Thursday, December 13, 2007

Feedback Loops of Doom III:

Retail, Downtowns and Cash-Strapped Cities

How many of you have looked at a book, CD, camera, etc. in a "bricks and mortar" store and then gone home and ordered the item online? Everyone with a computer and Internet access must have had this experience. There are plenty of reasons: the store didn't have the model or color, the price online was much lower, or the fun of browsing on eBay exceeded the fun of driving to the mall.

The problem, as we all know, is the revenue model of cities and local government is still based on "bricks and mortar" retail. It's wonderful that an entire eBay economy has sprung up, but most eBay transactions do not include sales taxes; nobody wanders "next door" for a cup of coffee after transacting the purchase, either.

I have addressed the overbuilding of Mall-USA here before, and readers have sent in reports on the empty retail spaces which remain empty in downtown/urban-core districts. Readers are also aware of the Pareto Principle, which suggests that the "the vital few" (20%) influence effects more than the "trivial many" (80%). This introduces the notion that when 20% of a downtown area or retail mall becomes vacant, a downward spiral of lower traffic and sales might begin.

There are several inter-related factors at work here. One is the death of the "downtown" deprtment store, which has been replaced by a Wal-Mart, Target or mall in the suburban periphery.

Another is specialization: where you once went to a department store to buy bath towels, now entire vast stores are centered around the premise that there can never be too many choices for towels, bathmats and other bathroom gewgaws.

We might also add the consumer's embrace of poor quality. Why spend more for a BBQ grill which might last a few seasons, when a cheap. poorly made one is half the price? Never mind that on a strict cost-analysis basis the cheap shoddy grill is a waste of money and much more expensive than the Weber when you factor in the cheap one must be replaced annually, and the rusted old one transported to the landfill; Americans live more or less in the present, and they have no demonstrable desire to calculate anything but their current credit car balance and checking account balance. (For proof, please consult the U.S.'s negative savings rate.)

Perhaps most troubling, people are abandoning entire "real world" retail activities which once anchored vibrant retail areas. Top of the list of course is independent bookstores; not only do Americans not read much anymore, they also seem to have lost the ability to enjoy browsing for physical books--especially those under the age of 40.

Cody's Bookstore in Berkeley to embrace Internet after former owner steps down

"The company is considering a range of changes aimed at adapting to today's era of Internet and chain store competition.

"The new Cody's will have to adapt to the online market and attract new people because our current market is graying," said Galoob, 30, who joined Cody's as its controller in autumn and was recently promoted.

"My vision was of how Cody's on Telegraph was in the 1980s - a great intellectual bookstore," Ross said. "Anything that was intelligent, we could sell. It really worked in the '80s but it doesn't work now. Young people aren't coming in. They aren't reading the way they were. People don't have the patience to sit down with a 300-page novel or a 500-page work of history when they are used to getting information from Wikipedia.

"Cody's needs to reinvent itself, and I can't seem to get out from under this beautiful vision that isn't working right," Ross said. "It needs a new way of looking at things."

Will wi-fi and online ordering lure young Americans back to bookstores? Will they ever actually buy a book at the store, or will they just buy a coffee and spend two hours IM'ing their friends? It's an open question.

Even for people who read a lot, it is not an easy issue. I like browsing in used bookstores, but the fact remains you can more easily locate the used title you seek online. If you want a new book, it is always cheaper online, and you needn't stir from your house to order and obtain the book.

This phenomenon is not limited to bookstores or the U.S. The last time I was in Paris (2004) visiting my brother, as we went about his business he pointed out empty corners which had until recently been cafes or bistros. He commented that people didn't go to cafes as much now, but went home to log on and "interact" online.

Rising taxes and steep rents don't help much, either.

But rather than focus only on these negatives, let's ask: what retail stores can thrive in an era of extreme Internet competition and mall-based specialty chain stores?

Here is an incomplete and not-at-all-comprehensive list based on my own observations:

1. Bicycle shops (new and used both). Large, heavy bulky items like bicycles cost a lot to ship, and most people would still prefer to ride the machine a bit before deciding to plunk down hundreds of dollars for a bike which depreciates 25% the second they buy it. Riders without tools and/or skill still need someone to fix flat tires and rehab bikes, so a thriving repair business is also possible (winter reduces this in northern climes, of course.)

2. Stationary/paper goods. It isn't worth the shipping costs to buy stationary online, and most people still prefer to select wrapping/gift paper, cards, etc. in person.

3. Ethnic groceries and restaurants. Any survey of vibrant urban business districts will soon reveal that in many cases, the busiest areas are those with halals, Hispanic ("Mexican") grocery markets, tacquerias, Asian, Indian, Pakistani and Mideast restaurants, etc. If I were to choose what would anchor a decaying downtown district, I would choose multi-ethnic groceries and restaurants, hands down.

4. A decent bakery. You can't order croissants over the Internet (any worth eating) amd bread is so abysmal in the U.S. that a real bakery will always have a market and be a draw.

5. Farmers markets/outdoor food stalls. Any traveler to Asia who strays from the 5-star hotel will notice streets bustling with vendors and sidewalk food stalls--and lots of customers. (Bangkok is especially instructive, but many other cities around the globe contain the same street-based energy.)

But for these businesses to knit together into a vibrant urban district, policy and regulations have to change. If cities try to increase tax revenue by leeching more off the existing real-world retailers, they will only exacerbate the trend to empty storefronts and closed businesses.

What's needed are these policy changes:

1. Small-business friendly city agencies that aren't out to strip off all profits via taxes and fees. Permits should be dirt-cheap, not skyhigh; renovations should be approved in a day and expedited by courteous staffers at every stage.

One of our friends owns a restaurant here in Northern California (tax, fee and regulation capital of the world, until proven otherwise). Moving one wall and adding a walk-in cooler required permits which cost thousands of dollars--more than the renovations! And the permit process was absurdly arduous, painful and slow, requiring multiple plan-checks (each one costing hundreds of dollars, of course) and weeks of wasted time.

Note to cities: if you want to destroy all taxpaying businesses and go bankrupt as a result, by all means keep on this path.

2. Enable and encourage street vendors. There is a restrictive health and bans outdoor food service, etc. Yes, all of this might have made sense in 1911 when disease was rampant, but you're now just as likely to pick up a disease from factory-packaged meat as from a street vendor selling tacos. Yes, care must be taken when preparing food; but not all Americans are so squeamish as to fear anything which isn't triple-wrapped in plastic.

3. A tax/revenue system which has adapted to the realities of the Internet, malls and eBay. If cities want any retail to survive, they need to stop burdening the survivors with ever-more taxes and regulations, and seek revenue streams from the competition, i.e. eBay and Amazon et. al. This may entail Federal/state regulation, which of course the online retailers will fight; but online retailers have to recognize the reality that they owe the same cut to local government as every brick-and-mortar store located within city limits.

No city can prosper by leaning ever more heavily on the remaining "real world" retailers, especially when the recession kicks in and reduces sales across the board. Taking small business for granted is a surefire way for cities to guarantee their own bankruptcy.

Public unions would be very well served by a campaign which encouraged and supported an increasing tax base for their municipality, and a municipal code of conduct for staffers which treats small business taxpayers as the boss and city staff as the helpful employees, not the other way around.

As noted here yesterday: cities, counties and government agencies can and will go bankrupt; The courts will strip off "guaranteed" pensions and other "ironclad" benefits from their employees because the money's simply not there. As small businesses go under and property prices continue their long slide back down to 2000-era valuations, the remaining taxpayers will rise up in rebellion at steep tax increases; and when the money runs out, so do the guarantees.

Thank you, James A., ($20), for your generous contribution to this humble site. I am greatly honored by your readership and support. All contributors are listed below in acknowledgement of my gratitude.

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