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The Future of Downtown RetailA Presentation to the International Downtown Association

Michael Stumpf, AICP, CEcDPrincipal, Place Dynamics

www.placedynamics.com

INSIGHT AND INSPIRATION FOR COMMUNITY VITALITY

The Future of Downtown Retail

Michael Stumpf, AICP, CEcD [email protected]

he last decade has been a period of unusually strong retail growth. This was true of sales and of the total amount of retail space covering our landscape. In the midst of a severe recession

is easy to look around and say that the changes in today's retail environment are the result of a faltering economy. But to do so would be an oversimplification that fails to take notice of some dramatic changes going on in the ways in which we live, work, plan, and shop. This golden age of retail has come to an end. It is not good news, but it is not all bad either. Our downtowns may be in a better position to capture future retail development.

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Let's begin by addressing the economy. Unemployment is rising, incomes are dropping even among those still employed, consumers no longer have easy access to credit, and most of us have taken a hit on our assets, including the home values that fueled a good share of total spending in the last few years. This would be enough to cause turmoil in the retail sector even if a number of more fundamental shifts were not occurring.

A brief history of retail can help to set the stage . Until 150 years ago most retailing was done through independent small shops located in downtown business districts. This began to change with the advent of catalog sales toward the end of the 19th century. We began to see the first chain stores not long after. The growth rate could be staggering. For example, Montgomery Wards grew from strictly a catalog operation to having over 500 stores in just four years. These new chain stores displaced independent businesses and helped to spur the suburban mall devel-opment that dealt the first major blow to downtown retail.

The Future of Downtown Retail - Presentation to the International Downtown Association, Michael Stumpf, Place Dynamics © 2009

1860 1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000

PowerCenter

MallDowntown and Neighborhoods

Independent Business Chain StoresMega

Chains

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Catalog SalesSelf-Service

First Chain StoresWalmart, Kmart, andTarget Open First Stores

Lifestyle Centers

As the "chaining" of America continued it gave birth to new formats that would further cripple downtown and lead to trouble in the mall as well. Discount stores were not new in 1962, when Kmart, Target, and Walmart all opened their first stores, but these three have grown to dominate the retail landscape. Along with other big-box and mid-box retailers, they have grabbed an ever-increasing share of spending in many categories. Unlike other stores that might locate in the mall, these stores gave birth to the power centers and strip centers that pulled more customers from downtown and the mall. It is an ironic twist that in an effort to regain customer traffic the mall developers turned to a new format - the lifestyle center - which is based on the traditional downtowns that malls helped to destroy. After initial interest, research is starting to show that shoppers are growing tired of lifestyle centers.

So where are we today? Bankruptcies, mergers, and acquisitions have all but eliminated local and regional chains, and increasing concentration is robbing us of the variety that makes shop-ping an interesting experience. Malls are struggling, lifestyle centers do not appear to be a panacea, and the recession is making it clear that we have overbuilt many of our suburban strips. It appears as if a change is needed.

Perhaps the recession is a transition to something new

I opened this article with a statement that the changes we are seeing in retail today are more than the result of a deep recession. Four trends are converging in a "perfect storm" that will dra -matically impact the retail sector.

Demographic trends

Every generation follows a spending curve. We start out as children spending very little and in-crease our purchases as our income grows. And then around retirement age we begin to spend less. The Baby Boom, that largest generation, is now beginning to retire. Generation X is much smaller and Generation Y is just beginning to spend. To further complicate the picture, these younger generations have much different interests and desires than the Boomers. This is equally true in work, housing, and shopping.

Growing ethnic populations are a second demographic trend shaping future retailing. We have all heard that it will not be long before minorities become the majority. They are already a major force in retailing. We are beginning to see efforts among chain retailers to reach out to these di-verse populations, as well as the arrival of new or foreign chains to accompany the independent merchants serving these markets.

Urban growth and sustainability

Smart Growth has always been embraced by advocates of downtowns, as many see its principles as benefitting urban centers and redirecting development inward. The real test is whether the general public embraces it, and evidence is starting to pile up to say that it has. A growing seg-ment of the population, from retiring empty-nesters to young singles, are showing a preference for urban living. The population has stabilized, and in many communities is growing within the urban core. Walkable downtowns and neighborhood shopping districts have been reinvigorated by this trend, which most analysts believe will continue to grow once the housing market sorts it -self out and begins to grow again.

Retail Consolidation

There are fewer retailers around now. Decades of consolidation have left us with a handful of de-partment stores, three major office supply chains, three major hardware dealers, two-and-a-half discount store chains, one electronics giant, and one bed and bath outlet. We are bored. Bore-dom demands a counter-trend. It can happen downtown.

Internet sales


Lastly, we should consider the Internet. A growing proportion of sales are occurring online Cer-tainly online sales will continue to grow, but what may be the long-term prognosis for retail in general, and downtown in particular? Will online sales lead to a scaling back of the major chains and expanded reach for smaller retailers? The Internet could be an opportunity for downtown businesses to supplement their sales and compete effectively against larger local competitors. The jury is still out on this one, though, and we will have to wait to see the end result.

Shoppers are making lifestyle and consumption changes

Analysts estimate that 85 percent post-recession spending could return to about 85 percent of pre-recession levels, with a greater share of cash purchases. That alone has implications for re-tail, but we can also expect some basic shifts in behavior. Most interestingly, there is a shift from aspirational shopping with a focus on luxury, quantity, and conspicuous consumption, as we have seen in the flight of shoppers from higher-end boutiques to mid-tier and discount stores such as Kohl's and Walmart. Shoppers now seek value, quality, and simplicity. Perhaps not merely coinci -dentally, these are the same adjectives often used to describe Generation X, while the tastes we are leaving behind could be more closely tied to the Baby Boomers.

Expanding on the ideas of value and quality over quantity, there is evidence to suggest that shoppers may be purchasing fewer, but more meaningful items. If what is not needed or not wanted badly is not being purchased, then consumers are buying what they truly need and what they truly desire. This can bode well for specialists who stock and offer knowledge in specialized sectors. In other words, the beneficiaries are not likely to be the mega-marts, but rather the niche retailers who are more likely to be found downtown.

Shoppers have a growing interest in community. This can be seen in preferences for green and fair trade goods, patronage for local businesses, and a desire for locally-sources products. Often, these are perceived as supporting the local community or offering a better quality or freshness. The independent businesses and small chains that often dominate downtown retail are uniquely positioned to cater to this lifestyle trend. They can easily identify local suppliers and adjust their product mix, whereas centralized purchasing makes it difficult for chains to do the same. We should be aware that chains have recognized this and are seeking to redefine the meaning of "lo -cal" in response.

Lastly, we should note that these observations have been consistent across all ranges of income, and have been global in scope.

The product dynamic is changing

Discounters, big-box specialty stores, and grocers are scaling back the number of SKUs they carry in their stores. Think about your last visit to one of the office supply giants. At one point you might expect to find a wall of different papers, in many colors, finishes, and weights. That se-lection has been pared down considerably. The story is the same for all office supplies, groceries, hardware, and other types of products.

As a result, the top brands gain shelf space at the expense of less popular items. On top of that, private labels are surging, taking up additional space on the shelf. Smaller brands and products are being squeezed, getting less shelf space or having their products no longer carried. Alterna-tive channels or outlets are more important than ever to these manufacturers. For some, these may be the only places where their products are carried. Downtown independents and small chains can use this chance to differentiate themselves from the larger competitors, and that leads us to the next observation....

Boredom is taking over


Shopping is a favorite activity. Whether at home or on vacation, people indicate that one of the activities they most often engage in is shopping. At the same time, people are indicating that they are dissatisfied with the shopping experience. We all know what it is like to walk into a mall, regardless of the city and state, only to find the same Macy's, Gap, Eddie Bauer, Old Navy, Sbarro, Panda Express.... Consolidation has robbed us of variety and of the local flavor that made shopping a fun activity. Malls are no longer in fashion and lifestyle centers are losing their luster.

Downtown may be the sole exception to the "anyplace" syndrome. Downtowns, developed over decades by dozens of individuals, have the architectural and design variety lacking in the malls. Downtown has a history and a story to tell. It has unique retailers and restaurants. It has a diver -sity of uses and people. Hopefully, downtown is not a sanitized and boring environment like the mall. Downtown is authentic. Downtown is the real thing.

The question for us is whether we do a good job of letting downtown be that unique environ-ment. We can make the same mistakes as the developers of malls. Our penchant for major rede-velopment projects can replace a quirky and genuine block of storefronts with a bland or artificial facade. Financing can lead us to favor well-known chain names over local and unique businesses. Before long, downtown may look too much like the mall.

We should also be aware of the threat posed by developers luring downtown businesses to their malls and other locations. Until very recently this was not likely to happen because retailers were so rapidly expanding. A developer could go to a single chain and sign multiple leases. There was less work involved in that than in trying to find, qualify, and negotiate single leases with indepen-dent merchants who were more likely to balk at some of the terms of a mall lease. In today's en-vironment, where the national vacancy rates has hit ten percent, few chains are expanding, and many stores are closing, independent downtown businesses are looking more attractive.

Serving a neighborhood need

I can't conclude before touching on one resurging aspect of downtown retail. Downtown may be a destination for a community or region, but it is also the shopping district for its neighborhood. Over the last few decades, as population growth has occurred elsewhere and businesses have moved out, residents of the downtown area have been presented with fewer options for meeting their daily shopping needs. With new housing going into downtown again, these needs are be-coming more acute. Downtown populations are often large enough to support pharmacies, food stores, and other basic retail needs. Adapting formats and identifying viable locations is often the challenge.

Downtown has an opportunity

Our economic recession and retail slump are coinciding with a convergence of trends that is re-shaping the retail environment. Demographics, interest in downtown housing, unique businesses, cultural shifts, and chain retail practices are creating opportunities while retail consolidation, boredom, and financial issues are presenting hurdles for malls and the chain retailers who oc-cupy them. Perhaps more than at any other time in the last several decades, downtowns may be in a position to recapture a share of the market that they long ago lost to malls and strip centers.

Realizing this opportunity may not be easy. Mall owners and developers will be competing, reaching out to downtown businesses and launching new formats to retain or grow market share at the expense of downtown. In our efforts to seize the opportunity, we face the prospect of mak-ing the same mistakes as the malls, wiping away the history and unique buildings and busi-nesses that make downtown different. That would be a loss, because downtown is "the real thing", with unique experiences to offer. This is its secret, and the quality upon which its future will be built.


Seven Retail Trends to Watch

Michael Stumpf, AICP, CEcD [email protected]

here is a simple secret to predicting what kinds of retailers will be growing in future. Look for significant lifestyle and demographic trends. These shape how we live: our needs, our de-

sires, and our priorities. In turn, they determine what we will buy and where we will shop. Assess-ing these changes can help us to pinpoint the retail product lines and store formats where growth may occur. From this we can make changes in the way we design shopping districts to become the location of choice for these businesses. The following trends are among those to watch.

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1. Our love for pets

I devoted an entire article to this topic last year (Pet Friendly? Why Catering to Pets Makes Cents)1. Pets have gone from being simply an animal to being a member of our families. With this very fundamental change comes a shift in how we buy for them. The result is a growing number of pet-oriented businesses, from basic pet stores to pet bakeries and pet hotels. In addi -tion to making room for these businesses, I argue that there is an advantage to creating a down -town environment that is welcoming to pets, and a destination for their human companions.

2. Nesting - the home and garden trend

Here is another retail segment I have covered before (Making the Connection Between HGTV and Downtown Revitalization, and The HGTV Effect Revisited). Writing in 2006 it appeared that this was one of the hottest opportunities, with rapid growth in the number of stores. I noted some concern about the housing slump that was beginning at the time. Following up last year, I still believe this to be a future growth opportunity. Even now, people are spending in certain areas of their homes. Since they are spending more time at home, people will continue to spend to have an environment in which they can feel comfortable. After the recession, our interest in home en-vironments will bring vitality back to these retailers.

3. Health and alternative health products, and products for the reluctantly ag-ing

The aging population is creating a demand for health-related products. Two elements of this are particularly interesting. First, there is a growing acceptance and exploration of alternative health products and services. Secondly, the Boomers are desperately trying to maintain their younger selves. This is leading them to spend freely on products and services meant to help them look and feel younger, even if not to actually help them maintain their health.

4. Goods from or targeted to growing ethnic populations

1 To view copies of the articles mentioned here, visit www.placedynamics.com, or visit Michael Stumpf's site at www.linkedin.com or www.slideshare.com.


Growing minority populations will help to grow and diversify the retail sector in several ways. As consumers, ethnic minorities demand products that have not been carried in existing retail stores. Some stores will begin to cater to these populations, but we can also expect to see many new chain and independent retailers. Recent immigrants are among the most entrepreneurial Americans, and the stores they open will reshape the character of many communities. Many of the goods they carry may be destined to become new staples of the mainstream economy.

5. Green, sustainable, organic, and local products

Tying into rising consumer interest in community and sustainability, there is an increasing inter-est in stores that carry environmentally-friendly, organic, and locally-produced items. This is equally true in small towns and big cities. Outside of a few chains (Whole Foods, etc.) this seg-ment of the market is still dominated by independent businesses. It is a natural fit. A locally-owned store has the credibility of the marketplace.

6. Experiential retail environments

There are five considerations that go into the decision about where to shop. The experience a shopper receives in a particular store or place is one of these considerations. A growing number of stores are focusing on this as a strategy to lure customers. Approaches can be very simple, such as creating and reinforcing a storyline through products and design. Many more stores offer demonstrations, seminars, instruction, or other activities to bring people in, sell products, and build a loyal following. Still others engage the customer in preparing the product, such as gourmet cooking to prepare the family dinner.

7. Ready to go / anytime

If you have ever picked up a rotisserie chicken from the grocery store for dinner, then you are part of this trend. In a hectic world, people are seeking to save time by letting others do their work for them. Prepared foods is a big part of this trend but it can also be found in other ser-vices. The other way they save time is through flexibility. In the fitness industry, this is popping up in unstaffed gyms where members have 24-hour access. Other retail and service environ-ments will follow suit.


PLACE DYNAMICS

About us ▪ Place Dynamics provides the research, analysis, knowledge and strategies to help communities realize their vision for economically successful and attractive neighborhoods and business districts. Our profes-sional staff are leaders in economic development, community planning, and market analysis.

Formed in 2004, we have a nationwide practice serving local and state government, the non-profit sector, and private developers. Some of the core services we offer include:

Economic Development ▪ We offer a broad array of services to eco-nomic developers, including overall economic development planning, in-dustrial park feasibility and design, revitalization planning, industry target-ing, impact studies, and entrepreneurial development strategies.

Business District Vitality ▪ Whether a traditional downtown or a high-way commercial district, we have the experience and contacts to help you understand and act on the available opportunities for growth and develop-ment. We combine market knowledge with effective strategies to position your commercial areas to compete in the market.

Market Analysis ▪ Our work with numerous retailers and communities has given us the insight to identify and capture the prospects for growth. In addition to retail strategies, we have extensive experience in housing, office, and industrial market analysis within existing and developing areas. We also provide impact analysis for big box and other new development projects.

Community Planning ▪ The ideal client for us is one that wants an ac-tion-oriented plan based in market realities. Our focus tends to be on spe-cific areas such as neighborhoods or redevelopment sites. We excel at capturing community vision and realizing it through detailed implementa-tion strategies. These are not plans that “sit on the shelf”.

Development Planning ▪ We work with a several developers and retail chains to identify sites for new development projects, research market op-portunities, and develop concept plans for commercial, industrial, residen-tial, and mixed-use projects.

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