The New Retail Thread

[JumboBuc]

Fair point on franchise revenue transfer, though I don't think the corporation lets its franchisees run their business into the ground and declare bankruptcy, do they? I don't know for sure - do you? Who is left with responsibility for the lease if a franchise fails?

And a corporation closing a store doesn't mean the landlord gets stiffed. Mom and Pop closing (presumably in bankruptcy) does.

Depends on the terms of the lease. Sometimes failed stores sell their leases to other retailers who take them over (this is how Webster Bank took over many of the Citi Bank branches around Boston when Citi pulled out, for example). Sometimes the landlord gets the lease back to find a new tenant and negotiate new terms (this is what's happening, for example, with the Sports Authority at Assembly). When the market is hot, the landlord actually prefers to "control the box" and be able to find a new tenant for themselves as the current market rents will typically be higher than the rents when the lease was originally signed; in multi-year leases this can often more than make up for the revenue lost while the building sits vacant. When the market is cold, it's worse for both sides of the lease.

I don't know how retail evictions work. Maybe someone on this board does?

It is true that, all else being equal, chain stores are typically a better bet than non-chain stores. After all, chain stores got to be chains in the first place because they were successful. The issue here is that all else is not necessarily equal. A local store may be more successful than a chain franchise, and have better financials, and be willing to pay more rent, but could still be turned away because outside parties are not familiar with it.

 

[choo]

But there's informational asymmetry here. The banks making the loan don't know the odds of Joe's Coffee paying $55/sf because they've never heard of Joe's Coffee. They have heard of Starbucks, however, and have made loans to 147 other firms with Starbucks in their portfolios. So they assume that Starbucks must be better, even if Joe's Coffee has been crushing it at that location since the Carter Administration.

I've learned that for all the numbers, banks are people to and there are costs in due diligence. Signing off on a starbucks is much easier and faster than doing the due diligence on Joe's Coffee here and Mary's Tea there. Plus banks are putting up debt. They really want certainty that their loan will be paid back, so they don't care if the developer makes 20% more or less on their equity as long as their loan is paid. So it is the equity's limitations and risk aversion. No starbucks has shut down because the manager has wanted to retire, plenty of family spots have.

This isn't an argument for chains, btw. I think more local shops are better, but in places where the community desires it, there should be the recognition of the market perception and either seek to change it with some rent back-stop that lower equities risk or an outright ban and except that fact that retail spaces will likely take longer to fill up and may be more susceptible to future economic uncertainty.

 

[CSTH]

Seems like there should be an opportunity for a mutual rent guarantee entity - landlords would benefit from a deeper market for their space, small tenants would benefit from access to more locations and maybe even at a lower cost, banks would get the risk mitigation they need.....we need the business hippies to get on this ASAP! (EDIT - or maybe it would be easier as just a new subsidy channel for the SBA)

 

[choo]

^ so insurance

 

[whighlander]

Seems like there should be an opportunity for a mutual rent guarantee entity - landlords would benefit from a deeper market for their space, small tenants would benefit from access to more locations and maybe even at a lower cost, banks would get the risk mitigation they need.....we need the business hippies to get on this ASAP! (EDIT - or maybe it would be easier as just a new subsidy channel for the SBA)

CSTH -- Do you people actually read what each other are writing and then agreeing to ....?

This sounds like a meeting of the Moscow Soviet in the days between the death of Brezhnev and Fin de Siecle regimes of Andropov and Chernenko when nothing was working

The solution is very simple get rid of the stupid [if perhaps well meaning] banking regulations such as Dodd / Frank which make local lenders nearly impossible. Once you have local banks again with the ability to make local business loans, you can have local small developers who build to the local scale. Then when everybody once again knows your name -- you will have local small landlords leasing to "Mom's Tea Table" and "Pop's Joe".

The giant developers will lease to Starbucks and we'll see who gets the customers.

The alternative is to have celebrity local stores such as "Big Papi's Salsa" who can command the attention and admiration of the big developers, big landlords and the BIG BANKS with their friends in Washington.

As RR said about Big Government -- "If it Moves Tax it; if it keeps Moving ; Regulate It; if it Stops Moving Subsidize it" -- you can throw-in the Byzantine web of set-asides and special provisions for income, taste in minimalism, preferred charcuterie, favorite cheese monger, etc., in the midst

 

[bigpicture7]

I am pretty sure none of us are talking about:

...preferred charcuterie, favorite cheese monger, etc...

We are talking about the systemic oddity that a mom+pop can perform better than a chain, yet still lose their opportunity to run a business in a certain retail location.

You'd be hard pressed to find someone on this board who doesn't feel that the most viable business should succeed at a particular location, despite our varying political leanings

 

[FenwayResident]

I am pretty sure none of us are talking about:



We are talking about the systemic oddity that a mom+pop can perform better than a chain, yet still lose their opportunity to run a business in a certain retail location.

You'd be hard pressed to find someone on this board who doesn't feel that the most viable business should succeed at a particular location, despite our varying political leanings

The disagreement comes from your definition of "perform better". Generally retail leases are long term; most are on the order of 5-10 years. A lot of mom and pop retail (especially restaurants) can do very well for a few years but then there's an economic downturn or a shift in the public demand and they don't have enough capital to weather the storm. A large corporate chain will usually have the financial backing to last through a tough period.

So from a landlord's perspective, they would want a risk premium on a 10 year lease to make up for the increased chance that a small business would go bankrupt after six months of hard times. I think the ideal solution would be to create some sort of landlord's insurance. Something where both the landlord and the tenant pay into an SS-like trust fund. Then if a company goes out of business the insurance policy will pay the rent for up to a year or until the landlord finds a new tenant.

That way the landlord is not worried about the increased risk of bankruptcy from the tenant. And if a landlord/tenant continue to have bankruptcies their rates would go up similar to how other insurance works.

 

[JumboBuc]

The disagreement comes from your definition of "perform better". Generally retail leases are long term; most are on the order of 5-10 years. A lot of mom and pop retail (especially restaurants) can do very well for a few years but then there's an economic downturn or a shift in the public demand and they don't have enough capital to weather the storm. A large corporate chain will usually have the financial backing to last through a tough period.

I don't know about this...

As we've previously discussed, many chain stores are actually franchises where individual stores or groups of stores are independently owned and operated. They don't have any large capital sources to back them up. And if a corporate-owned store is faltering, then HQ will shut it down rather than continually take a loss on it. It happens all the time. I would believe that corporate-owned stores have a little more financial wiggle room in the short-run (HQ can cover the rent for a couple months when times are tough), but alternatively independent stores are able to cut costs and pinch pennies more effectively in the short-run as well (the owner/managers are more willing to give up their own pay in order to keep the store open, for example).

I also have a hard time believing that a "shift in the public demand" is any more of a risk to an independent store than a chain store. Chains get crushed by the whims of the public all the time (see: Pinkberry), and plenty of independent stores last for decades. Obviously one can point out anecdotes on either side, but I don't know that there is a real trend one way or another.

Nobody is arguing that all mom-and-pops perform better than all chain stores, of course, and ceteris paribus chain stores are probably a safer bet. That being said, many mom-and-pops do perform better than many chain stores even over the long run. The issue is that even the over-performing independent stores have a harder time getting leases than the under-performing chains because they are not familiar to removed, third party institutions.

 

[CBCArch61]

Not to totally derail, but Luke's Lobster in DTX had its official grand opening today at noon! Walked by in my lunch walk today. Didn't go in for lunch but will definitely be trying it out shortly

 

[datadyne007]

Not to totally derail, but Luke's Lobster in DTX had its official grand opening today at noon! Walked by in my lunch walk today. Didn't go in for lunch but will definitely be trying it out shortly

You actually re-railed this thread, so thank you.

 

[CSTH]

This sounds like a meeting of the Moscow Soviet in the days between the death of Brezhnev and Fin de Siecle regimes of Andropov and Chernenko when nothing was working

Probably more like a meeting of the National Council of Farmer Cooperatives, or one of the coastal self-insurance syndicates on Nantucket, or one of the airline alliances.

This kind of arrangement is a completely normal feature of mature market economies. Don't believe everything you read on the WSJ editorial page...

 

[odurandina]

Lobster w/ big screen TV's i hope.

public service announcement.

Jacoby Brissett out with torn ligament on his thumb (throwing hand).

 

[curcuas]

I think Whiglander is right for the most part. Local banks can do the due diligence and have the relationships to determine which local merchants are creditworthy and who has valuable assets for collateral. That's why they're generally better places to get mortgages too.

Where I disagree is the effect of banking regulations - there is less dominance by big banks than before the financial crisis. Regional banks (like the aforementioned Webster) have picked up a lot of the retail banking business as the largest banks had their wings clipped. Is this the best environment for lending to businesses? Probably not, as these can often be too large to pay attention to the locals.

At the same time, let's not forget that the FDIC is mostly bailing out small banks as they're the ones that fail most often.

 

[cjbski]

Ben & Jerry's will be opening in Watermark Seaport.

Better Bagels (previously announced that they'd be coming to the Seaport) is opening next door to Blue Hills Bank in the Watermark Seaport building. Word is their bagels are phenomenal and this will be the first brick and mortar location for them.

 

[BostonDrew]

I know many readers likely won't find themselves in here, but DryBar looks to be opening up a location on Kingston Street in Downtown Crossing (next to the new Sweetgreen which looks to be nearing completion). I'm guessing they are expecting office and Millennium Tower clientele in this location...

 

[tysmith95]

Not new retail but Cosi filed for chapter 11 bankruptcy today. I'm wonder if they'll close some Boston locations.

 

[datadyne007]

Not new retail but Cosi filed for chapter 11 bankruptcy today. I'm wonder if they'll close some Boston locations.

Good riddance. Feel sorry for the workers company-wide, but I never had a pleasant Cosi experience. Rude staff, inaccurate orders, overpriced...

 

[Justin7]

Good riddance. Feel sorry for the workers company-wide, but I never had a pleasant Cosi experience. Rude staff, inaccurate orders, overpriced...

Sorry, but they're not going anywhere. They just need to get out of paying their bills. (Maybe considering a run for POTUS? sorry)

 

[cca]

Good riddance. Feel sorry for the workers company-wide, but I never had a pleasant Cosi experience. Rude staff, inaccurate orders, overpriced...

The issue was not that the model was bad. Its that there was wide inconsistency. Some stores were great. Great service and atmosphere (Kendall Square) and some were an organizational disaster. (Boylston Street). Until one crops up around here again I will miss the greek salad.

cca

 

[datadyne007]

Sorry, but they're not going anywhere. They just need to get out of paying their bills. (Maybe considering a run for POTUS? sorry)

They're trimming down. Since Monday, the company says it's laid off 450 employees and closed 29 locations. Cosi currently has about 1,100 employees. Probably won't cut the Boston market though. Far too many catered lunches to screw up that will keep them in business here.