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TO: Dwight Bassett, Town of Chapel Hill FR: Rod Stevens, Spinnaker Strategies RE: Questions and Answers on Retail Development DA: June 19, 2015 How does demographics affect development? Most metropolitan areas have about the same amount of retail space, 36 to 40 square feet per capita, with variations depending on density and land use restrictions in a given place. Places with a tighter land supply, like Portland and Berkeley, have approximately 35 square feet of space per capita, while more sprawling places, like Houston, Atlanta, and Phoenix, have approximately 40 to 42 square feet per capita. Sales of everyday goods and services account for about half of this retail space, about 15 to 18 square feet per capita, while the balance is in space for “comparison” goods, things people buy less frequently and for which they may make multiple stops before deciding what and where to buy. Everyday goods are sold in local strip centers and supermarket- anchored community shopping centers, while comparison goods are sold in power centers, regional malls, and specialty centers like the Streets at Southpoint. Demographics affects more the form of development than the amount of development. Often, in fact, more affluent places have less retail space per capita than less affluent ones. More affluent communities are frequently more anti-growth and resist putting shopping centers in their midst, while higher land values make it more expensive to do so. People in more affluent communities are also more likely to shop online and at boutiques and specialty stores, especially the “main street” retail like you have along Franklin Street. Less affluent communities usually have more big box stores, while their old downtowns and main streets are often derelict or severely under-leased, unless they have made special efforts to turn these around. One note: people often equate the amount of sales with the amount of development, but a place may have less building and more sales per square foot. Some of the more affluent communities in the United States, such as Mill Valley, CA (in Marin County), have relatively little retail space but extremely high sales per square foot. It can be useful to know the relative health of your retail in different parts of the community. Sometimes it is possible to assess this by creating “heat maps”, made using sales tax and assessor’s data. These can be quite helpful in redevelopment, especially in planning where to put in public improvements. This can also be helpful in understanding exactly where your sales tax revenues come from.1 How many people does it take to support different kinds of stores? The average supermarket today is 46,500 square feet and serves a population of about 10,000 to 15,000 people. There are 10 supermarkets in Chapel Hill and Carrboro, serving an average population of 8,000 people each. This ratio is low partly because some of these are smaller specialty stores serving people who drive in from beyond the town limits, such as Whole Foods, Trader Joe’s, Southern Season and Weaver Street Market. With additional supermarkets nearby but outside the town limits, such as the Walmart store just across I-40, the town seems to be very well served with supermarkets. Big box, department, and high-end specialty stores generally serve a market of 100,000 people or more. In the Triangle, there are about 90,000 people per Target store. In the 2000s, Target planned to aggressively expand across the country, saturating communities with its stores to capture more everyday sales, and it planned a smaller format store to do this, but it seems to have put these plans on hold, perhaps because of difficulties in Canada. Walmart has a smaller store, its “neighborhood market”, which it hoped to become more local with, but that chain has also been slow in this rollout. There are three of these smaller Walmart stores in the Triangle: two in Cary and one in Morrisville. There are nine wholesale clubs in the region2, or about one for every 227,000 people. Upscale stores like Ann Taylor, Talbot’s and Crate and Barrel usually require about 500,000 people per store, and that pattern generally holds in the Triangle area. Most regions have no more than one Apple store per one million people. There are fewer than 50 Ikea stores in America. Ikea is slow to open new stores, but it will probably come to the Triangle. When Ikea does open a store in the region, it will likely be in a very central area. How has the financial crisis changed retail? This has been the big one in terms of retail change, especially consumer spending. The recession catalyzed a lot of changes that have been long in the making, and this has led to a lot of restructuring within the retail industry. The National Retail Federation puts out a daily compendium of stories on the industry, and even today, seven years after the recession began, the digest is full of stories of companies closing stores, changing their leadership, and trying new strategies to get back sales. Just this last week, on June 15, Gap announced that it was closing one-quarter of its North American stores, which have been undercut by the company’s own value-priced chain, Old Navy. J. Crew, the essence 1 These can also be very helpful in understanding the basis of your sales tax collections. I did this for Sacramento County, in California, and the maps revealed unexpectedly high collections from warehouse areas, due to a boom in building supply sales. This caused county government to want to zone more of this kind of land. 2 Four Sam’s Clubs, three BJ’s, and two Costcos. Page 2 of preppy clothing, has been losing sales even as its new chain Madewell, which sells simple, everyday denim clothing, does better than ever. Here are three of the most important changes that retailers are struggling with: 1. The bifurcation of buying. Fewer people shop for pleasure now than 20 years ago. People are spending less time at the mall, and when they do shop, they are more focused on price and value. Convenience is king, particularly in everyday shopping. After slowing their increase in size immediately after the recession, supermarkets have started getting bigger again, offering more services and variety than ever before. More than ever, big supermarkets offer one-stop shopping, selling not only food, drugs and flowers, but also banking, videos, coin-changing, coffee, and gasoline. At Target and Walmart, you can now take home both eggs and socks, the commodities of everyday life that keep a household running. This focus on efficiency and convenience in shopping for everyday goods is in stark contrast to the development of comparison goods places like specialty malls, where people go to slow down and relax. These have become more like oases, places to put aside the cares of everyday life, with less emphasis on the storefront and more on the experience. In Los Angeles, developers are remaking standard, enclosed malls into collections of courtyards, lush with landscaping, fountains, palm trees and patios.3 2. The digitization of the economy. Borders, Blockbuster, Circuit City and Tower Records are gone, done in by the new model of music distribution pioneered by iTunes. J.C. Penney and most of the other old-line department stores may also soon be gone, replaced by the buy-anything options of Amazon4. Smart chains are figuring out how to combine “bricks and clicks”: turning the store into a display that leads to ordering then and there, overcoming the “show- rooming” problem of people ordering elsewhere. In ten years, online ordering could account for 15 percent of all retail purchases. Meanwhile, a great number of teens are constantly connected by smart phones, deciding where to go by group decisions of their friends. The smart places will figure out how to make themselves destinations for these digital tribes. 3. Haves and have-nots. We really are losing our middle class. There is a growing gap in income and lifestyles, especially between service workers with a high school education and professionals with graduate degrees. Howard Schultz, the CEO of Starbucks, worries that his own chain will not do 3 These changes were sparked by the popularity of several centers, first “The Lab” in Orange County, then “The Grove” in West L.A., and most recently, “The Camp” in Orange County. “The Camp” is one of America’s most innovative shopping centers, featuring the use of recycled materials and a sense of place targeted at a very clear demographic young, health-conscious Millennials. The Camp calls itself a “green gathering spot offering wellness and personal styling services, unique and purposeful shopping as well as healthy, local and international dining.” 4 Chapel Hill does not yet have Amazon Lockers, but probably will soon. The provide for secure, centralized pick-up using computer codes. Their popularity with students shows with the number of empty cardboard boxes stacked around them. Page 3 well if more of his own workers cannot afford the coffee they are serving. This gap has translated into the growth of more dollar stores and “value” subsidiaries like 365 by Whole Foods, which is intended to overcome the companies “Whole Paycheck” image problem.5 For those with money, however, there are more and better stores than ever before. Have mom-and-pop stores gone away? No. In places like Chapel Hill, with affluent and well-educated shoppers, new independent and small chain stores are evolving and growing. The new generation of mom-and-pop stores have state-of-the-art inventory systems, online newsletters, store events, and trained clerks.

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