As the readers of this blog probably know, I have spent a lot of time and effort on identifying the components of our Central Social Districts and analyzing what makes them succeed or fail. I’ve dug deeply into public spaces, movie theaters, housing, and various other components in cities large and small.
Recently, I was asked for one article that put it all together. I realized that I did not have one, so I consequently set out to write it. That article was recently published in The American Downtown Revitalization Review – The ADRR at https://theadrr.com/
Doing the topic justice meant that it would be long, about 30 pages, and more like a monograph than an article. Readers wanting a quicker take can just focus on the first six pages. However, if you are looking for more guidance about what to do and not do, you will need to dig deeper into the article.
Some of the important things I tried to do are to establish that some components are much easier and cheaper to establish than others, and which work better in different types of downtowns. I also tried to strip away a lot of the advocacy hype about some components that too often hides the challenges involved and obscures how progress needs to be evaluated, e.g., the arts venues, while spotlighting venues whose importance still goes widely unrecognized, e.g., libraries.
Here’s the article’s tease and link:
Strong Central Social Districts: The Keys to Vibrant Downtowns
By N. David Milder
DANTH, Inc.
CSDs and Some of Their Frequent Components. Since antiquity, successful communities have had vibrant central meeting places that bring residents together and facilitate their interactions, such as the Greek agoras and the Roman forums. Our downtowns long have had venues that performed these central meeting place functions, e.g., restaurants, bars, churches, parks and public spaces, museums, theaters, arenas, stadiums, multi-unit housing, etc. The public’s reaction to the social distancing sparked by the Covid19 pandemic, and the closure of so many CSD venues, was a natural experiment that demonstrated how much the public needs and wants these venues. They are the types of venues and functions that make our downtowns vibrant, popular and successful. To read more click here : https://theadrr.com/wp-content/uploads/2021/07/Strong-Central-Socia-LDistricts-__-the-Keys-to-Vibrant-Downtowns__-Part-1-FINAL.pdf
We Need More Than Pollyannaish or Wishful Thinking for Our Downtowns to Recover and Thrive
We are in the midst of what many observers have called the deepest crisis this nation has faced in many decades. It has been especially injurious to our downtowns because it has necessitated massive social distancing that makes it impossible for so many downtown entities, — e.g., shops, eateries, offices, movie theaters – to function properly or profitably. In this situation, it is understandable if downtown leaders and stakeholders look for signs that their future will be considerably better. Hope is perhaps the most underestimated, yet essential ingredient of any downtown revitalization or recovery. Still, if our downtowns are to recover, we must face realities and overcome some exceptionally strong challenges, while taking advantage of any new opportunities that this terrible crisis either creates or reveals.
In recent weeks a number of articles have appeared that have been quite pollyannaish about the recovery of our downtowns based on either wishful thinking or sloppy analysis. These puff pieces may be good for instilling hope, and perhaps are even needed. However, they are no substitutes for the kind of critical thinking and contingent planning that we need to start doing now if we are to robustly recover as quickly as possible.
Will Entrepreneurial Gold Dust Really Fall to Spark Our Economic Recovery?
The Wishful Trend. One retail expert has recently written:
“When all the dust settles, the post-lockdown era should provide a boost to downtown areas, in part due to newly unemployed but highly skilled restaurant and retail workers opening new businesses in downtowns where rent prices will trend downward.
The pandemic has left millions of highly skilled workers from the retail and food and beverage industries unemployed and eager to work. Many of these people are highly motivated to start their own businesses, creating an unparalleled pool of talent and potential entrepreneurial interest.
In a recent Forbes article, Bernhard Schroeder wrote: ‘27 million working-age Americans, nearly 14 percent, are starting or running new businesses. And Millennials and Gen-Z are driving higher interest in entrepreneurship as 51 percent of the working population now believes that there are actually good opportunities to start companies.’”1
A Reality Check. However, Schroeder was citing data from the “Global Entrepreneurship Monitor United States Report 2017” published by Babson College in 2018. It must be noted that:
The GEM data are from before the swift and powerful economic decline the Covid19 crisis caused. There is no telling yet of precisely how the crisis has diminished the number of nascent firms or killed off the young firms under 42 months old that the GEM studies look at. A reliable picture of the situation may not be possible until the CARES subventions time out.
Although the 2017 Gem study found that the Wholesale/Retail sector accounted for the highest proportion of the nascent and young firms in the United States, 21% , it had not grown from the previous year and was “dramatically lower than the average of the 23 innovation-driven economies, 31%.”2 Just a year later the Gem study found that the finance, real estate and business services accounted for 27% of the new and nascent firms, while retail, at 26%, still considerably trailed the other high income economies at 36% (see chart below from the 2018 Gem study.) 3
Retail has long been a downtown storefront space use, but in pre-crisis years many downtown leaders were worried about their ability to attract and maintain retail tenants. The Gem study showed that we were not generating as many retail startups as other innovation driven economies. And that was in relatively good economic times.
The fastest growing sectors for entrepreneurship were those that involved technology and knowledge – possibly good for generating office demand , but not exactly the types of firms noted for tenanting lots of downtown storefronts.
The Millennials and Gen-Zers are among the two most economically screwed generations in living memory, so while many of them may have had an interest in entrepreneurship in 2017, even then raising capital for such a venture was probably a frequent barrier to actual entry. Many of them are so strapped for income that they are still living with their parents, and Covid19 has increased their numbers. Raising capital was probably less of a challenge for those with gig or freelance sole proprietorship, but those “firms” also don’t fill many downtown storefronts.
Most importantly, and more precisely, we don’t know how startup rates will be impacted in the sectors that are most likely to produce tenant prospects for downtown storefronts – or which sectors they might be. How the continued growth of online retail sales and their integration into omnichannel operations will play out in terms of the amount, kind and location of physical commercial spaces remains to be seen. While most pamper niche operations have low initial capital costs and relatively low operating costs so they can be reconstituted with comparative ease and speed during a recovery, there is a real question about the availability of the types of consumer discretionary spending dollars they depend on.
Nor do we know how the Covid crisis’s economic impacts will influence current and future levels of interest and intent in becoming an entrepreneur. Most importantly, we don’t know how interest and intent will be impacted in the sectors that are most likely to produce tenant prospects for downtown storefronts. The blue line in the above chart from the 2018 GEM study shows the level of people aged 18-64 who intended to become an entrepreneur within a few months. The path is upward, though it shows much fluctuation, a Great Recession climb, and a bumpy 2016-2018 ride. The red line shows the percentage of the 18-64 population who are either a nascent entrepreneur or owner-manager of a new business, e.g., between 3 and 42 months old. It dived through the start of the Great Recession and then had a mostly upward path since. Obviously, these firms benefited from a recovering economy. Unfortunately, GEM does not provide a sector breakdown. Given that the constructive destruction in the retail industry and serious problems in several parts of the restaurant industry had already appeared, there is reason to suspect that nascent and young firms in those industries were not doing as well as those in other industries.
Recent losses of retail jobs have been huge, and industry reports indicate it will continue to grow through this year, as record numbers of retail stores are closed (perhaps over 20,000), and many chains enter bankruptcy. Are more retail workers, past or present, likely to find appealing startup opportunities in this kind of retail industry than in pre-crisis years? Will other entrepreneurs find the opportunities in the retail sector more potentially rewarding and less risky as those to be found in other sectors?
The attempt to see unemployed retail workers as an asset that will convert into an above average level of new retail startups as we recover may carry with it the implication that unemployment creates a high level of job need to which heightened entrepreneurship is a response. The 2018 GEM study presents data on the number of nascent and young firms (the total TEA) that were “necessity driven (see blue line in chart below). The necessity driven firms over all the years studied steadily account for a relatively small portion of all TEA firms. While the Great Recession did increase their number for some years, overall their number did not change all that much, and never reached levels where they might spearhead startup led downtown recoveries.
B&M retail stores are taking on new functions and that may mean the skill sets of former retail employees are increasingly outdated and provide no advantage for starting up new types of retail and restaurant operations. For example, a new type of department store is appearing, — e.g., Neighborhood Goods, Showfields, b8ta – that sells curated collections of merchandise created by online birthed merchants.4 Also, the growing number of “ghost kitchens” can reduce the relevance of kitchen skills in the restaurant industry.
Restaurants, another major source of downtown tenants, also have been clobbered. Prior to the crisis many parts of this sector, e.g. casual dining, were already showing stress. The current need for social distancing and the apparent current danger of indoor dining, makes it very hard for restaurants to make needed profits. Until models for restaurants operating profitably under these conditions emerge, or the crisis significantly abates, will the sector be able to maintain the interest of entrepreneurs and its skilled workforce?
Here again the competitiveness of the opportunities the restaurant industry offers in terms of potential rewards and risks is very relevant. Restaurants have long had a very high failure rate compared to other industries – and Covid19 has certainly not done anything to diminish that fact. Also, external financing for restaurants has long been relatively hard to get, and their startup costs, if a full kitchen is involved, can be high. Self-financing during a recession and in its recovery years is also likely to be difficult.
Much is being made about the costs of store space. They typically amount to about 10% of the total sales of restaurants and various studies over the years have found that they are between 8% to 12% for most downtown merchants.5 Rents may indeed be important, but these firms have many other costs such as labor, inventory, insurance., etc., to factor in and be concerned about.
The Kauffman Foundation’s 2017 State Report on Early-Stage Entrepreneurship found that “the rate of new entrepreneurs ranged from a low of 0.16 percent in Delaware to a high of 0.47 percent in Wyoming, with a median of 0.30 percent. This considerable geographic variation certainly might also characterize the emergence of new entrepreneurs as we recover economically from the Covid crisis. It certainly suggests that entrepreneurship levels are dependent on a set on conditions, not just the cost of space, and will vary geographically with their strengths and weaknesses.
This is not to say that the recovery will not see either new downtown firms appearing or the full reopening of downtown firms that had suspended their operations. The question is how many of these startups and recovering firms can fill downtown storefronts with well activated and magnetic uses? Will they bring downtown vacancies back to acceptable levels? Will they bring customer traffic back to or above prior levels? Or will they just fill a few vacancies with drab uses that attract weak flows of customer traffic? Right now the difficulty of answering those questions is compounded by the fact that we probably won’t know the full extent and dimensions of our downtown vacancy problems until after the CARES subsidies time out, when the downtown operations then have to support themselves from “normal” type operations.
Is There a Real and Strong Startup Trend That Downtowns Can Ride to Recovery? If one goes back to some Kauffman Foundation studies about entrepreneurship in the decade or so prior to Covid19, one sees that there was not any steady trend of growing entrepreneurship. Indeed, there were ups and downs, with some concerns about it stalling or even seriously declining. 6 Covid19 may be sparking a number of startups in industries that help individuals and firms cope with the crisis, but I have not observed, or heard from professional friends, or seen any published reports that claim it is causing lots of new downtown storefront-filling firms to open. There is no data-proven strong startup trend for downtowns, especially in smaller cities, to ride to their economic recovery.
In sharp contrast, there are loads of data to show that remote work increased enormously in response to the crisis and lots of surveys that show that significant numbers of both workers and employers now think their remote work arrangements will continue on into the post crisis era. These are signs that remote work is a trend that has a good chance of lasting. There are no comparable data signals for resurgent entrepreneurship in the sectors that might occupy downtown storefronts, such as retail and restaurants.
Do We Just Sit on Our Hands? The settling of the crisis’s dust may or may not occur anytime soon. Whether it happens quickly or slowly can be pivotal. As John Maynard Keyes famously wrote “In the long run we are all dead.” The full impacts of other trend breezes such as remote work, changes in commuting patterns, and e-shopping may well take a decade or more to play out. They in turn may have big impacts on the demand for downtown storefront spaces, space uses, and occupancy rates.
What will happen to our downtowns during those years? Should downtown stakeholders and management organizations then just wait for the dust to settle and hope that new startup merchants will appear? If not, then what should/can they do?
Contingent Planning
Since it is far from certain that entrepreneurial gold dust will fall from heaven as the Covid crisis ebbs, perhaps it is valuable for downtown leaders to do some contingent development planning about what they can and will do to cultivate the types of small businesses that can tenant their district’s storefronts. Here, again, the variation in local conditions will probably mean a corresponding variation in responses. And prudence suggests anticipating a process of trials, errors, learning and adapting.
Community Supported Enterprises. For many years prior to the Covid crisis, in downtowns and Main Streets that were suffering storefront vacancies, severely weakened retail, and even food deserts, some local leaders created successful solution paths to these challenges. In our Covid economic recovery period, many other downtowns of all sizes may find these solution paths worthy of consideration. These solutions were most apt to succeed in situations where profitable operations were possible, but investors considered the rewards of entering these downtowns or Main Streets lower and riskier than the opportunities they were being offered elsewhere. Some of these solution paths are:
Using crowdfunding to help open and/or maintain businesses strongly wanted by the local community
Using Community Owned Enterprises to save and operate key commercial operations
Using local social assets, such as social clubs, to leverage business development 7
Towns buying and operating failing essential retail operations, such as groceries.
Using such business models, and any riffs upon them, may help many downtowns and Main Streets recover their vibrancy over the next few years. They may be essential components of a New Deal program to revive retail. For more information about many of these business models see The Spotlight group of articles in the forthcoming Fall Issue of the American Downtown Revitalization Review at https://theadrr.com/ that will appear in September 2020.
Creating Supportive Small Town Entrepreneurial Environments.8 While much attention has been given to the creation of Innovation Districts, this concept is so large scale and complicated that it is only really applicable to big city downtowns and neighborhoods that are present in about 349 of our cities. Our remaining approximately 19,000 incorporated places also need a supportive startup culture and environment, but one that is simpler, less expensive to create and operate, and appropriately aspirant in its growth objectives. That is especially true at a time when many, if not most, downtowns will probably be striving to cultivate their own startups to occupy their storefronts. Such a Small Town Entrepreneurial Environment (STEE) might include: social places for new and small business operators to meet and network; access to viable funding sources; effective technical assistance; joint marketing programs, and affordable spaces in reasonable condition. It basically can take many existing downtown assets, such as libraries, bars, coffeeshops, makers places, community colleges, a downtown organization that invests in businesses and has niche marketing programs, etc., to create an informal district-wide business incubator and accelerator, Libraries in particular, are emerging as critically valuable STEE assets. Unfortunately, most downtown organizations do not yet see being actively engaged in small business development and expansion as a proper role for them to play. Nor do they exhibit any comfort or skills in playing that role when they do. A contingent planning effort could focus on how downtown leaders would foster the emergence of STEEs, should the need for it arise. This will likely entail a reappraisal of the roles the downtown organization should and can play.
Small Merchant Training. The Covid crisis has reinforced the growth of two important nascent merchant trends:
Small and micro firms were weaving increased online activities with the operations of their brick and mortar stores. Customers ordering online and then picking their orders at the curb or at the storefront is one example of this.
More small merchants were tapping customers in distant market areas via their online storefronts and attending distant trade shows and fairs.
A contingent planning effort also could focus on how downtown leaders could encourage and train more of our smaller downtown merchants to use an omnichannel marketing operation that would help them to capture more sales dollars from both local and seldom before penetrated distant markets.
However, even prior to the Covid19 crisis, small merchant training has long been a challenge. In my experience, merchant training programs are often advocated, but seldom effectively implemented. The vast majority of them underperform because they ignore basic merchant needs and behavior patterns. Far too often, they want to EDUCATE the small merchants, and make them, for example, marketing savvy or bookkeepers. That can take a lot of merchant time and effort while providing them with more information than they have any need for near-term or even probably well into the future. Instead, what the merchants want is not to be taken to school, but actual solutions to their specific immediate problems. They want action steps that are credibly viable, affordable and easy to do. They don’t really want courses, workshops, or seminars. And they prefer not leaving their places of business.
Also, in my experience, many small merchants are resistant to any suggestion that they are not doing things as well as they could be done, while others find it hard to ask for help even when they badly need it. Small merchants are often small merchants because of their need for independence and a strong sense of their own efficacy.
Merchant training programs would probably be more effective if they:
Consider small merchants behaviors and attitudes as much as they do the information the program’s experts believe the merchants should learn
Give merchants access to training that is closely tied to their immediate needs, and less into making them better, more knowledgeable entrepreneurs. Blasphemously, feed them fish, don’t try to teach them how to fish. Small merchants play too many roles to be experts in all of them, and they lack the dollars to hire others to take on some of them.
When possible, facilitate merchants learning from their peers whom they know, like and respect. In turn, that means it’s very productive to identify in a downtown those merchants who can be models and mentors for other merchants, and then to leverage them.
Start off by identifying the low lying fruit that can produce the quick wins that will enable the training program to swiftly show other nearby merchants what it might do for them.
Perhaps some of national organizations such as IDA, IEDC, and National Main Street can develop such improved small merchant programs that can then be easily tailored to local conditions. Leaving their development solely to organizations such as SCORE or the SBDCs is a massive mistake. A strong need for such programs existed well before the Covid19 crisis, and will very likely far out last it.
ENDNOTES
1) Robert Gibbs. “After Lockdown, New Opportunities for Downtown Shopping Districts” at https://dirt.asla.org/2020/05/13/the-pandemic-will-lead-to-a-revitalization-of-main-street-retail/ Matthew Wagner wrote an interesting article on the Main Street Blog that also extolled our penchant to be entrepreneurs as a path to recovery, but most of the piece usefully went into the need for various things that I would associate with creating what I called above a STEE. See: Matthew Wagner,” Main Street America. Main Spotlight: COVID-19 Likely to Result in Increased Entrepreneurship Rates” June 9, 2020. https://www.mainstreet.org/blogs/national-main-street-center/2020/06/09/covid-19-likely-to-result-in-increased-entrepreneu
2) Julian E. Lange, Abdul Ali, Candida G. Brush, Andrew C. Corbett, Donna J. Kelley, Phillip H. Kim, and Mahdi Majbouri. “Global Entrepreneurship Monitor United States Report 2017” published by Babson College in 2018, p. 27. https://www.gemconsortium.org/economy-profiles/united-states
3) See: Julian E. Lange, Candida G. Brush, Andrew C. Corbett, Donna J. Kelley, Phillip H. Kim, Mahdi Majbouri, and Siddharth Vedula Global Entrepreneurship Monitor United States Report 2018” published by Babson College in 2019 https://www.gemconsortium.org/economy-profiles/united-states
4) I want to thank Mike Berne for bringing these stores to my attention.
5) See for example: Kate Paape and Bill Ryan, University of Wisconsin-Madison/Extension Division, and Errin Welty, Wisconsin Economic Development Corporation. “A Comparison of Rental Rates Charged for Downtown Commercial Space: A Market Snapshot of Wisconsin Communities”. August 2019 https://economicdevelopment.extension.wisc.edu/files/2019/10/Downtown-Rent-Study-100119.pdf
6) See: “Victor Hwang Testimony Before U.S. House Committee on Small Business, Subcommittee on Economic Growth, Tax and Capital Access,” February 15, 2017
These organizations face the same two overarching challenges that all businesses and nonprofits in the nation now face: 1) surviving the crisis and 2) then making any operational changes needed to be successful in the post crisis environment. The legacy layer of conditions for a large proportion of these venues already placed them in grave financial danger that the additional challenges unleashed by the Covid19 pandemic probably will only exacerbate. Their size and business models are two very important variables that impact on their ability to meet these two challenges. The larger organizations are more apt to have or attract the financial resources and staff talent to survive this crisis. Nonprofits usually have a troubling hybrid income model that combines revenues from earned income with contributions from various government and numerous private sector and individual sources. That presents a managerial challenge even for the strongest of them. Another important impacting factor is an industry’s long term trends, as is the case with movie theaters. In many instances, the impacts of the Covid19 pandemic do not have to be all that strong to quickly send financially teetering entertainment and arts/cultural organizations into extremis. Getting them prompt and appropriate assistance will be critical to their survival.
For those that do survive, legal or customer sanctioned adaptions to make them more pandemic proof could pose new operational challenges and financial burdens, especially for those with weaker financial and staff resources. Moreover, the book on what such adaptations might be has only begun to be written, so it is difficult at this time to scope out what the post crisis needs of these organizations might be. However, the more quickly this task is accomplished, the sooner programs can be created to help assure these organizations will operate well into the future.
Downtown organizations should not overlook the needs of these organizations as they also try to help retailers and restaurants.
Looking at Some For Profits
Downtown Cinemas. For many small and medium sized downtowns, their movie houses are one of their strongest assets and their most important entertainment attraction. It is often also a source of considerable community pride. When the conversion to digital projection threatened their local movie theaters, residents in many communities across the nation banded together to raise funds to keep them in business. Saving them unleashed an impressive amount of community action across the nation.
Nevertheless, movie theaters long have been on a rather steady path of decline, and “the totals for both 2017 and 2019 rank as the worst years for movie ticket buying since 1995.”1 Attendance also has been in sharp decline. Over the past 20 years, it has dropped by about 25% nationally, while the population has grown by 15%.2 Making things worse for theater owners, 2019 was the strongest year yet in the number and quality of the movies sent either directly or very early to streaming outlets. Netflix, for example, produced and distributed many films. It also “received the most Oscar nominations of any company (24) for films like The Irishman and Marriage Story”.3 Americans, since at least 1994, have preferred by rather large margins to watch their movies at home to seeing them in a theater (see the table below).4 And they watch more movies per person at home than in movie theaters by a 5 to 1 ratio. Moreover, even the most frequent movie goers prefer home viewing.5
Downtown cinemas can spark a lot of community pride
Movie theaters were immediately hurt by their inability to have onsite patrons during the pandemic crisis as long as social distancing measures are required, or they were closed outright by local governments. Many were already badly financially stressed, and they are unlikely to survive a year or longer recovery period. Long term, they were already likely to be hurt at an accelerating rate by increased studio direct releases to streaming, and consumers’ increased online movie going. Their financial and management burdens will only be increased if they are also forced by customer pressures or legal requirements to install anti- pandemic physical and operational improvements (e.g., reducing seating so they are 6 ft from each other, better air filtration, taking patrons’ temperatures, more frequent and more thorough cleaning, customer spacing on entry and egress).
Any downtown EDO that wants to keep its movie theaters should look at the toolbox of programs that was developed by many downtowns to help their movie theaters cross the digital divide and then have their own program ready to implement. Quick action is often needed when a movie theater gets in trouble. Crowdfunding and forming a community owned corporation to buy and operate a cinema were two of the most powerful tools used.6 The alternative is likely to be trying to find new uses for these empty large buildings. That may be an even more challenging task.
Professional Sports Events. Major league sports teams, these days, are often fairly large organizations that are worth billions of dollars (see table below) that are owned by people who often are billionaires themselves. They also have very significant annual sales and very high proportions of those revenues come from contracts with cable and tv networks. The NFL in 2019, for instance, had a total revenue of about $14.47 billion, with $452.375,000 the average team revenue.7 About 57% of the league’s revenues come from TV and cable contracts, with the remaining 43% coming from fans in the stadiums.
Most Americans do not attend professional sports events with any real regularity. Tickets are just too expensive, or the games/events are too geographically distant. They predominantly watch sports events on TV. Quartz reports that: “The average 2019 NFL regular season broadcast (and there are many of them) was watched by nearly 17 million Americans.”8 In contrast, the total attendance for all of the NFL’s regular season games in 2019 was 16.67 million.9 One may doubt if TV-based fans really care if there are fans in the stands of the arena or stadium. While social distancing directives are in effect, they might be adhered to, in part, by dispersed seating. That, of course, would mean reduced revenues for the teams and venue owners/operators. Heightened sanitation measures for seats, restrooms, and concession stands would also add to operating costs. The flows of fans entering and leaving these venues, and their use of parking, restrooms and concession stands also will need to be regulated while social distancing is in effect. At the moment, most discussions about resuming the play of professional sports games involve no fans attending them in person, an indication that making the needed adaptions in the operations of arenas and stadiums might be either too problematical or difficult.
However, these professional teams plainly have the on-hand financial resources and the financial and political connections to have a very good chance of getting through the crisis and adapting to any anti-pandemic requirements that may emerge in the post crisis period. The TV and cable contracts provide a very important assured revenue stream. “Fanless events” mean reduced revenues, but may also mean significantly reduced operating costs.
Look Out Fors:
Given that office workplaces are very likely be under pressure to be reconfigured so that they are more pandemic proof, will existing sports arenas and stadiums be as well?
Indeed, will the designs of future arenas and stadiums reflect newfound concerns about coping with potential pandemics?
Will a recovery produce a return of former attendance levels?
Will local governments be as willing to permit or fund proposals for such structures as they have in the past, especially if ticket sales revenues are significantly reduced?
Will the revenues of sports venues be so reduced by Covid19 that existing loan/bond payments are endangered?
Cultural/Arts Venues: Nonprofits
Arts and cultural organizations are being hit hard by the Covid19 crisis. Americans for the Arts on its website claims that these organizations are ”experiencing $3.6 billion in devasting losses.”10 The organization’s recent survey of artists and craftspeople showed that a very large number of their incomes have been squashed by the pandemic. Over two-thirds reported being unemployed. However, unless these artists were hugely successful or working for a corporation, they have long had very modest incomes that had to supplemented by non-arts and culture jobs. That they have long been on the cusp of financial need is evidenced by how long the phrase “starving artists” has been a part of our culture.
“Word Class” Museums in Major Cities. Pre Covid19, many museums in our largest cities aspired to be world class and followed a strong bigger is better strategy comprised of major exhibitions that would attract lots of the tourists who were visiting their city. The result was often overcrowded galleries that impeded art appreciation, big museum budgets that often totaled in the hundreds of millions of dollars, and attendance numbers in the millions that were overwhelmingly the result of-out of- town visitors. For example, here in NYC, 87% of the Guggenheim Museum’s visitors are tourists and that number is 75% at both MoMa and the Metropolitan Museum of Art.11 The pandemic has shut off the entire tourist spigot, foreign and domestic. The museums for the most part are closed to in-person visits, but many are offering online access. Their visitor income streams have been choked. The Metropolitan Museum just announced an anticipated deficit of $150 million. However, many of their board members are titans of their business communities with records of making large donations and having strong connections to our largest financial institutions. The museums’ real estate properties and art holdings (which they normally should not deaccess), are often worth billions of dollars. They have huge capital assets, though they may not be very liquid. Equally important, they have very valuable political, social and financial connections. These arts organizations have proven capability of raising $400 million (MoMA) to $500 million (the Met).
If they reopen while physical distancing guidelines are still in effect, it will be interesting to see how that transforms the long lines of visitors who in the past entered their buildings, paid admission fees, and then stuffed their gallery rooms? Will they, too, strengthen their sanitation efforts. Can they take advantage of this crisis and treat it as an opportunity to make much needed improvements? Many museums in Europe, such as The Louvre in Paris are limiting access to famous works, such as the Mona Lisa, because of overcrowding. The Guardian has reported that: “The Vatican Museums are considering putting a cap on visitor numbers amid fears among tour guides that overcrowding could provoke a stampede unless security policy is changed.” 12
The crowded Vatican Museums have 6 million visitors per years
A Curmudgeonly Opinion. I think that these museums have holdings that are far too large – most pieces are not even exhibited – and they are far too crowded. They have lost sight of providing an excellent art appreciation experience and instead seem to focus on cramming as many visitors as possible into their buildings as often as possible. The actual feet on the gallery floors are undeniable and prove the veracity of that statement. Consequently, how they operate needs to be rethought. The Met in NYC, for example, has many galleries that are so wonderful they could be very strong museums on their own – something like Ron Lauder’s Neue Galerie. A visitor then can be have a less crushed and more intimate and relaxed interaction with the art. Entry to them could be more appointment based and limited to a tolerable number per hour. This is how the Glenstone Museum in Potomac, MD works and the Barnes Foundation operated in its former home. These decentralized museums could enliven neighborhoods across a city. If they instead were clustered together, that still would decentralize the entry and existing processes, and reduce the density of visitors in the galleries.
Smaller Arts Nonprofits.
Most Arts Organizations Are Small.13Most arts organizations are small, with revenues probably under $28,000. In 2012, about 63% of the nation’s estimated 110,000 arts organizations had revenues below $25,000.14 A study done in 2017 estimates that there were 39,292 nonprofit arts and cultural organizations in the USA that had revenues over $50,000.15 This means most art nonprofits will have little or no staff and will very likely either have very few performances or very few hours when they are open to the public. If they rent street level storefronts, when closed, they function as dead spaces that detract from their block faces walkability, while also signaling a lack of vibrancy.
Even when budgets get somewhat higher, the impacts are not likely to be significantly large. For example, the Wyoming Territorial Prison, a museum in Laramie, WY, (population 32,000) reported revues of $90,290 on its IRS Form 990 in 2015, but its annual visitation was about 16,000 (averaging about 2,700 per month) during a season that lasts from May 1st through October 31st. To put that attendance in perspective, consider that the Laramie Main Street Alliance around then held seven one-day events that attracted a total of around 8,250 people.16
There is a real question about whether the positive impacts of these very small arts/cultural venues outweigh their negative ones that is too often drowned out by the advocacy efforts of those who believe that the arts are the engine for economic development in these communities. That is not to say that the arts cannot be a valuable asset, but that knee-jerk advocacy can produce a lot of underperforming or even failing arts organizations that really do little for their downtowns.
A Structural Propensity to Have Deficit Annual Budgets. 17 Roland J. Kushner and Randy Cohen in their National Arts Index 2016 paint a troubling picture of the financial condition of many arts organizations A very large number of them do not have break-even budgets and consequently, raise concerns about their long-term sustainability. According to Kushner and Cohen:
“Arts nonprofits continued to experience financial challenges: The percentage of arts organizations operating at a deficit has ranged from 36 percent in 2007 (during a strong economy) to 45 percent in 2009 (the deepest part of the recession). In 2013, a time of improved economic health, 42 percent of arts nonprofits still failed to generate positive net income—a figure that raises concerns about the long-term sustainability of arts organizations that are unable to achieve a break-even budget. Larger-budget organizations were more likely to run a deficit, though no specific arts discipline is particularly more likely to run a deficit…. (I)t is clear that the budget fortunes of nonprofit arts organizations got worse during the Great Recession and have been very slow to recover.” 18
Consequently, it would seem very reasonable and very prudent for downtown leaders to expect that large numbers of their arts organizations were long primed for being pushed over the edge by the Covid19 crisis.
The Proven Long-Term Uncertainty of Their Revenue Streams. The hybrid model is based on revenues coming from many very different sources and obtained through different means. According to Americans for the Arts: “Support for the nonprofit arts is a mosaic of funding sources – a delicate 60-30-10 balance of earned revenue, private sector contributions and government support.”19
Other research has found a slightly different funding mix. The National Endowment for the Arts (NEA), using data from the Urban Institute and Census Bureau for 2006-2010, found that the revenue sources for nonprofit performing arts groups and museums were:
55.1% Earned Income, Interest and Endowment Income
38.2% Contributions From Individuals, Foundations & Corporations
6.7% Government Grants.20
Earlier, pre-Great Recession estimates showed that earned incomes only accounted for about 50% of the revenues of nonprofit arts organizations.
Perhaps it is best to amend AftA’s statement to read that arts organization funding has been a delicate balance of 50% to 60% earned income, 30% to 40% private sector contributions and 10% or less from government support.
In any case, there is general agreement on the types of funding sources and the fact that there are many of them. In a 2012 study of the factors that challenge the financial sustainability of nonprofit organizations, the RAND Corporation’s authors placed at the top of their list:
“Risk of reliance on external funding sources and streams. In contrast to for-profit organizations, nonprofits in the United States depend on diverse sets of funding sources and streams of funding to sustain their operations. Most nonprofits receive funds from multiple sources (e.g., government, foundations, private donors) and streams (e.g., grants, contracts, membership fees). Substantial cutbacks in both government and foundational funds suggest that nonprofits should develop or revisit their fundraising plans to support financial sustainability.” 21
The hybrid business model both taxes the skill sets of nonprofit managers in organizations too small to structurally differentiate and staff their earned income and contributed income activities, and bets too much of their financial future on the strong generosity of many others. Consequently, nonprofits were easily badly hurt by the Great Recession and the Covid19 crisis.
Saved by The Feds? Americans for the Arts apparently feels that the recent stimulus program can be of great help to arts and cultural organizations. It cites the following programs that can help them.
The annual appropriation for the National Endowment for the Arts and the$75 million for the National Endowment for the Humanities were each supplemented by $75 million in the CARE Act stimulus package.
The $350 billion for?Small Business Administration?(SBA) emergency loans of up to $10 million for small businesses—including?nonprofits (with less than 500 employees), sole proprietors, independent contractors, and self-employed individuals?(like individual artists)—to cover payroll costs, mortgage/rent costs, utilities, and other operations
$10 billion for Emergency Economic Injury Disaster Loans (EIDL) for loans up to $10,000 for small businesses and nonprofits to be used for providing paid sick leave for employees, maintaining payroll, mortgage/rent payments, and other operating costs.
Expanded?Unemployment Insurance (UI) that includes coverage for furloughed workers, freelancers, and?”gig economy” workers.22
It will be interesting to see just how many of these arts and culture organizations get enough support from these federal programs to last into the recovery phase. There are about 30.2 million businesses in the US with fewer than 500 employees. To date only about 1.3 million, about 4.3%, have reportedly obtained the SBA loans. Hopefully recent legislations will produce a much higher number.
Looking to the Future. Looking out to the post pandemic phase, the anti-pandemic measures the arts/cultural organizations will have to take and the cost burdens that might add still remain largely unknown, but seem fairly likely to appear.
We have a consumer-based economy, so economic recovery will depend a lot on spending power and inclinations returning to our households. Revenues promise to be a serious problem for these organizations well into the future unless our national economy has an unexpected robust recovery.:
Given their Covid19 induced revenue problems, state and local governments will likely have greatly reduced capacity, other than by passing through fed dollars, to fund arts and cultural organizations well into the future.
During and after the Great Recession, large corporate and foundation givers substantially switched their funding away from the arts to help better meet pressing social and economic needs. If our past is in any way prologue, we might expect something of the same to happen as we recover from the Covid19 crisis, even well into the early part of the post crisis phase.
As for individual donors, a lot depends on who lives in the market area of these arts/cultural organizations and how many households there are with incomes above $200,000/yr. Those with “lower incomes” only account for about 6.3% of the total household donations to the arts!23
The fact that these arts and cultural organizations continue to have the same problems time after time after time should be taken as a strong signal that the way they have operated is seriously flawed. For me, a major statistical indicator of this is their needed revenue per visitor, which probably is also a good indicator of their cost per visitor since few make any substantial “profit.” Computing from the data in the above table, among those with budgets above $50,000 per year, the revenue per visitor for museums is $72.01 and for nonprofit theaters it’s $56.15. If 50% to 60% of those revenues come from admission fees and other earned income streams, the admission prices of these venues are still probably multiples higher than what local cinemas are charging for their admissions, (a good benchmark for local affordability).
How do these organizations explain the amount of income needed by them that is not market supported? A curmudgeonly explanation are artistic aspirations that are unconstrained by their boards whose members are insufficiently concerned about their fiduciary responsibilities and the long-term well-being of their organizations.
These organizations need a new operational model that should:
Enable them to increase their earned incomes by exploring new revenue streams. They need to stop thinking only about admission fees and museum store sales. They need managers who are more entrepreneurial in non-arts areas. The Red House Theater in Syracuse is one example of this. A lot of other arts organizations should go to school on it. Among other things, it provides paid services to the local school district and is now a landlord with several rental income streams. The Public Theater in Auburn, NY, is another example. While continuing to serve as a theater, it has also assumed more of a role as a community center with a café, mic nights, and classes for yoga, etc.
Set a goal of having earned incomes cover 80% of the organization’s operating costs.
Have their boards exercising greater constraints on costs that cannot be supported by earned incomes.
Some Take Aways
As a result of the Covid19 crisis, downtown leaders and their organizations need to be concerned about the health and retention of their arts and cultural organizations, not just their retailers and restaurants. Assisting them will often be a very challenging task.
These organizations have congenital weaknesses caused by their size and business model that make them prone to extremis even in none crisis times, but that worsen exponentially during trying times.
Art and cultural organizations have the potential to be more important than ever to our downtowns, as that of retail subsides. However, their financial fragility means that there will be substantial churn in the actual organizations that are present. While some downtown BIDs and Main Street programs have retail and restaurant retention programs, they now may also need one for their arts and culture organizations.
Downtown stakeholders and their leaders should definitely explore using the arts to spark more economic and community development, but they should do so with adequate awareness of and knowledge about the fragility of the organizations they will be working with, and the tendency of artistic aspirations to lead to financial shortfalls and organizational failures.
If appropriate lessons are not learned, then post pandemic, a lot of our arts and cultural organizations may be in worse shape than ever.
4)Paul Taylor, Cary Funk and Peyton Craighill. “Increasingly, Americans Prefer Going to
the Movies At Home: Home “ticket sales” dwarf theater attendance 5-1”. Pew Research Center, May 2006. https://www.pewresearch.org/wp-content/uploads/sites/3/2010/10/Movies.pdf
13) This section is taken from: N. David Milder. “Let’s Get Real About*: The Arts As An Important Downtown Revitalization Tool — Redux. Part 1.” Downtown Curmudgeon Blog, June 18, 2017 https://www.ndavidmilder.com/2017/06/lets-get-real-about-the-arts-as-an-important-downtown-revitalization-tool-redux-part-1
15) Zannie Voss and Glenn B. Voss, “Arts and Culture Are Closer Than You Realize: U.S. Nonprofit Arts and Cultural Organizations Are a Big Part of Community Life, Economy, and Employment —and Federal Funding Enhances the Impact.” National Center for Arts Research, SMU. Pp.7. https://sites.smu.edu/Meadows/NCARPaperonNationalArtsandCultural%20Field_FINAL.PDF
16) Information kindly provided by Trey Sherwood, Executive Director of the Main Street Alliance in 2016.
They did not look at arts organizations with annual revenues under $50,000 so their finding that larger arts organizations are more prone to having deficits should be treated with caution.
Contact: N. David Milder, Editor The ADRR — The American Downtown Revitalization Review 718-805-9507 [email protected]
THE CREATION OF THE AMERICAN DOWNTOWN REVITALIZATION REVIEW (THE ADRR)
There currently is no real professional journal for the downtown revitalization field. For many years, that has been strongly lamented by many of the field’s best thinkers. To remedy that situation, a band of accomplished downtown revitalization professionals are creating The ADRR. It will be a free online publication, appearing four times each year. The target date for the debut issue is now set for the June 1-15, 2020 timeframe, with the second issue aimed for the Sept 7-14, 2020 timeframe.
This ADRR is intended to be a lean and mean operation, based totally on the availability of free online resources and the time, energy and elan contributed by its authors, advisory and editorial board members, and its editor.
How to Subscribe to The ADRR
Those interested can now visit The ADRR’s website, www.theadrr.com , where, on the home page, they can sign up to become subscribers. This enrollment places the subscriber on a MailChimp mailing list so that they can receive New Issue Alerts (see below).
How Issues of The ADRR Will Be Distributed.
New Issue Alerts, containing the Tables of Contents of issues and links to their downloadable pdfs of articles are sent to subscribers via a MailChimp email blast and posted to the ADRR’s website. Each issue’s pdf files initially will be stored in a folder in ND Milder’s Dropbox account from which they can be downloaded. Subscribers can download only those articles they want to read and whenever they want to read them. The ADRR also can be found via Google searches.
The Content We Are Aiming For. Only manuscripts about major downtown needs, issues and trends will be considered for publication. They will be thought pieces and not just reports about a downtown’s programs and policies that its leaders want to brag about. Articles must have broad salience and their recommendations broad applicability within the field. The “voice” of The ADRR will be anti-puff, and very factual, evidence driven, though not dully academic. Discussions of problems and failures will be considered as relevant as success stories if, as so often is the case, something substantial can be learned from them. The ADRR will not avoid controversial issues.
Also, the focus of The ADRR will not be overwhelmingly on our largest most urban downtowns, but also provide a lot of content and relevant assistance to those in our small and medium sized communities, be they in suburban or rural areas.
Who Will Write the Articles?
Hopefully, they will be from people in a broad range of occupations – downtown managers and leaders, municipal officials, academics, developers, landlords, businesspeople, consultants, etc. — who have significant downtown related knowledge and experience.
Curated Articles and Wildflowers. Initially, the ADRR will solicit articles to prime the content pump. Once The ADRR is up and running some articles will continue to be solicited on topics deemed a high priority by the editorial board members. Each board member can select a topic to curate an article on and seek the author(s) to write them. However, there still will be a continual traditional general call for submissions (wildflowers) focused on subjects selected by their authors. All submissions, curated or wildflower, must demonstrate sufficient merit to warrant publication in The ADRR. All submitted articles will be reviewed by board members. We hope to see many submissions!
Article Length and Author Responsibilities.
There will be short reads and long reads. Articles of 1,500 to 5,000 words will be considered. Multi-part articles of exceptional merit and salience will also be considered. What counts is their quality, not their length. Authors must have their articles thoroughly proofread prior to submission. Poorly proofed manuscripts will be rejected. Guidelines for submissions may be found on The ADRR website.
Publication Schedule:
Published four times per year, with a minimum of 5 articles in each issue. Given that this is an online publication, from a production perspective, the number and length of the articles is not a particular problem. However, from an editorial and content management perspective, the number of articles and their lengths can quickly become burdensome.
How It Will Be Organized.
The ADRR will be published by an informal group for its first year, with no person or group having ownership.
Editor. During the ADRR’s first year, N. David Milder has volunteered to serve as its editor.
The Advisory/Editorial Board :
Jerome Barth, Fifth Avenue Association
Michael J Berne, MJB Consulting
Laurel Brown, UpIncoming Ventures
Katherine Correll, Downtown Colorado, Inc.
Dave Feehan, Civitas Consulting
Bob Goldsmith, Downtown NJ, and Greenbaum Rowe
Stephen Goldsmith, Center for the Living City
Nicholas Kalogeresis, The Lakota Group
Kris Larson, Hollywood Property Owners Alliance.
Paul R. Levy, Center City District, Philadelphia
Beth Anne Macdonald, Commercial District Services
Andrew M. Manshel, author
N. David Milder, DANTH, Inc
John Shapiro, Pratt Institute
Norman Walzer, Northern Illinois University
Articles in our first issue that will be published in June 2020
Michael Berne, MJB Consulting, Working Title, ” Bringing Downtown Retail Back After COVID-19”
Roberta Brandes Gratz, “Malls of Culture.”
Andrew M. Manshel, “Is ED Really a Problem?”
N. David Milder, DANTH, Inc., “Developing a New Approach to Downtown Market Research Projects – Part 1.”
Aaron M. Renn, Heartland Intelligence, “Bus vs. Light Rail.”
Michael Stumpf, Place Dynamics, “Using Cellphone Data to Identify Downtown User Sheds”.
The Spotlight: “Keeping Our Small Merchants Open Through the COVID-19 Crisis”
Katherine Correll, Downtown Colorado, Inc.
David Feehan, Civitas Consulting
Isaac Kremer, Metuchen Downtown Alliance
Errin Welty, Wisconsin Economic Development Corporation.
In my retail recruitment experience, I’ve found that there
are types of retail stores that clients need and those that they want. The need
category generally includes groceries, specialty food shops, pharmacies, etc.,
while the want category overwhelmingly includes GAFO operations — i.e., general merchandise, clothing and footwear,
home furnishings, electronics and appliances, sporting goods, book and music
stores, and office supply stores. The shops that respond to needs did relatively
well through and after the Great Recession, while the GAFO stores have been in
consistent decline or weakness since about 2009. Recent research indicates that
e-GAFO retailers are now eating the lunch of brick and mortar GAFO merchants.
An Enormous 45% Hit on B&M Retail Sales Potentials!. One of the most significant trends that has helped define the new normals for retailing and our downtowns is the increasingly significant share of the sales of the merchandise sold in GAFO stores that are being captured by online operations. Obviously, the more sales dollars the e-stores win, the less there are for brick and mortar shops (B&Ms) to capture.
A while back, in another blog posting, I presented the above
table, taken from a provocative study by
Hortacsu and Syverson, that showed e-store market penetration for a range of
retail categories in 2013 along with
estimates of the years in which they each would reach 25%, 50%, 75% and 90% market
shares.
A more recent 2019 report by Morgan Stanley suggests that
the Hortacsu and Syverson study was pretty sound. It found that while “…e-commerce
penetration reached 11% of total retail sales at the end of 2018” that “e-commerce penetration in the GAFO
segment” was now over 45%.(1) That makes
it so much harder for B&M GAFO retailers to survive, much less thrive,
unless they are executing or part of an omni-channel marketing strategy.
The Morgan Stanley report also found that “the shift to
e-commerce has hit the home-furnishings segment the hardest,” while clothing,
linens and other “soft” goods have experienced a significant “e-commerce
disintermediation” with a 22% e-commerce penetration expected in 2019. (2) It was long thought that these two retail
segments would be resistant to e-store penetration because one offers large and
heavy merchandise and the other offers merchandise that consumers would want to
touch, feel and try on. One weakness of such thinking was the failure to
recognize that so many of the soft goods we buy are like commodities and we
don’t need to touch them, feel them or try them on. For example, lots of people
have long bought shirts, trousers, shoes, dresses, swimsuits, parkas from
catalogs. They often are buying more garments like the ones they already have –
e.g., I have countless blue, button down collar shirts — or replacements for
them. Then, too, lots of home furnishings products are not furniture suites or otherwise
prohibitively large, while others have been re-imagined – e.g., Casper
Mattresses – so they can be shipped “small.”
How Are the Leakage Analysis Data Providers Dealing With This? Frankly, I do not know the answer to this, but I think the data providers owe their customers a clear explanation of how they are handling this situation. One technique they might be using for estimating consumer demand is to take the sales of retail stores by NAICS code within a certain fairly large geographic area and then divide the sales by the number of households in that study area. That defines demand solely in terms of B&M store sales, ignoring the huge Internet sales and demand. If, instead, they are using extrapolations from BLS consumer expenditure surveys to determine demand, then they must have whopping “leakages” in each of the NAICS codes analyzed unless they also are using data on e-store sales by NAICS code.
The leakages to the Internet for GAFO store merchandise now
are probably several magnitudes larger than traditionally defined leakages to
B&M shops located beyond the trade area’s boundaries.
Of course, an increasing number of downtown merchants now
have both a B&M shop and an e-store. Most of their e-store revenues often
come from distant customers and represent “e-surplus” sales. How are these
e-sales revenues included in the leakage analysis? How do leakage analysts know
which e-sales come from within the B&M store’s traditional trade area from
those that come from beyond it?
A growing number of retail sales are “click and collect” transactions
that involve ordering online via a retailer’s server that probably is located
hundreds of miles away and then picking up
the merchandise at the retailer’s local store. Are those transactions to
be deemed leaked or “unleaked” sales? The local store’s involvement may be key
to the sales transaction, though it may not logically be part of the monetary
transaction. Would the sale have occurred if the local store were not there? If
the answer is no, then somehow the role of the local shop has to be recognized
in the analysis.
Vacancies, Store Closings and Openings, Changing
Functions
A Word or Two About Vacancies. I fear that I’m very much an outlier, a contrarian, when it comes to downtown vacancies. While I don’t like vacant storefronts, my jockeys don’t always get in an uproar when I see them. Too often, they are not viewed from the proper perspective. Rule 1 for looking at vacancies should be to ask: where is the downtown on its revitalization arc? If it’s in the initial very troubled stages, then the prospects for recruiting really good retail tenants are not great, especially with today’s upheavals in the retail industry. Moreover, recruiting crappy tenants would be worse for the downtown’s revitalization effort than the empty shops. Also, at these early points in the revitalization process, an EDO’s scarce resources are probably better spent on working for improving the infrastructure and housing and reducing quality life issues such as the fear of crime, than paying for very problematic efforts to recruit good retail tenants.
Rule 2 is don’t be snooty — look at pamper niche tenant
prospects such as hair and nail salons, yoga and martial arts studios, etc.,
especially early in the revitalization process when their relatively low
revenue needs and desire for low cost spaces can put them among the downtown’s
best tenant prospects.
I take vacancies more seriously when the downtown is much
further along on its revitalization arc. In these situations, Rule 3 is the
locations of the vacancies are far more important than their number. Those that
are in strategic locations such as on or near the district’s “100% corner” or near
other strong assets will certainly need attention. A cluster of them is also
significant and probably indicates the existence of an important underlying
problem.
Rule 4 is that the downtown EDO should identify and address
such underlying problems, otherwise any “fill the vacancies” recruitment
program undertaken either by it or local commercial brokers will most likely
yield paltry results.
In the mid-arc downtowns, Rule 5 is to determine if new
downtown projects have raised landlord expectations about:
Their ability to attract national chains, even
though they are looking for fewer and smaller spaces and have become much more
finicky about their new locations.
Potential rental incomes to the point that their
spaces are too pricey for their most likely tenant prospects, small independent
merchants.
If either of the above is the case, then there’s a landlord
problem, not a tenant prospect problem. This leads into Rule 6: as downtowns
revitalize, erroneous landlord estimates of viable rent increases can result in
more vacant spaces than diminished consumer retail demand or its associated
reduced retailer demand for store spaces.
In the past, I argued that a vacancy rate of about 5% was
the sweet spot for mid-arc downtowns. Some vacancies are necessary to allow for
the tenant churn that can bring in new merchant blood and help keep the
district vital. That still strikes me as an ideal goal. Many years ago, my real
estate mentors taught me that vacancy rates above 10% indicated the existence
of serious downtown problems that needed immediate identification and
remediation. Well, these days, under the New Normal, it seems that a 10%
vacancy rate is about average for retail spaces (3). Of course, I am not clear
whether that statistic refers to all the spaces in shopping centers and malls
or just to those allocated for retail tenants. Given that so many malls and
shopping centers have saved themselves by bringing in non-retail tenants, I
would say it probably is the former. One disturbing implication for downtowns
is that, these days, a 10% storefront vacancy rate may not be all that bad,
comparatively speaking. Even more unsettling for me have been the reports I’ve
seen of downtown vacancy rates in the 10% to 20% range in some of our small and
medium sized communities, Another
implication is that downtowns must look more to nonretail tenant prospects to
fill their vacancies, but ones that are able to stimulate and reinforce
pedestrian traffic on nearby sidewalks.
Because of Omni-Channel Marketing, B&M Retail is Not Going Away. One might expect that if the addressable retail markets for B&M chain stores have shrunk substantially, that lots of the stores would be closed. In fact, there have been a huge number that were closed –e.g., 7,000 just in 2017. However, new shops are also opening and an accelerating number of them are by Internet-birthed retailers (4). For example, so far in 2019, there have been 1,674 retail chain store losings, but 1,380 store openings (5).
Today, successful retailers do not see B&M store
customers as a different set from their e-store shoppers. Instead, they just
see customers who they can individually reach through several channels, e.g.,
B&M shops, websites, social media, traditional media, etc. They know that
while most consumers may still prefer shopping in B&M stores over e-stores:
(6)
Convenience is an important driver of which
shopping channel the consumer will select
Unless the B&M store provides an attractive
shopping experience, it will not attract as many customers as its management
might want.
B&M retail shops, under an omni-channel marketing
strategy can play a number of functions, besides being a place where sales
transactions occur, that can justify their existence:
SONY and Samsung, for example, have had
important store locations that are nothing more than showrooms. Many other
retailers use their shops as places where customers can experience the use of
their merchandise. You can, for example, book a nap at a Casper Mattress Sleep
Shop.
More and more large retailers are offering
“click and collect” purchasing, e.g., Best Buy, Walmart, Amazon.
Some retailers are developing special store
formats, e.g., Nordstrom Local, where they can provide extremely high levels of
customer service to shoppers with a proven record of spending large sums in
their stores.
Almost universally, the B&M store is seen as
the venue where the retailer can best provide experiences that will strengthen
their relationships with customers.
B&M stores also can generate website
traffic. For retail chains, a new B&M store in a market area sparks “a 37 percent
increase in overall traffic to that retailer’s website” by area residents. (7) “For
emerging brands, new store openings drive an average 45 percent increase in web
traffic following a store opening, according to ICSC research” (8). Of course, web traffic does not mean web sales
(see below).
Very importantly, B&M stores outperform e-stores in
several very critical ways:
They have a much higher sales conversion rates (visitors who turn into actual buyers), averaging about 22.5% across all retail sectors, than the less that 3% for e-stores (9).
Merchandise return rates for e-stores are three to four times higher than for B&M stores, probably because e-shoppers cannot touch, feel, try on or otherwise experience the merchandise. Returns have become an enormous ball and chain on e-retailer profitability, while bad returns experiences are really ticking off e-shoppers (10).
Bottom
Line: B&M retail stores are not going away, but there will be far fewer
of them, they will occupy smaller spaces, and perform many new functions that
justify their existence besides making sales transactions. How is your downtown planning
on dealing with such a scenario?
