Category Archives: multichannel retailing

WE NEED TO DO CONTINGENT PLANNING BECAUSE WE CANNOT BE SURE THAT AN ENTREPRENEURIAL RESURGENCE WILL LEAD US OUT OF THE COVID CRISIS

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By N. David Milder

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

https://www.kauffman.org/resources/victor-hwang-testimony-before-us-house-committee-on-small-business/

7) See: Norman Walzer and Jessica Sandoval, “Emergence and Growth of Community Supported Enterprises.” Center for Governmental Studies at NIU. 2016. https://www.cgs.niu.edu/Reports/Emergence-and-Growth-of-Community-Supported-Enterprises.pdf

8) N. David Milder. “Toward an Effective Economic Development Strategy for Smaller Communities (under 35,000).”

https://www.dropbox.com/s/tnwdomfzwrkv5i1/White-Paper-Toward-an-Effective-Economic-Development-Strategy-for-Smaller-Communities-1.pdf?dl=0

Capturing “Up for Grabs Shoppers” is an Important Key to Downtown Retail Success

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By N. David Milder

Who Are They?

Many downtown retail growth strategies are doomed because they try to avoid some key facts. One is that, except in the very rarest of rare situations, downtown retailers, be they new or old, large or small, must compete for and win sufficient market share to prosper. Another, and closely related fact,  is that beneath the venerated “leaked” sales to merchants located beyond the downtown’s trade area, and the 45% of GAFO sales now being e-leaked to online merchants, is a group of shoppers who are either weakly bonded or completely unbonded to merchants in either the downtown or its larger trade area. They are “up for grabs shoppers” who are very likely to buy fewer things, or to be won over by strongly magnetic brick and mortar merchants located beyond the trade area, or by online merchants, or—and this is very important – by new retailers opening in the downtown or elsewhere in the trade area.

Some Implications

The existence of such shoppers has important implications:

  • The up for grabs shoppers are always there, though their numbers may vary across retail sectors and over time.
  • For new and expanding downtown retailers, it means that there very often will be between 15% to 60% of the shoppers in their retail sector who are up for grabs and likely to give them a look. That indicates the local competition is weak.  If the new/expanding retailers are capable, they will have a very good chance of winning the dollars and loyalties of these shoppers.
  • For many existing retailers, the up for grabs shoppers can indicate – if they learn about them — that a good percentage of their customer base may be prone to desertion and signal a need for the merchants to improve their operations.
  • For downtown economic strategists and leaders, it means that any successful new retailer brought into town is likely to win customers away from merchants located beyond the trade area, or from online merchants, and/or from brick and mortar merchants currently located in the downtown or elsewhere in the trade area. The existence of substantial numbers of up for grabs shoppers also is a sign that downtown EDOs need to create effective programs to help existing merchants improve, or to be prepared to recruit more capable merchants who can better satisfy consumer needs and wants.
  • Just looking at the shoppers leaking their retail expenditures to beyond the trade area merchants is rather myopic – and a denial of reality. This myopia is understandable given that it seems to allow for the ill-conceived assumption of immaculate retailing that any new or expanding downtown retailer competing for the leaked dollars will not take any sales away from other downtown merchants. The existence of any sizeable number of up-for-grabs shoppers in the relevant retail sector means that is a highly unlikely prospect.

Some Examples


DANTH, Inc. first addressed up-for-grabs shoppers in a number of telephone surveys we did back in the 1990s when we asked respondents  whether various types of retail stores they could visit within  a 20-minute drive from their homes, were excellent, good, fair, or bad. Responses of fair and bad were treated as indicators of weak bonding with the relevant retailers. Their retail expenditures consequently may be considered as up-for- grabs and more prone to being captured by new or expanding retailers, be they brick and mortar or online.  Above are two tables showing the responses to surveys done of the shopperss in the trade areas of Rutland, VT, and Carlisle, PA.  For example, about 44% of the expenditures for suits or dresses by shoppers in Rutland’s trade area were up-for-grabs, as were about 43% of those expenditures by shoppers in Carlisle’s trade area.

For all the retail store types, the average number of loosely bonded shoppers in Carlisle’s trade area, 27.3%, was somewhat lower than that in Rutland’s trade area, 33.7% — see the table above. This may be because Carlisle is in a denser region, with higher household incomes, and with many more retail choices. Downtown Rutland is located in the Rutland Micropolitan Statistical Area that is composed of Rutland County. The median household income in 2017 in the county was about $52,000, and about 19% of the households had an annual income of $100,000+.  The county has a population of about 61,000, and Rutland City is by far its largest retail center. In contrast, Downtown Carlisle is on the western edge of the  Harrisburg–Carlisle MSA that had a population of about 560,000. Carlisle is located in Cumberland County where the median household income in 2017 was over $82,000, and about 27% of the households had an annual income of $100,000+. Moreover, back in 1997, in the downtown Carlisle trade area there were 12 major malls occupying a total GLA of about 3.5 million SF.

It is also interesting to note that, even with all that retail within an easy drive, on average, 27.3% of the shoppers in Carlisle’s trade area were up-for-grabs. Moreover, that number was even higher for some important markets segments: shoppers with children and those with annual household incomes over $50,000 (about $80,000 in 2019 dollars). The same pattern among market segments was even stronger among Rutland’s shoppers.

Some Types of Up-for-Grabs Shoppers

Up for grab shoppers can be present in many market segments and to varying degrees. For example, the numbers/percentages of loosely bonded shoppers in the upper income 4th and 5th quintiles are of particular interest because they account for a very disproportionate amount of consumer expenditures across all sectors, especially retail. As can be seen in the above table, nationally, shoppers in the highest income quintile (the 5th 20% group) accounted for about 38.9% of all consumer expenditures in 2017, about equal to the combined total of the 3rd and 4th quintiles. The 5th quintiles shares of all expenditures on food away from home, home furnishings, and apparel were at about that level. However, they also accounted for 52% of all entertainment fees and admissions, making them an absolutely critical market segment for most downtown entertainment niches. 

In rural towns and cities, such as Rutland, VT, Scotts Bluff, NE and Laramie, WY, where trade area populations are not large and household incomes are relatively modest, one might expect the more affluent shoppers will be among those most detached from local merchants. These downtowns usually do not have a strongly varied retail environment and local merchants are prone to catering to the more numerous middle income shoppers. Underserved, and possibly ignored, these more affluent consumers tend to shop in distant towns and cities having more robust retail assets, and they are increasingly buying from online retailers. 

Very often, a large proportion of leaked retail expenditures come from the 20% to 30%  of the households with the highest incomes in the trade area. Unless a sufficient bolus of the types of retail they prefer open in the downtown or trade area, it will be very difficult to recapture those leaked dollars. Traditional leakage analyses, by themselves, cannot identify such situations. However, an analysis of the up for grabs shoppers can help  answer the critical question that  leakage analyses raise, but cannot answer: how many of the leaked dollars can be captured by new or improved local merchants?

Lower income shoppers also can be up for grabs. The local retail structure also may not have the stores with the price points and/or merchandise they need. Evidence of this comes from the enormous growth in recent years of dollar store chains and their ability to take significant numbers of low-income shoppers away from huge, well-established retailers such as Walmart, as well as from local small merchants. 

It should be noted that an important element in the discussions of upper and lower income shoppers presented above is the existence of what might be termed a gap between the types of stores these shoppers need and/or want and those that exist in the downtown or trade area. A useful estimate of the monetary values of such gaps can be made by multiplying the number of dissatisfied shoppers by sector in the relevant income groups with estimates of the retail expenditures by sector of households in those income groups. However, such estimates do not carry along with them the assumption that all of the potential gap expenditures are being leaked to beyond the trade area merchants. Shoppers might also spend online, or simply reduce their spending levels.

The discussions of these two income groups also helps spotlight a frequent deficiency in downtown market analyses: the primary focus on statistical means and medians.

Millennials, now our largest generation, seems very prone to being weakly bonded to product brands. One might reasonably hypothesize that also will probably be the case for retailer brands.  For example, in 2017, a study found that “67 % of millennials changed brands in the last year” and called this “a clear lack of brand loyalty among 18-34 year olds.” The two major factors driving disloyalty were product quality (49%) and product availability (44%).  These findings suggest that the number of up for grabs shoppers is likely to grow in importance in coming years as the economic importance of the millennials grows. See: “Millennial Research: Factors Driving US Millennials Brand Disloyalty”, Posted on January 20, 2017 by B. Smith to https://www.customerinsightgroup.com/loyaltyblog/brand-loyalty/millennial-research-factors-us-millennials-brand-disloyalty

Here’s the Rub

In my experience, telephone surveys with about 500 to 600 respondents were the best way to obtain useful and reliable data about the up for grabs shoppers in a downtown’s trade area. However, over the past two decades, it has become harder and harder to conduct such surveys. Response rates have dropped significantly as the public became more resistant to answering surveys and responding to telemarketing efforts. Online surveys are not a substitute, since their use really requires a panel of respondents from which a valid sample of trade area respondents can be drawn. Few, if any, trade areas have such panels.

As a result, for many years we stopped doing trade area telephone surveys, yet the need for the types of data they could provide seemed to grow with the upheavals in the retail industry and the need to get a good grip on how many sales were going to online retailers. Today, in the face of that growing need, the best available solution path appears to be one framed by an analytical modesty that recognizes we will have to deal with survey data that is far less accurate than we might like. For example, it may be necessary to accept a 5%  or 10% estimate error at the 85%  or 90% confidence level. These can be maximized when the population being surveyed can be treated as finite.  Furthermore, the solution path might utilize several of these research tools:

  1. Shopper Intercept Survey. The value of these surveys depends a lot on where and when the interceptions are made and the number of interviews that are completed. The more completions the better. That number will be determined by where the interceptions are made, the length of the questionnaire, the ease of answering the questions, and the respondents interest in revitalizing/improving the downtown. Given the need for brevity –- say 10 minutes to complete the questionnaire – it will be essential to carefully select the most important questions. In the past, we limited our use of shopper intercept surveys because they seemed limited in their ability to gather all the information that a telephone survey could. Furthermore, they could not reach the trade area shoppers who did not shop downtown and obtain information from them that might help explain why. That said,  the need to get some useful data about these up for grabs shoppers has grown to the point that we are faced with the choice of either rejecting the use of any survey data or using surveys that may not have the error and confidence levels held as the acceptable standards in the past. One can argue, that if the conclusions drawn from a survey with a 7% or 10% error factor at an 80% or  90% confidence level are carefully structured, they still can be very useful analytically. The analyst is certainly in a better situation having access to such information than not having it.   
  2. Online Surveys. In a number of instances, some market segments may be known to be more important than others and merit special attention. The size of such a market segment and viable ways of contacting its members also may be known. That means that huge proportions of the relevant population, possibly even every member, can be invited to participate in an online survey. In these situations sampling is either not an issue or not a significant one. This is often very true of important segments in a downtown’s daytime population: people employed in the downtown, seniors in downtown housing and senior centers, high school students, patrons of downtown cultural venues, users of downtown transportation centers, downtown residents, etc.  
  3. Nominal Group Process (NGP).  We like this small group process because its structure prevents the discussion being dominated by a few participants and assures a useful information product will be produced at the end of the session. The NGP is able to handle 100 to 150 participants grouped in 10 to 12 tables and then the  results often can be stated in quantitative terms. However, the qualitative inputs generated by participants are usually the primary useful products.
  4. Focus Groups.  These small groups can be useful, but too often are not. They best provide qualitative information, Using them to predict market segment behaviors is ill founded, since the number of participants is usually too small to constitute a useful sample and their characteristics and recruitment are unlikely to be representative of the relevant population. If not well-led and/or are too large , focus groups can be dominated by a few individuals. However, the qualitative information they often can produce can give the analyst an understanding that simply cannot be provided by just the numerical data. They can be invaluable for generating viable explanatory hypotheses.       

SOME MORE THOUGHTS ABOUT DOWNTOWN RETAIL

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GAFO E-Sales

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?

ENDNOTES

1) https://www.morganstanley.com/ideas/us-consumer-retail-trends-2019

2) ibid.

3) https://www.nreionline.com/retail/how-many-more-store- closures-are-expected-2019

4) Ibid.

5) ibid.

6) https://www.retaildive.com/news/why-most-shoppers-still-choose-brick-and-mortar-stores-over-e-commerce/436068/  . Pew surveys have had similar findings.

7) www.nreionline.com/retail/how-should-retail-leases-account-omni-channel-transactions

8) Ibid.

9) See: http://www.comqi.com/sales_conversion_rates_more_for_physical_stores/

and https://www.invespcro.com/blog/the-average-website-conversion-rate-by-industry/

10) https://www.retaildive.com/news/shoppers-are-judging-retailers-by-their-returns-process/544740/

Retail at the End of 2017: Apocalypse or Evolving Paradigm Shift

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By N. David Milder

Introduction

A spate of recent articles has appeared that talk about our nation’s retail apocalypse. There is even a new Wikipedia entry for it: https://en.wikipedia.org/wiki/Retail_apocalypse . On the other hand, some important players, such as Brookfield Property Partners, Elliott Associates, and Third Point (see: http://tinyurl.com/y9cgoa2u) have made significant contrarian investments in retail real estate development companies such as GGP and retailers such as Restoration Hardware. Moreover, while there have been many reports about numerous store closings, the number of store openings, though admittedly far fewer, are not insignificant. Additionally, the post-Great Recession years have seen major retailers such as Target, Best Buy, Marshalls, and Walmart enter dense urban ethnic areas in numbers previously unseen. That said, the growth of e-commerce has had, as widely noted, a strong disruptive impact on the retail industry. As has the behavior of Deliberate Consumers. Since the fate of the retail industry will likely have strong impacts on many downtowns, a year-end assessment of that industry seems like a fitting task for the Downtown Curmudgeon to undertake to see if we are in the midst of an apocalypse or a paradigm change. It may well be that we are in the midst of both since paradigm changes usually mean massive changes in old structures.

 Consumer Demand for Retail Goods and Shopping Behaviors

The Great Recession brought about large and fundamental changes in consumer behavior that rival the impacts of the Great Depression of the 1930s. It not only turned middle-income households into Deliberate Consumers, but also helped impeded the career climbs and earnings power of young Millennials, fostered far greater income inequality, and the emergence of a Permanent Underclass. Additionally, the Baby Boomers have aged, with consequent changes in their consumer behavior. Overall, consumer demand and behavior have changed significantly over the past decade and at the end of 2017, those changes are continuing to have big and lasting impacts on the retail industry.

Deliberate Consumers (DCs) In 2017, DCs are still alive, well, cautious about spending and value conscious. They now expect and search for bargains, an expectation that retailers have unhappily fostered and continue to reinforce. For example, a recent NREI newsletter reports that:  “Almost half of apparel sold online during the (Thanksgiving 2017) holiday season were marked down an average of 46 percent, according to research firm Edited (See:  http://tinyurl.com/ybvzn22g ) Though, DCs have more jobs and more confidence in the economy than they had in 2010 and probably a little more money in their pockets, they are not making retail purchases the way they did pre-2008. Consequently, where they are present, their cautious behaviors continue to create serious problems for brick and mortar GAFO retailers, unless they are targeting and catering to the DCs, e.g., the off-price operations. If your downtown’s trade area is dominated by middle-income households, then your retailers must deal with lots of DCs.

Affluent Shoppers. They are spending again, though with somewhat more caution about their purchases. About 30% of the luxury market sales are now discounts. Where they are present, retailers are generally doing well, especially those in malls and large successful downtowns that have lots of expensive condos, office workers, and foreign tourists. Retailers still feel confident about being successful if they can capture affluent shoppers and retail property owners like to attract retailers that attract affluent shoppers. However, suburban downtowns that had heavily recruited what were once considered trophy apparel retailers, such as Ann Taylor, Chico’s, Talbots, Nine West, etc., are seeing vacancies as these chains closed many stores.

Affluent shoppers account for 40% to 50+% of the consumer expenditures in most retail product categories, but they account for only 20% or so of the households, so there are not a lot of them to go around.

Millennials. They are now the largest age group, but they are spending far less than the Boomers at comparable ages. They value experiences more than material things. They also have far less money to spend on retail than Boomers did at comparable ages. They are burdened by recession impacted slow career climbs and heavy student loans. A large number are still living with their parents. They feel very comfortable shopping online.

Overall, the Millennials are an age group that retailers must deal with, but getting significant sales from them is very challenging.

Baby Boomers. They are no longer the largest age cohort, but certainly the one with the most money. They are aging, with more and more of them approaching retirement age. Many are empty nesters. Though they may have more money than other age cohorts, their retail purchasing has shifted as they aged and their needs and wants changed. Many retailers, such as Chico’s, have been badly hurt as their Boomer customers “aged out.” Retailers need to be smarter about how to tap this very important market segment.

Ethnic Urban Shoppers.  Areas with these shoppers, such as The Bronx and Elmhurst in NYC, attracted new retailers in recent years. However, it isn’t the large numbers of low-income shoppers that is attracting the retailers, but the smaller, yet still very significant numbers of middle-income households that have been overlooked in past decades. Moreover, the members of these ethnic urban middle-income households very often have cars and exhibit a preference for car-oriented, suburban-type retail venues.

Low –Income Households. Walmart and Amazon are now battling the dollar store chains to capture their retail expenditures. For years, the dollar stores have been opening the most stores, while many other retailers were closing them because they were focused on this low-income market segment. And, in doing so, the dollar stores were cleaning Walmart’s clock. Walmart and Amazon have both now decided to also target this market segment.

However, these households probably account for less than 20% of the nation’s retail spending.

Shopping Behaviors and Preferences. Americans are shopping less at malls. According to Cushman and Wakefield, visits to shopping malls in the US declined by an astounding 50% between 2010 and 2013. A lot of the consumer demand disgorged by the malls is undoubtedly going to e-retailers. Pew Research Center, for example, found that the proportion of Americans shopping online had increased from 22% in 2000 to 79% in 2015 (Pew Research Center, December 2016, “Online Shopping and E-Commerce”.) However, as I have mentioned in past Downtown Curmudgeon posts, my field visits suggest that e-retailers are not capturing all of the malls’ disgorged sales revenues. Many savvy downtown merchants are also capturing significant shares in smaller communities where failed mall anchors were the older department stores such as Sears, JCPenny, and Kmart.

That Pew report had a number of other extremely important findings:

  • “Overall, 64% of Americans indicate that, all things being equal, they prefer buying from physical stores to buying online.” In addition, the Pew survey found that most online shoppers did not do so because it was more convenient than going to a physical store. Together, these two findings suggest that it is what brick and mortar retailers are failing to do in their stores that makes people prefer online shopping. In turn, that implies improving in-store experiences will bring back shoppers. How to do that is the real question facing many of today’s retailers. The old ways are failings. What are the new ways that can succeed?
  • “Respondents reported that price is often a far more important consideration than whether their purchases happen online or in a brick and mortar store.” This shows the impact of the DCs.
  • “Fully 65% of Americans indicate that when they need to make purchases they typically compare the price they can get in stores with the price they can get online and choose whichever option is cheapest.” This again shows the impact of the DCs.
  • “Roughly eight-in-ten Americans (82%) say they consult online ratings and reviews when buying something for the first time.” This is also DC behavior.

The strongest impact of the Internet may not be through e-commerce purchases, but how it has restructured the way Americans now shop. We now:

  • Research online before we shop. The Pew findings suggest that the Internet is now influencing 80+% of our first-time purchases.
  • Have more targeted visits to brick and mortar shops. We go directly to the merchandise we had previously researched online. With shoppers also being directed to retail destinations by their Internet searches, will the store’s location become less important? Far too little attention has been paid to this possibility.
  • Spend less time in retail stores, do far less in-store browsing and make fewer impulse purchases. This means that making retail shops and the downtowns “stickier” for shoppers is more important than ever. In turn, that probably translates into a need to have much stronger downtown Central Social District functions and for stores to offer more socially congenial experiences.

What physical stores need to do to compete more successfully with online competitors seems to be 1) offering competitive prices and 2) providing a socially congenial and appealing retail experience. Among many savvy retail experts and retail landlords, wrapping retail purchases in highly enjoyable experiences has become their new mantra. Successful malls are looking more and more like sucessful downtowns with major public spaces, loads of restaurants and entertainment venues, office spaces, hotels and lots of residential units.

The Rise of E-Commerce

True, more and more retail expenditures are going online. For example, according to the Census Bureau, in the first quarter of 2010, e-commerce accounted for 4.2% of the nation’s total retail sales, but by the third quarter of 2017, it had grown to 9.1%. Nonetheless, a critical point is that most retail dollars are still spent in brick and mortar stores, though online sales is where the growth is these days.

However, when we look at the table above, it is apparent that online sales have much higher capture rates for many types of retail merchandise and that online now dominates or probably has a good chance of soon dominating, many product categories. Sales for items once thought relatively difficult for online retailers to make are starting to gain traction. For example, online apparel sales were once thought hard to do because customers would want to touch and try on the merchandise. Similarly, furniture was once thought hard to sell online because it involved big and bulky items. However, both apparel and furniture have seen significant recent online sales growth in recent years and projections indicate the potential for even larger future growth.

The food and beverage sector has long been considered the toughest for e-merchants to penetrate, but the entry of Amazon, especially with its purchase of Whole Foods, has many experts reconsidering their previous positions.

Amazon’s Whole Foods and physical bookstore ventures are perhaps best understood as critical experiments in how online and physical store operations can be most efficiently and most profitably integrated. It’s not a question of whether the online or physical stores will have the most sales, but how a retailer can get the most sales by optimizing how they work together. Having an omnichannel approach to retail is now generally accepted as the right meta-strategy. How to properly and effectively implement that strategy is the real question now on the table. If no retailer succeeds, then we certainly will be in a genuine apocalypse, but if a pathfinder can succeed, others will follow, and then our retail industry will be operating under a new paradigm.

Finding the right path most likely will involve a lot of trial and error. It must be adaptable for very large and small operations. Finding it requires firms with a lot of money and patience. Amazon’s first physical bookstores are an interesting, if far from successful attempt at such an integration — and Amazon recognizes that. So far, Amazon has not attempted similar innovations at Whole Foods, though the lower prices it ushered in are definitely noticeable at check out and much appreciated.

Old Dogs Are Learning New Tricks. For many years industry commentators were concerned about the ability of major legacy retailers to develop successful online presences. Certainly, when it came to online sales, legacy retailers were only capturing small shares – about 13.1% in 2015, according to my calculations based on Census Bureau data. In recent years, however, Best Buy has made a substantial turn around and Walmart, through heavy investments in its own website as well as its purchases of major e-retailers such as Jet and Bonobos, has exhibited considerable online sales strength. Industry observers have also noted, that though Macy’s and Nordstrom’s are still facing tough headwinds on both the customer and financial fronts, their online capabilities have improved substantially.  Now, their major problems are really what is and is not happening inside their physical stores and how they will implement an effective omnichannel strategy.

Retailer Demand for Space

Store Closings. Since the onset of the Great Recession, a lot of media and analyst attention has focused, quite properly, on retail store closings. In 2017, eight years after that recession’s end, experts are estimating, based on company announcements, that there will be a very large number of stores closed by retail chains this year. The total may exceed 6,800. Among those that are hardest hit are the mall-type retail chains stores, especially those in apparel and the older department stores, e.g., Sears, Kmart, JCPennys, Bon-Ton and Macy’s. Save for Macy’s, most of the department store closings are in malls in smaller, less urban and less affluent locations such as Scotts Bluff, NE, and Rutland, VT.

Many middle-income areas have long been facing store closings because the retail market has been bifurcating into higher and lower income tiers for well over a decade. Wealthier communities – e.g., Westfield, NJ, and Wellesley, MA, have not been immune. To some degree, this was because some of the “trophy” retailers they had attracted were precisely the apparel chains that were most challenged nationally and closing lots of stores. But, it was also probably due to the changing behaviors of their trade area’s residents, who are shopping less often, seeing shopping less as recreation and more as a chore, and integrating the Internet more into their shopping routines.

Perhaps ccounter-intuitively, poor neighborhoods and small towns have been the least adversely impacted by the travails of the retail chain store closings, mostly because they seldom had any GAFO chain stores. Ironically, with the growth of online GAFO shopping, small town residents probably now have better retail choices than ever before, while their local retailers really do not compete that much with those online merchants.

Troubling still is the research by F&D Reports that suggests 33 retail chains with a total of 34,450 stores are now “vulnerable,” their futures distinctly uncertain. Among them are Ascena (whose store brands include Dress Barn, Maurice’s, Lane Bryant, Catherine’s, Ann Taylor and Loft), GNC, Toys R Us and Claire’s. (See:  http://tinyurl.com/yd6nw2gb)

Some observers argue that, currently,  the root problem of these troubled chains is not Internet competition or careful consumer spending, but that they “are overloaded with debt—often from leveraged buyouts led by private equity firms.” ( See: https://www.bloomberg.com/graphics/2017-retail-debt/ ).  Much of this debt was incurred at a time when the Federal Reserve was keeping interest rates close to zero, but those rates are expected to rise soon as those loans are due and when they will also have to compete with a lot of other borrowers looking to refinance their loans. This major threat seems to result more from incompetent business practices, than from e-commerce impacts.

Store Openings.  Less often discussed are the retail store openings. About 3,300 openings are expected in 2017. Dollar stores account for about half of those openings! Far fewer, but still meaningful numbers of openings are coming from off-pricers, other discounters, supermarkets, some auto parts chains (e.g., Auto Zone), some beauty retailers (e.g., Ulta and Sephora), the physical stores of online birthed retailers (e.g. Warby Parker), fast fashionistas (e.g., Zara), and high personal service boutique shops (e.g., Moda Operandi in Manhattan).

This is a key point: increasingly online birthed retailers are opening brick and mortar stores,  e.g., Amazon, Warby Parker, Bonobos, Rent the Runway, Athleta, etc. There are several reasons why they may want a brick and mortar store. For example, some evidence suggests that physical stores, in fact, may often be more profitable than a pure online retail operation and that conversion rates are higher among visitors to physical retail stores than among visitors to retail websites.

Simon Properties, the nation’s largest owner/operator of retail malls, has just created a new program to facilitate e-retailers being able to affordably open pop-up presences in its 300 malls (see http://tinyurl.com/y8qalsuc ). Simon obviously sees e-retailers as the source of future successful retail tenants and is trying to ease their transition to brick and mortar operations. Simon is not alone in this. Savvy retail landlords across the nation are also focusing on these retail tenant prospects and all expect their numbers to grow.

Successful Malls.  Here is another key point that counters visions of a retail apocalypse: about 20% of the shopping malls are doing very well and they generate nearly three-fourths of mall revenues. They are “…located in affluent, highly populated markets that are tourist or economic hubs; and they’re owned by major mall operators who have the cash to make them even stronger.” (See:  https://www.cnbc.com/2017/01/26/why-these-malls-are-thriving-while-others-die.html.) Malls still can be very profitable if they are in the right location and well-managed. 

Stronger Demand for Smaller Retail Spaces.  Retailers are not only looking for fewer spaces, but also for smaller spaces than they were 10 years ago—about 25% smaller. This reinforces the declining demand for retail space.  Online birthed retailers may reinforce this trend if, like Bonobos, they have no need for large amounts of onsite storage space for merchandise, since their customers’ physical store purchases are all shipped to their homes or workplaces from its distribution center, just like its online orders.

In the past, many downtowns have been unable to recruit high quality retailers because they lacked large enough spaces. That may not be as much of a  problem in the future when spaces of 1,500 SF to 2,500 SF are much more desirable to retailers. This means that these downtowns would have less need for mixed-use projects that has been the way many of them – e.g., Cranford, NJ – generated needed larger retail spaces.

The photo below is of a J. McLaughlin shop that opened in West Hartford, CT around 2014. It only occupies about 1,500 SF and its storefront is certainly less than 25 feet

wide. I found the shop surprisingly narrow inside. Two of the chain’s older stores that I’ve visited in the past in East Hampton, NY and Wellesley, MA are much bigger and their storefronts are much wider.

High Vacancy Rates and High Rents in Too Many Places.  To a very significant degree, the problem of high retail vacancy rates has less to do with the impacts of e-commerce or deliberate consumers and more to do with district success, landlord greed and miscalculations, and retail chain management deficiencies.

NYC is a good place to observe the vacancy problem. In Q3 of 2017, its economy, as Cushman & Wakefield noted, was doing pretty well:

“New York City’s economy continued to grow in the third quarter, although the pace slowed after an employment surge during the second quarter. A critical driver of retail activity, steady New York City tourism contributed to this growth as a record 60.3 million tourists visited the city last year, with 50.0 million visitors to the Times Square area alone.” (See: http://tinyurl.com/y92kw3qb)

Yet, in Manhattan’s 12 major submarket areas, the “availability rate” of retail space” – a.k.a. the vacancy rate – averaged 18%, with a low of 7% and a high of 32%. (See above table). Five of the 12 submarkets had availability rates above 20%. One cause for these vacancies is the large number of closures made by GAFO retail chains, but they cannot explain the wave of independent retailer departures.  An executive at a large Midtown Manhattan BID explained that many independent operators in his district have been driven out by unaffordable rents, and those that survived have been compelled to move from their desirable avenue locations to the less trafficked and less expensive street locations. Also, for many of the departing GAFO retailers, there were many store locations across the nation that their managements could select for closure, but they probably picked those in Manhattan because either the equation of how many sales dollars their very high rents were buying access to was no longer favorable or they could no longer afford to keep a nonperforming Manhattan store just for marketing reasons. Such calculations are perhaps enhanced when retail rents in these 12 market areas averaged $1,115 PSF and ranged from a low of $280 PSF to a high of $2,939 PSF.

In recent years, the city’s media have produced numerous stories about the growing vacancy rates in neighborhood commercial districts and the wholesale disappearance of small independent merchants. Vacancies even sparked an editorial in The New York Times (see: https://nyti.ms/2hNwVuP ). The independents usually closed when their leases came up for renewal in a district that was on the upswing and they could not afford the huge asked for increases that could reach as high as 625% ( see: http://tinyurl.com/ycfzc4x2). Landlords asking for such increases from small merchants obviously wanted them out so they could attract national chains with much deeper pockets. Problems arose when the location and space demands of national GAFO chains declined substantially and their recruitment became far more difficult.

It is not hard to find similar stories in towns and cities of all sizes across the nation.

One frequent cause of the high rent increases is the successful revitalization or development of the commercial areas in which these storefronts are located. While district revitalization can understandably stimulate landlords to ask for increased rents, there is little evidence that many landlords can or want to calibrate their rent increases to what their current tenants can afford, even with their improved sales potentials, or that their conclusions about attracting far better paying retail chains were wise.

In some instances, abundant retail vacancies have been caused by local zoning that was incongruent with local market realities. In Arlington, VA, for example, zoning called for all new downtown residential buildings to have ground floor retail spaces. This requirement was probably motivated by an admirable desire to make or keep downtown streets pedestrian friendly. However, the development of too many mixed-use residential projects with street-level retail spaces meant that much more retail space was being developed than the market could absorb.

Elsewhere, in some downtown suburbs, developers have avidly built mixed-use residential projects with ground floor retail based on the expectation that the retail tenants would pay rents associated with newly constructed spaces. Unfortunately, creditworthy national chain tenants were slow to sign and independent merchants found the rents unaffordable. The result was unexpected long-term vacant storefronts and considerable lease concessions. While downtown revitalization advocates have long pushed for mixed-use residential/ground floor retail projects, it may be that in many downtowns that mix is no longer financially viable. Large downtown residential projects may be more cheaply and easily developed on sites within a few minutes walk of its main commercial corridor and still benefit district merchants.

Too Much Retail Space?  Of course, if a downtown has more retail space than the market can absorb, there will be plenty of vacancies. According to data from CoStar, total retail space in the U.S. totals about 13.0 billion square feet. That estimate includes both the total GLA in shopping centers and the GLA in other types of retail spaces, e.g., those in downtowns and neighborhood districts. (Source: CoStar Group, Inc. cited in  http://cwglobalretailguide.com/unitedstates/). With a current US population of 326.3 million, that translates into 39.8 SF of retail space per capita. Back in 2009, ICSC estimated that there was 14.2 billion SF of total retail space and 46.6 SF of retail space per capita. Some communities may have even more per capita retail space. For example, back in 2010, DANTH, Inc. estimated that Peoria, AZ had 58.7 SF of retail space per capita (see http://tinyurl.com/y8gsvaes, page 7).

Since about 2010, there has been a growing acknowledgment among real estate experts that the US has far more per capita retail space than any other nation and far more than consumer sales can support. The recent downsizing of retail chain demand for new locations and the square footage of each store increases that surplus. As is happening with failing shopping centers and malls, much of today’s retail-prone spaces can be expected to be re-purposed in the coming years. In downtown after downtown, recent years have seen vacant retail spaces taken by professional and personal service operations. Many downtowns also have a significant number of “occupied vacancies” – occupied storefronts no longer generating rental incomes, but the landlords allow their tenants to stay on in the belief that it is easier to attract a new tenant to an occupied space. These spaces are usually in poor condition and in suboptimal locations.

Yet, new downtown developments continue to have significant retail components. Their rentals often mean that existing downtown retail tenants are being attracted, creating vacancies in older and harder to lease locations.

The US probably has had its surplus of retail-prone space for decades. What has helped hide it, or at least divert attention from it, was that there was usually significant demand for the new spaces. New retail spaces with attractive characteristics always draw tenants away from less attractive spaces, whether there is a space glut or not. Older spaces were allowed to follow an untended downward drift in condition and value — unless they became too publically noxious and then were made part of some revitalization effort. One might argue, that many downtowns, for years to come, will need to think about how they will reuse their problematic secondary and tertiary level retail spaces. Finding Central Social District uses for them – e.g., restaurants, ice cream shops, childcare and senior centers, crafts co-ops, small business co-worker spaces, etc. – would strengthen downtown visitation and use as well as the remaining retailers.

Keep Your Eye on This: The Uses of Retail Spaces Are Changing

As space uses change, the demand for retail spaces and where retailers want them located will also change.  In times past, retail shops were all brick and mortar and operated as places where:

  • Most of a retailer’s interactions with customers occurred
  • Customers obtained most of the information they could use about potential purchases
  • The retailer’ sales transactions occurred
  • Customers took delivery of their in-store purchases
  • In recent decades, there has been a distinct trend toward depersonalizing the shopper experience. Salespersons became harder and harder to find. Retailers are trying to do away with cashiers at check-out points, pushing self-checkouts.

Today, those physical stores are:

  • Increasingly used as distribution points for online purchases
  • Increasingly used as showrooms for online purchases
  • Starting to become places to deliver intense customer service to high-value customers that have been identified online. In luxury retailing, in particular, the personal touch that leads to customer pampering is still necessary and impossible to deliver electronically. Other retailers, especially independents, are catching on.
  • Starting to try to create a convenient, congenial and entertaining experience in which the traditional retail transaction – merchandise identification, selection, sale, and delivery – can be enveloped.
  • Less important for providing information about merchandise, but very important for providing experiences with the merchandise. The retailers’ online website and social media activities are taking on more of the information dissemination functions.
  • Less important as the sales transaction locations. By meshing with the stores’ online capabilities, customers are given more options, convenience, and freedom.
  • Most importantly, searching to integrate their uses and operations with their firm’s Internet operations

These changing uses of retail space raise some interesting questions that are now probably still unanswerable:

  • How will they impact the demand for physical space? Retailers like Bonobos may need less storage space, but other retailers who are responding to online sales may need more warehouse-type space for storage, wrapping, and shipping.
  • How will electronics infiltrate further into the in-store experience through such things as beacons and artificial intelligence?
  • If the customers of retail shops are being strongly directed to them by online information, then does that mean that their geographic locations become less important? They do not have as much need to be easily “found,” but they still will need to be easy to get to.
  • In the future, will retail stores with a different mix of uses still benefit as much from being close to high pedestrian flows? Will that depend on the uses in the mix?

It’s Time to Recognize the Incompetency of Too Many Owners/Managers of Retail Chains and Retail Properties

It is obvious that the very stressful position the retail industry now finds itself in was caused not only by changed consumer behaviors and the immense impact of the Internet, but also by the flagrant ineptitude of many of the people who owned or managed important retail chains and retail properties.

Prior to the Great Recession, too many retail chains followed a simple strategy: more stores. More stores meant more revenues. More revenues meant higher stock prices and happier shareholders. There was an amazing tolerance for sales cannibalization between their stores.  Macy’s, for example, had a very high percentage of its stores that were located within 10 miles of each other. Discussions about the US having too much retail space were already underway in the mid-1990s, but it took the Great Recession for industry leaders to take that issue seriously.

Also, prior to the Great Recession, many chains did not correctly understand how much space they needed for their stores. The post-recession downsizing undertaken by so many of them confirms that assertion.

When one hears that Related Properties is considering the purchase of the entire Neiman Marcus chain that is mired in debt, just to assure that one of its stores will open in Related’s huge new Hudson Yards project in Manhattan, one must seriously wonder about the competency of the firm’s management.

A recent article by Bloomberg noted that: “more chains are filing for bankruptcy and rated distressed than during the financial crisis.” Often these bankruptcies involve long-lived, well-known chains that were taken private, using a lot of debt, by private equity firms. (See: https://www.bloomberg.com/graphics/2017-retail-debt/ ).  

 Of course, Sears presents a sterling example of blundering retail management. Once the nation’s largest and strongest retailer, the anchor of many shopping centers and malls and the owner of several leading merchandise brands, e.g., Kenmore and Craftsman, today it is on the verge of total collapse. It is a sign of Sears one-time strength, that it is taking more than 20 years of decline for it to die off. It took a lot of incompetent managers to continue the bleed out that long.

The Bloomberg article also noted an associated and very troubling “increase in the number of delinquent loan payments by malls and shopping centers.” A wave of new mall and shopping center shutdowns may soon be upon us as the loans are not refinanced.

When very high prices are paid for downtown office or residential buildings with retail spaces or for downtown retail structures, the new owners will most likely have to ask for commensurately high retail rents. Such rents may be completely out of whack with what quality retailers, be they chains or independents, are prepared to pay. Across the nation, in major downtowns, many recent high-priced buildings were purchased by foreigners or investors with little or no knowledge about local real estate or retail markets. Of course, there were also experienced real estate companies that bought very high-priced buildings that have proved troublesome– e.g., Kushner’s purchase of the building at the Devil’s address,  666 Fifth Avenue in NYC. One wonders if and how these buyers took future retail rental revenues into consideration prior to their purchases? It is reasonable to suspect that this type of building owner accounts for a lot of the pressure for higher retail rents as well as store vacancies in Manhattan and other places.

Then there are the developers of mixed-use projects in suburban downtowns that expected to attract GAFO retail chains. However, prior to construction too many had not even a glimmer about who those retailers might be. After construction, they found that few, if any, were interested. These same developers were also likely to expect quality independent retailers would have little problem paying unsubsidized new construction rents.

Of course, thankfully, there also have been a lot of savvy retail merchants and real estate developers.

Looking Ahead

Retail stores are not going away, but they certainly will be changing. There probably will be fewer of them. Yet, the internet will not and cannot capture all retail activity.

The retail stores of the future probably will be quite different in their uses and ambiance and probably better than today’s. What they specifically will look like remains to be defined.

Sociologists and economists have long known that bringing about massive socio-economic changes require a strong crisis that severely weakens existing social and economic structures, thus easing the path for the innovations to appear and take hold. In my opinion, that is what is happening in the retail industry today. The old retail paradigm has been greatly weakened, but the new one is emerging in fits and starts. Many pieces of the new retail paradigm are already there. Effectively fitting them together remains the challenge.

The time for downtown leaders and stakeholders to start dealing with the emerging retail paradigm is now. Otherwise, their downtowns may be significantly injured or miss opportunities for real growth as the new retail paradigm unfolds. Retailers who do not keep up with the changes will lose. Not all that try to make changes will succeed, but those that don’t try will definitely be losers.

Retail markets in the future will be defined as much electronically as they are geographically. For many, many retailers in smaller and isolated communities that means great new opportunities as well as new risks.

I’m told that the Chinese word for crisis also means both danger and opportunity. A lot of retail commentators have been focusing on the danger our retail industry is in. More attention needs to be placed on the opportunities.