Some Key Aspects of the New Normal for Downtowns: some emerging challenges ©

Posted on December 8, 2013 by DANTH

Article 1 – Part 2

N. David Milder

Author’s Note for Downtown Curmudgeon Blog and Newsletter Readers

A number of readers of the Downtown Curmudgeon blog have asked me to write an article on the new normal for downtowns that I have referred to in many of my blog postings in recent years. In response, I have planned a series of articles that will be posted over the coming six to eight months.

This is the second part of the first article in that series. It focuses on providing a description of the critical characteristics of the new normal and some of the emerging challenges downtown organizations now may face under it. Proper treatment of this subject requires sufficient space and cannot be done within the usual short take format of most blog posts and email blasts. While I have tried to be economical in my use of words, this article is almost 12,000 words long, even when I have skimped on examples and skipped using data tables and other illustrations. I have divided it into two parts. Each part will be posted to my blog and emailed separately.

Later articles in this series will cover such topics as the arc of downtown revitalization, the potential implications of the new normal for downtown development projects and BID programs.

Some of the Challenges Emerging Under the New Normal

Downtown revitalization is a process that never ends because: change is unavoidable and downtowns will consequently face new challenges; downtowns will have new assets and liabilities that will call for them to amend their strategies and visions of the “promised land.” Consequently, downtowns under their new normal can expect to face important challenges. Below are some that already have arisen. Downtown prosperity does not mean the end of downtown challenges — and it is important that prosperity’s joys do not limit downtown leaders’ awareness of the challenges. Following are some challenges that I think are among the most important. Here, again, my discussion is intended to be illustrative, not exhaustive or definitive.

1. The Deliberate Consumer. The Great Recession brought into sharp national focus consumers who act more cautiously and more deliberately in their purchasing decisions. This has impacted downtowns along every dimension where consumer behaviors and expenditures are important: retail purchases; housing rentals and purchases; entertainment admissions and equipment; transportation modes and use; healthcare, childcare and eldercare services, etc.

Deliberate consumers put needs far ahead of wants, look for value in their purchases and are much more careful about the use of credit and loans than in previous decades (19). Initially, affluent households exhibited deliberate consumer behaviors, but this eased substantially as the impacts of the recession declined. However, for the broad group of middle income households in the nation’s second, third and fourth income quintiles, this behavior has hardly eased. Indeed, it is part of a trend for a growing number of middle-income families to face strong economic stress that dates back at least to the mid 1990s and is expected to continue on to at least 2021. As Warren and Tyagi outlined in their 2004 book, median incomes for these middle income households were long stagnant, while their disposable incomes were being constantly eroded by the ever rising costs of healthcare, childcare, and education tuitions and fees as well as by substantial interest payments on mortgages and credit cards (20).

More recently, additional stress has been added by the weakening in the job market, not only in terms of the number of jobs available, but also their reduced skill levels, lower pay. Also, the private sector has a growing reliance on freelance workers, outsourcing jobs abroad and computerizing middle level management, technical and support functions. The ability of the stressed middle-income families to find discretionary expenditure dollars has been also impeded by their reduced use of home equity loans and more conservative use of credit cards.

Post Great Recession, the impacts of the deliberate consumer are being felt unevenly by downtowns depending on the degree to which their businesses and fee charging nonprofits rely on middle-income patronage. Those with lots of affluent households living in and near the district as well as strong tourist traffic, such as Midtown Manhattan and Chicago’s Miracle Mile, are least likely to be significantly impacted. Affluent suburban downtowns, such as Greenwich CT and Wellesley MA, are also unlikely to be significantly impacted.

Similarly, in large cities, the impact of the deliberate consumer on many large low-income shopping areas, where retailers and other businesses succeed because the population density allows sufficient aggregation of low household expenditures, has been comparatively small: they have few middle income users and their low-income shoppers always have far fewer discretionary dollars to spend or lose. However, several “ethnic downtowns” I’ve visited in medium+ sized cities have been improving in recent years by attracting more of the middle income shoppers living and working in their trade areas. They are being impacted by deliberate consumers.

Bottom line: Most of our nation’s downtowns rely on middle-income shoppers. In the new normal, these shoppers are behaving as deliberate consumers. The Great Recession did not create the deliberate consumers – their household income stagnation started a decade before –though it certainly worsened their level of economic stress. For many downtowns, the emergence of the deliberate consumer:

Provides a constraint on economic growth
Impacts on the types of retailers and service businesses that can succeed and be attracted to their districts.

2. New Dynamics in Retail Markets. A recent article from McKinsey aptly characterizes today’s retail:

“The North American retail landscape looks quite different today than it did even ten years ago….. Some predict that retail will change more in the next five years than it has over the past century and that the extinction of brick-and-mortar stores isn’t far off. Our view is less dramatic, but we do believe that big changes are inevitable and that retailers must act now to win in the long term.” (21)

Retailers are being hit by subpar economic conditions and the deliberate consumer. Again from the McKinsey article:

“Economic indicators do not paint a rosy picture for retailers: budget deficits are mounting, unemployment remains high, and the average consumer’s balance sheet—while improving—remains shaky, for it has taken more than five years to recover the $16 trillion in net worth US consumers lost from peak to trough in the recent recession.”

The other powerful factor that continues to impact on the character of retail operations is the Internet. As of June 20013, online sales only accounted for 5.8% of all retail sales, but McKinsey estimates that it will rise to 15% by 2025, with few experts doubting that it will continue to grow significantly beyond that date (22). Additionally, a 2009 report from McKinsey estimated that by 2011 the Internet would play some role in about 45% of all retail purchases (23). The Internet is influencing both how brick and mortar retail space is being utilized and how much space is needed. Increasingly, successful retailers – large and small — have adopted a multi-channel approach that integrates e-commerce capabilities with the operations of their brick and mortar stores.

Lower Growth Rate. Industry forecasts indicate that the compound annual growth rate for retail sales over the next five years will be only about 3% to 4% instead of the 5% to 7% experienced in the decade before the recession and just a bit better than the 2.4% of the 2007-2012 period. Furthermore, these limited growth opportunities are most likely to be found by tapping the Boomer, Millennial and Hispanic market segments (24).

Show me the money: I strongly believe that stronger retail growth rates will not return until the income stagnation of middle class households is eroded. Periodic expenditure surges may occur as their consumer credit is used and repaid, but not long-term higher growth.

Significantly Reduced Demand for Retail Space. Together, the deliberate consumer, the growing power of e-commerce and slowed retail sales growth are having some profound effects on the retail industry. For example:

Retail chains have closed many stores (e.g., 4,500 just in “post-recession” 2012) and now look for fewer locations that average about 25% less space than their existing stores (25)
Many use the resulting cost savings gained from fewer stores and smaller formats to pay for improvements in their own e-commerce capabilities, while several big box chains are developing the smaller formats to ease entry into tight urban contexts
Nationally, the amount of retail space decreased by 259 million SF between 2001 and 2011 and is expected to drop by another 210 million SF by 2016 (26). The number of real estate experts who recognize that the nation has far too much retail space has grown substantially
Today, only about one-third of the 1,300+ malls in the U.S. are high-growth, investment-grade properties; another one third are in deep trouble and prone to either closing or being re-purposed. (27) The successful malls are increasingly taking on the look and functions of successful downtowns and adding many non-retail functions.

Downtowns That Want Strong Retail Will Need to Work Hard to Get It and Keep It. Overall, downtowns consequently face a future in which having a robust retail sector is certainly possible, but it has become much more challenging to achieve and maintain than it was in the 15 years prior to the Great Recession. Most downtowns that want their retail to be strong will have to work harder and more proactively than they have in decades to get it. However, there is significant variation in the degree to which downtowns will feel their retail challenged as well as in the ways the challenges are manifested. For example:

Most importantly, retail chains have themselves become more deliberate and cautious, avoiding consideration of locations that are not proven and deemed high risk. Looking for fewer and smaller locations, they have become much more selective. That means, for example, most downtowns that have not established themselves favorably with GAFO retail chain site selectors effectively have been further downgraded as possible retail locations. For them, having a cluster of robust GAFO retail shops will depend on attracting and/or growing attractive independent small retailers. However, they probably still have the ability to attract convenience-type retail and food related chains. Furthermore, there are some downtowns that have successfully lured retail chains, but their stores have underperformed compared to others in their chain. They, too, face a downgraded potential for attracting new retail chains
Retail in large, “big league,” downtowns that have affluent residents living in and near the district as well as lots of tourism and a high daytime population continue to do well as reflected in asking retail rents that can reach $3,500 PSF (28)
The suburbs are saturated with retail; growth opportunities are shifting to dense urban areas and possibly some ex-urban areas. However, here again, downtown retail in affluent suburban communities remains stronger than in neighboring middle-income downtowns, and they continue to be favored by retail site locators
In many medium and large downtowns, small independent merchants are disappearing, sometimes at alarming rates, because of unaffordable high rents, reduced consumer demand and strong e-commerce competition. For example, the average sought retail rent in Manhattan in the Spring of 2012 was $116 PSF. (29) That means for a small merchant to afford renting a 2,000 SF store, the operation would need annual sales of roughly $1.9 million to $2.9 million per year. In a thriving NJ suburban downtown, where retail rents are about $50 PSF, a merchant would need annual sales between $0.833 million and $1.25 million to afford renting that 2,000 SF shop. Such sales numbers require an operator with exceptional core merchant skills and strong financials, a treasured find in any downtown
In many medium-sized downtowns, GAFO retailers were among the hardest hit by the recession, the deliberate consumer and e-commerce. The potential for this type of retailing to return increases with improvements in the downtown’s regional economy, especially its housing sector
Many downtowns continue to report that when storefront vacancies are filled, the likely new tenants are personal and professional service operations, not retailers. However, many downtowns have benefited from such “pamper niches” – many others might be wise to follow their example (30)
Downtown food related operations (e.g. groceries and restaurants) and personal services have been comparatively strong from 2007 through 2012. In many downtowns, they provide the spine for the district’s revitalization. Nevertheless, their importance is too often underestimated and far too little attention is paid by retailers to leveraging the customer traffic they draw to the district.

Under the new normal, many downtown organizations, especially those whose trade area customer bases are dominated by middle income households filled with deliberate consumers, will need to take a new, in-depth look at their current retail and its market-driven prospects for growth. They then will need to formulate a strategy to achieve that growth. Some may conclude that the strong presence of the Boomer, Millennial and Hispanic market segments or the power of their strong existing niches (e.g., entertainment, wedding, home and hearth, etc.) is sufficient not only for growth by meeting unmet demand, but also for winning market share from competitors. Other downtown organizations may conclude that while growth in neighborhood/convenience type retail remains viable, their GAFO growth potential has significantly eroded or can probably only be achieved by relying on the attraction of small independent operators. Many, especially in small districts, may decide to focus on neighborhood/convenience type retail. Still other downtown organizations may decide to make retail growth a lower priority and to focus instead on leveraging other strong downtown assets such as their entertainment and pamper niches.

The new retail assessment that many downtown organizations need to undertake can benefit from a “right fit” approach that includes:

Getting a good handle on the types of retail functions, e.g., niches, they can attract given the emergence of the deliberate consumer, the impact of the Internet, the altered pattern in retail chain site location decision-making and the downtown’s ability to attract or grow quality small retailers
Having a workable estimate of how much market-supported retail space (in SF) each of these retail functions can provide
Identifying the stock of probably available retail spaces and assessing their ability to compete
Matching the market-driven demand for retail space with the downtown’s stock of probably available commercial spaces to determine such things as which spaces are strongly competitive and those that need to be improved or converted to non-retail uses, as well as how much new space should be developed.

Perhaps, more than ever before, as the interest of GAFO retail chains in many communities recedes, downtowns will need to attract or nurture quality small merchants if they want to have a strong group of attractive retail shops. However, this cannot be easily accomplished. Successful small merchants need appropriate skills (including the ability to use the Internet), sufficient capital, affordable rents and viable locations. Today, most downtown small retailer recruitment is like throwing a bowl of spaghetti against the wall and being lucky if a few pieces stick. Most downtown recruitment programs rush to find and are proud to sign new small retailers. Too few recruitment programs vet them to assess whether they will require assistance; fewer still then can link those “indies” that need assistance to appropriate technical assistance providers. Understandably, these are complicated and resource-eating tasks and difficult for downtown organizations with budgets under $500,000 to undertake. Nonetheless, something like this will need to be done in numerous downtowns if they are to have any meaningful amount of quality GAFO retailing. Consequently, many downtown organizations may need to start thinking about expanding the range of functions that are included in their understanding of their district management mission.

While discussions about the technical assistance needed by a downtown’s small retailers often centers on finances, in today’s world their need for technical assistance that can help them gain an effective Internet presence is growing rapidly with each passing day. In many downtowns, the Internet capabilities of their small merchants will determine the attractiveness, strength and viability of the district’s retailing. If the downtown organization does not provide or facilitate the needed technical assistance, then who will? Here again, the costs in staff time and money admittedly can stress the budgets and skill sets of many downtown organizations.

So far, no model program has emerged for overcoming this impasse. Here are a few thoughts about developing one:

Effective downtown organizations are smart about often getting other organizations to do what the downtown needs. Can they get other organizations to help provide the needed Internet technical assistance?
Perhaps several downtowns can band together to reduce the costs of developing and operating such a program through the creation of a consortium or the use of an umbrella organization such as a county EDC or the local SBDC
However, whichever organization is the technical provider, it is essential that its program be correctly designed to avoid problems that have hindered other attempts
The biggest need for help will probably be with retailers having fewer than five employees
Many of these merchants have been scared off by overly complex and costly types of e-marketing tools or programs that consultants have offered them. Some merchants have actually tried e-commerce tools and found them ineffective and/or off-putting
The two basic marketing objectives the small merchants should focus on are a) being found easily on the Internet and b) cultivating existing customers
Many small merchants can achieve both of these objectives by using relatively inexpensive and easy to use Internet tools (31).

Bottom line: downtowns face a future in which having a robust retail sector is certainly possible, but it has become far more difficult to achieve than it was in the 15 years prior to the Great Recession.

3. Some New Dynamics in Downtown Development. On the positive side, Christopher Leinberger has made a strong case for “walkable urbanism,”, i.e., the creation of urbanized environments ”… in which most daily needs can be met within walking or rail-transit distance of one’s home,” being today’s major development trend.”

Others talk in terms of an overlapping concept, transit-oriented development (TOD), that can be defined as “higher-density mixed-use development within walking distance – or a half mile – of transit stations” (32). Walkable urbanism seems to give more emphasis to walkability while TOD pays more attention to developing around transit stations, but both approaches overlap in stressing the values of pedestrian friendly environments and easy access to transit.

Leinberger also notes that:

“Pent-up demand for this type of development has been proved convincingly during the housing collapse of the past three years (2008-2010 when) most of the housing decline occurred in the overbuilt, automobile-dependent suburban fringe while walkable urban places generally maintained their home values” (33).

A study released in 2013 — commissioned by the American Public Transportation Association and the National Association of Realtors and that was prepared by the Center for Neighborhood Technology — strongly confirmed Leinberger’s observation finding that:

“Across the study regions, the transit shed outperformed the region as a whole by 41.6 percent. In all of the regions the drop in average residential sales prices within the transit shed was smaller than in the region as a whole or the non-transit area. Boston station areas outperformed the region the most (129%), followed by Minneapolis-St. Paul (48%), San Francisco and Phoenix (37%), and Chicago (30%)” (34).

In addition to the benefits of living in more walkable, urbane communities and enjoying “more resilient residential property values,” the study found households living in transit sheds had better access to jobs and lower average transportation costs than the region as a whole” (35).

TOD has been especially of value for many suburban downtowns that have commuter rail stations.

Leinberger also presents an interesting argument that, although it is significantly harder to finance “walkable urbane” projects, they can be very attractive to investors, especially patient equity providers, because:

“…There could be significantly higher cash flows as the project matures. Unlike conventional development where cash flows have been hybridized to be loaded at the front end—the result of lower construction costs for simple commoditized product—it appears that cash flows from walkable places get better over time. Value spirals upward as the critical mass of a walkable place is achieved and enhanced. As more development takes place within walking distance, there are more people on the street and therefore rents and sales prices go up, resulting in land and building values rising, which leads to increased cash flows and so it continues upward as more development is added to the area” (36).

Economic factors combined with changes in the ways tenants want to use their leased spaces have altered the nature and strength of demand for downtown retail spaces, offices and housing units.

Retail. As mentioned above, nationally, there is significantly less demand for retail spaces and much of the current inventory needs to be repurposed. Also, significant changes are appearing in the ways that retail spaces are used because of the Internet, and their full impacts have yet to be manifested. For example:

There is less need for on-site space to store inventory, especially with large, low turnover items
There is more need for space for wrapping and shipping e-purchased items, picking up e-purchased merchandise, consumers touching and feeling merchandise
Sales transactions increasingly are done by self-checkouts or by salespersons throughout the store using smartphones or tablets, e.g., Apple stores, Home Depot, CVS
Internet searches mean that more retail stores are turned into destinations and such destinations have less need for the most prime locations

Regarding downtown development, these trends now are most visibly playing out in the reduced aspirations for retail growth found in many downtowns and the more frequent resistance to including retail in mixed-use residential projects in suburban downtowns. For example, it is causing some communities, such as Arlington County, VA, to revise zoning laws to allow other uses in addition to retail in ground floor commercial spaces, because so many retail spaces were not being leased (37). I also have either heard developers state or read about developers in CO and CA saying, that they preferred not to include retail in their downtown residential projects because it is so hard to get credit worthy quality tenants and that the revenues from residential use of the ground floor space would be greater and more reliable. Most of the projects of the developers I spoke to would be located in the downtowns of upper middle-income suburban downtowns, where they see signing GAFO retail chains would be costly, time-consuming and increasingly uncertain of success. Recently, I have also seen a mixed use project on a highly trafficked hipster street in Brooklyn in the process of converting ground floor retail spaces into residential units, though I think that ground floor retail in new mixed use projects is generally secure in dense urban locations.

In the types of downtowns where developers are showing resistance to putting ground floor retail in their residential projects, the downtown organization and, most importantly, the municipality’s leaders need to:

Decide if they really want more retail and not just because they and their voters might like it, but because there is good evidence to suggest that a) there is market support for this additional retail space and b) which kinds of retailers are most likely to be interested in it
Be prepared to offer developers incentives for embracing retail into their projects. They might include assistance in developing marketing information and collaterals, identifying qualified small merchant tenant prospects and some form of financial incentive, e.g., low cost loan, pilot, TIF, etc.
Develop a special incentive program to make rents in new mixed-use buildings more affordable to more small merchants.

For some time now, many downtown economic development officials have viewed mixed-use projects as the best way to provide the Class-A, vanilla box retail spaces needed to attract high quality GAFO retail chains. However, under the new normal, a significant number of downtowns may no longer have the potential for recruiting the GAFO retail chains, though there still is significant local market support for this type of retail activity. In such situations, the best path for realizing the GAFO growth potential is through the recruitment of competent small merchants. They, in turn, are unlikely to afford the rents sought for newly constructed retail spaces. In fact, they may not require such vanilla box spaces to succeed. Frequently, they probably would be best served by leasing a storefront in a competitive downtown location that is in good condition and then making such additional improvements deemed advantageous and affordable. Under such a scenario, more downtown housing will still remain highly beneficial for the downtown, but without pedestrian friendly storefronts on the ground floor, a large residential building on the main commercial street can be a pedestrian dead spot. Perhaps, such a residential building then would be best located around the corner and down a side street? In other words, in numerous downtowns, the mixed-use project model may no longer be either viable or optimal.

Offices. Under the new normal, the character of office development also appears to be changing in very significant ways because of the Great Recession and alterations in the ways people work and use office spaces. The demand for space is being reduced by large corporations, forced to cut costs by the Great Recession and then taking a much more rigorous assessment of how much office space they actually need and the rents they pay for it. As a result, they are re-signing leases for or moving into smaller office spaces. Consequently, as a 2011 article in CoStar’s e-newsletter reported, a symposium of office development experts convened by BOMA found that we now “…have roughly all the office space (in aggregate) that we will need” (38). One expert has suggested that the industry should entertain the possibility of a 20% decrease in office space demand, because, given the current trend, that may well be the long-term implication for office building landlords and developers (39).

There is little doubt that, as a result of the new corporate leasing scrutiny, the ratio of leased space per office worker (SF/worker) has dropped significantly – employees are working in smaller offices with reduced spaces for themselves. The question is by how much? The answer is critical to assessing the scale of the downturn in demand. In discussions about it neither the previous ratio that is being used as a reference nor the current ratio are well evidenced. For example, one observer claims that that the ratio at some unspecified time in the last decade was 250 SF/worker and has dropped now to 185 SF/worker (40). It seems more likely that the 250 SF ratio was applicable to big city corporate back office operations (which have long since left our major city centers) back in the years of rapid office growth during the1980s. I believe a 200 SF/worker ratio was the more common yardstick in the 2000s. Furthermore, a 1994 Arthur Anderson report then claimed that the ratio would soon be 175 SF/worker (41). Also, there has long been a difference in space utilization between downtown and suburban locations. Finally, another observer of the current scene noted that some high tech firms in CA had seven workers per 1,000 SF, which translates into an 143 SF/worker ratio (42).

The demand for office space is impacted not only by the growth in the types of jobs that require office space, but in how the office space is used because this will influence on how much space is needed per worker. As one participant at the BOMA symposium argued:

“But to remain competitive, the existing stock of commercial real estate must be reconfigured to keep pace with an increasingly mobile, Internet-connected workforce; ongoing changes in technology, and to support the way companies are structuring their staffs to foster more collaboration and efficiency, while also addressing the values and attitudes of new generations of workers “(43).

Increased telecommuting, flexible work schedules, the untethering of workers from desks to enhance collaboration and increase face-to-face client contacts have combined to increase employee density in major office buildings and reduce the demand for office space. For today’s office worker, according to another of the BOMA symposium experts, the ideal situation may be: “(W)here you go into the office two or three days per week and work remotely the other days, which reduces our carbon footprint by 20% – 40% and has a huge impact on improved quality of life “(44).

Many of these changes in the ways office employees do their work and utilize space have been influenced by patterns developed in high tech firms such as Google and are preferred by the growing number of Millennials and the creative knowledge workers among them.

The potential negative impacts of the new normal’s altered demand for office space on development are:

Rather than expanding by millions of square feet in the future, experts expect the total office market size in the U.S. to remain approximately at its current size, with significant new construction to replace obsolete buildings. Fewer new downtown office buildings will be built”
Existing downtown office buildings that are not configured to meet the new work habits of office workers will have languishing leasing efforts. A lot of existing downtown office buildings may have to be renovated if they are to be competitive
Downtown retailers and eateries will have a significantly reduced office worker market because the telecommuters and flex-timers will spend much less time in the district.

However, there is a potential upside for downtowns that can provide “a dynamic, experience-rich environment,” i.e., strong CSD functions. As the CoStar article notes:

“The lesson for companies (and the investors and building owners who want to have them as tenants) is that younger workers prefer to work in a more dynamic, experience-rich environment, such as an urban- type setting offering different entertainment, cultural and transportation options (45).”

Downtowns with strong CSD functions will consequently continue to have a distinct advantage in a highly competitive office market, while listless downtowns will probably be weaker competitors than ever.

Coworking spaces are an interesting example of how the quantitative and qualitative changes in the ways people work and use office spaces also offer growth paths for downtowns — and not just for the very large ones. These shared spaces help fill the essential needs of entrepreneurs and freelancers to build their professional networks and collaborate with other small businesspeople. These shared spaces average about 6,000SF and provide such features as: desks (“hot” and dedicated), private offices, conference room(s), kitchen, lounge, Wi-Fi Internet connections, 24/7 office access, and equipment for printing, binding, faxing, scanning, photocopying, etc. Very importantly, the spaces are also programmed for: “networking events, collaboration and mentoring, one-on-one assistance, business planning topics, business management topics, B2B, B2C, B2G activities and technical skills training (46). They also can provide connections to such technical assistance providers for small firms as SCORE, SBDCs, local government agencies, local university programs, etc.

The clients for coworking spaces are most likely to be active in occupations associated with Richard Florida’s creative class construct such as: computer and mathematical; life, physical and social science; architecture and engineering; education, training and library; arts, design, entertainment, sports, media; business and financial operations; legal; healthcare practitioners and techs; high-end sales and sales management.

An international survey of coworkers by Deskmag found that, as might be expected, 85% of the coworking spaces are in cities having populations of 100,000+. The large city spaces are near colleges or universities and have other coworker spaces within their market area. The coworker spaces in the smaller communities tend to be smaller, but the desk utilization rates are similar to those of the spaces in larger cities. However, the small city coworkers are older and wealthier than their large city brethren. Also, as might be expected, the spaces in smaller cities draw from a relatively larger area in which there are no other coworker spaces. Coworker spaces apparently do no conflict, but complement with the use of home offices, probably by providing the opportunities for vital business related social interactions that working alone at home cannot: ”Nine out of ten coworkers also work outside their coworking space, regardless of the size of their city. The most popular alternative is still the home office (around 80% for both groups” (47).

DANTH, Inc., in a recent unpublished analysis, reviewed 20 suburban communities in the New York-NJ metro area and concluded that coworker spaces would be most viable towns that are true commercial centers, and they are likely to be county seats.

The Deskmag survey also found another very important difference between the coworkers in small and large communities: “In towns, one in three coworkers reported using coworking spaces to establish or grow a business. In cities, they number only one in ten.” In larger cities, coworkers are more likely to be freelancers and they do report that using the coworker spaces does increase their income. This is important because:

Coworker spaces may help bolster a community’s or county’s economic well being by helping freelancers get more assignments and increase their household incomes. A 2010 report by Intuit on the 20 trends that will shape the current decade predicted a strong increase in the size of our “contingent workforce” – of which freelancers and individual subcontractors are substantial components – will grow from about 25% to 30% of the workforce in 2010 to about 40% in 2020. Also, this study reported that 80% of our major corporations plan to substantially increase their use of contingent workers (48). Freelancers have unsteady incomes and no benefits and usually make less annually than someone with a full time position doing comparable work. As a result, the growth in the contingent workforce could have a significant weakening effect on many communities as a significant number of their residents are shifted into the more unstable and lower paying contingent employment. To the degree that coworker spaces can help freelancers get more projects and increase their incomes, they can be a useful tool for ameliorating this situation and thereby helping the community to maintain its economic well-being
Coworker spaces also may help many communities in the 20,000 to 100,000-population range to generate the jobs they are looking for. Besides their own jobs, freelancers are not job creators – they are self-employed, not employers. However, as is well known within the economic development community, small growing firms are our job creators. Furthermore, as they grow so does their demand for office or industrial spaces. Coworker spaces in these towns attract firms that want to grow and apparently do help many of them to achieve that objective.

Housing. Besides significantly reducing both demand for and the construction of housing, the Great Recession also influenced downtown projects by encouraging a shift in consumer interest from purchased units to rentals. In some parts of the country, this shift had started prior to the recession, but the strong downturn really deepened and widened the scope of this trend. Some housing experts expect it to diminish when the economy recovers; others see it as being with us for a very long time as our housing market increasingly looks like those found in Western Europe (49).

Housing in and very near to many of our downtowns is now for the affluent and financially comfortable. For example, in September of 2013, the average rent for an apartment in Manhattan was estimated at $3,862/mo; the median rent was $3,087 (50). To not be “rent burdened,” i.e., not have to spend more than 30% for the median rent, a household would need an annual income of $123,480. Googling “high downtown rents” brings up many webpages about high downtown rents and condo/coop prices in many of our larger cities. My field observations suggest that the same trend, if not to the same financial heights, is present in many of our medium-sized cities and suburban communities. While the presence of the affluent and financially comfortable is a strong asset for any downtown, the associated high cost of housing means that affordable housing has become an issue, not just for the poor, but also for the middle-income household members who are often skilled and essential workers for downtown businesses.

On the positive side, this has lead to the diversion of middle-income demand to neighborhoods that were formerly decayed and housing lower income residents and the revitalization of those neighborhoods. Some have the housing stock that makes their rehabilitation understandable, while others do not. All, however, have comparatively short commutes to the CBD that are often facilitated by easy access to a robust public transit system.

One result in both the downtown and the desirable close-in neighborhoods is the repurposing of underutilized schools, churches, office buildings, etc. for residential uses. Indeed, a recent report by the CoStar Group claims that: “more than half of office space removed from inventory returns to the market as residential” (51).

Another response to this situation, especially in cities such as Atlanta, Cincinnati, Denver, Pittsburgh, Seattle, St. Louis and Washington D.C., where the share of single person households exceeds 40%, may be the development of mini apartments that have about 350 SF. The mini apartments are not unusual in Tokyo and many European cities, and they have recently appeared in such American cities as Boston, Chicago, New York, Providence and San Francisco (52).

The popularity of downtown housing is also creating a challenge that takes form in lots of tourist residential owners who are only present for small portions of the year, even during the local tourists season, if there is one. In one Florida downtown I visited, most of the units in the district’s large residential buildings I walked by were dark. Local economic development officials lamented that this was the normal situation and one that they very much wanted to change.

UP NEXT: My next article in this series will be on the challenges facing downtown entertainment niches.

Endnotes

19.See: https://www.ndavidmilder.com/downtown-revitalization/the-deliberate-consumer
20.Elizabeth Warren and Amelia Warren Tyagi. The two income trap: Why middle-class parents are going broke. Basic Books, 2004.
21.Ian MacKenzie, Chris Meyer, and Steve Noble, “How retailers can keep up with consumers,” Insights & Publications, McKinsey & Company, October 2013 http://www.mckinsey.com/insights/consumer_and_retail/how_retailers_can_keep_up_with_consumers
22.See http://www.census.gov/retail/mrts/www/data/pdf/ec_current.pdf for current e-commerce stats
23.Steve Noble, Amy Guggenheim Shenkan, Christiana Shi, “The promise of multichannel retailing,” McKinsey Quarterly, October 2009.
24. See endnote 21. Two of these market segments are not new: the Boomers have been impacting retail for decades and DANTH was dealing with very large Hispanic markets back in the 1990s in the Bronx, West New York NJ and Elizabeth NJ. Back in the 1980s and 1990s.
25. See endnote 21
26.Cited in: https://www.ndavidmilder.com/2012/10/the-new-normal-requires-more-dynamically-managed-downtown-organizations.
27.See endnote 26
28. Stephanie Clifford, “Street’s Sunny Side Costs Retailers More in Rent” New York Times, September 24, 2013 ttp://www.nytimes.com/2013/09/25/realestate/commercial/streets-sunny-side-costs-retailers-more-in-rent.html
29. N. David Milder, “Nail, Hair and Skin Salons: Bane or Boon?” Downtown Idea Exchange. October 2005
30.See endnote 28
31. N. David Milder. E-Marketing: How EDOs Can Help Independent Downtown Merchants Engage Effectively in E-Marketing. Economic Development Journal (IEDC), Summer 2013, pp. 34-40.
32. See, for example, Center for Neighborhood Technologies, “Center for Transit-Oriented Development,” http://www.cnt.org/tcd/projects/ctod/
33. Christopher Leinberger, “A Model for Growth: Walkable Urbanism,” Urban Land, September/October, 2010, http://www.urbanland.uli.org/Articles/2010/SeptOct/Leinberger
34. Center for Neighborhood Technologies, “The New Real Estate Mantra: Location Near Public Transportation,” March 2013,    http://www.cnt.org/resources/the-new-real-estate-mantra/
35. See endnote 34
36. Christopher B. Leinberger, “Financing Walkable Urbane Projects,” Urban Land, January 2007 http://www.chrisleinberger.com/docs/By_CL/Financing_Walkability_0107.pdf
37. Rebecca Cooper, “Arlington looks to ease up on retail rules,” Washington Business Journal, Sep 26, 2013, http://www.bizjournals.com/washington/blog/top-shelf/2013/09/arlington-looks-to-ease-up-on-retail.html?ana=RSS&s=article_search&page=all
38. Tim Trainor, “Do We Need Any More Office Space? Experts examine far-reaching impact from changing demographics and ever-pervasive technology on the workplace of the future.” CoStar Group. http://www.costar.com/News/Article/Will-We-Need-Any-More-Office-Space-/134483?ref=100&iid=261&cid=DC6077B43E67ACADB224FF6D0AF89AB6; I have taken much of this section from what I wrote in 2012: N. David Milder, “Office Development — We now have all the office space we need,” https://www.ndavidmilder.com/2012/01/office-development-we-now-have-all-the-office-space-we-need.html
39. Mark Heschmeyer, “Changing Office Trends Hold Major Implications for Future Office Demand: pioneered by tech firms in California, communal workspace model becoming more mainstream among big office firms.” CoStar Group. March 13, 2013. http://www.costar.com/News/Article/Changing-Office-Trends-Hold-Major-Implications-for-Future-Office-Demand/146580
40. See endnote 39
41. Arthur Anderson. “Draft Report: City of White Plains Comprehensive Plan, Economic Futures: The Alternatives.” 1994 – p.4
42. See endnote 39
43. See endnote 38
44. See endnote 38
45. See endnote 38
46. Place Dynamics, “Igniting an Idea:THE CREATIVE SPARK,” www.placedynamics.com, p.12. This is one of the best sources on this topic and I thank Mike Stumpf for so graciously sharing it with me.
47. “Coworking in Big Cities vs. Small Towns,” Deskmag, January 17, 2011 http://www.deskmag.com/en/big-city-vs-small-town-coworking-182
48. Intuit, “Intuit 2020 Report?:Twenty Trends That Will Shape The Next Decade”    October 2010, http://http-download.intuit.com/http.intuit/CMO/intuit/futureofsmallbusiness/intuit_2020_report.pdf
49. Stacy Proebstle December 30, 2011   More NJ Families Will Rent Instead Of Own,” (Audio), http://nj1015.com/more-nj-families-will-rent-instead-of-own-audio/
50. See: http://www.elliman.com/pdf/57c5541a5c29aef8d1914567e1af02b593b23069
51. Randyl Drummer; Developers Increasingly Find It Can Pay To Convert Office Buildings Into Apartments and Condos: More than Half of Office Space Removed from Inventory Returns To the Market as Residential, October 29, 2013, CoStar Group Newsletter, http://www.costar.com/News/Article/Developers-Increasingly-Find-It-Can-Pay-To-Convert-Office-Buildings-Into-Apartments-and-Condos/153853?ref=100&iid=361&cid=DC6077B43E67ACADB224FF6D0AF89AB6
52. Wendy Koch, “Mini-apartments are the next big thing in U.S. cities,” USA TODAY, August 1, 2013. http://www.usatoday.com/story/news/nation/2013/07/30/tiny-apartments-apodments-catch-on-us-cities/2580179/

Helping Independent Downtown Merchants Engage Effectively In E-Marketing: Part 2

Posted on March 1, 2013 by DANTH

Introduction

This is the second of a two part article. Part 1 can be found at http://tinyurl.com/bxhdx8a

Over the past year, DANTH Inc. has experimented with such social media as Facebook, LinkedIn, Twitter and Pinterest and revamped our website, blog and email program. To support this effort we did a lot of research on what the various e-marketing tools do best and the challenges small firms like ours have in using them. In this two-part article I would like to share with the downtown revitalization community what we learned from our e-marketing overhaul, so that more independent downtown merchants (e.g., retailers and restaurateurs) might make an effective transition to e-commerce.

What we learned was the importance of an analytical process able to identify the e-marketing tools that will most effectively use an organization’s scarce resources to achieve critical marketing objectives. This process:

Starts off by looking at and prioritizing the organization’s marketing objectives
Then matches them with the e-marketing tools (e.g., website, emails, Twitter, Facebook, blog, etc.) that can best achieve each of those objectives. These two topics were covered in Part 1
And next selects those objective-matching tools that can be implemented, because the organization has the required financial resources and either has or can acquire the needed skilled employees. This topic will be covered here in Part 2.

Selecting the objective-matching tools that can be implemented, because the organization has or can hire the required resources

The types of resources required to use a particular e-marketing tool will vary by the package of objectives it is targeted to achieve and the amount and complexity of the usages that are required to achieve them. In my field observations, this is the second area where small merchants are likely to encounter problems — or have them made by consultants who just focus on the mechanics of using the e-marketing tools with which they are enthralled.

In Part 1, I argued that “being found” online is probably the e-marketing objective most independent downtown merchants should focus on first. The initial inclination of these merchants – or their formal or informal “consultants” – might be to create a complex website with many pages, a full catalog of its merchandise, a matching e-store purchasing capability and to fill the site with lots of short marketing movies. Nonetheless, many small firms plainly lack the resources for such a robust effort and, more importantly, they probably do not need it to accomplish their e-marketing objectives.

Here are three brief case studies DANTH encountered over the past few years to demonstrate this point

The High Effort E-Store For A Fast Food Shop. Last year, in a NYC neighborhood that had sustained impressive economic growth through the Great Recession, I interviewed a fast food operator in the 6-10 employees category, who was very interested in penetrating the rapidly growing nearby office worker and high rise residential markets. Though both market segments were strongly represented within a 5-minute walk of the eatery, neither accounted for many of the pedestrians passing by or entering its doors. The owner was interested in creating a website where office workers and residents could find and learn about the eatery and its menu, order from the menu and daily specials, have their orders charged to their credit cards, and have their food delivered to their workplaces or homes.

This small merchant was unaware of the intricacy and full costs of such an operation. He was expecting to pay consultants to set-up his website, merchandise basket and credit card charging. However, he did not foresee that he would also need:

Someone to update the “specials” daily on the website and to periodically keep the overall menu up to date. Updating and maintaining a website can easily eat up far more resources than creating it
Additional part-time employees to process the lunchtime orders
Additional part-time employees to deliver the ordered food
Someone to provide the copy for his website pages
Someone to provide the photos and other graphics for the website pages
To spend a lot more of his time and money putting together the needed new team and then managing a complex new operation.

A year later, this small operator has no website, but has affiliated with a telephone-based service that takes orders and delivers food if customers know about the delivery service and call them. The eatery also does have a simple “name, rank and serial number” page on its BID’s website, a Facebook page with one like and no postings and is listed on a few special websites such as Foursquare. Right now, not much info is to be found on the web about this eatery. It still needs a much stronger “being found” on the web capability.

This could be accomplished by a modest website, without the e-store. It would successfully provide name and contact information as well as information about the menu and reasons to patronize this eatery. Such a website would provide an affordable and acceptably better, if not optimal, penetration of the office worker market. Website visitors, for example, could see the full menu and be invited to visit or phone the eatery to learn about and order the daily specials. An even simpler solution would be a substantial improvement of the information provided on the eatery’s BID web site page, combined with a campaign to get it listed on more special web pages.

The prime take aways from this case study are that:

Small merchants should be wary of complex uses of e-marketing tools that are beyond their resources
More modest deployments of these tools are often more viable and ultimately more effective
BID/SID web pages can be very useful for a small merchant if they do more than just provide the store’s name, contact information and business category. They need to also provide space for information about the shop’s merchandise and to tell the merchant’s story. This is the prime way that BIDs can help their merchant members gain a viable e-commerce presence.

The Low Effort Ice Cream Parlor. In Part 1 of this article, I mentioned a very popular ice cream parlor in a New York City neighborhood. It is a unique and highly regarded operation that has been around for over 50 years and, for decades before that, it was an ice cream parlor under a different owner and name. Today, it is “a functioning antique,” with an old soda fountain, tin ceiling and marble small tile floor. It makes its own ice cream and is famous for its fresh home-made whipped cream.

When I spoke to the owner about his e-marketing activities, he smiled, reporting that he knew nothing about such things, but his workers, most of whom are high school or college students, had created a Facebook page that gathered 8,000+ likes. He felt Facebook definitely had helped generate some additional sales. The shop occasionally offers special flavors only to its Facebook page visitors, with the young workers doing the postings, and they are always quickly sold out. The owner said, with another smile and shrug of his shoulders, that he would like to do more with Facebook, but…. My guess is that the shop was doing well enough that there was no great need now to do more online marketing.

Googling the shop’s name showed that this ice cream parlor had a lot more going for it than just its Facebook page.. The search showed that its authentic, old time story and favorable customer reviews and contact information were available on a whole slew of specialty web sites such as: google.com, plus.google.com, www.yelp.com, www.facebook.com, patch.com, newyork.seriouseats.com, www.zagat.com, www.urbanspoon.com, newyork.citysearch.com, untappedcities.com, www.tripadvisor.com, www.delivery.com, www.menupages.com, www.bridgeandtunnelclub.com, events.nydailynews.com, newyork.grubstreet.com, www.scooponcones.com, chowhound.chow.com, www.flickr.com. That these positive reviews were coming from customers and not the parlor’s ownership enhances their credibility and power. Aside from the Facebook page, all the other listings, came about organically without any effort by the ice cream parlor owners or employees.

The net result is that this ice cream parlor, with little effort on its part, can be very easily found on the Internet and its story is certainly being told. The very nature of its limited menu means that people do not really need to know much about all the flavors to be convinced they should visit the shop. Consequently, it probably can do fairly well without its own website. On the other hand, given its ability to easily attract a significant number of Facebook likes, it also might easily garner many Twitter followers and also use Tweets to inform followers of special flavors or coupons. It might then also use its Facebook and Twitter capabilities to further cultivate its existing store apostles –frequent customers who advocate a shop within their social networks– and garner new ones.

This ice cream parlor had very substantial name recognition and a bevy of store apostles well before or separate from any of its e-marketing activities. The strength of this non-electronic customer network substantially eased the challenge and costs of collecting 8,000 Facebook likes. A new ice cream parlor would need to expend a lot of resources to get enough Facebook likes to make its use worthwhile. The same is true of using Twitter. Indeed, one might ask if the use of these social media is cost effective for small merchants with say 30 transactions or less a day. Might they achieve the relationship building and customer service functions much more effectively and efficiently by focusing on face-to-face interactions? However, they still would need to be found online.

One thing the ice cream parlor owner probably should do is to have his young, Internet capable, employees check their listings on the special web pages to make sure they are accurate and up to date. Research has shown that this is where most small businesses are apt to fall down (1). Another thing he certainly needs to do is to keep hiring young employees who know how to use Facebook.

The prime take aways from this case study are that:

Strong small businesses that have been around for a while probably will have strong assets that can make their entry into e-marketing a lot easier than start-ups or weaker operations
A robust easy-to-be –found on the Internet capability does not always require a complex website if the merchant has sufficient positive listings and reviews on the special website pages and a narrow range of products are offered
These special website pages are too often overlooked, especially by the food related operations that they so frequently cover and that account for such a high proportion of downtown businesses
Young, internet savvy, employees can often be a source of the internet related skills a small merchant lacks, but needs.

A Well-Calibrated Retail Website. A toy retailer has two brick and mortar stores in the Chicago suburbs and a very interesting website. The retailer quickly appears at the top of searches for toy stores in its two towns. Its website does not present a catalog of all of its toys, but has a page that shows all the toymaker brands it sells with their logos. It does not have an e-store that sells scads of different toy products online. Its e-store is limited to selling just one new toy a week. Customers can sign up to get the “new toy” newsletter each week via email. The website has short movies, one to two minutes long, for each of the new toys. The website shows that the “new toys” are sold out every week. That they are sold out so often strongly suggests that the retailer is building up a core of repeat purchasers. Repeat customers are the makings of a band of store apostles, a solid revenue stream and a strong word of mouth network.

The website reportedly was put together and is maintained by a relative of the store’s owner who is skilled in developing websites.

It also has a Facebook page that has garnered 604 likes. People in the 35-44 year old age group are its most frequent visitors and they are most likely parents.

I do not know what this merchant’s e-marketing objectives are, but I hope to connect with him in April, when I am again in the Chicago area. I am particularly eager to find out about their website’s impact on their brick and mortar store’s customer traffic and sales.

The important take aways from this case study are:

The one new toy a week strategy is a great example of how calibrating a small firm’s deployment of an e-marketing tool to its level of available resources can help assure its successful use
The site appears to be meeting all of the “being found” challenges, while also building a core of store apostles and making significant online sales
Family members can often be a source of the internet related skills a small merchant lacks, but needs.

How Can Downtown Organizations Help?

The transition to e-marketing calls upon small merchants to innovate, something most of them feel very uncomfortable doing. DANTH’s experience with trying to get them to improve their facades suggests that many more – but not most – would innovate, if innovating can be made easier for them to do (4). This means providing them with needed information in easy to digest terminology and helping to bring the costs of their innovation down to affordable levels.

Some questions to which they may need answers are:

What can they do and accomplish with e-marketing, what are the benefits and how much will it cost?
Are there local merchants who have made this transition who they can talk to?
Which types of skilled people will they need help from to get into e-marketing? Where can they find them? Or who can do a whole package for them?
How can they afford to create and maintain the e-marketing effort?

Here are some actions downtown organizations and other EDOs might take:

Post a 20-minute webinar or podcast on the organization’s website — that the merchants can access at their discretion, when they have sufficient time — focused on what small merchants can do with e-marketing, its benefits and costs
A tie-in to SCORE or other free or low cost consulting assistance to help clarify the connections between the e-marketing tools and the frm’s overall marketing objectives
A mentoring program that connects e-marketing “newbies” to local merchants who have successfully made the transition
Provide a vetted list of technical assistance providers
Most importantly, offer each merchant who lacks a website a web page on the organization’s website that can provide name, contact information, information about products or services sold and the firm’s story.
Perhaps the downtown organization can charge a fee for an “enhanced page”, i.e., updating, writing copy, supplying graphics, creating movies, etc., that would be meaningfully lower than what the merchants would have to pay if they did it by themselves
Provide website consultants to merchants at a lower than market rate cost, because the downtown organization can aggregate member demand and “buy in in bulk”
Provide an expert, on a reduced fee basis, who can help merchants get listed on special web pages. This is something different than search engine optimization
Use a downtown organization’s strong Facebook and Twitter presences to help the merchants get sufficient likes and followers to be able to effectively use them. It is getting followers, not setting up and using the Facebook or Twitter page that now impedes most small merchants from effectively using these e-marketing tools
Set up an “e-department store” where merchants, like the toy store described above, would only sell a few items. A dedicated and limited e-department store may be a good way to strengthen a downtown niche.

N. David Milder

Acknowledgement: Thanks to Mark Waterhouse of Garnet Consulting Services for his input and editorial assistance.

Endnotes

MarketingCharts staff, “1 in 2 Small Businesses Fail to Update Their Online Listings, Find Inaccuracies” February 6, 2013, http://tinyurl.com/atexhky
Mitch Lipka, “These Big Companies Are Abandoning Twitter And Facebook For Customer Service” Business Insider 1/18/13 http://read.bi/11EbziS
Findings of a survey of small businesses conducted for the Center for the New West as summarized in an email by the center’s former CEO, Phil Burgess
N David Milder, “BEING A DOWNTOWN CHANGE AGENT: Facilitating Change for Downtown Business Operators” June 3, 2007, https://www.ndavidmilder.com/category/formats-facades-signs

Invitation: Please join me at Session S681: Integrated Small Town Planning at APA’s 2013 National Planning Conference in Chicago, April 17, 2013, at 10:30 a.m. I will be presenting along with Andrew Dane of SEH.

Helping Independent Downtown Merchants Engage Effectively In E-Marketing: Part 1

Posted on February 19, 2013 by DANTH

Introduction

Starts off by looking at and prioritizing the organization’s marketing objectives
Then matches them with the e-marketing tools (e.g., website, emails, Twitter, Facebook, blog, etc.) that can best achieve each of those objectives. These two topics will be covered here in Part 1
And next selects those objective-matching tools that can be implemented, because the organization has the required financial resources and either has or can acquire the needed skilled employees. This topic will be covered in two weeks in Part 2.

Where Not to Start

In the years preceding DANTH’s entry into the social media, a slew of e-marketing consultants and downtown management types had suggested that we do so because:

These e-marketing tools were popular
They were chic
The astronomical number of people on Facebook and Twitter
Most importantly, their purported and vaguely evidenced ability to attract new customers and drive sales.

For us, such “follow the pack” reasoning was plainly inadequate. DANTH is, like many independent downtown merchants, a small establishment, with fewer than five employees. There are limited financial resources available for our e-marketing activities. We long have hired consultants to set up and technically maintain our website and email blasts and guide our entry into the social media. However, most of DANTH’s e-marketing activities fall directly into my hands, where they compete with many other demands for my time and attention. It was essential to know, when we used an e-marketing tool, that it would be consistent with our overall marketing strategy, effective and affordable in terms of money, my time and the skills sets of the current DANTH team as well as any other skilled professionals we could afford to hire.

Possible Downtown Merchant E-Marketing Objectives

Our field observations strongly suggest that one of the biggest mistakes independent downtown merchants make is to not identify the specific marketing objectives they want their e-commerce activities to achieve. It is essential for them to do so, if they want to effectively use e-marketing tools. Typically faced with a scarcity of money, skills and time, a small operator: a) needs to have objectives in order to make any judgment about the effectiveness of the e-marketing tools the firm invests in, and b) cannot hope to achieve all of the possible objectives. Therefore, prioritizing them and then focusing on the most important are essential.

There are a wide range of marketing objectives that a small merchant can try to realize through the use of the right e-marketing tools. Here is a brief list of some potential e-marketing objectives:

Reaching target market segments
Being found on the Internet
Finding new customers
Branding
Making direct sales: setting up an e-storefront
Advertising: information about new merchandise, sales , discounts, fun events; driving customers to brick and mortar stores
Relationship building with customers; grooming “store apostles”
Customer service.

I would argue that when considering e-marketing, for the small independent downtown merchant, the most important of these objectives, the one that all should focus on, is “being found on the Internet.” Here’s why. The most significant impact the Internet has had on retailing is that, today, most shoppers first go online to research the merchandise or service they are interested in and the stores that sell them. For example, a 2010 Pew survey found that “58% of Americans research online about the products and services they buy,” with 78% of Internet users engaging in this online researching (1). Merchants who are not in on the search, consequently, are unlikely to be in on the sale!

“Being found” is complex and entails several components, such as:

Name recognition – shoppers can learn who you are
Contact info – shoppers can learn where you are
Info about merchandise offered – shoppers can find what they want to buy
“Why this store” info – reasons why the shopper should buy what he/she is looking for in this shop.

Merchants in different situations may vary in their needs for each of these components. For example, a new downtown merchant or a pure Internet retailer needs to be concerned about all four components, but a longtime downtown merchant may already be fairly well-known and found with relative ease. If the number of downtown merchants and the trade area population are small and/or relatively stagnant, then more merchants are likely to be in this situation. As a result, in many small and medium-sized downtowns, shoppers are probably more likely to want to know which merchants are offering the goods and services they want to buy and the reasons to make that purchase in that store. The websites of too many downtown merchants and downtown organizations that provide member merchants with a web page usually just focus on the shop’s name and contact information. Actually, the merchants usually have the stronger additional needs to display their product information and make persuasive appeals to patronize their shops.

Regarding online sales, although they accounted for an estimated 7% of the USA’s 2010 total retail sales, a study by Mckinsey & Company estimated that by 2011 the internet had played a role in 45% of the nation’s retail sales(2). So the vast majority, around 80+%, of the internet’s impact on retail is not via direct sales. E-marketing’s impact is primarily indirect, but still critical. Also, many observers have noted that e-retail stores demand a lot of complex and expensive infrastructure related to storage, shipping and payments. While this barrier that has kept more firms from competing with Amazon, it also is a major reason that more independent downtown merchants have not attempted e-stores and why so many that did have failed.

Some Examples of Matching E-Marketing Objectives to Appropriate E-Marketing Tools

Research on e-marketing tools is still unfolding, with many issues yet unanswered, but this much is clear: e-marketing tools differ in their ability to achieve various marketing objectives. It is critical to select those e-tools that are best able to achieve your firm’s objectives. For example:

The social media differ substantially in their penetration of the online audience: according to a 2012 Pew report, 66% of online adults use Facebook, 20% use LinkedIn, 16% use Twitter and 12% use Pinterest (3).
The social media will also differ in their ability to penetrate specific market segments. Some illustrative findings by Pew: “African-Americans, young adults, and mobile users stand out for their high rates of Twitter usage” (4); 19% of online women use Pinterest compared to 5% of online males (3); LinkedIn attracts the most educated and male audience (5).
E-commerce tools also vary in their ability to enable a downtown merchant to be found in Internet customer research efforts. The Pew Research Center studied the sources that people rely on to get news and information about local restaurants, bars, and clubs. They found that 38% used a search engine and 17% specialty websites (e.g., zagat.com, urbanspoon.com, tripadvisor.com, etc.), while only 3% relied on a social networking site or Twitter. For finding information about other local businesses Pew’s survey had similar findings: 36% of respondents relied on a search engine, 16% on specialty websites and just 1% on a social media (4).
The most searched for online categories, when shoppers seek information about local businesses, are restaurants, financial services and beauty services (8). Firms in these sectors definitely need an easily findable online presence
Research also suggests that social media do not drive online sales. For example, one study found that the average order value of e-commerce sales sourced from social media is 25% lower than the average sale coming from emails and 35% lower than those sourced from Internet search. (5). Another study in 2012 by Forrester Research found that only about 1% of e-retail transactions could be traced back to “trackable” social media links. Consumers making a first-time purchase with an e-retailer were far more likely to originate their purchase by first making a direct visit to the vendor site (20%), or finding it via an organic or paid search (16% and 11%, respectively). For repeat shoppers, e-mails and direct site visits are the keys: 30% of their online purchases are sparked by an e-mail from the retailer, while another 30% of repeat customer searches start with a direct visit to the retailer’s site (6).
For downtown retailers, the more important question is can e-marketing tools drive customers into their brick and mortar shops and increase sales. We could not find a reliable systematic survey of consumers that addressed this question. However, we did come across numerous anecdotal reports of special product and discount offers distributed via emails, Facebook and Twitter that did bring more customer traffic and sales into traditional retail shops and eateries. For example, one ice cream parlor we visited in a New York City neighborhood reported occasionally offering special flavors only to people visiting their Facebook page and they are always quickly sold out. But, this ice cream parlor has been around for about 50 years and has 8,000 Facebook likes
Many e-marketing experts claim that e-marketing tools, especially the social media, are very effective at building customer traffic and sales indirectly through stronger branding, relationship building and better customer service. For example, a 2012 survey of business to consumer marketers by Webmarketing 123 found that the top objectives of their digital marketing programs were increasing brand awareness 33%, increase sales 26%, generate leads 22%, generate site traffic 11%, build online community 6% and other 3% (7). It is interesting that only about a quarter of these marketing professionals were focusing on directly increasing sales. Among these marketers 49% reported search engine optimization had the biggest impact on lead generation compared to 26% reporting it was pay-per-click advertising and 25% the social media.

What About the Personal and Professional Service Operations? This question was posed by a reviewer of a draft of this article who noted that these firms are so strong in many downtowns. My expectation is that most of the above applies to them too, but that there may be some important differences. For example, I suspect that the potential for effectively using the social media is greater among hair and nail salons, gyms, spas, etc., because they do not primarily sell merchandise and personal relationships are so important in the delivery of their services. Also, as DANTH found, LinkedIn will be very important for professional service firms.

N. David Milder

ENDNOTES

Jim Jansen, “Online Product Research: 58% of Americans have researched a product or service online,” September 29, 2010, Senior Fellow, Pew Internet Project http://pewinternet.org/Reports/2010/Online-Product-Research.aspx
Steve Noble, Amy Guggenheim Shenkan, Christiana Shi, “The promise of multichannel retailing”, McKinsey Quarterly, October 2009.
Lee Rainie, Joanna Brenner and Kristen Purcell, “Photos and Videos as Social Currency Online,” Sept. 13, 2012, Pew Research Center’s Internet & American Life Project, http://pewinternet.org/Reports/2012/Online-Pictures.aspx
Aaron Smith and Joanna Brenner, “Twitter Use 2012,” May 21, 2012, Pew Research Center’s Internet & American Life Project, http://pewinternet.org/Reports/2012/Twitter-Use-2012.aspx
Keith N. Hampton, Lauren Sessions Goulet, Lee Rainie, and Kristen Purcell “Social networking sites and our lives” June 16, 2011, Pew Research Center’s Internet & American Life Project, http://pewinternet.org/Reports/2011/Technology-and-social-networks.aspx
The Forrester report, The Purchase Path of Online Buyers, is reported in Brad Tuttle, Study: Posts on Facebook Almost Never Lead to Retail Sales” TIMEMomneyland Sept 27,2012 moneyland.time.com/2012/09/27/study?posts?on?facebook?almost?never?lead?to?retail?sales/ and Zak Stambor, “Social media posts don’t lead to sale,” Social Media, Sept 25, 2012, www.internetretailer.com/2012/09/25/social?media?posts?dont?lead?sales
Webmarketing 123, 2012 State Of Digital Marketing http://go.webmarketing123.com/rs/webmarketing123/images/DMR%202012%20FINAL.pdf
YP.com, “The YP Local Insights Digital Report” http://i2.ypcdn.com/radiant/radiant_assets_47482_YP-Local-Insights-Q3.pdf

THE NEW NORMAL REQUIRES MORE DYNAMICALLY MANAGED DOWNTOWN ORGANIZATIONS

Posted on October 20, 2012 by DANTH

Introduction

Since even before the onset of the Great Recession at the end of 2007, a new normal for downtowns has been emerging. Downtown retailing, office use, entertainment niches, housing development, population growth, transportation use, etc. have all experienced significant changes. From my discussions with downtown leaders and merchants, municipal economic development officials and developers, my reading of many articles, my participation in online discussions and my assessments of a number of revealing recent RFPs, I have concluded that the vast majority of downtown leaders and their organizations are not adjusting to these rapidly occurring changes. Too often they demonstrate that they are scarcely aware of them, let alone adjusting their operations to deal with them. Some of these changes represent potential growth opportunities, while others pose strong existential threats.

Downtown Retail’s New Normal

In this posting I will focus on retail. Over the past five years the demand for retail space has changed dramatically. For example:

There’s been a paradigm change in consumer behavior with the emergence of the “deliberate consumer” who spends less and with greater deliberation, considers needs more than wants, and who uses credit far less often.
The Internet is now involved in over 45% of all retail sales — if retailers are not in on the search, they are unlikely to be in on the sale
An integrated multichannel approach to retail is increasingly necessary– brick and mortar, internet, b2b sales, trunk shows, concierge services, etc. — for merchants large and small.
The impacts of the internet and the recession have been strongest on GAFO merchants, with the big box stores and small merchants among them hit the hardest. Small downtown merchants who sell GAFO type merchandise are at a growing disadvantage if they do not have an effective presence on the Internet to complement their brick and mortar stores, yet most lack the required resources and skills to create and maintain such a presence. Without an effective e-commerce capability, these small merchants are likely to fail and produce more vacancies that are hard to fill.
In many medium and large downtowns, small independent merchants are disappearing at alarming rates because of unaffordable high rents, decreased consumer demand and strong e-commerce competition.
Nationally, the amount of retail space decreased by 259 million SF between 2001 and 2011 and is expected to drop by another 210 million SF by 2016. (1). The number of real estate experts who recognize that the nation has far too much retail space has grown substantially.
The suburbs are saturated; growth opportunities are shifting to dense urban areas and possibly some ex-urban areas.
Today, only about one-third of the 1,300+ malls in the U.S. are high-growth, investment-grade properties; another one third are in deep trouble and prone to either closing or being re-purposed. (5) The successful malls are increasingly taking on the look and functions of successful downtowns and adding many non-retail functions.
Big box and category killer stores – e.g., Best Buy, Staples, Circuit City, etc. – have been hit hard by both the recession and strong e-commerce competitors.
Generally, retail chains are looking for fewer and smaller locations. Internet sales mean that many now require less on site storage space for inventory (4). Many use the resulting cost savings to pay for improvements in their own e-commerce capabilities, while others are developing the smaller formats to ease entry into tight urban contexts.
But, the smaller formats eventually may also go into suburban and ex-urban locations, once the chains master them. This may mean that Walmart, Target, Best Buy, et al may be trying to enter more, not fewer communities.
Banks are no longer gobbling up prime downtown retail sites with their branches as a result of e-banking, especially the growth in mobile.
Many downtowns continue to report significant vacancies and that, when filled, the likely new tenants are personal and professional service operations, not retailers.
Downtown food related operations (e.g. groceries and restaurants) and personal services have been the most successful sectors from 2007 through 2012.

Current Response Patterns

Here are some of the response patterns I have observed:

There is a strong propensity to believe that, once the ill effects of the Great Recession are overcome, there will be a return to the way things were prior to 2007. Few are aware of the structural changes in the demand for retail space and many of those who are have not really grasped their full implications.
There seems to be little recognition that for the foreseeable future it will be much harder for most downtowns to attract retail chains than in the pre-2007 years and that if they want to have any significant retail, they increasingly will need to:
- Accurately know which retail chains they can realistically expect to attract
- Go beyond traditional retail marketing and promotions and get deeply into economic gardening type operations aimed at developing and growing small merchants.
No one is talking about whether, in the new retail environment, a small “big box” store, like a 15,000 SF Walmart, could be a good thing for their downtown. But, I bet that within the next five years this will be an issue for a surprising number of communities.
As talk of downtown multi-use projects has started to come back, the inclusion of retail seems to be divided between those who see retail returning to its pre -2007 days and those who believe retail is now too risky to include at all. Perhaps there is a viable middle ground of fewer retail tenants who can be recruited to and succeed in such downtown projects.
Local political leaders too often still expect new downtown mixed use projects will attract a bevy of trophy retail tenants.
A surprising number of downtown leaders will acknowledge the need for local merchants to develop a multichannel approach with a strong e-commerce component, but not want their organizations to get too involved in assisting their merchants make this transition. This seems to be largely due to their own lack of knowledge about e-commerce , often age related, and their organizations’ financial constraints.
On the other hand, a good number of downtown leaders do want to help get their merchants involved in e-commerce and some have programs to do so. However, too many of these programs are simply e-directories and do not provide the merchants with needed marketing and transaction functions. Few appeared to based on a knowledge of how websites, emails and the social media are used by shoppers and which market segments are most drawn to each of them.
The complexity of developing an effective downtown program that can facilitate small merchant e-commerce capabilities is evidenced by the fact that our largest retailers are still trying to figure out how to merge their e-commerce and brick and mortar operations and how to effectively use the social media.
The recently announced reorganization of Staples is a good example of this. Motivated by declining sales, adverse consumer trends, the growing importance of its online sales, Staples’ new strategic plan calls for: increased investment in its online and mobile capabilities, further enhancing its multi-channel strength by uniting the management of its online and brick and mortar operations, expanding the range of the merchandise it sells, and an overall 15% reduction in retail store square footage to increase their productivity. The later will entail both store closings and downsizings. (2, 3).
Few downtown or Main Street organizations have tried to strategically face the problem of what to do with their excess and often vacancy –prone retail spaces.
Faced with vacancies, many downtowns have welcomed, as inevitable, personal and professional service operations as tenants for vacant prime retail locations. However, the lack of enough high quality retail spaces has long been a fundamental barrier to revitalizing downtown retail sectors, so communities following this tack may be severely harming their long-term retail prospects. Admittedly, filling these vacant prime storefronts is highly desirable, but perhaps more innovative and retail-friendly responses could be developed, such as:
- Tying rentals to service operations to a high vacancy rate (say 12%) in the downtown or blockface
- Targeting the vacant prime storefronts for such uses as a retail incubator or a location for other types of start-ups
The vast majority of the staff and financial resources that downtown organizations now allocate to improving their district’s retailing still goes for old style events and marketing programs. Few of these programs have been evaluated to determine their ability to stimulate more sales and customer traffic. Too often, however, their expense and organizational inertia leaves few dollars left for the development and testing of new and more effective marketing programs.

What Is Needed

The response patterns described above strongly suggest that if downtown leaders and their organizations continue in their “same old, same old” views and operational behaviors, painful failures and missed opportunities are highly probable. What is happening with retail is also frequently happening in the office and entertainment sectors.

Downtown leaders need to recognize that the new normal has emerged and that it is very dynamic, characterized by a frequently changing socio-economic environment. This means that their organizations’ strategies and programs must be frequently assessed and updated to assure their continued relevancy and efficacy. It also means that downtown organizations need to have strong line items in their budgets for developing and testing out on new programs, program evaluations and strategic updates. It also means dropping or down-sizing longstanding, but ineffective programs. All of these are now quite anathema in too many downtown organizations.

Endnotes:

Mark Heschmeyer, “Storefront Loss Equals Warehouse Gain”, CoStar Group News: National, Dec. 14, 2011
Joe Weisenthal, “Staples Announces Major Store Closures — Will Take A Charge Of More Than $1 Billion”, Sept. 25, 2012, 8:21 AM Business Insider www.businessinsider.com/staples?store?closures?2012?9
Lisa Eckelbecker, “A change of space: Staples again finds smaller is better”, Worcester TELEGRAM & GAZETTE, June 26, 2011
Mark Heschmeyer, “ Virtual War Games: Brick and Mortar Retailers Battle Online Retailing,” CoStar Group News: National, November 09, 2011
Randyl Drummer, Can This Mall Be Saved? Elements Needed for a Turnaround Include Lower Debt, Deep Pockets, CoStar Group News: National , October 10, 2012

WILL DOWNTOWN RETAIL SOON REBOUND?

Posted on April 21, 2012 by DANTH

Recent press reports have indicated increased retail sales and I am seeing in most media reports on the subject a kind of optimistic mood emerging about this sector’s recovery. I would suggest, however, that in looking at retail one should keep in mind the “show me the money” rule, i.e., to identify where consumers will be getting the money for their increased retail expenditures. The family house as a “piggy bank” from which consumers took about two trillion dollars in the years prior to the recession is basically gone. Median incomes have not really improved and most of the income increases have gone to the wealthiest households. Unemployment is slowly declining. Gas prices, child care, tuitions and medical expenses have all continued to increase faster than inflation. There does not appear to be much room for increased household retail expenditures.

The one area where there may be some wiggle room that will allow the 60% of our households that fall into the middle income category to increase spending is credit. As Floyd Norris recently noted in his NYT column, American households have been reducing their debt burdens: see http://nyti.ms/Idt8Kf

Some hedge fund mangers have suggested that in our current situation households are bringing down their debts and then using their new available credit to buy things until they again reach a level where they feel uncomfortable, when they will again buy less until they bring their debt levels down. I think they are correct and that we can expect retail sales to follow a bumpy up and down path for many years to come.

However, this pattern is far more likely to hold for downtowns where the median incomes of their trade areas’ households fall in the middle income range. In contrast, those, such as Morristown, NJ or Wellesey, MA, where the median household incomes are well above $90,000/yr are already finding that retailing is improving in a less choppy and more consistent pattern.

N. David Milder at DANTH, Inc.

Downtown Revitalization Specialist

Category Archives: Downtown Merchants

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WILL DOWNTOWN RETAIL SOON REBOUND?