A brief lesson in "incentivizing" supermarkets and department stores

For many years I thought it was disgusting that big corporations like Macy's got big incentive payments to open up department stores. In 2003, I heard a presentation by Robert Gibbs at the Congress for the New Urbanism conference in DC, and that made me change my tune.

What this is really about is anchors. The point about anchors is that they spend a fair amount of money on advertising to draw in customers. Anchors, as part of shopping centers or districts, draw in customers who also patronize other stores--spending money elsewhere.

As a result, they demand and receive below normal rents. For example, on H Street NE, Harris-Teeter wanted to pay under $15/s.f. to lease at 300 H St. NE. (The property owner said no way.) That is probably less than 25% of what will be the prevailing lease rate for the rest of the space.

In a shopping center, a price like that doesn't matter, because the rates of other tenants are adjusted accordingly, to cover the sweetheart rate. But Steuart Development doesn't own any other property on H Street. Other property owners and businesses will benefit from a new anchor like Trader Joes, Harris-Teeter, etc. Therefore, the originating property owner asks for incentives to help subsidize the cost of attracting desired retail businesses to the city.

I've written about this in terms of the Wal Mart philosophy, which is directed towards capturing 100% of your typical consumer dollar (other than on high ticket goods like automobiles)--in theory and practice Walmart can sell you everything, from clothes to food to prescription drugs to furniture to sporting goods to electronics. They don't want you spend money with anyone else.

See the old blog entry "Retail tax incentives don't always provide 'enough bang for (the) buck.'"

The issue is that you have to ensure that the deal is mutually beneficial.

So back to the current hullaballoo about Nordstroms wanting an incentive payment to locate in Georgetown. See "Some Question Nordstrom Financing," from today's Post.

The reason this is justifiable is because:

1. Nordstroms will spend a lot of money on advertising
2. Which will attract a lot of customers to Georgetown
3. Who won't spend all their money in Nordstroms
4. Or in stores leasing from Herb Miller.

Therefore much of the benefit goes to other stores and property owners, who aren't paying to subsidize the buildout and low rents/square foot that Nordstroms is likely demanding.

Now, initially the Hines people were hoping to attract Nordstroms to the Old Convention Center site. That would have been better from broader city economic development objectives.

But the reality is that retailers don't feel that it is their business to help revitalize downtowns or neighborhood commercial districts. They just want to make money. It is a tricky balance to achieve those multiple objectives. Given the agglomeration effect reflected in the Reilly Law of Retail Gravitation, good places tend to get better, and average places stay average, and under-stored places stay under-stored.

{Note to everyone who says "you should get a Starbucks..." Starbucks considers 8th and D Street SE, on Barracks Row, a stone's throw from the Eastern Market subway station, a distressed area. So if they consider that a distressed area, how do you think they think about places like H Street NE, Deanwood or North Capitol Street?}

Now Elizabeth can comment about the incentive provided to Trader Joes...

From "Commerz in the 'hood... (aka "Commerce as the engine of urbanism") ":

Last night I went to a presentation by Alex Wall, author of a recent book about Victor Gruen. To Wall, the story of VIctor Gruen is really about "commerce as an engine of urbanism," and it turns out there was a lot more to Gruen than I realized, even though as a child I was a patron of his very first shopping center in a Detroit suburb...

A big thing is the narrative, "the story" told by the commercial district. (Gruen's ideas have since been extended in the 1970s by James Rouse and in the 1980s by Jon Jerde--Citywalk in LA, and even Disney, although Disneyland was created at the same time as Gruen began developing shopping centers and his increased prominence on the national scene. Gruen was familiar with and interacted with Disney; Wall claims that Disneyland was Walt Disney's organized response to Southern California sprawl.)

Wall's book seems worth reading and will likely have as much impact on my thinking as some of the chapters in the Harvard Guide to Shopping. In particular that book's chapter on women which states "a history of shopping is really a history of women"... reinforced my thinking about the importance of the fact that upwards of 80% of retail transactions are conducted by women and if women don't feel comfortable in a (the) (H Street) commercial district they won't shop there and it won't succeed (unless somehow it can become a "men-only" shopping district anchored by stores like Bass Pro or Cabela's--the "beyond" big box sized sporting goods behemoths primarily shopped in by men).

This relates to the Reilly Law of Retail Gravitation which focuses on measurable indicators--the number and mix of stores in particular shopping destinations. The Law is that with factors being roughly equal (travel, etc.) people will choose the shopping center/option that is better (more and more interesting stores, variety of product selection, etc.). Obvious huh? In the urban context especially, factors that people mull over when deciding between shopping destinations include comfort and perceptions of safety, physical condition of the commercial district, etc.

This is why I joke about Main Street principles #9 and #10 (there are officially only 8 principles)--knowing what you have (or not) and being honest about it; and making the hard choices you need to make in order to improve.

As long as a particular urban commercial district is deficient compared to nearby shopping alternatives, it won't be able to attract new customers, until it starts providing some decent options. That's why I always write about the importance of restaurants, places like Banana Cafe on 8th Street SE, which seeded revitalization by attracting patrons to the corridor despite its negatives, and the existence of few other retail options, because of relatively inexpensive but decent enough food in a comfortable enough atmosphere.

A new carryout, or even a sit-down fast food place like Cluck-U will not change the offer in the commercial district in a substantive way, and the commercial district will continue to languish.

As I have said many times before, businesses want to make the most money, for the least investment, with the fewest problems. (There are other factors, granted, but I won't bore you with the details.)

Also see:
-- Concentration and connection are key concepts for urban revitalization
-- Why would marginal, convenience businesses expect an uptick in business from proximity to an Ikea.