.

Jay Choudhary (36:41)

So I have one other question, Jay, for you.

Tim Stanweck (36:44)

So given the amount of data in.

Jay Choudhary (36:46)

The world of security and you know.

Tim Stanweck (36:48)

You guys generate trillions of data points, will the security world have its own LLM?

Jay Choudhary (36:56)

Yes. The answer is yes. We are actually working on building our security focused LLM and I do not need to have the large, large language model. Security is very focused set of high quality Data. With over 8,000 customers and 45% of Fortune 500 companies. We generate over half a trillion transaction logs a day. Those logs are anonymized, but they can give us an idea of where the threats are coming from. We can find a needle in a haystack and help all of our customers. So AI is only as good as the data that powers it and we have the best data and we believe we can help identify some of these threats in almost near real time and provide a closed loop system so that the threats can't really exploit our customers and provide them benefit at a much faster ways. That's why we are focused on AI powered security operations. And our acquisition of Red Canary is part of that strategy because they built some very, very good agentic AI technology that we're integrating with our platform.

Tim Stanweck (38:11)

The use of AI to make the system more robust certainly makes sense, but the concern about how AI has made the attackers just more robust and the attacks more robust. Can you point to specific instances where hackers have actually used AI to enhance their attacks and did it work?

Jay Choudhary (38:30)

Yes, there are many, many examples. Let me give you a few simple ones. Every attack starts by finding your attack surface where you are and public IP address is the starting point. Every firewall, every vpn, every application portal is an attack Surface. In the past, a hacker may have taken weeks to identify. Now you can go to ChatGPT and say, Tell me all the firewalls and VPNs that have vulnerabilities and give it to me in a nice tabular format under 60 seconds. You can get that. Now the second part hackers would do is these phishing emails. Now they can ask AI to say, write an email that looks like a CFO's writing style, no typos, make it very targeted. That's number two. Third, hackers are using automation that AI provides. Once they are on the network, automation can find the key applications and try to encrypt that data. A lot of that is happening. What does Zscaler do in this case? Number one, we hide your attack Surface. Your applications are hidden behind our cloud. Bad guys can't even find you. They can't find you, they can attack you. And the second is own the network. The biggest problem with firewalls and VPNs is they're trying to protect the castle. And we actually make it zero trust.

Carol Massar (39:57)

Jay, we've got to run. This was so informative and so enlightening in terms of AI security. We so appreciate it. Jay Choudry is founder, chairman, CEO of Zscaler and of course our own Mandeep Singh of bi.

Scott Sanborn (40:15)

If a Lenovo computer for your business.

Tim Stanweck (40:16)

Is on your holiday list, don't shop around.

Scott Sanborn (40:19)

Just go directly to the source lenovo.com you'll find exclusive deals on the PCs you want for your business like the.

Tim Stanweck (40:26)

ThinkPad X914, Aura Edition and Yoga 7i 2 in 1. So avoid all that shopping chaos and price comparing and just go directly to the source Lenovo.com where PCs are up to 50% off.

Scott Sanborn (40:38)

That's Lenovo.com Lenovo Lenovo.

Tim Stanweck (40:45)

Running a business is hard enough, so why make it harder With a dozen different apps that don't talk to each other. One for sales, another for inventory, a separate one for accounting. Before you know it, you are drowning in software Instead of growing your business. This is where Odoo comes in. Odoo is the only business software you'll ever need. It's an all in one, fully integrated platform that handles everything. CRM, accounting, inventory, E commerce, HR and more. No more app overload, no more juggling logins. Just one seamless system that makes work easier. And the best part, Odoo replaces multiple expensive platforms for a fraction of the cost. It's built to grow with your business, whether you are just starting out or already scaling up. Plus, it's easy to use, customizable, and designed to streamline every process so you can focus on what really matters running your business. Thousands of businesses have made the switch, so why not you try Odoo for free@odoo.com that's o d o o.com hello.

Herman Chan (41:47)

Hello, I'm Malcolm Gladwell, host of the.

Tim Stanweck (41:49)

Podcast smart talks with IBM. I recently sat down with IBM's chairman and CEO Arvind Krishna, and I asked him, how can companies use AI to its fullest potential to create smarter business? My one advice to them Pick areas you can scale.

Herman Chan (42:06)

Don't pick the shiny little toys on the side. For example, if anybody has more than 10% of what they had for customer service 10 years ago, they're already five years behind.

Tim Stanweck (42:23)

If anybody is not using AI to.

Herman Chan (42:26)

Make their developers who write software 30% more productive today with the goal of being 70% more productive. Yeah.

Angus Thirlwell (42:35)

Wow.

Herman Chan (42:35)

So we are not asking our clients to be the first experiment on it. We say you can leverage what we did. We're happy to bring out all our.

Tim Stanweck (42:43)

Learnings, including what needs to change in the process. Because the biggest change is not technology.

Herman Chan (42:48)

It's getting people to accept that there's.

Tim Stanweck (42:51)

A different way to do things. To listen to the full conversation, visit IBM.com smarttalks.

Tim Stanweck (43:04)

You're listening to the Bloomberg Business Week Daily podcast. Catch us live weekday afternoons from 2 to 5pm Eastern. Listen on Apple CarPlay and Android Auto with the Bloomberg Business app or watch us live on YouTube.

Carol Massar (43:18)

Plenty ahead our second hour of the weekend edition of Bloomberg Businessweek. We have a great glimpse of the world around us, from real estate to retail, including, yeah, it's shopping's biggest season. So what does Target need to do to turn its business around? Plus, break out the hot chocolate. We catch up with the founder and global CEO of the UK based Chocolatier Hotel Chocolat, this company taking on the US first up this hour, a lot happening with New York real estate. This past week, New York Mets owner Steve Cohen won approval to operate a casino next to Citi Field in Queens as one of three projects selected for gambling licenses right here in New York City. Two other projects were also selected Genting Group's Resorts World, which proposes to expand a casino next to the Aqueduct racetrack in Queens, and Bally's Corp. Which plans to operate a gaming facility at the site of a Bronx golf course. We spoke with Ron Eliasaf. He is founder and managing director of Northwind Group. It's a real estate private equity firm in Manhattan that has transacted over $5.6 billion of debt and equity investments in residential, commercial, senior living and healthcare properties.

Tim Stanweck (44:25)

It was a long wait, I think for a lot of the observers and the companies who put in bids for these licenses. I'm just wondering how you view this in terms of changing the real estate landscape. This one is not in Midtown where one of the other licenses could have gone. But how do you view it?

Ron Eliasaf (44:44)

I think in general it's a positive thing for New York City. I think it was given it's not going to be in Manhattan. And I think to support growth in communities in Queens and Bronx, it's overall a positive thing. It will create jobs opportunities, increase tourism and attraction. I think the Hard Rock bid together with, with Stevie Coin, it's going to make great things for Citi Field there. It's great transportation. I don't think anybody wants a casino in Times Square or anywhere in the city.

Christina Lee (45:11)

Agreed.

Tim Stanweck (45:12)

The thing that's.

Ron Eliasaf (45:12)

And overall it's. It's going to be. If you look at the three projects that are almost there, right. They're still final stage to get. To get done. It's going to be total over $20 billion invested in developing the real estate around it. Hotels, tourist attractions, concert venues, music. It's. It's a good thing.

Tim Stanweck (45:30)

On the casino side though, the thing that's puzzling to me is that we all have casinos in our pockets with our phones nowadays. It seems like. And the rise of prediction markets, the rise of online sports betting and doing it through apps, it means like it's.

Carol Massar (45:43)

Not the same experience.

Tim Stanweck (45:44)

No, you don't have to go to Vegas or Atlantic City.

Ron Eliasaf (45:47)

I don't gamble personally, but I think casinos are not what you do on your phone. It's exactly what Carol is saying. It's a touristic attraction. You go there for the experience. It's coupled with great dining, with shows, Cirque du Soleil or whatever it is. And I think it will overall increase tourism to.

Herman Chan (46:05)

To New York.

Carol Massar (46:06)

Interesting, interesting. Take a big picture right now. How do you see real estate in New York right now?

Ron Eliasaf (46:12)

I think right now everybody's bracing for the Mamdani taking office in January and what will come next. I think there has been positive signs. Tish staying on as a commissioner seems something that at least for the real estate community is perceived as a positive thing. I think public safety is on top of every everybody's mind. But with that said, there are some pretty aggressive legislation looming recently. City council is pushing COPA community offer to purchase. It's not Sponsored by Mamdani per se. But it's definitely something that you see as a left wing agenda. It basically means that anybody that owns a multifamily building will have to. To first give a right of first offer to nonprofits and community organizations to purchase. It basically could potentially stall selling real estate multifamily.

Tim Stanweck (47:00)

Those multifamily buildings aren't moving anyway though, right?

Ron Eliasaf (47:03)

They are. They are. They're moving. Not rent stabilized building.

Tim Stanweck (47:06)

Okay.

Ron Eliasaf (47:07)

This will. If it passes, which they got a pretty overwhelming initial vote.

Tim Stanweck (47:12)

So this goes for rent stabilized and non rent stabilized too. So any multifamily.

Ron Eliasaf (47:16)

Any multifamily.

Tim Stanweck (47:17)

Oh, wow.

Ron Eliasaf (47:17)

Above certain unit count, which is pretty overwhelming. It hasn't passed yet. But this sort of agenda will scare investors potentially and will make people pause. The city you asked about the city in general, the city is facing a supply shortage. That's unbelievable.

Tim Stanweck (47:32)

But what, what would this do for a supply shortage, though?

Ron Eliasaf (47:35)

This will hurt it because people, you will think twice before buying.

Tim Stanweck (47:38)

I think that's what's so puzzling to us. And I'm going to speak for Carol a little bit because we talk about the supply demand challenge with, with multifamily real estate and with real estate in New York City anyway, the prices won't come down unless you build more housing.

Ron Eliasaf (47:50)

This sort of legislation will do the exact opposite.

Tim Stanweck (47:54)

A political position here. I mean, this is what.

Ron Eliasaf (47:56)

This is not a political position. This is the supply demand. The supply demand. In economics, if the city council or the mayor wants to reduce pricing, what they have to do is push more supply. And you push more supply by providing subsidies by endorsing legislation that makes it easier to build, changing zoning less effective, increase up zone, not limiting someone's ability to sell their own property, rent their own property. So this will have a negative effect, not a positive effect.

Carol Massar (48:24)

I mean, what are the rules? I mean, I don't understand why when a developer is building a building that there isn't either a certain percentage that's always put aside for people who maybe don't make as much money.

Ron Eliasaf (48:40)

Well, there've been certain programs.

Carol Massar (48:42)

Right, certain programs. But why? I mean.

Ron Eliasaf (48:45)

Well, the full affordable kind of subsidies have been tapped out. They've maximized in the budget. So then there was 421A that tapered off and died. Then 48,485X those have built in 2020 5% affordable components in it for every new construction.

Tim Stanweck (49:00)

Yeah.

Ron Eliasaf (49:00)

Yes, if you, if you qualify. Right. And then now with.

Carol Massar (49:04)

What do you mean if you qualify?

Ron Eliasaf (49:05)

There's certain ground well, 421 is expired, but 4085x you have to qualify with pricing and how much you do. But then if you build Roundup and you've done a in the timeframe that the legislation existed, you would have to build 25% or provide 25% affordable.

Carol Massar (49:19)

So why do you think is it just zoning that we don't have enough affordable housing here in New York City, I mean, or any major city.

Ron Eliasaf (49:26)

The issue in the city is it is that the land is limited. Yeah, right. Manhattan is an island.

Carol Massar (49:31)

Right.

Ron Eliasaf (49:32)

Cost of land is very high. Cost of construction is very high. It's not like building somewhere in middle of Texas. You can just bring your trucks in, you have to stop traffic, you have to build. The cost of labor is more expensive. So everything costs more to build. So the end product costs more. So for you as a developer, it has to be more profitable to justify it.

Christina Lee (49:48)

Right.

Ron Eliasaf (49:49)

But the city has done a few things right. If you look at City of Yes, it was a great program. It is still a great program. The 467M tax abatement, which basically said if you convert an office building to resi and set aside affordable, you get a tax incentive, property tax incentive. Those have been positive, I think examples of how the city has done it. Right?

Carol Massar (50:06)

Yeah.

Ron Eliasaf (50:06)

This specific bill on the table is a very bad example and I hope it doesn't pass.

Tim Stanweck (50:11)

I think people could also point to something closer to my neighborhood like Gowanus rezone. I mean if you go to along 4th Avenue in Brooklyn and you know the, the Gowanus area that has been, that was rezoned, there's just like huge buildings and thousands of units that are going up there as a result.

Ron Eliasaf (50:31)

Tim, I completely agree with you. Upzoning is the right way to go because in the long term the city will benefit from more property tax eventually on more units being built. I would put personally up zone the entire midtown district that connects to Hudson Yards. Right now we have these meat block garment district buildings giving more property rights. Right. You have a building right now, you can build 12 times more than what your land lot sizes. Double it.

Carol Massar (50:56)

I mean, it's not like we're building higher, essentially.

Herman Chan (50:58)

Go higher?

Tim Stanweck (50:58)

Yeah, go higher.

Ron Eliasaf (50:59)

I mean, the city, we have plenty of sky rises here, right?

Carol Massar (51:02)

Yeah, high rises.

Tim Stanweck (51:02)

I think one of the challenges would be transportation to move all the additional people. And I think about that a lot. It does get dense and it's not like you can add more, you can't add more cars to the subway. You can't always increase frequency of subway trains coming because some of these trains share tracks.

Ron Eliasaf (51:21)

It has to come with investment in infrastructure. So this is upzoning is not something you press a button. You have to plan 10 years ahead and it has to come with additional infrastructure for public, public transportation for sure. So in places in Queens and Midtown, you have to plan on building more public transportation. I think eventually you're going to see also eventually these driverless cars coming in. That will have a huge impact on traffic over time.

Tim Stanweck (51:44)

In a positive way.

Ron Eliasaf (51:45)

I think in a positive way, definitely.

Tim Stanweck (51:47)

When do you think they'll arrive?

Ron Eliasaf (51:48)

We've, I've seen them driving around the.

Carol Massar (51:50)

City so in love.

Ron Eliasaf (51:51)

I've tried it in the, in the west coast, in L A. It was one of the best experiences.

Tim Stanweck (51:55)

I've never met anyone who tried it and didn't like it.

Carol Massar (51:57)

It's like unbelievable the rate environment, if indeed we get it's expected that the Fed's going to cut rates next week when it meets. How is that impacting kind of deals, valuations, opportunities?

Ron Eliasaf (52:08)

Right now it's pretty, I think it's pretty priced in right now. I think if you look at the, if you look at the forward curve, it's pricing in this reduction. It expects it. I think we're very close to being in kind of neutral state. I don't think we're going to see another significant decrease in rate, maybe another 50 bips over the next year, but not more than that. That's what the price the market is pricing. And you're seeing more liquidity flow into the real estate market in general, both from the lending side, from the credit. We've seen spreads come in and more loans available and equities back and people are making investments. They feel more comfortable now that there's more predictability.

Carol Massar (52:39)

Our thanks to Ronnie Elias off. He is founder and managing director of Northwind Group. You're listening to Bloomberg businessweek. Coming up off of the back of retail earnings and Black Friday, we take a deep dive into Target and the uphill climb for its incoming CEO. And speaking of earnings, Macy's reported this past week posting better than expected results, but the retailer warned that it may be seeing softer demand to come in the future. For details, our Wayne Bostick caught up with the CEO of Macy's, Tony Spring, for a pen and pad interview. Enjoyed Bloomberg's Dani Burger and Matt Miller to talk about it.

Tim Stanweck (53:14)

I mean I did ask him a lot about what foot traffic was. Was there an actual increase? He did say he was happy with foot traffic, but he Also seemed to imply here that a lot of the revenue gains that they've seen in this most recent quarter was people buying more. So basically bigger tickets, bigger receipts, if you will, rather than actual, actually more people going in there. But this is also a company that is, you know, he's done, he's doing the conference call now. He's been asked a lot about how strong this holiday season is going to be. And one of the reasons why you see the shares down a little bit here is the comp Sales growth, while certainly an improvement over previous years, is still kind of lagging. What you would have seen at a company like Macy's in holiday seasons of past. Remember, this is going to be or supposed to be their best quarter of the year, their fiscal fourth quarter. You know, going to a physical store.

Scott Sanborn (53:59)

Seems like a quaint idea, but a.

Tim Stanweck (54:02)

Strange thing to do, right? I mean most of us buy all of our stuff online. What are they doing with that? Well, I mean, first of all, the average age of a Macy shopper is over 40. It's like, you know, late 40s, I think is the average age. That gives you a sense of what challenge that they're going. I know, I know, Matt, and you're still in your 30s. But we get to this idea here that there is still a cohort of boomers out there that do want that physical experience. Macy's obviously is now trying to make sure that the younger generation of Gen Z and beyond that they are actually engaged in the physical stores and trying to make them more experiential. That's the long term story, you know, and that's what he's doing. He's basically taking 350 Macy's stores, basically going to revamp all of these stores to make them more experiential. He's only done about120,550 so far. They're going to get to the rest over the next year and a half, two years. It feels like we're in this bizarre.

Scott Sanborn (54:49)

World where the retailers who do well.

Christina Lee (54:51)

It'S because you've got like Sydney Sweeney to do your campaign or some sort of celebrity.

Carol Massar (54:55)

Yeah, I mean Macy's isn't doing that.

Ron Eliasaf (54:57)

But it feels like we're in this.

Tim Stanweck (54:58)

Weird era of collabs and influence. Well, it's interesting and you bring up, you know, obviously what we're seeing with American Eagle, their shares on fire. I think when they open they're going to be having their best day in a couple of months. But it gets to this idea that's a singular brand. Right. And Macy's is a multi brand retailer in an era where a of lot, lot of us go directly to the brands themselves. We connect with those brands either because, you know, Matt salivates over Sydney Sweeney in that ad or something else. And the question is, how does Macy's sort of, you know, get that fire? They've had a lot of collabs with Wicked and other things like that that do get people into the stores, but it's a much bigger challenge.

Carol Massar (55:30)

Danny that's Bloomberg's Romaine Bostick, Dani Burger and Matt Miller. Just ahead on Bloomberg Businessweek, more in the retail space and a look inside the inner workings of Target. I'm Carol Massar and this is Bloomberg.

Tim Stanweck (55:43)

This is the Bloomberg Business Week daily podcast. Listen live each weekday starting at 2pm Eastern on Apple CarPlay and Android Auto with the Bloomberg Business app. You can also listen live on Amazon Alexa from our flagship New York station. Just say Alexa, play Bloomberg 1130. Target has had a tough couple of years. Well, it's almost 2,000 stores still sell a of ton, ton of stuff and the company remains profitable. Some observers say it has long had a culture of high self regard which can be dangerous in an industry as rapidly evolving as retail.

Carol Massar (56:15)

Yeah, sometimes you got to be humble. The ailing retailer has lots lost.

Tim Stanweck (56:20)

Yeah, I made a typo. I'm sorry, that was my fault.

Carol Massar (56:24)

Has lost its cheap chic appeal. Can a new CEO get it back on feet with his old boss next year next door? I always think about that when there's a new CEO and yet the old CEO is kind of, you know, somewhere as executive chair or something. That's the question though, at the heart of J1King and Devin Leonard's profile for Bloomberg Businessweek. You can check out the story, it's on the terminal and also@bloomberg.com Devin joining us right here in our Bloomberg studio got Devin. Devin, by the way, senior global business writer. Just want to get your title out there. Hey, Target is a retailer we all know and have probably loved at different times. I have been one of those people when they did those fashion combinations and I wanted to be, I thought you.

Tim Stanweck (57:03)

Were gonna say the teakettle.

Carol Massar (57:05)

No, not the tea kettle, but that's.

Tim Stanweck (57:06)

A, that's a big star of the profile.

Carol Massar (57:08)

But I've lined up, you know, because I wanted to, you know, get a piece of some fashion folk, you know, and their combination or their, their collaboration with, with Target.

Carol Massar (57:19)

Talk to us about how you wanted to approach this one because they've been going through a tough time For a while here, I don't know.

Herman Chan (57:25)

I mean, it's just this company that's, that, that at its, you know, and it's good times. People have just really loved it, been really passionate about it. And, and I, my wife, my daughter were really into it. My daughter, as a teenager spent just hanging out there and, and that was her whole thing, you know, was, was, you know, they, they'd be selling, you know, Anasu, you know, handbags, but at a price that, you know, my daughter who's like, you know, 16, could afford. And so this whole thing of kind of like bringing design, bringing fashion to, to the masses, you know, to, to, to, to teenagers, you know, it's this huge, huge achievement. And yet, you know, things have been, for, things been really, really tough and sales have been declining. They peaked, you know, during the pandemic and they just haven't been able to get, get the group back. And there have been a lot of, a lot of missteps. But you know, we, you know, we wanted to sort of delve into that and look at that and go talk to them about that.

Herman Chan (58:25)

In early September and you know, spent a lot of time researching, going back to them. But I know it's, it's, it's kind of a, it's kind of a tragic story at this point. I mean, maybe they, maybe they can turn around, but turn it around. But, you know, they're in rough, they're in rough shape.

Tim Stanweck (58:40)

Well, you got to attend this pep rally for that. That was kind of the culmination of the most recent CEOs time at Target, Brian Cornell. And you spent some time with him and his.

Herman Chan (58:58)

Soon to be successful incoming. Right, Pending. Yeah, yeah.

Tim Stanweck (59:01)

I was like looking for the word and it's confusing. Does he, how does he look at his time and, and sort of the arc of, of this narrative? Well, because there's a little bit of a disconnect.

Herman Chan (59:12)

Yeah, no, no, totally, Tim, because, because I mean that was the thing, you know, is this huge, you know, event for 14,000, sorry, you know, upper level, you know, Target employees in this, you know, 8 o' clock in the morning in the Target center, the music's booming, red lights everywhere. And then, you know, Brian Cornell, you know, you know, the current CEO has been CEO since 2014, comes out and you know, basically it's going to be his, his last time as, you know, at Target together as CEO. And you know, it's a big look back, you know, the highlights and basically emphasizing that when he came in, he did a really good job and you know, the company did, turning around then he did that, he pulled it out of Canada where they were, they were losing money. He rebooted a bunch of stores and rebooted a lot of the store brands. You know, the company peaked though, you know, you know, in 2022. And he doesn't really, he didn't really talk about what happened, happened after that, except we didn't really grow. And there's all kinds of things that happened in the last couple of years that contributed to, you know, the decline of their stock and the kind of their sales. You know, you know, they've had some big political controversies. You know, they, they ticked off conservatives, they ticked off, you know, liberals with their abandonment of dei. So, you know, you know, you know, so they're kind of like, you know, all purposes the offender. And, and then, and then the stores have been operated, the stores have been kind of a mess anyway. He sort of ignores all that. And then he bursts into tears on the stage and it's kind of like, well, wait a minute, you know, he's announced that he's stepping down. He's not leaving though, until January. And then his replacement in his right hand man who's an insider, that's not to say that, you know, maybe he won't, that's not to say he won't work out, but, but, but it's not what investors wanted, the stock drop. And it was this moment kind of like, you know, he was, you know, he was kind of milking this moment on stage in front of all these folks when his last couple of years have been kind of a disaster. If he'd left in, you know, in 2022, he could have gone out in history as a great retail CEO. But he, but he stuck around and.

Carol Massar (61:22)

Well, they waived the mandatory retirement age for him a couple of times. Right.

Herman Chan (61:26)

Well, it just, well, once was enough, Carl. I think, but. Oh, was it once still?

Carol Massar (61:32)

But I think, I think what's great, what's fascinating, and you see this over and over again with companies and they are, you know, in a, in a hard place trying to figure out their way forward. And then they just top somebody who's been at the company for another 20, you know, who's been there for 20 years. And I know sometimes folks are like, well, it's good you have an insider, knows it, but a lot of times what you need is an outsider.

Herman Chan (61:52)

Well, actually, and we're neglecting something here because it's one thing to basically ignore investors and appoint and appoint, you know, cons of an insider, some guy's been there for 22 years. But we're for neglect to mention that on top of that, Brian Cornell, the guy who a lot of people think is responsible for, you know, presided over, you know, over, you know, this sort of catastrophe over the last couple of years. He's not going anywhere. He's sticking around as executive chairman. And I think there are, there are instances where like Jeff Bezos, you know, you know, when it's time to, you know, you know, you know the name, you know, you know, you know, his, his replacement, Andrew Jacey, I mean he sticks around as executive chairman. It's kind of like, well, you know, he's the founder. He's responsible for a lot of company success. If he wants to, to stick around and kind of, kind of keep an eye on things and you know, leave the strategy, fine. But when you're somebody who's had a really terrible record in the last couple of years, why are you sticking around and why is the board. Yeah, yeah, he's of course he's the chairman of the board, but, but, but, but it just seems to speak, to speak to kind of a larger problem at Target that, you know, the thing you mentioned the beginning about a lack of urgency and addressing problems and sometimes even acknowledging they have problems.

Carol Massar (62:56)

Right.

Herman Chan (62:57)

So.

Tim Stanweck (62:57)

Yeah, so when Cornell came in a little more than a decade ago, he pulled the plug on the Canada stores, which was seen as a pretty big move.

Herman Chan (63:06)

They were all losing money. They were all losing money. Yeah. 100, 133.

Tim Stanweck (63:09)

But they hadn't been in Canada for that long.

Herman Chan (63:11)

Right, right.

Tim Stanweck (63:11)

And there were just a lot of, as you point out in the piece, a lot of execution issues actually.

Herman Chan (63:15)

Right. Supply chain issues. Yeah. At what point?

Tim Stanweck (63:20)

Like the Target that you describe and that Carol describes and you know, the taking out all the ad like to take over the New York.

Herman Chan (63:29)

No, all that stuff is, I remember also. Yeah.

Tim Stanweck (63:33)

What was the sort of the end of that? Like why did that era decline?

Herman Chan (63:37)

Well, that all of that stuff happened, you know, for the, certainly for the most part happened under, I guess this CEO Bob Ulrich, who became CEO of Target in 1987. They just had about, you know, 300 plus stores. It was part of Dayton Hudson sort of department store company. But he basically, you know, decided that to compete with Walmart, we have to have like kind of cooler style our products. We have to have cleaner, you know, more, more well lit stores. The execution has to be better. But he kicked off this whole thing that sort of, I won't say culminated, but it really, really started, you know, with the Michael Graves partnership. And that was in, in 1999 that resulted in the famous tea kettle, which of course we can't stop talking about it. You can mention enough times in the story because, because it's just sort of like it was incredible. It was, it was a piece of art that people could buy for $34.99. But in any case, he steps down because of, you know, the retirement age limit. In 2008, he's replaced by Greg Steinhoffel, who was his number two, his right hand man. And that just, that just didn't really work out. Even, you know, Bob Ulrich says in the story he thinks that's the, you know, the biggest mistake he ever made. But they never really.

Tim Stanweck (64:56)

Probably the worst decision in my. Yes, God, blank life is what he said.

Herman Chan (65:02)

Yeah, filling up.

Tim Stanweck (65:03)

Right, but, but Steinhoffel did not respond to requests for.

Herman Chan (65:06)

No, no, but, Right, but, but so Brian Cornell comes in in 2014 and after Seinoff was ousted. And by the way, that follows, follows the, you know, the hack, you know, Target, you know, in 2013, that was, and the funny thing is like, that's something that's happened in a lot of companies since. But at the time it was kind of a first and it blew everybody's minds. And yeah, and he took responsibility for it, kind of lost his job. But, but, but, so Brian Cornell came in and fixed a lot of that stuff. But, but I think in terms of like maintaining that, you know, that stylistic edge, the edge on design, I think that that kind of started to wane and, and, and then, and then in the pandemic, they themselves admit that they weren't really staying in touch with the consumer people. You know, people were working from home and they weren't doing all the things they do is going out to consumers, homes and like looking through their, you know, you know, their, you know, their makeup bags and all that stuff, you know, they're kind of trying to do that now and trying to make up for that. But, but they really, you know, they really lost the edge. But to answer your question though, it's been, it's happened slowly. And then, you know, the pandemic, post pandemic, it's accelerated, you know, really rapidly, the sort of decline.

Carol Massar (66:21)

I mean, I have to say, when my daughter was younger, I mean, I lived in Target, like I was there all the time. And sometimes I've gone back for her even today and she's not a little one anymore. But so what do folks say needs to be done at Target because I gotta say, when it was in its groove, it was a pretty cool retail place.

Herman Chan (66:40)

I know they're really successful.

Carol Massar (66:41)

Yeah, super successful. And everybody talked about Tarjay. Right. It was kind of cool. So what do, what do outsiders or folks say needs to be done?

Herman Chan (66:50)

Well, there's, I mean they need to get their edge back in style and design. They said that, they say they're doing it that I mean, of course the question is they really, they really got there in the first place in a very different kind of, you know, media, you know, retail, Retail environment. So yeah, so it's a bit of a challenge to, you know, to recreate the success that they had. I mean you can't just like take, I guess you could take over the New Yorker now. I don't think it would be quite, quite, quite the same thing. But they have, that they still have operational problems at their stores. I mean, you know, you can go to really nice stores in the suburbs with a very nice, nice one in Edena, you know, Minnesota, right outside of, of Target where it turns out quite a few of the top Target executives, including one Michael Fidelke shop. So of course that place was fantastic. But. Or you can go to the Target down the street from where I live in Washington Heights on 181st Street.

Carol Massar (67:42)

Is everything locked up?

Herman Chan (67:43)

Yeah, and it's just, it's not a good, it's a mess. So how do you really. And I think this kind of in between sort of, sort of, you know, my Target and the Target Target we went to. But, but they have to fix, fix all that stuff. Stuff. They have a bunch of unhappy employees. They have to, they have to just do something there. But a lot of it is just executing at the level, you know, that they used to, they used to execute and they've, they've kind of let that slide and you know, can they do it in, in, you know, 2025, 2026, you know, it's a different world than it was in the aughts. So we'll see.

Carol Massar (68:18)

Well, it's a cool deep dive. Another one. You always do these stories where you're just kind of like into so much detail. You learn a lot. Devin, thank you. Really appreciate it. Devin Leonard, he's senior global business writer at Bloomberg Businessweek. Check out his story. Jwon King and Devin Leonard doing it for Bloomberg News this week.

Christina Lee (68:34)

Yeah.

Carol Massar (68:34)

No, no, no.

Carol Massar (68:37)

What a good reporter.

Tim Stanweck (68:38)

Yeah, Very, very always. Awesome. Devin, when you join us.

Carol Massar (68:41)

Thanks.

Scott Sanborn (68:46)

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Tim Stanweck (68:48)

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Scott Sanborn (68:54)

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Tim Stanweck (68:56)

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Scott Sanborn (69:10)

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Tim Stanweck (69:16)

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Herman Chan (70:19)

Hello, I'm Malcolm Gladwell, host of the.

Tim Stanweck (70:20)

Podcast smart talks with IBM. I recently sat down with IBM's chairman and CEO Arvind Krishna, and I asked him, how can companies use AI to its fullest potential to create smarter business? My one advice to them Pick areas you can scale.

Herman Chan (70:37)

Don't pick the shiny little toys on the side. For example, if anybody has more than 10% of what they had for customer service 10 years ago, they're already five years behind.

Tim Stanweck (70:55)

If anybody is not using AI to.

Herman Chan (70:57)

Make their developers who write software 30% more productive today with the goal of being 70% more productive.

Jay Choudhary (71:06)

Yeah.

Angus Thirlwell (71:06)

Wow.

Herman Chan (71:07)

So we are not asking our clients to be the first experiment on it. We say you can leverage what we did. We're happy to bring out all our.

Tim Stanweck (71:15)

Learnings, including what needs to change in the process. Because the biggest change is not technology.

Herman Chan (71:20)

It's getting people to accept that there's.

Tim Stanweck (71:22)

A different way to do things. To listen to the full conversation, visit IBM.com smart talks.

Tim Stanweck (71:36)

You're listening to the Bloomberg Business Week daily podcast. Catch us live weekday afternoons from 2 to 5pm Eastern, listen on Apple CarPlay and Android Auto with the Bloomberg business app or watch us live on YouTube.

Carol Massar (71:50)

You know what I love about the holidays?

Tim Stanweck (71:51)

Is it chocolate. Yeah, I knew you were gonna say that.

Carol Massar (71:54)

Cut to the chase.

Tim Stanweck (71:55)

Well, you know, it's funny that you say that. It's funny you say. Because our Bloomberg news team is out with the ultimate foodie gifts for anyone who likes to cook and eat. Did you see this at the terminal?

Carol Massar (72:03)

Nice job.

Tim Stanweck (72:04)

The word chocolate, it's mentioned 10 times in the gift guide.

Carol Massar (72:08)

Say no more.

Tim Stanweck (72:09)

Okay. It's all for good reason because it's the time of year where we like to indulge and that often includes, at least for me and I know for Carol Massar eating our share of chocolate.

Carol Massar (72:18)

Has to be really good chocolate.

Tim Stanweck (72:19)

With us here in the Bloomberg Interactive Broker studio is Angus Thirlwell. He's honoring global CEO of Hotel Chocolatier. It's the UK based chocolatier that has more than 150 cafes in the UK. You'll remember this was bought by Mars for more than $660 million. That deal closed at the beginning of 2024. So it's been almost two years since you've been under the Mars umbrella. Almost two years.

Angus Thirlwell (72:44)

Yeah, we've been, we've been really busy since then. Thank you. I mean the whole rationale of combining with Mars was to strap rocket launchers onto the Haute Shock Lab brand. We already knew from previous entrees into the American market that the brand resonated with people. The playfulness and the contemporary design coupled with a really strong approach on more cocoa, less sugar. So even with milk chocolate and white chocolate dying up the cocoa so it's not overloaded with too much sugar.

Angus Thirlwell (73:23)

So we can.

Tim Stanweck (73:25)

You're speaking, you're speaking my language right now. Like more cocoa, less sugar.

Carol Massar (73:28)

Totally.

Ron Eliasaf (73:28)

Yeah.

Tim Stanweck (73:29)

Like I'm talking like 95% dark is like, you know.

Angus Thirlwell (73:32)

Well, yeah, well, you're almost at my level. Yeah, that's your level. 100%.

Tim Stanweck (73:38)

I love that. Okay.

Angus Thirlwell (73:39)

Yeah. I take it as a drink. Every morning in our, we have a drinking chocolate machine called a velvetizer which enables families at home to make barista grade drinking chocolate really effortlessly. A velvetier velvetizer.

Carol Massar (73:54)

A velvetizer.

Tim Stanweck (73:56)

What is, what is drinking chocolate like comprised of?

Angus Thirlwell (73:59)

Well, I mean if you, if we step back and consider the history of humans and cocoa together, the history in the drinkable version is 5,000 years. According to the latest archaeological digs where they found.

Angus Thirlwell (74:17)

Ceramic fragments of drinking goblets with Little traces of cocoa on. And the edible version is only just over 200 years of history. So the drinkable version has way more heritage. And basically what you do is you take the cocoa bean and grind it up and then dissolve it into either a water base, which is the early civilizations way, or the way we prefer, in a velvetizer, put it onto your preferred milk, either dairy or plant, and it makes the most amazing, rich, deep, wholesome chocolate drink.

Tim Stanweck (74:54)

And this is sugar free.

Angus Thirlwell (74:56)

You can go sugar free. So there's no, you don't need to add any sugar. It's either already in there to a very restrained level or as I'm hoping to get you on, we can take you all the way to 100%. Not a single scintilla of sugar there.

Tim Stanweck (75:11)

Angus. Let's do it. I'm ready.

Carol Massar (75:13)

But it's fascinating that you say that because I think the views around chocolate, certainly, maybe globally, but I know certainly in the United States has changed in terms of looking at the amount of cocoa or chocolate that's in something. And that I think Americans are changing their preference. Tell us about the American market and what your experience has been since you guys have been moving into it.

Angus Thirlwell (75:35)

Yeah, so we, we're based in Chicago now and we've spent pretty much all of 2025 trying to win over the city of Chicago by opening five, you know, amazing locations and taking, you know, like really careful note of the way people are interacting with our chocolate. And what was, what we're seeing is that our neon sign that's in every store that says more cocoa, less sugar, people are doing Instagram pics against it and they're really loving that the drinking chocolate which we serve over indexes as a mix compared to our UK model. So that's telling us that the American consumer is very open to experimenting with, if you like composed and original drinks. And you don't have to go far.

Carol Massar (76:26)

We love our drinks.

Angus Thirlwell (76:27)

I know if you, if you look at the New York culture, the LA cult culture, you know, drink drinks are an art form.

Carol Massar (76:33)

Is it hot, cold?

Tim Stanweck (76:35)

Both.

Angus Thirlwell (76:36)

Like both of those plus ice.

Carol Massar (76:38)

Ice. Okay.

Angus Thirlwell (76:39)

Yeah. And we also have a version where we combine it with our own soft serve as well. If you want to go, you know, like really, you know, all the way. So we really notice those dimensions and we, we've also noticed that the preference for amongst affluent Americans is dark. And they start off saying, I'm a dark person, don't even show me any milk. But there's a way to do milk chocolate well, which is, you know, it can be very creamy and still loaded up with loads of cocoa. And so that's been a bit of an eye opener, we think for the Chicagoans to, you know, to taste really high end milk.

Tim Stanweck (77:20)

You mentioned the idea with the Mars partnership and Mars acquiring you a couple years ago was to strap this rocket ship. Leadership on expansion. Certainly the idea of distribution is incredibly helpful with a global company such as Mars, but also about sourcing and getting the actual ingredients. Are you able to get ingredients, the same ingredients you were getting as an independent company now for cheaper as a result of being part of Mars?

Angus Thirlwell (77:47)

In some cases, yeah. I mean if we put cocoa to one side where we willingly spend more than the market price and I'll come on to that, if you'll permit me, a bit later. But when we're looking at other things like hazelnuts, we're able to use the buying power of the group and the financial strength of Mars as well. I mean, as an independent business, we could offer a certain security over our trading relationship with our favorite hazelnut supplier. But when we're part of Mars, suddenly our credit rating is much higher and that can get reflected in better terms. It's how the world goes around. So yes, they're some of the synergies, but the combination was more about growth, not really about a cost based play. Yes, we'll collect those along the way to try and be a more efficient business and reinvest the proceeds into, into more development and more growth.

Carol Massar (78:48)

I'm still obsessed with the Velvetizer. I'm just going to say for Christmas. Exactly. So talk to us about the US market, the growth that you've seen and tell us what it's like. So you mentioned Chicago. Tell us about expansion and what you've seen since you've been here.

Angus Thirlwell (79:02)

Yeah, well, I mean if we look at our domestic market first, which is the UK market, there's loads of headroom left there and we've opened about 25, 25 locations in the UK over the last 12 months. And here in the US we very much a standing start, but already five open and they're spread across different neighborhoods in Chicago and also on a magnificent mile as well. So we're going into the holiday season all guns blazing with an amazing offer.

Carol Massar (79:37)

What is the growth market for you guys? Is it. Do you see the United States as being like a bigger and bigger part of the, of the business?

Angus Thirlwell (79:43)

Yes, very much. I mean, you know, the US is the world's biggest consumer market. As we know it's the leading media and Culture center for the world.

Carol Massar (79:54)

I mean social media plays a role in. Right, like expanding the brand usually.

Angus Thirlwell (79:58)

Yeah, I mean it's, it's, you know, the way we built it in the UK was word of mouth. We didn't spend any money on above the line advertising.

Carol Massar (80:06)

It's amazing.

Angus Thirlwell (80:06)

It was all PR and word of mouth and reviews and we very much want to focus on similar tactics in America. We know we've got a story to tell, we know we're differentiated and. Yeah, and America is our total focus for growth. We know that if we win in America, we can then win everywhere, as Frank Sinatra said, almost.

Tim Stanweck (80:33)

Well, so what's the extension plan in New York, in Los Angeles and other parts of the country?

Angus Thirlwell (80:38)

Yes, we're, you know, you won't be surprised that we've scoped out already, you know, the next three to five years and we're clearly looking at New York and California and you know, the other kind of interesting states. So I mean there's a wealth of headroom available for us to grow into. But the, the key, the key thing I bring is an insistence on quality growth.

Carol Massar (81:03)

Right.

Angus Thirlwell (81:04)

We're not just trying to rack up, you know, like numbers of stores. The most important thing is to hold on to that quality. The way our team interacts, they need, they need training, they need to know everything about cocoa and chocolate and that gives the confidence to be able to engage and have a proper conversation. And our supply chain, which Mars will help on hugely, the logistics, the things like filing patents, you know, getting, getting permits which are different state by state. So all those things are pretty, you know, difficult for, for Brits to understand where it's one homogeneous country, it's like one set of planning laws.

Carol Massar (81:47)

Right, right.

Angus Thirlwell (81:48)

But in America, you know, the, the, it's such a vast market that you've got to, you've got to crack the code for, you know, California when you've just learned it for Illinois.

Tim Stanweck (82:00)

Some people live in New Jersey and work in New York and have to pay taxes in both places.

Carol Massar (82:03)

It's not fun. You do get some of it back a little bit later on. Just final thoughts in terms of where you hope this business is. I don't know, two years, what's it, what's a fair timeline that you're thinking about? Just got about a minute left here, I think.

Angus Thirlwell (82:16)

I mean in the UK it took us 10 years to become household name brand in America. We're hoping to do it in half the time.

Carol Massar (82:25)

That's no pressure.

Tim Stanweck (82:27)

We'll come back, please.

Carol Massar (82:28)

Just going to say I'm a person who leaves my office and I'm going to just tell you there's another chocolate place that's down below. But I will actually buy chocolate on my way home. So hopefully you guys will be in.

Christina Lee (82:37)

The neighborhood soon so I can do that.

Angus Thirlwell (82:40)

Full intention.

Ron Eliasaf (82:40)

Yeah.

Carol Massar (82:42)

Angus, thank you so much. Happy holidays. Thank you and thank you. Thanks for coming in. Inglis Thirlwell, he's founder and Global CEO at Hotel Chocolat, joining us right here in studio.

Tim Stanweck (82:51)

This is the Bloomberg Business Week Daily Podcast available on Apple, Spotify and anywhere else you get. Your podcasts listen live weekday afternoons from 2 to 5pm Eastern on Bloomberg.com, the iHeartRadio app, TuneIn and the Bloomberg Business App. You can also watch us live Every weekday on YouTube and always on the Bloomberg Terminal.

Scott Sanborn (83:21)

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Tim Stanweck (83:23)

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Scott Sanborn (83:27)

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Tim Stanweck (83:30)

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Tim Stanweck (83:51)

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