Category Archives: EDOs

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

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/

Some Soul Searching About Why Do We Do Economic Development

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By N. David Milder

Jobs, Incentives and Huge New Expensive Projects

In the last few weeks I confronted an intellectual jolt that made me ask some very basic questions about economic development, the field I have been professionally active in for over 40 years. The causes of this jolt were the discussions in the traditional media and on LinkedIn about Amazon’s Long Island City 2HQ project and the opening of the huge $25 billion Hudson Yards project on the West Side of Manhattan’s Midtown CBD. The merits of both projects have been the subjects of significant debate – especially with Amazon reneging on the deal. The key concepts on these debates seemed to be:

  • JOBS. For the Amazon deal, jobs seemed to be the be all and end all of all of the pro-Amazon arguments.
  • THE DESIRABILITY OF HUGE NEW EXPENSIVE PROJECTS. For the advocates of both projects, the size and expense of both projects made them worthy, and the fact that they would attract the intellectually and financially blessed added greatly to their luster.
  • INCENTIVES. Criticisms of both projects were heavily cloaked in attacks of the large financial incentive packages given, both directly and indirectly to Amazon and Related, while proponents seemed to argue that direct incentives had no real cost – after all, no Brinks trucks were being driven up to the City’s treasury to take away  billions in cash.

What jolted me was that these discussions about big, important projects seemed to be vapid because they were missing so many really essential points. Indeed, this vapidity suggested that we, in the economic development field, had forgotten how to answer an elemental question and then use that answer in our professional activities. That key question is: Why do we do economic development? What is it supposed to achieve? I have been to countless professional conferences, but I don’t remember too much attention ever being given to that question.

Are Jobs a Means or an End? 

Jobs certainly are important. However, there are good jobs and bad jobs. Economic development should seek to maximize good jobs. Economic development should also try to provide good jobs for those who need them. All this would seem to be part of our field’s conventional wisdom. Amen.

Lots of Jobs Can Have Big Impacts That Can Be Good Or Bad, That Can Help Or Hinder Reaching Important Societal and Political Goals.  Unfortunately, not all jobs are good ones. The US, today, has an incredibly low unemployment rate. But, how many of those plentiful jobs pay a livable wage? How many people are holding several of those jobs because none of them alone pays enough to support their households?

Good jobs are also the means to many important socio-economic and political ends. They can enable system residents to have a better quality of life, enable a more equitable distribution of incomes, and reduce the extent and depth of socio-economic frictions. Unfortunately, what many people may consider good jobs, may also have bad impacts on such things as the environment, public health, housing demand and prices, commercial space demand and prices, stress on mass transit. It is precisely at this “system” level where the suasion of the arguments of the advocates for gobs of more jobs are most likely to fade or outright fail. It is also why such discussions are not likely to occur or be given import. It is also why questions such as this are almost never asked: how can 25,000 very high paying jobs in one relatively small area be absorbed without huge disruptions in the housing, market, labor market, public transportation, traffic congestion, etc.?

Jobs Are More Important to Some Economic Developers Than Others. The centrality of jobs to economic development practitioners varies. For those who are concerned about downtowns and Main Streets, jobs are not a key concern, save when they need to demonstrate the positive impacts of a new project. Job creation and development are much more salient to economic developers who are concerned about workforce growth and development, and those active in obtaining project approvals and funding from government agencies and foundations.

Jobs Have Become an Important Concern Because We Are Told We Can Accurately Estimate Them. Concern about jobs is also highly embedded in our politics and in our assessments of the economic impacts of large projects such as new buildings, stadiums and arenas, arts and entertainment venues, etc. This is facilitated by the ease with which input-output models can generate estimates about how many jobs such projects can generate.

Alas, the use of these I-O models often reminds me of a story the famous French sociologist Raymond Aron once told a seminar at Cornell about the former president of France, Valery Giscard d’Estaing. When taking a university exam and asked where the Seine was deepest as it courses through Paris, d’Estaing’s reply was something like: “Under which bridge? I am sure I can make a convincing argument for each one.” Similarly, these I-O models seem to have never met a project for which they cannot find huge positive benefits.  I would argue that the importance given to new jobs in many project assessments is, to an important degree, a result of the ability of I-O models to churn out positive employment impacts. I have come to treat the indirect and induced estimates of the I-O models with considerable wariness and skepticism. Reviewing them I keep in mind the axiom Garbage In, Garbage Out.

The Incentives Tie-In. Across the nation, scads of financial incentives have been given away for more new jobs, usually at an $XX/job rate . That was, indeed, at the heart of all of Amazon’s 2HQ deals. But, experience, has shown that far too often those jobs don’t show up or quickly disappear or are not the type pf jobs promised. For example, Amazon’s hoopla that 2HQ jobs will have a median salary of $150,000 seems to be very far from true for its new Nashville location.

Deal-Making.  In my years in the field I have met an awful lot of people for whom economic development is about making deals. These deals usually involve using public financial incentives to produce projects. A promised primary benefit of most of these projects is lots of more jobs.  Too often the content of the deal and its probable impacts are not as important as the making of the deal. 

Suggested Take Away. Jobs are undeniably important, but also a means to larger and more important economic development ends. We must not lose sight of those ends. Moreover, jobs, even those considered “good” ones, can have impacts beyond those on the job-holders that are beneficial or harmful. Those impacts are important to know and assess, though too often never looked into.

Jobs are often presented as the means by which the larger community benefits from a major project. Just knowing the number of jobs or even their pay ranges are really insufficient to assess a project’s real impacts on the larger community.

Are “More”, “Bigger” and “More Expensive” Always Better?  

Also embedded in the argument for the Amazon and Hudson Yards projects were that they are big or in some way the biggest, or the most expensive. Lots more workers, pedestrians, and residents, were taken as being desirable. BUT in the real world, you have to know a lot more about those jobs, pedestrians and residents. There can be too many of them that produce congested trains, buses, and auto traffic, that make sidewalks almost impossible to walk on comfortably, that provide more but lower paying jobs, that create a housing shortage and huge increases in housing costs. Do we really want every neighborhood to be like Manhattan or San Francisco or Seattle where those who can’t afford $1 million for a condo are hard pressed to find decent housing, where either midget apartments or shared housing –  the types of residential experiences the affluent definitely do not seek – are lauded as acceptable alternatives?

Walkability and high levels of pedestrian activity understandably have become almost religious mantras among downtown leaders, but many places in Manhattan have become almost unwalkable because of the density of pedestrians, and many tourist attractions in Europe are being overrun and ruined by attracting too many tourists. Often, as I walk through them, I think that Times Square and parts of Fifth Ave should have olive oil misters to lubricate pedestrian traffic.

If our downtowns are being changed into places that only can be used by people who can afford $1 million apartments, $500 per person meals and $500 theater tickets, will they still be everyone’s neighborhoods?

The fact that the Hudson Yards project is the biggest and most expensive urban project certainly does not in any way make it a “good” project for the community, for the city, for all of those who are neither its developer/landlord nor tenants, but who are paying $ billions for the project to happen. Compared to Rockefeller Center it is an outright gated community failure.

Just because a project might produce huge increases of something, be it jobs, housing units, money invested, etc., are poor reasons by themselves for doing the project. Why do we keep falling for the “more is better” types of arguments?

The Critical Density Issue

For a significant number of economic developers, particularly those with a partiality for urban areas, greater agglomeration and development density have long been seen as desirable community goals. Valid conventional wisdom recognizes that often there can be too much of a good thing, e.g., rain, food, fire, etc. Can there also be too much development density? One might argue that traffic congestion, growing pedestrian congestion, growing air pollution and garbage production might all reach the “too much” stage. A recent study has also shown that once our large cities reach a certain population level, their economic growth slows appreciably.   

Today, we can no longer assume that greater density will always be good. It is unfortunate that we are just beginning to look at where those cut off points might be.

Where Are Concerns and Discussions About Community, Equity, Justice and the Common Good?

These are the kind of concerns that I think best justify economic development activities and projects. It is amazing to me how often they are never raised when economic development projects, programs and policies are being discussed or how little attention is paid to them when they are. For example, one would be hard pressed to find them in the discussions about the NYC Amazon 2HQ or the Hudson Yards projects. While housing affordability was raised in the fight against the 2HQ project, incentives and jobs seemed to consume most of the oxygen in that debate.

For decades, downtown revitalization advocates argued that downtowns should be everyone’s neighborhoods. Can that aspiration be achieved when downtowns are increasingly being turned into places that even solid middle income households cannot afford to live or play in?

These concepts are fundamentally about values and often hard to quantify. They are also often very political. Discussions that involve them can be highly emotionally charged, even combative. Consequently, public officials may be inclined to want to avoid them. However, that avoidance does not diminish the importance of these concepts – or the incompetence and turpitude of too many of those public officials.

Who’s in Charge of Development?

Amazon’s 2HQ national effort initially drew a lot of my interest, but I slowly grew uneasy about it. The reason for my unease did not become clear until Amazon reneged on the NYC-LIC deal: Amazon and its needs and plans were driving things, not the needs and well-thought out plans and strategies of the responding communities.  Amazon was taking charge of the economic development processes in all of these communities so hungry for more jobs and huge investments in real estate. The cities were responding like giddy, compliant lackeys, anxious to give away anything to get such a prestigious corporation with all its promised jobs and investment dollars.

Amazon early on plainly established by its actions that they had an “our way or the highway” policy, but political leaders — many of whom claim to be powerful politicians — just accepted Amazon’s lead. Amazon reneged in NYC when it became clear it would have to engage in some real negotiations. They were never prepared to be a true development partner. They were/are more of a potential imperial development partner.  Cities do not need such imperious corporations –- they care mostly about themselves, little about the communities in which they are located.