Downtown Management Forum Recap: The Retail New Deal

Downtown Management Forum Recap: The Retail New Deal

Rebecca Kutner
Assistant Planner, Mercer Planning Associates

September 18, 2020

Downtown New Jersey is providing a series of virtual opportunities for downtown managers, economic development professionals, and public officials to exchange ideas about best practices related to downtown economic development in light of the COVID-19 crisis.

Downtowns need to start thinking beyond survival mode, and begin setting the stage for recovery. With the likelihood of widespread business failures and elevated storefront vacancy, the focus needs to shift to small business creation. The moment calls for nothing less than a “Retail New Deal” that incorporates a wide array of coalition partners, including district management entities, municipalities, community banks, community development financial institutions (CDFI’s), fin-techs, institutions, foundations and various others. This discussion was led by national retail consultant and Downtown specialist Mike Berne, President of New York City and San Francisco Bay Area-based MJB Consulting, about harnessing creative thinking, collaboration, and adaptability to encourage the timely emergence of new innovations and business models in response to changing realities and unforeseeable shocks. 

Recent articles by Mike Berne about this topic:

Other recent articles by Mike Berne about retail in general:

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Mike Berne is one of North Jersey’s leading experts and futurists on urban and downtown main street districts, specializing in the retail industry. He is the founder and president of MJB Consulting and has amassed more than 20 years of experience in conducting retail market analyses, devising tenanting strategies, and spearheading implementation efforts across the U.S., Canada, and the UK.

Downtowns carry a symbolic importance for how the community feels about itself and how it presents itself outsiders, and we judge communities based on the retail in downtowns.

Where We Are

Before diving into to the types of strategies municipalities, BIDs, SIDs, and other downtown organizations can employ to help downtowns recover, we need to understand where we are.

Part of the reason our downtowns have been suffering due to the lockdown, is because we have been overly reliant on what is called the experiential economy, which is centered around restaurants and bars. As we know, and have experienced, these types of businesses, which rely on in-person transactions and high turnover, have taken quite a hit.

However, these businesses were not the only ones to experience a downturn when the lockdowns began. There were also struggles in the discretionary soft goods retailers (clothing, shoes, accessories), which are prominent fixtures of downtowns. These struggles, along with the surge of online purchasing, seem to reinforce the idea that we are at the end of brick and mortar. Although, as will be discussed further on, this is not really the case.

Although consumer spending is low, it has held up better than economists predicted. However, with the uncertainty surrounding whether there will be more governmental stimulus measures, consumer spending will most likely not rebound to pre-COVID levels soon.

Business closures were also not as dire as originally predicted. According to Yelp data, approximately 50,000 – 70,000 retail businesses across the U.S. closed permanently between March 1st and August 31st. It remains to be seen how many more businesses will permanently close by the end of the year. When compared to how many businesses close during an average year though, these closures do not appear catastrophic. That said, among the small businesses that are still in business, many are feeling the strain of operating in these tough times.

The “New” Normal

Many are saying this is our new normal, but really, this is just the situation we are in right now. When economists’ make predictions about what the economy will look like in the future, the predictions are usually an extrapolation of the present. These types of predictions do not always work, particularly when they are applied to retail. This is especially the case now when the present is so unusual. Of course, any decisions we make or actions we take now will result in second and third order effects, but that is the case in “average” times as well.

Although they are very different events, the predictions made after 9/11 were similar – no one would fly again, no one would want to work in an office tower, or gather in large crowds, AND people would stay home. These predictions were based on surveys of how people felt in the short-term, but not necessarily how they would feel in the long-term. We have to focus on the long-term and the broader trajectories and how we can prepare for them, rather than the short-term feeling of uncertainty.

The Experiential Economy

One of the biggest questions is whether the experiential economy can survive in the long-term? There were signs that this segment of the economy was beginning to teeter even before the pandemic. Part of this comes from generational changes. Millennials are aging, moving to the suburbs and starting families, while Generation Zs are moving into more urban areas. These changes are going to dictate the strategies retailers use and where certain retailers locate.

During the pandemic, purchases of home fitness equipment boomed, as did home cooking. These new developments may carry over to post-pandemic times and effect the types of retail businesses that are in downtowns and main streets. The impact COVID will have on anchor properties, such as movie theaters (which many downtowns have), also remains to be seen. However, they were already in trouble with the expansion of streaming services like Netflix. Businesses that are considered third place(s) coffee shops, bars, or diners, may be establishments that can be relied to a greater extent in the future.

Discretionary Soft Goods

We are paying too much attention to the retailers, and not enough attention to the consumers. People will always need to clothe themselves and to eat, so while the players who sell the goods may change, the demand for the goods will not. There are structural changes going on in these categories that downtowns may be able to fill – bookstores are one example. Amazon hit the big box bookstores hard, Borders closed its doors and Barnes & Noble is hemorrhaging; however, the number of independent bookstores increased every year between 2010 and 2019. Overall, the number of independent bookstores jumped 50 percent during that time. There was a market vacuum that those retailers were able to fill. This may happen in other sectors, such as fashion, offering new tenant prospects.

Since the beginning of the pandemic, e-commerce has only gained more attention, with many consumers turning to online retailers over going into stores. However, municipalities and downtown organizations need to keep in mind that there is a sensuality to retail. By this we mean that retail is a sensory activity, you touch clothing, smell food, appreciate beautiful displays; and this plays a larger role than we may think. Shopping is a leisure activity, people like to go shopping, and will go shopping in stores again.  

In general, online shopping is not great for retailer’s bottom line. The costs of online retail are much larger than in-store for three main reasons; the cost of shipping goods to individual consumers, customer acquisition through advertising, and returns, which for online purchases is significantly higher than for in-store purchases. Another reason is the lack of impulse shopping for online retailers. Impulse buys are the things a store will entice a customer to purchase in addition to the items they went into the store to buy.

Although brick-and-mortar is still important, this crisis has forced many independently owned businesses to finally make an investment into building digital infrastructure. New platforms have grown out of this need, for example Beyond Main, which operates digital marketplaces for businesses in downtowns. Many retailers who already had both an online presence and a storefront have been able to make the numbers work better through online purchases, curbside pick-up, and orders from the store. The hybrid of “clicks and bricks” is a model that could play an important role in the future. E-commerce really only works if it is accompanied by a physical footprint.

Depressed Spending

The trend of experiences over goods has switched, given that there are less experiences available to consumers. Given the state of the world, this may only be temporary, so experiences, travel, eating out, fitness, may come back; but perhaps not to the same level they were pre-COVID.

Americans like to shop, consumer spending accounts for two-thirds of our GDP. Once we get past COVID, the American consumer will recover and there will be a lot of pent of demand for goods.

Business Closures

In the near-term, because we have become so reliant on the experiential economy, and we do have high shares of independently owned businesses, there will be elevated levels of store-front vacancies. But there is some room for optimism. The percentage of small business owners who have said they will, and can, continue operating under current conditions has almost doubled in the last three months. The ones who have been able to survive this long, who were resourceful enough, or had enough of a cushion to get through reduced or no traffic, have a good chance of surviving. Therefore, the attrition rate may be declining.

Another upside may be that, overtime, there will be lower rents and more eager landlords. Some landlords may also be less willing to evict tenants since there are not that many potential tenants to fill the space. This may not apply to all landlords, but overall, they have to be more responsive to tenants than they have been in the past.  Also, one positive to any restaurants closing is that there will be spaces with existing kitchens, which is the biggest upfront cost to new restaurants.

Relevant Trends for Downtowns

 Periods of high unemployment lead to high entrepreneurship – we saw this after the Great Recession. There is also opportunity when industries are in transitional periods. Long time platforms for distribution are going away, such as department stores, so many brands are opening their own storefronts to reach customers. This is something downtowns could take advantage of.

The best aspects that were in downtowns and main streets already, have in recent years been co-opted by more conventional suburban formats. For example, the chef driven foodie movement and the craft/maker movement now appear as artisanal food halls or as luxury stores in malls. Lifestyle centers and grocery-anchored strips will also be more aggressive in pursuing these trends. This means that downtowns and main streets will need to incubate new formats and new paradigms to stay relevant and differentiate themselves from these other retail centers.

What could a new paradigm look like?

As suburbanites increasingly wanted more walkable urbanity, this is also known as the “suburbanization of hip.” As millennials have moved to the suburbs, they have brought with them not only their preferences for goods/services, but their preferences for the urban landscape. As a result, downtowns have begun to change, and these changes can already be seen across the New York Metropolitan area and in North Jersey.

What does the retail mix start to look like?

There may be fewer restaurants and bars, but third place venues that serve an important social purpose may become more common. If work from home remains in place once we are past the pandemic, people may want the option to leave their homes and work from coffee shops, cafés, and the like as they offer some sense of connection. Quick-service and fast-casual eateries (including franchises) may also be the way of the future.

Retailers that create “treasure hunting” experiences, like TJ Maxx, continue to show strong earnings and are much harder to translate to online. This segment of the retail economy also includes second hand and vintage stores, which align not only with the economic downturn, but the concept of circular retail which focuses on sustainability and “recycled” clothing over new.

An emerging concept are brick-and-mortar platforms, which are playing the same role that department stores once played. They provide a physical platform for brands that are upcoming or more established, many that are digitally native, but cannot open their own store fronts. Examples include Neighborhood Goods and Showfields in New York City and could be transplanted to a main street.

Pamper-niche services, such as beauty salons, do not tend to require a lot of start-up capital or huge over-head, so these types of retailers may be more prevalent in the future. Also, healthcare retail is likely to flourish, given the size of the baby boom population in the suburbs and the size of the industry.  

As always, the retail mix for each downtown will look different. There is no one size fits all formula for the types of stores that will populate your downtown.

Market Positioning in the Wider Competitive Ecology

Retail is not just about goods and services, it has also always been about aspirations – especially in downtowns. It is about how we want our community to see us and how we want other places to see us. The question we need to ask ourselves is what aspirations we can realistically realize in our downtowns. It is important to keep in mind, when trying to answer this question, that there is a broader trade area. The broader trade area is not always coterminous with municipal or district boundaries, so we also need to ask what types of retailers will resonate with the broader trade area.

That must be figured out in the wider competitive ecology, that is the other downtowns or retail areas consumers can go. The ecology is in transition, as more conventional suburban outlets, such as malls or big box power centers, decline and close. Thus, more analysis of this changing market is needed in order to more accurately create the retail mix for your downtown.

Ideas for Implementation

During the recovery we need to be building and nurturing an “eco-system” for the creation of new small businesses that will fill the vacant store fronts. There are a number of ways that this ecosystem can help small businesses, not only with startup capital and risk mitigation, but also platforms that lower barriers of entry, such as retail incubators, or loosening ordinances and regulations that make it harder for businesses to open.

Towns or BIDs could also serve as a match maker for co-locators, which are retailers that operate out of a share space. What may also be helpful is retail resiliency training, so small businesses can be better equipped for the future. On-call business services could also be provided by the downtown organization.

Given the realities of municipal budgets, much of this work may have to fall to main street organizations. There are other stakeholders as well, CDFIs, community banks, local foundations, and FINTECs (tech start-ups that are using technology to develop or improve financial products and services) could all be options to help finance the creation of new businesses and aid existing businesses.

While municipalities may not be in a position to offer financial incentives, they can offer other types of incentives. Municipalities could also partner with land banks that keeps property in the hands of the community or community anchored institutions, such as community banks.

As we rebuild our retail mix, we need to diversify the types of retailers so that no one segment takes over and makes downturns vulnerable.

Discussion:

  • Are we allowed to prospect for tenants since we don’t own the real estate?

Prospecting for tenants is usually, if not always, in support of municipalities and landlords and it requires that you ensure you have a “buy-in” beforehand. In many communities there is a real openness, especially when there aren’t many prospects. Brokers, in general, do need to be involved to make those connections between tenants, landlords, and the BID.

When stepping into this role, it is best to work with the willing participants first. Don’t waste time chasing after reluctant or absent landlords, at least in the beginning. Capture what information you can from past tenants and neighbors. When you are successful with willing landlords, the others will likely come to the table on their own.  *See also the Real Estate Recovery forum recap related to Downtown Leasing Plans.

  • What are container villages?

Are collections of many different shipping containers that have been retrofitted to provide retail space and/or incubator space. Publicly owned space is perfect for this type of retail space. It also provides a lower barrier to entry for entrepreneurs. Related article/example in New Jersey: Jersey City Transforms Four Shipping Containers into Entrepreneurial Offices Known As ‘Container Village’

You have talked about oversaturation as being problematic for main streets. Pre-COVID, craft breweries were increasingly popular as an economic development tool. In your opinion, A) were we close to saturation pre-COVID, and B) how are craft breweries weathering the storm and do trends suggest they will be equally popular post COVID?

Craft brewing has grown significantly over the last two decades, and surpassed levels of market share that many may not have predicted. Some surveys show that it accounts for over 20% of the beer market, which means it has become mainstream. The specific market will determine if the craft breweries have reached their saturation point. New Jersey may still have a way to go before that point.

During COVID, we noticed that the craft breweries that had already secured shelf space at grocery stores were able to weather the shutdowns better than those that were much more reliant on tap rooms. The trend of craft breweries will most likely continue; however, there may be changes in the next decade in terms of overall alcohol consumption. Additionally, corporations like Budweiser are buying up craft brewers, which may mean that downtowns will have to reinvent again.

New Jersey liquor laws prevent micro-breweries from serving food (unless they have a traditional consumption license), so we don’t get the breweries with nice restaurants and entertainment like you see elsewhere in the country. Many do the best they can by bringing in food trucks. This is at least one factor into why New Jersey might not yet be oversaturated. On a side note, COVID-19 has only exemplified the shortfalls of New Jersey’s arcane liquor license laws, and there is a renewed sense of urgency for reform.

  • What do you think are best in class technical services being provided by BIDS that we can use for New Jersey small businesses?

The most effective technical assistance tools tend to be ones that offer a very discrete benefit to those merchants who want assistance, whether that is connecting them to online platforms or specific financial assistance. Often times, technical assistance programs aim to provide expertise to merchants that they don’t necessarily ask for or want. Communication is key – give them what they want. For example, several BIDs in New Jersey have set up virtual storefronts for their downtowns, and provided financial and technical assistance to merchants that participate. Another example is Digital Detroit that encourages merchants to make the leap to online presence.

  • What about the advent of co-operative stores? For example, in Asbury Park a bookstore was turned into a co-op, so it is now more or less community owned. Is this a portent of the future in terms of filling some vacancies?

Co-ops are very difficult even in normal times, in terms of creating them and then sustaining them. There needs to a certain level of financial wherewithal and the potential member base needs to be more financially stable. What we have seen in some cases during COVID, is individuals using crowd sourcing campaigns to keep businesses afloat. Another interesting model is social enterprise, which enables a company to integrate social impact into business operations and prioritize social goals.