How will downtown merchants recover from the pandemic?

By N. David Milder, DANTH, Inc.

This article was first published on EDNow, the blog of the International Economic Development Council 

At this moment it looks like there is a real possibility that many more of our small merchants will survive the pandemic than many downtown leaders and experts have feared or expected. However, many merchants are surviving by making significant economic sacrifices, often dipping into their retirement savings, credit cards, and family resources. To stay in business long-term, those sacrifices will need to be rewarded with sufficiently robust earnings. The economic environment they will compete in will not be the same as it was pre-pandemic. It will have new threats and new opportunities.

How badly have downtown merchants been hurt by the pandemic?

Social distancing requirements have certainly hurt the operations and revenues of merchants in our downtowns. Unfortunately, we lack any definitive count of small businesses that have permanently closed due to the pandemic. There have, however, been plenty of estimates about how many may fail. The Partnership for New York City, for example, has claimed that as many as 30 percent of NYC’s small businesses might not survive the pandemic. Estimates for the restaurant industry have been much higher, with one arguing that 85 percent of our eateries might fail.

In many ways those claims should not be surprising. Even before the pandemic, it was well known that small businesses are typically financially fragile, undercapitalized, and lacking enough cash on hand to withstand any crisis of significant duration. The restaurant industry has long been known to be a tough one with a relatively low survival rate. Prior to the pandemic, restaurants were going through a number of stresses with many large chains failing. Retail was also troubled, and while most media attention focused on the decimation of chain stores and the malls they were located in, small downtown retailers were also being squeezed by online retailers and changing consumer demand.

That said, my observations of storefront business failures here in my part of Queens, New York, have not found many permanent closures. Some, yes, but nothing on the scale suggested in the claims cited above. Moreover, my discussions with other consultants and downtown managers indicate that my observations are not all that different from theirs. Some downtown managers are waiting for the other shoe to drop, expecting that many merchants will hang on through the holiday season, and then close during the ensuing winter sales doldrums.

A mystery in the data

What does seem clear is that something is afoot that we analysts are not identifying. For example, prior to the pandemic, a study of 600,000 small businesses found that their median number of cash buffer days was only 27, and restaurants only had enough cash on hand for 16 days, retail for 19 days, and personal services for 21 days. In other words, if an economic crisis lasted for more than a month, one might reasonably have expected that a large number of these small businesses would be mortally stressed.

Since the pandemic, the Census Bureau has been conducting Small Business Pulse Surveys. The October results showed that between 52 and 57 percent of small businesses in the retail trades, arts, entertainment and recreation, and accommodation and food service industries still had cash on hand for less than one month (see table). How are these businesses surviving? CARES Act funds? Temporary closures? Owners not taking any salary? Landlord forbearance? The retailers are in sectors that are doing well during the pandemic?

The Pulse Survey found that while about 30 percent of respondents felt the pandemic has had a large negative impact on their business, only 25.2 percent of those in the retail trades felt that way. In sharp contrast, 59.6 percent of small businesses in the arts, entertainment, and recreation industries, and 63.7 percent of those in accommodation and food services felt a large negative impact. Given the pre-pandemic upheavals in the retail industry, the continued growth of e-commerce, and the concerns of many downtown managers about being able to keep storefronts filled with retail tenants, one might have expected many more small retailers to feel significantly impacted by the pandemic. Did the disruption the retail industry was already experiencing prepare small retailers for the pandemic?

The start of a real recovery

Announcements by Pfizer and Moderna about the 95 percent efficacy of their vaccines and estimates by medical experts about the timing of their distribution suggest that the end of social distancing may be on the horizon. Meaningful results may appear as early as summer. Also, Congress passing another aid package for consumers and small businesses remains a possibility. Combined, effective vaccines and an additional aid package would signal that we are finally passing from survival to a true recovery phase of this economic crisis.

Recovery will pose new challenges and opportunities

The pandemic has either unleashed or reinforced a number of trends, and they will significantly change the economic environments in which these small merchants will compete. They will not be returning to the old normal. For example:

  • E-commerce has grown substantially during the pandemic and penetrated retail areas such as groceries that were long thought to be safe havens for brick-and-mortar merchants. It’s not just Amazon.

  • The big box chains with strong omnichannel marketing – e.g., Walmart, Target, Best Buy – have won even larger market shares and are stronger than ever.

  • Consumer spending during the pandemic has changed considerably with increased demand for necessities, home entertainment, and home improvement and furnishings. Expenditures for apparel, food away from home, and pamper niche services have declined precipitously. With the growth of remote working, home cooking, and informal workplace attire, there are real questions about many types of retail spending returning to prior levels anytime soon.

  • Merchants in downtowns that were primarily dependent on tourist and office worker market segments have been the hardest hit and will recover more slowly than others. Remote work is likely to reduce post-pandemic office employment by 16 to 22 percent in our large downtowns. Merchants dependent mostly on residential markets have fared far better, though they too have faced serious challenges.

  • What will happen to the market shares of failed businesses? First, it should be noted that if the market shares were all that substantial, the chains might have survived. There is also the issue of whether their market shares were taken away by consumers who no longer wanted their products. This is best exemplified by the apparel chains, where demand has been declining for decades and simply dropped like a rock during the pandemic. Also, one cannot assume that whatever consumer demand was relinquished by these failed chains will be captured by small downtown merchants. Online apparel sales have grown by leaps and bounds, and there’s still the likes of Walmart, Target, and TJ Maxx to contend with.

On the upside:

  • At least another 20 percent of small merchants developed an online presence during the pandemic.

  • Many are adopting new operational techniques such as more takeout options, curbside pickup and delivery, outside dining and retailing, and internet sales and marketing. 

  • Commercial rents are likely to decline significantly, and this will reduce the financial stress on small merchants, especially restaurateurs.

  • Any culling by the pandemic has probably taken the weaker merchants while forcing many others to become better merchants.

The bottom line questions during recovery: Will small merchants who sacrificed so much to survive the pandemic regain the higher returns they need to stay in business long term? Will they be able to keep up with changing consumer demand and competition and flourish?

RESTORE YOUR ECONOMY

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