How It Started and How It's Going - The Local Retail Tenant Perspective

How it started:

Alliance Global Advisors spoke with local business owners in the retail segment regarding their experiences working with landlords and overcoming a year of government-imposed shutdowns, new health and safety measures, civil unrest and innovation.   

Uncollected rents in the United States are soaring. The COVID-19 pandemic put significant strain on institutional retail real estate in 2020, increasing bankruptcies and store closures, diminished sales and rising vacancy rates.

Specifically, apparel stores have been hit hard by closures amid the pandemic forcing many businesses to file for Chapter 11 Bankruptcy. According to Jones Lang Lasalle, there were over 55 bankruptcy filings in 2020, with 90% occurring post-COVID-19.  Iconic brands such as 24 Hour Fitness (100 gyms closed), GNC (1,200 stores closed), Lord & Taylor (38 stores closed), Modell's (134 stores closed) and Century 21 (13 stores closed) filed for bankruptcy in 2020. In total, bankrupt retailers announced 7,800 store closures in 2020, with the majority coming from apparel, department stores and supplement shops like GNC.

Not all retail suffered. Building material and garden supply stores, such as Home Depot and Lowes, led all retail categories with a 17% increase in sales.  Retail categories that have seen steep declines in sales revenue were Food Services and Drink (restaurants), which were down 17%. Apparel stores saw improved Q3 sales, but still down 19% year-over-year. Value retailers and essentials thrived in 2020, with essential retailers (grocery) gaining double-digit growth from Q2 forward.

General retail has seen the lowest vacancy rate out of any subcategory at 3.3%. Neighborhood centers have seen the highest vacancy at 7.8%. Class A malls are in the best position to weather the COVID-19 storm because of their premier locations and tenant mix. They have lost fewer inline and anchor tenants resulting in a significantly lower vacancy (4.7%) than class C malls (10.9%), which are more likely to lose tenants due to struggling department stores. Overall, retail vacancy stands at 5% nationally.

The challenges posed by 2020 have impacted every industry – but with every challenge comes an opportunity. The Co-Founders of Alliance Global Advisors interviewed the following three retailers to learn more about their challenges and hopes for 2021:

Retailer:       Boutique La Passerelle (BLP)

Industry:            Women's Apparel

Location:           Pittsburgh, Pennsylvania

Website:           https://www.shop-blp.com/

Retailer:             The Speckled Egg

Industry:            Restaurant

Location:           Pittsburgh, Pennsylvania

Website:            http://www.thespeckledeggpgh.com/

Retailer:             Naples Soap Company

Industry:            Beauty/Skincare

Location:           10 Brick & Mortar locations across Florida

Website:            https://www.naplessoap.com/

The content below includes the direct responses from each local retail tenant, followed by concluding remarks from Alliance Global Advisors. The direct responses are based on the retailer's experience and do not necessarily reflect the views of Alliance Global Advisors.

How it's going:

Boutique La Passerelle:   Rough.  The local market is the Downtown Business District and retailers have lost their primary clients - members of the workforce.  Recent statistics show that only roughly 15% of employees are working in the office in Pittsburgh.

The Speckled Egg: Weekdays are very slow. Weekend business is about half of the pre-pandemic levels.

Naples Soap Company: Overall foot traffic is down, but we have seen average sales increase as customers are looking for products that promote self-care, stress-reduction and detoxification in light of the global environment.

In what ways were you supported during the global pandemic?

Boutique La Passerelle:  Our landlord supported us through a three-month rent deferment plus the application of 10% of BLP's sales toward rent.

Right now, we owe the landlord, Pittsburgh History and Landmarks Foundation (PHLF), $13,530 in rent.  BLP is always looking for additional funding to put toward this debt.  BLP received a $15,000 three year no-interest loan from the Urban Redevelopment Authority (URA) of Pittsburgh, which we are paying back in $500 monthly installments.  All of this (and more) went to pay for Spring inventory in March 2020. We managed to work with our vendors to get as many discounts and free shipping as possible. The URA will pay half of the monthly rent reduction for the next six months.

The Pittsburgh Downtown Partnership's "Gift Card Give Back" program infused BLP with close to $6,000 in gift certificate sales between April and July in 2020.  In the Fall, they planned "Shopopoly" events, which improved Saturday sales tremendously, and they are still working on ways to help in 2021.

Additionally, the Honeycomb Credit Loyalty Bond program infused BLP with $3,000 in loyalty bonds (gift certificates) in July 2020. These just began to "mature" in January and are "payable" every six months. That brings the "holder" into the shop to hopefully spend more than the amount matured.

BLP received $5,000 between the Paycheck Protection Program (PPP) and Economic Industry Disaster Loans (EIDL). Our part-time employee left mid-March 2020, so this was only applicable to the owner.  The owner/operator has worked as the sole employee the past nine months and will continue to do so in order to reduce expenses.  One positive outcome from 2020 is BLP’s realization that BLP is functional as a single employee operation.

BLP also managed to collect unemployment through the Pandemic Unemployment Assistance (PUA) which yielded $175 per week after tax.  This, combined with a decent tax refund from 2019 and the first 2020 stimulus check, covered necessary expenses.  In 2021, my PUA continues and I received my second PPP, so I am hoping not to rely on my line of credit as much as I originally anticipated.  BLP is optimistic for better sales in 2021, as 2020 was the lowest sales year in BLP's 11-year history.

The Speckled Egg:   We deferred our rent.  While it added another six (6) months to our lease, at least we did not have to close for good.

Naples Soap Company:  We leaned heavily on the partnerships we had established to ensure our survival through this trying time.  Whether through creative rent solutions with our landlord partners or modifying terms and conditions with our biggest suppliers, we communicated with candor while ensuring that our partners understood our intent to maintain the relationship and work with them to find mutually agreeable solutions.  Leaning on our suppliers was critical as we tried to forecast supply chain constraints into our planning process. 

Mostly though, we would not be here without the tremendous support and loyalty from our customers. Those that were uncomfortable shopping in the store continued to shop with us, both online and over the phone, and we could not be more thankful for their continued business. 

In what ways has your interaction with the consumer changed?

Boutique La Passerelle:  Prior to March 2020, BLP was in-person shopping only.  During the initial shutdown, we built a website and enabled clients to shop online.  Now we have a mix of in-person and online clients.  We communicate with clients by phone, through Facebook Messenger, Instagram and in person.  

The Speckled Egg:   Overall weirdness, it is really hard to explain. Nothing about human interaction feels the same yet.

Naples Soap Company: We modified how we interact with consumers in our stores to ensure they can still experience our products while feeling safe in the retail shopping environment – an example being how we now handle our in-store testers and product demos.  We also released new products, like our hand sanitizer spray and our moisturizing hand sanitizer gel, which enabled us to continue delivering value to our customers with the products they needed.  Lastly, we incorporated new tactics (for example, taking orders over the phone and pick-up at the door).

What is one message you have for your consumers/clients?

Boutique La Passerelle:  Before you shop Amazon, search locally to see if what you want/need is provided by a small business in your neighborhood.

The Speckled Egg:  Thank you - to all of our clients for following their hearts and supporting us however you feel safest.

Naples Soap Company:  We took advantage of 2020 by spending time innovating for 2021 and beyond.  We developed a slate of exciting new product offerings that will roll-out throughout the year.  We also took time to audit our technology stack and identify improvements and enhanced capabilities that we believe will ensure we continue to serve and deliver incredible value to our customers to improve their experience throughout the customer journey. 

Tell us about your sales last year.

Boutique La Passerelle:   2020 sales were down 26% from 2019, but 34% in Q2 which qualified BLP for the second round of PPP.

The Speckled Egg:  The year started out great, we closed for six months and we are starting to get better and better every day.

Naples Soap Company:   We witnessed a minimum 25% reduction in foot traffic in our brick-and-mortar stores, but we're fortunate that we had an established e-commerce presence that experienced rapid growth.  Overall, sales in 2020 increased from 2019, which we feel fortunate to be saying in light of what we are seeing in the retail space at this time.

Tell us about your interactions with your landlord.

Boutique La Passerelle:  My landlord is my biggest supporter (see comment above).

The Speckled Egg:  Our interactions with our landlord have been positive during this time.

Naples Soap Company:  Before COVID-19, we worked hard to establish effective relationships with our landlords that allowed us to communicate with candor.  These relationships were critical as we approached landlords to seek rent deferrals or adjustments to our payment schedules.  In several instances, our landlords initiated the conversation. They came with attractive solutions that contributed to the strengthening of our partnership and, as a result, our long-term view of the location's viability.

Tell us what you learned from other businesses during this time? 

Boutique La Passerelle:  This sounds cliche, but it is true - we are all in the same storm, but very different boats.  Every business owner we talked to throughout the pandemic received varying levels of support - most received very little/no help from their landlord, some did not qualify for PUA, etc.  We did all talk, trying to support one another with what we learned about funding, marketing, programs, etc.  BLP was also boarded up for almost two weeks in June following the civil unrest in the wake of the George Floyd murder by police officers.  We are proud of the determination and drive we took in making sure BLP survived 2020.  It took all of our energy and hopefully, we have enough reserved to make it through 2021.

The Speckled Egg: It's okay to say no, it's okay to have boundaries.

Naples Soap Company:  We try to take lessons from everyone around us, bigger and smaller and outside our retail niche.  Examples include our approach to improving the customer journey (enhanced customer loyalty programs) and distribution options (ex. buy online/phone, pick-up in-store).  Other examples include our approach to technology and the data we are using to drive our decision-making as we continue to refine our multi-channel retail approach.

Are there any interesting programs benefiting you or your fellow retail tenants in the local area you would like us to highlight?

Boutique La Passerelle:

• PDP Gift Card Give Back - 25% bonus on gift cards - i.e. a client paid $100 for a BLP gift card, client and BLP got $125 - match primarily funded by the PDP and corporate donations

• Downtown Community Takeout Program:  https://downtownpittsburgh.com/Donate/

The Speckled Egg:  

• Community Takeout by 412 Food Rescue: https://412foodrescue.org/programs

• Downtown Community Takeout Program:  https://downtownpittsburgh.com/Donate/

The mission of the 412 Food Rescue referenced by The Speckled Egg is as follows: "We work with food retailers to prevent surplus food from going to waste." Post-COVID-19, 412 Food Rescue offered a program to help provide funding to local restaurants in exchange for meal preparation to feed those in need.  

Naples Soap Company:

• Outside of the PPP, there were no other programs we utilized.  Some landlords worked with their tenant mix to facilitate shared marketing or event-specific traffic (i.e. modified holiday walks, etc.) but that was relatively small in the grand scheme.

Conclusion:

The short-term effects of COVID-19 are putting a significant strain on local business owners as uncollected rents soar, employees are being furloughed, supply chain challenges and rise in e-commerce remain and the overall uncertainty of the future. The big question is how the pandemic's long-term effects will affect local business owners and the rest of the industry as we move into 2021 and beyond.

About Alliance Global Advisors:

Alliance Global Advisors is a women-owned consulting firm focused on empowering the institutional investment community to elevate best practices. Advising clients with approximately $105 billion in assets under management, Alliance partners with organizations to provide an independent perspective and innovative approach to critical strategic initiatives.  Our partnerships allow senior management teams to focus on what matters most: diligently managing client capital, creating value and delivering exceptional returns in a performance-driven market.

Disclaimer:  This blog was originally published on February 25, 2021, and will be updated periodically to reflect changes in the industry.  The content may contain or cite personal and/or professional opinions that differ from the views of Alliance Global Advisors.