State of the Retail Sector: Challenges and Opportunities for San - - PowerPoint PPT Presentation

State of the Retail Sector: Challenges and Opportunities for San Francisco’s Neighborhood Commercial Districts

September 5, 2018

• Ho

How are w are national trends in national trends in the re the retail tail, restaurant, and , restaurant, and per personal ser

• nal services

ices ind industries af stries affecting b cting businesses in San sinesses in San Franci ancisco’s Neighbor s Neighborhoo hood Comm Commer erci cial al Districts (NCDs)? Districts (NCDs)?

• Wh

What lo at local c cal challenges d allenges do San F San Franc ancisco b sco businesses f sinesses face? ? E.g., changing customer base, employee recruitment and retention, real estate conditions.

• Wh

What c at charact aracteristics d ristics do successful NCDs sh successful NCDs share? are?

• How might b

How might businesses and sinesses and NCDs need NCDs need to ad adap apt t t to remain successful giv remain successful given n nati national al trends trends?

Introduction

Concerns motivating the San Francisco study

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National Trends

• Major re

Major retailer tailers are s are closing st closing stores in

• res in record number

record numbers, s, reflecting a national

• versupply of retail space, increased competition with online sales, and (for some

retail chains) debt obligations associated with leveraged buyouts.

Expanding and contracting retailers

Note: Only categories for which data are available are shown. Different sources vary in reported numbers. Source: ICSC and PNC Real Estate, 2017, from Bloomberg’s 2017 article, “America’s Retail Apocalypse is Really Just Beginning”

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• 2,000
• 1,500
• 1,000
• 500

500 1,000 Home Entertainment Apparel Footwear Department Stores Bookstores Sporting Goods Home Furnishings Drug Stores Miscellaneous Retail Variety Stores (Dollar Stores)

National Announced Net Store Openings for Selected Retail Categories, Q1 to Q3 2017 (Reported Openings Minus Reported Closures)

• Discount st

Discount stores are

• res are seeing continued gr

seeing continued growth, wh th, while lu ile luxu xury b brand ands are are stru struggling. ggling. Discount retailers are adding stores, including discount clothing stores (TJ Maxx, Marshalls), discount grocery stores (Grocery Outlet, Trader Joes), warehouse and general merchandise stores (Costco, Target), and dollar stores.

Restructuring of the national retail, restaurant, and personal services industries

National Trends

• Nati

National ally, gr , growth in re th in retail tail and restau and restaurant sales is concentrat rant sales is concentrated in ed in a a few w cat categori gories including online sales, food and beverage stores, restaurants and bars, building materials and home furnishings, and health and personal care stores.

$0 $100,000 $200,000 $300,000 $400,000 $500,000 $600,000 $700,000 $800,000 2016* 2015 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 Millions of Dollars

Estimated Annual Sales of U.S. Retail Firms by Type of Business: 2000-2016 (in Millions of Dollars, not Adjusted for Inflation)

Food and Beverage Stores General Merchandise Stores Restaurants and Bars Online Sales and Other Nonstore Retailers Building Materials, Furniture, Home Furnishings Health and Personal Care Stores Clothing and Clothing Accessory Stores Sporting Goods, Hobby, Book, Music,

• Misc. Stores

Electronics and Appliance Stores

Based on monthly sales for 2016; annual 2016 estimates have not yet been released. Sources: U.S. Census Bureau, 2015 Annual Retail Trade Survey (released March 6, 2017) and Annual Revision of Monthly Retail and Food Services: Sales and Inventories—January 1992 Through March 2017; Strategic Economics, 2017.

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National Trends

• Online sales are

Online sales are driving re driving retail gr tail growth th, and , and expanding int panding into ne new cat w categories. gories. Nationally, non-store retailers accounted for 40 percent of retail sales growth between 2014 and 2016.

• At the same time, t

the same time, technol chnology is allo gy is allowing re ng retailer tailers, restaurant o , restaurant owner ners, and , and ser service ice pr provider iders t s to int integrat grate bric e brick-and-mor and-mortar and ar and online sales strat

• nline sales strategies.
• gies. Including
• nline sales, app-based delivery services, and online reservation services.

Increasing influence of e-commerce

25% 19% 17% 16% 14% 13% 13% 12% 10% 10% Books, Gifts Furniture, Home Sporting Goods Apparel Office Supply Department Stores Toys Health, Beauty Shoes Electronics E-commerce as a Share of Total Revenue, by Retail Category

Source: JLL, 2017, “Bagged or Boxed? The Future of 13 Retail Categories.”

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National Trends

• E-comm

E-commer erce emplo ce employment is gr ment is growing, as ing, as o

• verall ret

erall retail emp il employment remains flat ment remains flat. In the last five years, national employment attributed directly to e-commerce has doubled – even without accounting for associated increases in warehousing and logistics jobs.

• While there is a

While there is a national o national over ersupply of supply of trad aditional ret itional retail sp il space, d ace, demand fo mand for r “last ast mile” distributi mile” distribution space is gr

• n space is growing.
• ing. This includes warehouses located within close

proximity to major population centers (e.g., five to seven miles), as well as lockers and other types of small-scale distribution and fulfillment facilities.

Employment & real estate impacts of e-commerce

Source: Flickr Commercial Use Photographs; see footnotes for citation.

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National Trends

• Americans are

Americans are increasingly spending increasingly spending their mone their money on e y on experiences – periences – suc uch as h as dining, per dining, personal ser

• nal services, and

ices, and fitness tness – – rather than objects. ather than objects. Increased spending

• n food away from home, health and wellness, and travel.
• Retail st

tail stores are es are experimenting with ne perimenting with new w strat strategies t gies to capitalize on increasing capitalize on increasing demand f demand for e r experiences.

• periences. For example, by serving food and drinks, offering classes
• r events, and expanding opportunities for customers to interact with products

before purchasing.

Growing importance of offering an “experience”

Source: Bird & Beckett, 2015 (left); San Franpsycho 9th Avenue, Yelp; 2017 (right)

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San Francisco’s retail is starting to feel the impact of these national challenges

Impact of National Trends on San Francisco Retail

*Note that because food for home consumption and prescription medications are not taxable, the taxable sales data shown here significantly underrepresent total (gross) sales at food and drug stores. Sources: San Francisco Office of the Controller, 2018; Strategic Economics, 2018.

$0 $10 $20 $30 $40 $50 $60

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Annual Sales Tax Revenue Millions

San Francisco Annual Retail Sales Tax Revenue by Category, 2005-2017

General Consumer Goods Restaurants & Hotels Food & Drugs

Demand for ground floor retail space in the NCDs appears to be slowing

Impact of National Trends on San Francisco Retail

• Real estate brokers report neighborhood retail rents are

rents are plat plateauing eauing, after many years of growth.

• Fewer

r traditional re traditional retailer tailers are s are seeking space seeking space, while there is increased interest from other potential tenants of ground floor commercial space (e.g., personal service, restaurants, medical services).

• Between 2015 and 2017, a significant

a significant nu numb mber er of the 24 NCDs for which OEWD survey vacancy data is available experienced an increase perienced an increase in v in vacan

• cancy. About one-

third of these NCDs saw vacancies increase by at least 2%.

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High cost of doing business

• Employee recruitment and retention challenges
• Low unemployment rates
• High housing costs
• Competition with other industries offering better compensation or more flexible hours.
• High labor costs
• High rents

Land use regulations and permitting requirements

• The permitting process can add significant cost and time to the process of opening

a new business.

• Some laws intended to protect traditional retail by limiting other uses may:
• Limit retailer’s flexibility to adapt to changing economic conditions.
• Restrict complementary uses that could drive foot traffic to traditional retail.

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Challenges for San Francisco Businesses

SF retailers face challenges adapting to a changing market

• Loss of long-time customer base due to demographic change.
• Increasing competition from other brick-and-mortar locations.
• Lack of technical expertise or financial resources to adopt new technologies, or

invest in capital improvements or new inventory to appeal to a changing clientele.

Businesses report public realm challenges

• Real and perceived issues around cleanliness, order, and safety, which may deter

customers

• Long-term vacancies, which contribute to a sense of disinvestment

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Challenges for San Francisco Businesses

• In response to national trends and local challenges, some businesses

are adopting creative and varied strategies to survive. These strategies generally aim to:

• Expand sales;
• Reduce costs or pass costs on to customers; and/or
• Diversify revenue streams.
• While adopting these types of strategies will help some businesses

continue to thrive, change is challenging and some businesses will not be able to adapt to a changing market.

• Policies and programs may support business owners by providing

technical expertise or financial resources, but cannot force change

• n an unwilling business owner, or overcome fundamental

challenges (e.g., lack of sufficient market demand for products or services).

Business Adaptations

Rising costs and growing competition are prompting some businesses to adapt

Retail businesses function as part of neighborhood commercial districts

Successful Commercial Districts

• Most businesses rely on the spending power of households in the surrounding

neighborhood (or trade area) to generate demand.

• Businesses also rely on each other, and on other uses in a district, to draw

foot traffic.

• The quality of the pedestrian environment and of public spaces can help

attract (or potentially drive away) potential customers.

• Cultural events, other special events, and public space programming can also

help draw foot traffic.

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• Health

Healthy business mix in y business mix includ cluding: ing:

• Anchors (or cluster of uses) that attract foot traffic
• A diverse mix of retail and non-retail businesses, including restaurants, personal

services, entertainment and nightlife

• Appeali

Appealing ph g physical en ysical envir vironm nment ent including an attractive architectural character and street environment

• Con

Convenient, multi-modal access enient, multi-modal access including parking and curb space that is actively managed to balance the needs of different users.

• Driv

Drivers of demand: ers of demand: Local spending power, employment concentrations, medical/educational institutions, tourism.

• High-ca

High-capac acity distric ity district ma management nagement organizat

• rganizations

ions such as Community Benefit Districts, merchant associations, or Community Development Corporations.

Successful Commercial Districts

Key factors that contribute to successful commercial districts include:

Conclusions

1.

• 1. To thriv

thrive in a in a more c more challenging busi allenging business ness en envir vironment, re nment, retailer tailers need s need to embrace ne embrace new t w technol nologies. gies. 2.

• 2. Retailer

tailers need s need to be be fle flexible and ible and creativ creative t to pr provide cust ide customer

• mers with a

s with a more more int interesting e resting experience. perience. 3.

• 3. Div

Diversifyi ying the mix of uses in the NCD the mix of uses in the NCDs can help re can help retai tailers e expand pand thei their r cust customer base.

• mer base.

4.

• 4. By

By of

• ffering an attractiv

ring an attractive, fun shopping , fun shopping and and dinin dining e experience, perience, NCD NCDs can help can help re retail tailer ers con continue t ue to dra draw f foot traf traffic.

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