CNDC BigBox Impact Study 2006 - ORD. 766-11

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Big-Box Centers andNeighborhood Business Districts:

Impact Analysis and Competitive Strategy

Michael J. Berne / MJB ConsultingNovember 2006

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Table of ContentsChapter Subject Page

Introduction 3

1 Executive Summary 5Category Impacts 5District Impacts 9District Strategies 12Municipal Strategies 18

2 Category Impacts 24Grocery Stores 24Hardware Stores 28Appliances 29

Office Equipment/Supplies 30Local Restaurants 31Apparel 31Medical Providers (including Pharmacies) 33Local Business Support Services 35Discount-Variety Stores 35

3 District Impacts 39Old Brooklyn 39Slavic Village/North Broadway 40Clark-Metro 40Lorain Station 42

Tremont 42

Ohio City 42

4 District Strategies 44Old Brooklyn 44Slavic Village/North Broadway 49Clark-Metro 52Lorain Station 55

Tremont 56Ohio City 58

5 Municipal Strategies 60Incentives/Assistance 60

Retail Recruitment 61Contraction 63Infrastructure 64Historic Preservation 64Branding 65Retail Strategizing and Technical Assistance 65

Appendix A: National Comparables 67

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IntroductionAnnouncement of the Steelyard Commons project sparked an interest

within Clevelands community development community in

understanding the impacts of big-box development on the citysneighborhood business districts. In December 2005, the ClevelandNeighborhood Development Corporation (CNDC), in partnershipwith the Cleveland City Planning Commission, issued an RFP for aNeighborhood Retail Competitiveness Strategy. In February2006, it awarded a contract to MJB Consulting, a New York City-based national retail real estate consulting concern. The followingis the final report for that study effort.

The report is designed to serve three purposes. One, it assesses theimpact of Steelyard Commons and other big-box stores on two

levels: one, within particular retail categories and two, on specificshopping precincts. Two, it describes formats in these particularcategories that seem best able to survive within the shadow of thebig-box threat, and proposes strategies that these specificprecincts can adopt in an effort to return to retail relevance. Three,it details the role that the City of Cleveland should play in this area.

Specifically, the scope-of-work involved the following tasks:

Monthly meetings with a Steering Committee consisting ofrepresentatives from each of the CDCs in the affected districts,

from City Planning and from City Council.Guided tours of the affected districts with representatives from the

respective CDCsAn approach of total immersion, whereby we immerse ourselves

completely in neighborhood sub-cultures by, for example, stayingthe weekend, eating at local restaurants, talking to locals, etc.

Review of existing and future suburban-style competition (i.e. big-boxcenters as well as anchored strip malls), both within the city and inadjacent inner-ring suburbs- A series of interviews, with the following:

o Retail real estate experts (i.e. Mark Jablonski, Great LakesResources; David ONeill, Colliers International; RussellBerusch, formerly of Neighborhood Progress Inc.)

o Residential real estate experts, so as to understandmigration trends (i.e. Keith Brown, Progressive Urban RealEstate; Tom Bier, Cleveland State University)

o Dan Saltzman from Daveso Ron Mosby from Wal-Mart, and Wayne Hill from Edward

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Howard Co. (Wal-Marts public-relations firm in Cleveland)o Mitch Schneider from First Interstate

- Meeting with members of City Planning involved in the 2020 Plan- Two presentations to City Council, the second a Council Hearing

before the Councils Committee on Community Planning and

Economic Development- Research into four national comparables: Midtown Center

(Milwaukee), The Waterfront at Homestead (Pittsburgh), TheQuarry (Minneapolis) and St. Louis Marketplace (St. Louis

As part of the total immersion approach, the author spent close to amonth in Cleveland over the course of the study effort. In addition, herelied on the local knowledge (as well as the hard work and keeninsights) of his research assistant, Mark C. Pugacz, a born- and bred-Clevelander.

The report is organized in the following fashion. First, an executivesummary. Second, chapters on the impact within particular retailcategories and on specific shopping precincts. Third, chapters on thestrategies that can be employed in the individual districts and on amunicipal level. Then, an appendix, which includes a narrative andtable summarizing the research into the four national comparables.The scope-of-work also involved the creation of: 1) two matrices, onedetailing the key factors that were used to evaluate retail potential inthe individual districts, and the other delineating the various suburban-style competitors; and 2) a map, pinpointing the location of thesecompetitors. However, the size and format of these products

precluded their inclusion in this document.

Finally, the author would like to thank Mikelann Ward Rensel andWendy Sattin at CNDC, Bob Brown and George Cantor at City Planning,Councilperson Tony Brancatelli and Bob Jackimowicz at City Council,Tom Collins and Jay Gardner at Old Brooklyn CDC, Steve Kruger atClark-Metro CDC, Walter Wright at Tremont West DevelopmentCorporation, Joe Mazzola at Ohio City Near West DevelopmentCorporation, Anita Brindza and Cathy Sabolik at Cudell Improvement,and Ben Campbell and Marie Kittredge at Slavic Village DevelopmentCorporation for all of their hard work on this project.

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Chapter 1Executive Summary

Category Impacts

- With such a wide scope of inquiry, the focus for this studyhad to be tightly-drawn and rigidly-maintained. Forexample, in the following section, we have covered onlythose categories that were specifically mentioned insection C-1 of the RFP.

GROCERY STORES

-According to a study by the University of ChicagosGraduate School of Business, the sales volume of atraditional supermarket can be expected to drop by 17%upon the arrival of a Supercenter.

- The study found that a Supercenter captures sales fromthe following demographic segments: 1) those with infantsand pets (i.e. young families); 2) weekend shoppers; 3)store-brand buyers; and 4) large-basket consumers.

- The households that do notswitch to the Supercenter are

ones that devote a large percentage of their groceryexpenditures to fresh produce and seafood, as well asfreshly-prepared, take-home meals.

- The strategy that seems more promising is to exploit Wal-Marts weaknesses on the high-margin perimeter (i.e.produce, meat, fish, deli/HMR, bakery etc) and provide ahigher standard in the areas of freshness and service.

- The impact at certain Daves locations will be limited sinceas much as 30-50% of shoppers do not have a car, and will

not have access to Steelyards-bound transit. However,unlike the national chains, Daves does not have a largestore fleet (and high-grossing suburban units) that can helpto absorb a blow, and it will probably need to close acouple of units, at least.

- The limited-assortment grocers (i.e. Save-A-Lot, Aldi)consistently beat Wal-Mart on price, and they do not fear

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the arrival of a Supercenter. In fact, Aldi, with a priceadvantage of as much as 17-18%, usually experiences anincrease in sales when a Supercenter opens.

- Bi-Rite stores within the shadow of Steelyard Commons,

will be hard-pressed to compete on price with Wal-Mart,but smaller ones can continue to fill a niche, as high-service, convenience-oriented food markets for nearbyresidents who only need a few items.

- The earlier study by the Oster Research Group should bediscarded. For some inexplicable reason, the authorschose possible supermarket sites that would competedirectly with existing operators (e.g. Daves, Church SquareSupermarket). Furthermore, their recommendations donot reflect the competitive landscape post-Steelyard.

HARDWARE STORES

- With the Home Depot at Steelyard Commons, both thewest side and the east side will be triangulated by homeimprovement giants. Even if they are able to differentiatethemselves through service, specialization, etc., existingmom-and-pops will still be hard-pressed to compete,especially given the recent stagnation in the housingmarket.

-Such additional competition might deliver a knock-outpunch to independent operators that had been justhanging on. Indeed, West End Lumber, nine years afterthe arrival of the citys first Home Depot, has announcedthat it will be closing its Lorain Avenue store due to weaksales.

LARGE APPLIANCES

- Because large appliances are big-ticket items, shopperstend to be more price-sensitive, and will travel significant

distances in order to comparison-shop. And unlike withhardware stores, the public seems to have no greataffection for mom-and-pop operators in this category.

- In addition to the new competition posed by Steelyards,independent operators might also have to contend with thepossible introduction of Sears appliances at the BrookparkRoad and/or W. 65th Street Kmart's.

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- In terms of niche, the most viable one in this market isscratch-and-dent (or S&D). Merchandise at suchstores is not used; at most, they will suffer frominconspicuous dings or scratches. It would appeal to two

markets found in heavy concentrations in the study area:apartment-building owners and cost-conscious, first-timehomebuyers.

OFFICE EQUIPMENT/SUPPLIES

- A high level of customer service makes even less of adifference in this category as with, say, large appliances,since, with the exception of electronics, the merchandise(e.g. pens, binders, file cabinets, etc.) does not requiremuch salesperson assistance. Again, scratch-and-dent

(S&D) or used/refurbished items could find a niche with amore budget-conscious clientele.

LOCAL RESTAURANTS

- Local restaurants should be unaffected by SteelyardCommons. After all, places like Lolita and Parallax draw anentirely different demographic than Applebees. Also,budget-conscious locals/regulars would still prefer dinerssuch as BJs (Lorain Station) because they are closer,quicker, more personal and even cheaper. And the

nationals/regionals most likely to be interested in big-boxcenters in the Cleveland market are ones that serve typicalAmerican fare, not foreign cuisines such as Puerto Rican,Middle Eastern, etc.

APPAREL

- The low-priced selections at popular chains such as Wal-Mart and Old Navy will likely depress sales at (and curb theexpansion plans of) lower-profile retailers that sellaffordable second-tier brands, like Fashion Cents or TNT

Fashions. On the other hand, independents and chain-letsthat showcase the latest and hottest urban sportswearlabels (e.g. Grind, Ts Urban Gear) can prosper in theshadow of the boxes.

- While Target specializes in so-called cheap chic andpeddles exclusive lines by fashion-world celebrities, itcertainly leaves room for boutiques that feature

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hip/hipster fashions or lesser-known designers. Thriftstores can also prosper in Steelyards shadow.

PHARMACIES and other MEDICAL PROVIDERS

-In this category, Wal-Marts primary competition is notmom-and-pops, as most of these have already lost thebattle with large drug-store chains such as Walgreens andCVS.

- While Wal-Marts cheaper prices on prescription drugswould draw those who must pay out-of-pocket, the un-insured account for as little as 5% of the prescription-drugsales at drug-store chains, and are therefore not asignificant factor. Some insured consumers might switchto Wal-Mart and Target, given the recent decision by the

two chains to sell certain generics at $4, which is less thanthe $10-15 co-payments required by many plans. But evenhere, the impact will be somewhat muted, since the $4offer only applies to 150 drugs, just a small fraction ofavailable generics.

- Profit at drug-store chains is actually driven by the higher-margin, front-end (i.e. non-prescription) departments,and sales in such departments suffer in the shadow of aSupercenter. But such stores enjoy a significant advantagevis--vis Wal-Mart because they are usually nearer to most

shoppers, and far easier to negotiate. Arguably they havemore to fear from deep-discounters like Family Dollar,Aldis, etc., which are not only cheaper in front-endcategories but also offer equally convenient in-the-neighborhood locations.

- Offering low-cost exams, glasses and contacts, Wal-MartsVision Center will attract cash-and-carry customerswho do not have vision benefits and must pay out-of-pocket, as well as insured shoppers with expensive co-payments Independent optometrists can differentiate

themselves from Wal-Marts Vision Center with, say, 1) ahigh level of customer service; 2) in-house lab services; 3)a more upscale selection of frames (if the market exists);4) contracts with third-party insurers that reimbursemost of the cost; etc.

- Wal-Marts in-house medical clinics do not threaten thedrug-store chains because those retailers, along with

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Target, supermarkets and other boxes, have also begun aroll-out of the concept. However, the convenience aspect(e.g. walk-up appointments, evening and weekend hours,etc.) could result in a shift of patients from traditionalpractices.

LOCAL BUSINESS SUPPORT SERVICES

- The client rosters and revenue streams of small, localconcerns in certain professions (e.g. law, accounting,insurance) will undoubtedly shrink as independent retailersclose in response to big-box development. This will, inturn, remove potential customers from the neighborhoodbusiness districts in which such offices are located.

DISCOUNT-VARIETY STORES

- This format is typically referred to as the dollar store, butlarge chains such as Family Dollar and Dollar General,while including the word dollar in their names, are not,technically, dollar stores, since neither sticks to the $1price-point. Prices are deeply discounted, but notnecessarily to $1: most of the merchandise costs $10 orless.

- With their combination of low prices and in-the-neighborhood convenience, this format is relatively

unaffected by a Wal-Mart Supercenter. The businessmodel of the discount-variety format (e.g. low overhead,Wall Street pressures, etc.) also helps to make storeclosures unlikely.

District Impacts

- Again, with such a wide scope of inquiry, it was necessarywhen writing this memo to remain focused. For example,in the following section, only the six core business districtswere considered, and not any of the other commercialcorridors or nodes within their host neighborhoods.

- Note that the only access planned to/from SteelyardCommons is via the 807 Circulator, which currently runsbetween the W. 25th Street & Detroit Avenue intersectionand the so-called Denison Loop (i.e. Denison Avenue &

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Ridge Road), servicing the Ohio City, Tremont and Clark-Metro neighborhoods. This bus will now make a shortexcursion to the big-box center upon arriving at ClarkAvenue & W. 14th Street.

OLD BROOKLYN

- Old Brooklyns four drug-store chains might be exceedingcurrent demand, with CVS struggles suggesting acondition of oversupply. Indeed, the Supercenters lowpricing might diminish CVS sales to the point where itwould have to close. Other anchors should be able tosurvive.

- Steelyard will impact Old Brooklyns potential for newretail. For example, not only is the Daves at Denison and

Ridge now vulnerable, but the grocer will no longer beconsidering a new store at Pearl & Broadview.

- As a result of Steelyard, traffic volumes will increase onBroadview as well as the stretch of Pearl from Broadview tothe Pearl/State split, heightening the visibility of the corebusiness district and improving the prospects there forretail re-tenanting that can or does not compete withSteelyard.

SLAVIC VILLAGE / NORTH BROADWAY

- The Broadway & East 55th Street business district will notbe dramatically affected by Steelyard (or City View, for thatmatter). One, RTA will not be providing direct transitaccess. Two, the drive is not necessarily a convenient one.And three, the retail categories do not overlap.

- Gillombardo Giant Eagle could experience a dip in sales,especially to customers to the northwest, although it mightalso stand to gain a small amount to the southeast if theDaves on Harvard Avenue closes.

CLARK-METRO

- The heightened traffic volumes expected on Clark Avenueas a result of Steelyard is partly responsible for theproliferation of national chains in that corridor.

- Clark-Metros retail anchors will experience some loss as a

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result of Steelyard, but most of them should be able tosurvive within its shadow. The drug-store chains are theonly ones that could be truly challenged, given theirvulnerability on high-margin front-end merchandise, notjust to Wal-Mart but also to Family Dollar, Save-A-Lot, etc.

- Daves at Denison and Ridge is vulnerable, and if it were toclose, Save-A-Lot should capture a percentage of the sales.But Save-A-Lots performance in Clark-Metro mightultimately depend on its ability to replicate Davesattentiveness to the specific needs and preferences ofLatino sub-markets.

- Most of the immigrant-oriented businesses in Clark-Metroshould be largely unaffected by the mass-market retailersat Steelyard, but the proliferation of national chains on

Clark is probably generating pressure to demolish the sortsof older buildings that house such tenants.

LORAIN STATION

- Given its location almost five miles away, this businessdistrict should not feel much of a direct impact fromSteelyard. However, the Daves at Denison & Ridge andthe Big K on W. 65th are vulnerable, and if they were toclose, the eastern half of the trade area would feel a voidin certain categories, such as grocery and discount-variety.

TREMONT

- Tremonts core business district, on Professor Street, isunlikely to be affected by the new big-box center. Themarket for its foodie restaurants, trendy bars and cuteboutiques either avoids Wal-Mart, Applebees, etc.altogether, or goes there for very different (i.e. non-competitive) purposes.

OHIO CITY

- Ohio Citys core business district is unlikely to be greatlyimpacted by the big-box center. The daytime retail will stillbe able to count on the traffic generated by the venerableWest Side Market, which, with its superior perishables,ethnic products and inexpensive prices, should not beaffected by the Supercenter. And its other draw, thecollection of trendy watering holes and ethnic sit-down

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eateries, will also be immune to the Steelyard threat.

- As for Daves, its base of low-income, transit-dependentshoppers might now have access to a lower-pricedalternative, but they would have to suffer the

inconvenience of taking a bus to/from the supermarket.Furthermore, the neighborhoods higher-income youngprofessionals and empty nesters, while having access to acar, would probably stick with Daves and avoid Wal-Marton principle.

District Strategies

- Note that this chapter strives to provide general directionin terms of market positioning, retail anchors, tenantclusters, etc.; unfortunately, the budget simply does notallow for a more fine-grained blueprint, although that willhopefully be the next step (see next section). Also, itshould be understood that the district-specific proposalshere will ultimately rely for implementation on the Cityembracing the policy and programmatic recommendationsthat are offered in the next section.

OLD BROOKLYN

- The Old Brooklyn market is somewhat uncertain. Theneighborhood boasts the highest median householdincome ($35,600) and second-highest median housingvalue ($96,000) in the study area, but over 1,000 Cityemployees live in Old Brooklyn, and would be permitted toleave if the Mayor ultimately fails in his challenge to therepeal of the residency-requirement law. Furthermore, theneighborhoods relatively inexpensive bungalows mightlose their niche as similar product in struggling inner-ringsuburbs continues to drop in price and draw middle- andeven low-income Clevelanders.

- With already-weak tenanting and such market uncertainty,the Old Brooklyn core business district needs to becontracted, with the retail energy concentrated along thestretch of Pearl from Broadview to Memphis, where trafficvolumes and storefront visibility are maximized. New retailspace outside this zone (e.g. as part of mixed-usedevelopment on Broadview between W. 24th and Colburn)should be discouraged, through zoning tools, incentive

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structures, etc. Note, however, that local housing expertssuggest only limited potential for multi-family residential inOld Brooklyn (i.e. 60-70 units at most).

- In order for the retail dynamic to change, Old Brooklyns

core business district desperately needs another draw.Assembled sites on the northeast and northwest corners ofPearl and Broadview, or the southwest corner of Pearl andMemphis (i.e. the existing CVS) would be well-positioned toensnare Steelyard-bound motorists with deep-discountformats, ones that can undercut even a Wal-Mart or aMarshalls. Possibilities include Marcs, Big Lots,Savers/Value Village and Gabes. Such large anchors aremore likely to revive the core business district than thenearby presence of the zoo.

-New daytime workers will generate additional demand forquick-service lunch and coffee spots, and basic staples,like, perhaps, a Rascal House Pizza and a Chinese take-out,might be considered. The core business district is probablynot going to re-emerge as a trendy dining/nightlife quartera la Professor Street or Market Square, but other eatingand drinking establishments, more in keeping with thesurrounding demographics, might be successful, like areincarnation of the popular Last Chance Saloon, a secondlocation for Tick Tock Tavern, or even, a branch of theWinking Lizard, Paninis or Quaker Steak & Lube regional

chain-lets. Finally, a Stockyard Meats could fill some of thevoid in perishables if the Daves at Denison & Ridge wereto close, given Wal-Marts weakness in this area and thevisibility to Supercenter-bound traffic.

SLAVIC VILLAGE / NORTH BROADWAY

- The North Broadway core business district at E. 55th Streetand Broadway is challenged on a number of fronts. Themedian household income is just $18,800. Theneighborhood has been devastated in recent years by

foreclosure. Crime rates are high, and perceived as such.Residents who are able to move appear to be doing so,either to inexpensive inner-ring suburbs, or to West Sideneighborhoods. And the core has to compete for retailersand shoppers with the more automobile-friendly stretch ofthe corridor to the immediate southeast.

- The intersection of E. 55th and Broadway is one of the few

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examples remaining in Cleveland of a still-intact historicretail crossroads. However, without rent-payers, thesebuildings will physically deteriorate to the point where theyare no longer redeemable. In the short term, then, atriage strategy should be adopted, with landlords

considering any possible tenants that 1) are credit-worthy and 2) cater in some way to existing residents.More ambitiously, efforts could be made to replicate themodest but successful cluster of independent merchantson Buckeye Road just east of E. 116th St.

- One longer-term possibility, suggested by Keith Brown ofProgressive Urban Real Estate, is to take advantage of thedistricts rawness by marketing E. 55th and Broadway to thealternative underground. This psycho-graphic is less likelyto be deterred by fear, and would be drawn to cheap

housing with transit access (i.e. upper-floor apartments ofmixed-use buildings), not to mention the areas off-the-radar-screen quality. It has historically gravitated toCoventry and Tremont, but these two neighborhoods areseen as having lost their edge.

- Such re-positioning could pay handsome dividends oncethe Opportunity Corridor connects I-490 to UniversityCircle and improves access for the constant stream ofstudents at Case Western Reserve University and theCleveland Art Institute. This might seem a bit fanciful now,

but then again, todays Tremont seemed almost as unlikelyin the 70s and 80s (and with similar housing stock).Indeed, artists can already be found in Slavic Villagesfledgling St. Hyacinth neighborhood. Ultimately, however,very little will change in Slavic Village if its high-crimereputation is not reversed.

- One might argue that such an approach ignores the mostlypoor, African-American consumers that currently populatethe surrounding blocks. However, this submarket hasproven unable thus far to sustain retail vitality at E. 55 th

and Broadway, partly due to the difficulty in attracting (andthe undesirability of siting) a larger anchor store there thatcaters to such shoppers.

CLARK-METRO

- Clark-Metros market fundamentals are surprisingly strong.Its median household income, at $23,600, is higher than

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Tremonts and not far from Ohio Citys, and its populationdensity, at 14,800 persons per square-mile, is the highestin the study area. As a result, its aggregate income persquare-mile dwarfs that of any of the other neighborhoodsdiscussed here. Also, crime rates are lower than the study

area average, and below those of Tremont and Ohio Cityeven for violent (as opposed to property) incidents.

- The neighborhood has long been dominated by working-class white and Latino contingents, but Northeast Ohiodoes not have the same drawing power among these twogroups as it once did. Clark-Metro has always been agateway-immigrant neighborhood, but since the region isattracting very little immigration (or domestic migration)today, there is no obvious replacement for these decliningpopulations. The longer term could see an influx of East

Side African-Americans, or, if the brand improves, spill-over from gentrified neighborhoods nearby.

- The stretch of Clark Avenue from W. 25th Street to FultonRoad has seen a flurry of investment by national chains inrecent years. One should expect more of the same in thenear future, with remaining houses acquired anddemolished for smaller strips and freestanding buildingshousing such tenants as Wireless Toyz, EB Games,Georgios Pizza and Taco Bell. Insomuch as Clark is one ofthe only corridors in the study area where the private

market is taking the lead and where public subsidy has notbeen necessary, the City and CDC should probably expendits limited development-dollars elsewhere (e.g. on W. 25th

Street).

- Efforts should be made to consolidate on W. 25th St. all ofthe neighborhoods immigrant and Latino-orientedbusinesses (including ones displaced by furtherredevelopment on Clark), thereby transforming it into theLatino shopping street. With the Puerto Rican populationprobably in decline, this might seem like a short-term

strategy, but African-American arrivals should be able tosustain some of the same retail sub-categories. Thinkinglonger term, the high traffic counts on and visibility of W.25th should be used to re-brand Clark-Metro and improveperceptions.

LORAIN STATION

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- Lorain Station is challenged by weak market fundamentals.Traffic counts are low for a major thru street. The retailmix is part of (and seemingly indistinguishable from) theendless Lorain Avenue commercial sprawl, and lacks anysort of separate identity. I-90 weakens the pedestrian

connection to/from the dense residential blocks north ofthe highway. The district leaks tenants and shoppers toWestown Square to the immediate west. And the viciousbeating of Ken Schneider, owner of Schneiders Bikes,reinforced public perceptions of a dangerous, drug-infestedcorridor.

- Lorain Station can, however, take advantage of very highpopulation densities (13,800 per square mile.), suggestingthe potential for additional convenience-orientedbusinesses that cater to the walk-in trade. Indeed, if the

nearby Daves or Big K were to close, the neighborhoodseastern half might be able to sustain a small-format groceror discount-variety operator. The old furniture store nearthe I-90 crossover might be considered for just such aretail anchor, perhaps a Family Dollar or a small Bi-Rite,assuming some parking.

- The stretch of Lorain Avenue between W. 98th Street andthe I-90 overpass has also been emerging as the epicenterfor the small but growing African-American community onthe West Side. This presents a real opportunity for Lorain

Station: the African-American population on the West Sidewill probably continue to grow, and the two other districtsthat could claim this demographic are moving in differentdirections. Efforts should be made, for example, to identifyand lure the staples of East Side African-American retailing.

- Lorain Station is a classic example of an urban, streetcar-oriented shopping precinct that, in the era of the strip mall(e.g. Westown Square), has lost its retail raison detre andneeds to be contracted. The CDCs advocacy for non-retailtenancies is appropriate (except at the main intersections

or near the larger anchors). Buildings beyond repair andadjacent to successful businesses or high-visibilitystorefronts should be considered for acquisition, demolitionand reuse as surface parking. And first-floor retail onnearby streets (e.g. Denison) should be prohibited.

TREMONT

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- Tremonts market fundamentals are surprisingly weak.The median household income is just $21,700, and theresidential densities, at 3,500 per square-mile, are almostsuburban, translating to the lowest aggregate income persquare-mile in the study area. Professor Street is a hidden,

low-traffic corridor in a small, isolated neighborhoodseparated from most everything else by highways andvalleys. Without a critical mass of affluent residents, it ischallenged to become much more than a high-end foodiedestination, and even, as demonstrated by Theorysfailure, might face a ceiling in that category.

- With this being the case, Tremont should not try to bemore than it is. Its success is rooted in its isolation, whichresults in a quieter, neighborhood feel and mellow vibe,in stark contrast to the downtown flash of the Warehouse

District. And the gourmet restaurants and art gallerieshave lent it an air of sophistication and refinement. Thisbrand would be ruined by the arrival of more boisterous,mass-based nightlife (e.g. clubs, SUV limos, etc.).

- In terms of tenanting direction, local chefs/restaurants,given the possible market saturation in high-end dining,could look to develop stylish and high-quality foodconcepts at a more affordable price point than one finds at,say, Lolita or Parallax. Additional comparison-goodsboutiques, however, should be discouraged. With the

notable exception of Banyan Tree, such stores havestruggled to survive, as Professor Street suffers from lowvisibility, little daytime foot traffic, and relatively high(restaurant-driven) rents. Ohio City is probably the moreappropriate location for this niche (see below).

- Given the need to draw a regional clientele, efforts shouldbe made to improve the experience from the visitorsperspective. The streets (even Professor) can be dark andforeboding, suggesting the need for new street-lightingthat illuminates the entire length of the sidewalks (while

notcausing disruption for abutting residences). And while alarge deck would be inappropriate for such a neighborhoodsetting, additional lots fronting on Professor Street andadjacent/close to existing restaurants and bars could beused for surface parking, thereby shortening the walk forpatrons (and releasing spaces for locals).

OHIO CITY

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- Like Tremonts, Ohio Citys market fundamentals are notespecially strong. The median household income is just$24,100, and roughly one-third of the households live inpublic housing. However, its median home value, at

$105,000, is the highest in the study area, and while thehousing market has stalled recently, the neighborhood,with its brand and its amenities, is well-positioned to takeadvantage if/when the regional economy rebounds.

- Ohio City has emerged as one of the citys three topdestinations for dining and nightlife, and it can differentiateitself still further, as the one district where NortheastOhioans can go to access minority cuisines and sub-cultures without feeling scared or self-conscious. Effortsshould be made to build this brand by: 1) pushing it in

marketing materials; 2) lobbying certain establishments toappear more welcoming; and 3) recruiting similar best-in-class operators from elsewhere in the region (like PhnomPenh and Cambodian food).

- Ohio City is also well-positioned to emerge as thecomparison-shopping destination for Clevelandsprogressive new-urbanites, given its centrality vis--visother gentrifying neighborhoods (e.g. Tremont, Detroit-Shoreway, Downtown, etc.) and Downtowns sluggishnessin building on its competitive advantage in this regard.

Certain anti-chain chains, like American Apparel orAvedas Institute concept, would fit with the psycho-graphic and brand, as would smaller chain-lets fromcomparable markets in the region and beyond (e.g. AkronsHighland Square, Milwaukees Brady Street).

- Finally, it is worth noting that while the housing projectsare slated to remain, virtually all of the residential activitythese days is market-rate, and those who live in theneighborhoods older homes are not protected fromincreasing rents or assessments/taxes. It might make

sense, given the condition of the regional economy and theglut of affordable housing, to encourage re-investmenteven if the result is displacement of existing residents, butat the same time, there should also be an awareness ofwhat that would jeopardize in this case: 1) Ohio Cityssocioeconomic and ethnic diversity, arguably its greatestachievement; and 2) Daves, which relies heavily on theweekly shopping trips of low-income households.

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Municipal Strategies

- Steelyard Commons might provide a number of benefits forthe City of Cleveland (e.g. more tax revenue, added

amenities for residents, etc.), but it no doubt adds furtherto the challenges already faced by the citys neighborhoodshopping precincts, compromising their ability to attractnew anchors, taking market share from existing retailers,etc.

- Other municipalities that welcomed such developmentswithin their boundaries have done relatively little to assistthe nearby neighborhood business districts that arenegatively impacted, and Cleveland has the opportunity tobecome a national model in this regard, one that couldgarner much attention as suburban-style power centersbecome ubiquitous in U.S. cities over the coming decade.

- Economic development today means more than justluring big business. The reality is that in numerical terms,small businesses is still the engine that drives inner-cityeconomies, comprising 99% of the firms and 80% of theemployment there. Furthermore, small independently-owned shops propel the sort of organic growth thatcreative-class workers find so appealing. Attracting large-scale employers is no doubt critical, but the thinking todayis that will locate where the talent is, and the talent thehipsters and the yup-sters want to live in cool citiesand neighborhoods, ones with some authenticity and funk.

- In terms of incentives for and assistance for smallbusinesses, the City of Cleveland lags well behindcomparable cities elsewhere. For example:

o Washington (DC) has created a tax-increment-financing (TIF) district to subsidize build-out costs for

retailers willing to locate on certain downtownshopping streets, and is exploring the possibility ofcreating a variant for its neighborhood commercialcorridors.

o Dallas (TX) can give grants (not loans) for tenantimprovements as well as other related start-upcosts, and will subsidize monthly rents (for a

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maximum of two years).

o The cities of San Jose (CA) and Memphis (TN), forexample, offer loans that can be used for workingcapital (including inventory).

o In Providence (RI), for instance, mezzanine-financingis available for capital investments by start-upretailers that have no track record, low sales/profit,insufficient cash flow to cover debt, credit problems,etc.

o The City of St. Louis (MO) has a Retail FranchiseDevelopment Program, which matches potentialfranchisors with and offers financial assistance toqualifying franchisees.

Such programs, it is true, involve an up-front cost, but withthe additional tax revenue that would be generated, theinvestment would more than pay for itself.

- Cleveland desperately needs a fresh approach to retailrecruitment. The received wisdom is that the City has toidentify opportunities for developing suburban-style stripcenters in Clevelands inner-city neighborhoods so as toprovide residents with the same shopping opportunitiesthat they would have in the suburbs. With this in mind, the

public/non-profit sector has looked to partner with theInternational Council of Shopping Centers (ICSC), a tradeorganization that, while moving to build a presence inurban areas through its Alliance Program, remains largelysuburban in its focus and perspective.

- This relationship with ICSC might help in cases where alarger anchor or a strip center can be accommodated (e.g.in Old Brooklyn), but it does little else for the citysneighborhood shopping precincts. At the risk ofgeneralization, and with obvious exceptions (e.g. in

Chicago, San Francisco, etc.), it can be said that most ofthe developers, brokers and retailers in ICSCs membershiphave little interest in traditional urban storefronts, or muchunderstanding of the niche submarkets that can be tappedin such settings. The anti-chain chains that should betargeted for Ohio City, for example, cannot be found at anICSC event.

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- CNDC is the logical one to fill this gap, given that it has laidthe groundwork with the Retail Commercial SupportInitiative and the www.retailspacescleveland.com website.The City should provide CNDC with the funding needed tohire at least one full-time staff person devoted exclusively

to retail recruitment (i.e. developing relationships withlandlords and brokers, canvassing for and pitching toprospective tenants, etc.). In addition, the City shouldrecognize the disincentive that private brokers face inhigh-risk, small-payout urban settings, and perhapsconsider a neighborhood-oriented variant of Kalamazoos(MI) Business Recruitment Incentive Program (BRIP), whichsubsidizes broker commissions for downtown leasing deals.

- Clearly, the supply of retail space in inner-city Clevelandfar exceeds current demand. In order, then, to reduce the

vacancy rate and raise rent levels, some percentage of theexisting square footage needs to be converted to otheruses and removed from the market. Of course, the publicsectors direct influence is limited to the properties which itowns or buys, but it can also, through various tools at itsdisposal, incentivize the private market to shift itsenergies towards certain nodes and corridors.

- Generally speaking, the recommendation is to work fromstrength, to focus on the business districts primaryintersection, where road and transit networks converge,

where traffic and visibility are highest, where retailpotential is maximized. Where, however, the privatemarket is already responding, the counsel is to concentrateinstead on the part that is still being ignored (e.g. W. 25th

Street, in Clark-Metro). The addition of new ground-floorretail space (e.g. in new mixed-use developments) isstrongly discouraged, unless it is located: 1) within thecore; and 2) in a strong sub-market and not likely tocannibalize existing space (e.g. Ohio City).

- The City needs to have a consistent policy on historic

preservation. The received wisdom is that such olderfabric is obsolete from a retail standpoint, but this is arather simplistic assumption, one indicative of ICSCsinfluence. It is true that national chains, especially larger-footprint ones, will usually prefer new suburban-styledevelopment in a market like Cleveland. However,retailers that cater to typical urban submarkets (e.g.green-hairs, yup-sters, immigrants, etc.) are often less

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demanding. Furthermore, architecture is very fadish, andstyles change from one decade to the next (e.g. theWarehouse District, Tremont, etc.), meaning that if aparticular era can survive the initial swing in tastes, it willeventually return to popularity.

- Of course, buildings can only be kept if they have beenmaintained, which depends on having revenue from rent-paying tenants. In most cases, the alternatives soundsomething like this: 1) lease to check-cashing outlets, cell-phone stores, ground-floor offices, etc. and keep theexisting stock; or 2) demolish an entire row and redevelopfor a traffic-generating anchor. Ultimately, this studyargues, the decision should rest on where the shoppingprecinct is headed or can go. A Big Lots at Pearl andBroadview would fundamentally alter that districts retail

dynamic. The same cannot be said of a Rite Aid atBroadway and E. 55th, given the existence of a Walgreensnearby. And another drug store is not integral to thebroader transformation envisioned for Slavic Village here.

- It goes without saying that the future of Clevelandsneighborhood shopping precincts ultimately depends onmacro forces beyond their control, e.g. job creation,housing market, immigration patterns, etc. The City isundoubtedly working on these larger issues, but one oft-overlooked driver is branding. In the past, Cleveland has

suffered more than most cities from an exceedinglynegative brand (e.g. The Mistake By The Lake), but todayit is missing an opportunity to use that reputation to itsadvantage. At the risk of generalizing, the highly-toutedcreative class responds to irony and authenticity, twoqualities that Cleveland, with its tattered and gritty past,most definitely offers. Take, as an example, the popularityof the Great Lakes Brewery beer called Burning River(with the picture of a fiery Lake Erie on the label). The Cityshould hire an advertising/branding firm to develop contentand strategy for a national campaign that sells Cleveland in

these terms.

- The City also needs to invest more in retail strategizingand implementation assistance. The budget for this studyonly allowed for exploration of and recommendations for ageneral direction for neighborhood business districts in thestudy area. More is needed in order to: 1) develop for eachone a fine-grained blueprint that details specific actions to

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be taken with regard to individual blocks and properties; 2)create for each one a list of specific tenants in the regionthat should be targeted; 3) develop compelling leasingbrochures; and 4) train CNDCs new full-time retailrecruiter (see above); etc. The expenditures required to

fund these efforts would be miniscule in comparison to thereturns that they could help to generate (i.e. new tenants,street vitality, tax revenue, etc.)

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Chapter 2Category Impacts

The following provides our assessment of the impacts that theSteelyard Commons development (and future big-box development) islikely to have in specific retail categories.

With such a wide scope of inquiry, the focus for this chapter had to betightly-drawn and rigidly-maintained. We have covered only thosecategories that were specifically mentioned in section C-1 of the RFP,as well as one other that we feel to be particularly important: discount-variety stores. We have provided an overview of the conditions andprospects of independents in these various categories, and detailedthe kinds of retailers in each one that are likely to be able to survivethe big-box threat, but we did not offer recommendations on largerissues (e.g. owner succession, advertising imperatives, etc.).Geographically, we have considered the impact on these categories asthey are represented in the study area (i.e. near west and east sides),and not much beyond. Finally, we have assessed types of stores,rather than specific retailers (which will be discussed in Chapter 3).

GROCERY STORES: The Wal-Mart Supercenter planned for SteelyardCommons casts a long shadow over grocery retailing in the study area.

Similar to Super K (Brookpark Road), the Supercenter format consistsof both a full-line Discount Store (i.e. general merchandise) as well as afull-line supermarket, with groceries occupying roughly 30% of thefloor area and accounting for approximately 30-35% of sales. Wal-Marthas been growing this format very aggressively over the last fifteenyears, and is now the nations top grocer in terms of overall sales. Theretail giant plans on converting all of its existing Discount Stores in theCleveland area to Supercenters, in line with its national strategy1.

Wal-Mart arouses such fear as a grocer because its prices are 8-27%less than those found at traditional supermarkets (even after

accounting for loyalty discounts and other specials)2

. With theindustrys typical profit margin a slim 1%, how is Wal-Mart able to offersuch low prices? Because its cost structure is different, for the

11 The source for the confidential information on Wal-Marts strategic direction will be

protected.2 Wall Street Journal, May 27, 2003. The traditional supermarkets used in this

comparison were the Big Three of Kroger, Safeway and Albertsons. A 2003 Time

magazine article suggested a cost differential of 15%.

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following reasons: 1) higher sales volumes means that it can exercisemore bargaining power with manufacturers; 2) an extensive network ofdistribution centers allows it to bypass wholesalers; 3) superior supply-chain logistics and proprietary RetailLink software enable it toachieve greater efficiencies in distribution and inventory-control; and

4) non-unionized labor reduces its costs in an area which normallyaccounts for 70% of overhead.

There is an element of strategy here, too. Low-priced groceries areseen not as a profit center, but rather, as a driver of traffic to (andpossibly even a loss-leader for) higher-margin general merchandisedepartments. Indeed, general-merchandise sales at Wal-MartsSupercenters tend to be 20-25% higher than at its Discount Stores,which explains why the format has emerged as the companys primarygrowth vehicle.

According to a study by the University of Chicagos Graduate School ofBusiness3, the sales volume of a traditional supermarket can beexpected to drop by 17% upon the arrival of a Supercenter, translatingto a shortfall of roughly $250,000 per month (or $3 million per year).This loss can be attributed to fewer store visits, rather than a smallerbasket size; in other words, consumers, once inside the store, spendroughly the same amount as before, but there are just fewer of them.Furthermore, the loss can be traced to a small percentage ofcustomers: 10% of households account for 45% of the decline inrevenue, 20% of the customers for 70%.

Interestingly, the willingness-to-shift could not be explained simplyby distance. Indeed, Supercenters are often located further afield, onthe outskirts of communities (rather than within them), with low pricesas the enticement. The study found that a Wal-Mart Supercentercaptures sales from the following demographic segments: 1) thosewith infants and pets (i.e. young families); 2) weekend shoppers; 3)store-brand buyers; and 4) large-basket consumers. These findingsmake sense. One is more likely on the weekends, for instance, totravel that extra distance needed to reach the out-of-townSupercenter. Furthermore, those buying lots of groceries would beless sensitive to the promotional Hi-Lo approach historically utilized

by traditional supermarkets, and instead prefer Wal-Marts EDLPEvery-Day-Low-Price model.

Wal-Marts strength is in price-driven commodities, where quality does

3 Singh, Vishal P., Hansen, Karsten T. and Blattberg, Robert C., "Impact of Wal-Mart

Supercenter Entry on Consumer Purchase Behavior: An Empirical Investigation" (March

15, 2004).

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not vary from one retailer to the next. Examples include canned andpackaged goods, like cans of peas or bags of rice. On these sorts ofitems, Wal-Mart will simply price-check and undercut its competitors.This holds even for ethnic products, where local operators such asDaves are thought to have a considerable advantage. (The only

format likely to survive with this niche is the small corner bodega,which is not just physically closer to its often transit-dependent targetcustomer but can also provide a level of co-ethnic comfort, e.g.speaks in native tongue, develops a personal relationship, etc.). Wal-Mart has proven far weaker, however, with perishables, an area oftremendous importance to grocery shoppers, and one in which theyare often willing to pay a premium for better quality and service.Indeed, according to the study, the households that do notswitch tothe Supercenter are the ones that devote a large percentage of theirgrocery expenditures to fresh produce and seafood, as well as freshly-prepared, take-home meals (also known in the trade as home meal

replacement, or HMR4

).

Certain larger national supermarket conglomerates have tried to beatWal-Mart at its own game, by acquiring regional players so as toachieve similar buying clout and economies-of-scale, and/or by addingvarious other services within store walls (e.g. pharmacy, bank, etc.) soas to move closer to one-stop shopping. But the strategy that seemsmore promising, especially for smaller, local chain-lets working withsmaller, urban footprints, is to exploit Wal-Marts weaknesses on thehigh-margin perimeter (i.e. produce, meat, fish, deli/HMR, bakeryetc) and provide a higher standard in the areas of freshness and

service. These departments also offer opportunities for such operatorsto retain their edge in and appeal to ethnic submarkets otherwisedrawn to Wal-Marts low prices, although the price inelasticity ofimmigrant/minority shoppers might ultimately doom those locationsthat rely too heavily on their patronage.

So where does all of this leave Daves? Undoubtedly vulnerable to theSupercenter threat, given the price-sensitivity of its low- andmoderate-income customer base. Daves wholesaler, Giant Eagle,predicts that the chain-lets volumes could decline by as much as 25-30%, although the ultimate percentage will likely be lower. One, the

Saltzmans are shrewd operators and will know how to adapt. Two, asignificant percentage of Daves shoppers, estimated at 30% to 50% incertain neighborhoods, do not own a car. However, unlike the nationalchains, Daves does not have a large store fleet (and high-grossing

4 HMR is considered especially popular among time-pressed consumers (e.g. young

professionals) who want something for dinner that is quicker than sit-down but fresher

and healthier than fast food.

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suburban units) that can help to absorb a blow, and it will probablyneed to close a couple of units, at least. The most imperiled wouldseem to be: 1) the tired-looking store at Denison and Ridge; and 2) therelatively new one on Harvard Avenue (expecting a 30% hit). Closureof these stores appears all the more likely now that the Tops at

Westown Square will be replaced by a Giant Eagle, and the one at Turneytown Shopping Center (Garfield Heights) by a Daves. Also,Daves will also notbe considering any new developments in the studyarea, as it was doing, for instance, at Pearl and Broadview. Indeed, theSaltzman family presently feels an acute sense of betrayal, and can nolonger be counted on to anchor risky projects on behalf of the city orparticular neighborhoods, as it has done in the past.

Another format that should be considered in this discussion is thelimited-assortment grocer. Its two dominant players are Save-A-Lotand Aldi. At 10,000 to 15,000 sq.ft., their stores are much smaller than

traditional supermarkets, with: 1) an edited selection of fast-movingbasics; and 2) few perimeter departments and additional services.Even so, they can and do play the role of anchor in Clevelandsneighborhood business districts, and although the shopping experienceis decidedly no-frills (e.g. goods on pallets; charge for shopping bags;mostly private-label brands), they provide a real service for low-incomehouseholds without access to a car, with their: 1) exceptionally lowprices (see below); 2) acceptance of food stamps, and 3) convenientneighborhood locations. It is true that their business model requiresnon-unionized labor, but Save-A-Lots can be locally-owned, withfranchisees accounting for 75% of the fleet nationwide.

These stores consistently beat Wal-Mart on price, with Save-A-Lotroughly 5-11% lower and Aldi 17-18%5, and they do not fear the arrivalof a Supercenter. Save-A-Lot typically loses some volume, but itsoverhead is so minimal (e.g. second-generation spaces) that it is ableto absorb the blow. Indeed, the future presence of a Supercenter atSteelyard Commons, just one mile away, did not stop it from decidingto open in the old Tops on Clark Avenue, perhaps because the rentthere is a very low $3/sq.ft. Aldi, with even more of a price advantageas well as a reputation for private-label goods that are equal orsuperior to national brands, usually experiences an increase in sales

when a Supercenter opens. Indeed, it is perhaps the only supermarket

5 The www.retailwire.com website suggested that Save-A-Lot was priced 10% below

Wal-Mart, and 8-10% higher than Aldi. A 2005 survey by DSN Retailing Today pegged

the price for a 30-item market basket in Dallas at $38.35 for Save-A-Lot and $40.21 for

Wal-Mart (a 5% difference). A 2004 study by Goldman Sachs found that Save-A-Lots

prices in the Memphis market were 11% lower than Wal-Marts on similar store-branded

goods.

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operator that benefits from proximity to a Supercenter, often takingout-parcels of a Supercenter-anchored development so as to captureprice-conscious shoppers (54% of Aldis fleet is in close proximity to aWal-Mart supermarket6). Of course Germany is a vastly differentmarket, but Aldi, a German retailer with some 4,000 stores there, was

considered a major reason why Wal-Mart recently chose to pull out ofthat country.

One last operator to consider in connection with the new Wal-MartSupercenter is Bi-Rite. Bi-Rite is not a chain, but rather, a network ofindependent grocers who belong to the Bi-Rite buying cooperative. Bi-Rite stores are already reeling from the arrival of the limited-assortment grocers, and the ones within the shadow of SteelyardCommons, such as the Vollicks Bi-Rite in Old Brooklyn, will be hard-pressed to compete on price with Wal-Mart. But while they might notbe able to serve as destinations for the weekly shopping trip, smaller

Bi-Rite units, like the one on Fleet Street, can continue to fill a niche, ashigh-service, convenience-oriented food markets for nearby residentswho only need a few items.

Finally, the earlier study by the Oster Research Group needs to bediscarded. Partly this is because of Steelyard Commons: for instance,the intersection of Pearl and Broadview, which Daves was consideringfor a new store, is no longer appropriate for such use. But also, forsome inexplicable reason, the authors chose supermarket sites thatwould compete directly with existing operators, such as Daves. Forexample, it is unclear why, with a Daves nearby at Denison and Ridge,

the report even suggested West 65th

Street and Clark Avenue.(Ironically, with that Daves seemingly in peril, the W 65th/Clark locationmight make more sense now, although perhaps only for a limited-assortment grocer like an Aldis). Meanwhile, a new food superstore atEuclid Avenue and East 55th Street would likely thrive as a result ofsuperior visibility and access, but probably at the expense of theDaves on Payne Avenue and on Community College Avenue, as well asthe Church Square Supermarket at East 79th Street (which is alreadyfacing increased competition with the new Aldis at East 75th).

HARDWARE STORES: This retail category has been revolutionized in

the postwar era: first, in the late 60s, with the emergence of thehome improvement center, a format that combined the traditionalhardware store (i.e. home maintenance and repair) with thelumberyard (i.e. lumber and building materials), and then, in the late70s, with the rise of the 100,000+ sq.ft. warehouse store, which

6 According to Aldi spokesman Jon Drummond, as quoted in Leeching off Wal-Mart,

by Parija Bhatnagar, www.CNNMoney.com, February 16, 2006.

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perfected the Wal-Mart formula of low price points and one-stopshopping. The 80s and 90s also saw rapid expansion by Wal-Martitself, which also includes hardware departments. The traditionalhardware stores, long accustomed to high margins, did not fare wellamidst all of this competition, and many were ultimately forced to

close. Today, the three leading warehouse store chains HomeDepot, Lowes and Menards control over 40% of the market.

With the Home Depot at Steelyard Commons, both the west side andthe east side will be triangulated by home improvement giants. Ofcourse, the shopping experience at such stores can be a veryunpleasant one, particularly on the weekends, and independenthardware stores are typically closer (i.e. in the neighborhood), smaller(i.e. no long treks from one department to another), faster (i.e. no longwaits to get a clerks attention), etc. They might also stand a chanceof surviving by adopting the strategy of choos[ing] what they want to

be famous for7

, i.e. evaluating their departments, identifying theirstrength, deepening their selection, leveraging their superiorknowledge and experience, offering an exceptionally high level ofcustomer service, and charging a premium. But even with suchdifferentiation, existing mom-and-pops will still be hard-pressed tocompete, especially given the recent stagnation in the housing market.Such additional competition, then, might deliver a knock-out punchto independent operators that had been just hanging on. Indeed, WestEnd Lumber, nine years after the arrival of the citys first Home Depot,has announced that it will be closing its Lorain Avenue store due toweak sales.

APPLIANCES: This category, traditionally dominated by Sears and itsprivate-label Kenmore brand, has seen dramatic gains by the home-improvement giants. As of August 2005, Sears still controlled 33% ofthe market, but Lowes had climbed to 16% and Home Depots to 9%(with Best Buy in the mid-single digits and Target also selling suchgoods8). Major appliances have become more important to HomeDepot not only as a way of taking market share from Lowes, but alsoso that it can provide even more of a one-stop shop tohomebuyers/remodelers. For Best Buy, it serves as a traffic-driver toother, higher-margin departments, such as consumer electronics. Not

surprisingly, these retailers, offering both lower prices (due to costefficiencies and high volumes and, in Best Buys case, as a matter ofstrategy) as well as greater selection (due to larger floor-plates), havewreaked havoc on traditional mom-and-pop authorized dealers.

7 Comment on www.retailwire.com by Gwen Morrison, President of The Store, posted on

September 13, 2004.8 J.C. Penney exited the category in 1983, and Wal-Mart mostly sells small appliances.

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Competition is only going to become more fierce for the remainingindependents, with new Home Depot, Best Buy and Target storesslated for Steelyard Commons as well as the possible introduction ofSears appliances at the Brookpark Road and/or W. 65th Street Kmart's.

Because large appliances are big-ticket items, shoppers tend to bemore price-sensitive, and will travel significant distances in order tocomparison-shop. And unlike with hardware stores, the public seemsto have no great affection for mom-and-pop operators in thiscategory. Furthermore, the housing market is currently weak, even inthe resurgent neighborhoods of the last decade (e.g. Ohio City),meaning that the proverbial pie is not expanding.

The still-successful mom-and-pops are probably the ones that havecommitted to high levels of customer service. Industry experts attestto the weakness of the home-improvement giants in the area of

product knowledge and salesperson assistance9

, and independents canalso differentiate themselves with delivery and installation. Inaddition, they can appeal to the high percentage of study-arearesidents without a credit history by offering easy, cheap and patientfinancing. In terms of niche, a particularly viable one in this market isscratch-and-dent (or S&D). These stores offer overstocked,discontinued and returned appliances at deep discounts. Such itemsare not used (although S&D dealers also will specialize inrefurbishing and reconditioning); at most, they will suffer frominconspicuous dings or scratches (perhaps caused by a clumsydeliveryman). Dealers, which focus on a particular brand(s), will buy

them at a discount from retailers or manufacturers. The concept islegitimate: in fact, Sears has its own chain of Sears Appliance Outletstores. It appeals to two markets found in heavy concentrations in thestudy area: apartment-building owners and cost-conscious, first-timehomebuyers.

OFFICE EQUIPMENT/SUPPLIES: Medium and big boxes have beengaining share at the expense of mom-and-pop operators in thiscategory since the 80s. Large chains such as Staples and Wal-Martappeal to home offices and small businesses with their one-stopshopping and low prices (made possible by high volumes and buying

clout). As a result, independents could claim just 11% of the market in2004, while the big three Staples, Office Depot and Office Max ledthe way with 35%, followed by discount department stores and

9 According to comments by experts on two www.retailwire.com stores: Home Depot

and Others Fill in the Appliance Vacuum Left By Sears, 3/23/06, and Sears Watches

Others Grab Appliance Sales Share, 8/26/05.

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warehouse clubs, at 30%10, along with other superstores that capturesales in particular sub-categories (e.g. Best Buy and computers).

The outlook for mom-and-pops in the study area is not good, as theywill feel even more squeezed with the opening of Staples, Wal-Mart

and Best Buy at Steelyard Commons. High levels of customer servicecould make a difference, but not as much as with, say, appliances,since, with the exception of electronics, the merchandise in thiscategory (e.g. binders, file cabinets, etc.) does not require muchsalesperson assistance. Staples and Wal-Mart, while difficult to beat onthe so-called accessories (e.g. pens, paper, staplers, etc.), might besomewhat more vulnerable in the area of office/home-office furniture,since so much of their selection is in catalogs, rather than on the salesfloor. Alternatively, scratch-and-dent or used/refurbished itemscould draw an even more budget-conscious clientele.

LOCAL RESTAURANTS: Sit-down restaurants in the study area can bedivided into three groups: one, trendy, up-market establishments,located in Tremont and Ohio City, that pull from throughout the regionand that appeal largely to upwardly-mobile young professionals andwell-off empty nesters; two, basic, unpretentious, low-price/large-portion family restaurants that cater to the neighborhood andprimarily attract working-class folks; and three, ethnic offeringsspecific to immigrant or minority submarkets. None of these would beaffected much by the large chains that are planned for SteelyardCommons (i.e. Applebees, IHOP), or are likely to be considered forfuture big-box developments. The foodies and the trend-oids drawn

to places like Lolita are not the same ones who dine at Applebees.Budget-conscious locals/regulars would still prefer diners such as BJs(Lorain Station) because they are closer, quicker, more personal andeven cheaper. And the nationals/regionals most likely to be interestedin big-box centers in the Cleveland market are ones that serve typicalAmerican fare, not foreign cuisines. Families from the near east-sidelonging for a safe dining environment might, it is true, now head toApplebees for dinner or IHOP for breakfast, but it is difficult to seewhat they would be taking business from.

APPAREL: The apparel offering at Steelyard Commons will be

anchored by the two discount department stores. Wal-Mart offersclothing for babies, boys and girls (including school uniforms), juniors,women, womens plus, maternity, men, mens big and tall, and menswork wear. It features national brands such as Levi Strauss, Dickies,Wrangler and Puritan, as well as popular store brands like mary-kate-and-ashley, George and Faded Glory. The retailer which already

10 According to www.the-infoshop.com, Office Supplies US February 2006 report.

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controls 13% of the market, is moving aggressively to improve itsimage in this area, with its new Metro 7 line (for trendy young women)as well as a more upscale floor-design (e.g. more space between racks,simulated wood floors, etc.). Target, with 6% market share, sellsclothing for babies, kids (including school uniforms), juniors, plus,

maternity, men and mens work wear (including white-collar). Theretailer has carefully cultivated an image as the more hip and fashion-forward alternative to Wal-Mart, and while it also carries mid-marketnational brands and private labels typical of discounters, its offeringskews towards a younger, better-educated and more affluentcustomer, with exclusive collections from high-profile designers suchas Issac Mizrahi, Mossimo Giannuli and Liz Lange.

(J.C. Penney has been proposed for Steelyard Commons and wouldserve as a third apparel anchor. But while such a location would fitwith the department-store chains strategy of opening more off-the-

mall stores, it has not yet been confirmed.)

Steelyard Commons will also include two other large apparel retailers --Marshalls and Old Navy as well as two smaller womens-apparelstores Fashion Bug and DOTS. Marshalls, part of the TJX Companies(i.e. T.J. Maxx, A.J. Wright as well as HomeGoods), features off-pricedesigner and brand-name fashions, for kids, teens, women and men.Old Navy, the lower-priced unit of the Gap, Inc., attracts families andteenagers with its own trendy but affordable private-label clothing forbabies, kids, juniors, plus, maternity, and men. Fashion Bug, a divisionof Charming Shoppes, Inc. (i.e. Lane Bryant, Catherines), sells low-

and moderately-priced wares for girls, juniors, plus, maternity andmisses (primarily women from 20 to 49), and now offers JS, anexclusive line by Jessica Simpson. DOTS, the Solon, OH-basednational, showcases up-to-the-minute styles at $10 and under, forjuniors, plus and misses (mainly females between 15 and 45).

The study area consists of several different kinds of clothing stores,and the apparel offering planned for Steelyard Commons will impactcertain types more than others. The low-priced selections at popularchains such as Wal-Mart and Old Navy will likely depress sales at (andcurb the expansion plans of) lower-profile retailers that sell affordable

second-tier brands, like Fashion Cents or TNT Fashions. On the otherhand, independents and chain-lets that showcase the latest andhottest urban sportswear labels (e.g. Grind, Ts Urban Gear) canprosper in the shadow of the boxes. Marshalls does carry some of themore popular names, like Rocawear (Jay-Z) and Apple Bottoms (Nelly),but it cannot easily match a local purveyor with his finger-on-the-pulse of this fast-moving and trend-obsessed submarket, and with acapacity to move quickly in response to changing tastes. Similarly,

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while Target specializes in so-called cheap chic and peddlesexclusive lines by fashion-world celebrities, it certainly leaves room forboutiques that feature hip/hipster fashions or lesser-knowndesigners. Finally, one other concept that will remain viable is thethrift store (e.g. Unique Thrift Store), because, amidst such

homogeneity, it can still offer the excitement of the unexpected, thethrill-of-the-hunt, as well as, for those who long to be original (e.g.hipsters), the possibility of a truly unique outfit.

MEDICAL PROVIDERS (including PHARMACIES): As of 2005, Wal-Mart operated more than 3,500 in-store pharmacies, with over 3,000 inSupercenters, and was the nations fourth-largest retailer in thatcategory, trailing only the major national drugstore chains11. As of2004, it controlled 25% market share in OTC products12 -- and in arecent consumer survey, only Walgreens was more popular forprescription drugs in the Midwest13. Initially, Wal-Mart viewed in-store

pharmacies as a traffic-driver to other parts of the store, with users ofones in Supercenters spending an average of almost 50% more overall($73.96 versus $50.0214). But the retailer is now starting to treat thedepartment as a destination in its own right, and looking to competehead-on with freestanding (and supposedly more convenient)alternatives (e.g. CVS, Walgreens) by providing drive-thru windows,locating counters within easy reach of store entrances, etc. (Target,meanwhile, also includes in-store pharmacies in its new stores, butmore as a customer convenience and a nod to one-stop shopping).

In this category, Wal-Marts primary competition is not mom-and-

pops, as most of these have already lost the battle with large drug-store chains such as Walgreens and CVS. These small boxes,measuring 10,000 to 15,000 sq.ft., can now be found throughout inner-city Cleveland, and while they may be cursed as national chains, theyplay a critical role in many neighborhood business districts, as retailanchors and, in certain cases, as the onlyoption for particular goodsand services, for national brands, etc. They retain a significantadvantage vis--vis Wal-Mart because they are nearer to mostshoppers, and far easier to negotiate. And while Wal-Marts cheaperprices on prescription drugs would draw those who must pay out-of-pocket, the un-insured account for as little as 5% of the prescription-

11 Big box answers call for convenience, by James Frederick, DSN Retailing Today,

February 28, 2005.12 Novartis, 2004 Annual Report.13 BIGresearch, April 2006.14 The Economy, The Consumer and the 2003 Retail Outlook, by James Russo, AC

Nielsen.

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drug sales at drug-store chains15, and are therefore not a significantfactor. Some insured consumers might switch to Wal-Mart and Target,given the recent decision by the two chains to sell certain generics at$4, which is less than the $10-15 co-payments required by many plans.But even here, the impact will be somewhat muted, since the $4 offer

only applies to 150 drugs, just a small fraction of available generics.

Interestingly, due to fixed co-payments, prescription-drug sales, whilerepresenting roughly two-thirds of a drug-store chains business,function not so much as a profit center but rather, as a driver of trafficto other, higher-margin departments which account for the bulk of theprofit. Indeed, the importance of such front-end (i.e. non-prescription) merchandise helps to explain why drug stores havemorphed in recent times into a general store of sorts. Prices on suchgoods are still lower at a Wal-Mart, perhaps leading to some salesleakage, but usually, Walgreens, CVS, et al. enjoy a significant

advantage in terms of convenience, with locations that are, again,nearer to most shoppers, far easier to negotiate, etc. Actually, inbudget-conscious, inner-city markets, they might have more to fearfrom deep-discounters like Family Dollar, Aldi, etc., which are not onlycheaper but also sited on the same corridors, in the neighborhood.Perhaps the most formidable competitor would be a Discount DrugMart, which, in its product mix, price point and pharmacy counter,mimics a Supercenter (albeit on a much smaller scale).

In addition to an in-store pharmacy, the Supercenter also includes anin-store Vision Center. Offering low-cost exams, glasses and

contacts, this department will attract cash-and-carry customers whodo not have vision benefits and must pay out-of-pocket, as well asinsured shoppers with expensive co-payments. In the face of thisthreat, independent optometrists can differentiate themselves with,say, 1) a high level of customer service; 2) in-house lab services; 3) amore upscale selection of frames (if the market exists); 4) contractswith third-party insurers that reimburse most of the cost; etc. Wal-Mart is also starting to open in-house health clinics in Supercenters,where nurse practitioners and physician assistants provide diagnosis ofand prescriptions for common ailments, again, at a low cost thatappeals in particular to un-insured patients. Although typically located

next to (and helping to increase sales in) the in-house pharmacies,their impact the drug-store chains will depend on speed of roll-out,because those retailers, along with Target, supermarkets and otherboxes, are also expanding the concept. However, the convenienceaspect (e.g. walk-up appointments, evening and weekend hours,

15 According to Keith Miller, a Walgreens real estate representative, in a presentation at

the LISC Urban Forum in Miami, FL, in November 2006.

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etc.) could result in a shift of patients from traditional medicalpractices.

LOCAL BUSINESS SUPPORT SERVICES: The client rosters andrevenue streams of small, local concerns in certain professions (e.g.

law, accounting, insurance) will undoubtedly shrink as independentretailers close in response to big-box development (see above). Theresult will be two-fold: one, the disappearance of ground-floor tenantsin districts where offices are occupying retail space, and two, the lossof customers and sales at nearby food and convenience-orientedbusinesses. Of course, the severity of the impact will ultimatelydepend on the diversification of the particular firm. And advertising isa different matter altogether. Mom-and-pop hardware stores, forexample, join cooperatives such as Ace and True Value partly so thatthey can benefit from its advertising support, which is provided withthe help of a large and/or high-profile outfit most likely based in a

major American city. On the other hand, most of the apparel storesthat could be hurt by a Steelyard Commons do not appear to engage inmuch (if any) formal advertising.

DISCOUNT-VARIETY STORES: This format is typically referred to asthe dollar store, but large chains such as Family Dollar and DollarGeneral, while including the word dollar in their names, are not,technically, dollar stores, since neither sticks to the $1 price-point.Rather, discount-variety would seem to be a more accuratedescription. Prices are deeply discounted, but not necessarily to $1:most of the merchandise costs $10 or less. And the mix ranges from

household supplies and paper products to comparison goods such asbasic apparel, with a recent push to add refrigerated coolers for certainperishable foods (e.g. milk, bread, lunch meats, etc.). Although notspecifically mentioned in the RFP, we feel that the impact of big boxeson these retailers should also be considered, since, like the drugstorechains, they play a critical role in many neighborhood businessdistricts, as retail anchors, and, in certain cases, as the onlyoption forparticular categories of merchandise.

The discount-variety chains compete on two fronts: price andconvenience. Their distribution system is not as technically

sophisticated as Wal-Marts, nor do they have as much clout withsuppliers, but they keep costs low with: 1) no-frills store interiors; 2)few employees per store (i.e. average of four); 3) cheap real estate(i.e. in second-tier locations, or second-generation space); 4) very littleinvestment in marketing/advertising (e.g. few if any circulars); 5)reliance on close-outs and stock over-runs for a percentage of sales;and 6) national brands eager to reach the deep-discount market andwilling to price (even package) their goods accordingly. As a result,

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their pricing is extremely competitive with Wal-Marts. According to aJanuary 2004 survey by DSN Retailing Today16, the same basket ofgoods cost just 3.0% more at Family Dollar and 3.4% more at DollarGeneral than it did at a Supercenter, and the difference could be partlyattributed to the preference among the discount-variety chains for

even price points (e.g. $1, $2, $3, $6).

Of course, these retailers cannot provide the sort of one-stop shoppingconvenience available at a Wal-Mart Supercenter. However, they offerconvenience of a different kind: averaging roughly 8,500 sq.ft. in size,they, like the drug-store chains, can be nearer and faster. They arewell-positioned as alternatives for those small, middle-of-the-week in-fill trips that do not require a visit to the Supercenter on the edge oftown. Indeed, Family Dollar says that it operates neighborhoodconvenience discount stores. In this sense, Family Dollar and DollarGeneral do not compete head-on with Wal-Mart, but rather, with the

drug-store chains (which it can beat on price) and the limited-assortment grocers (on mix). Finally, the formats peddling ofcloseouts and stock-overruns helps to create a treasure-hunt orgarage-sale atmosphere where customers can find an unexpectedbargain, a la Marcs (but in a smaller and closer space).

With their combination of price and convenience, the discount-varietychains prove especially popular among budget-conscious householdsthat make less than $25,000 a year and that live nearby. They drawheavily from consumers for whom options are severely limited by time,money and access. Many subsist on the basis of a small paycheck or

government assistance, and a considerable number are retired. AndBank of America estimates that 40-45% of Family Dollar and DollarGeneral customers do not own automobiles. According to a 2004ACNielsen study17, the key demographic indicators are as follows:poorly-educated females (i.e. high-school graduates or not even),African-American, blue-collar, low-income (i.e. less than $20,000/year),large households (i.e. 5+) and kids (i.e. 18 and under). With the agingof the U.S. population, one would also expect the elderly to assumeeven greater importance going forward, especially given the small andmanageable footprint.

The format appears relatively unaffected by Wal-Mart, with surveys byACNielsen showing that as consumers shop more at Supercenters,annual trips to dollar stores remain stable or grow (while the number of

16 Dollar stores fare well against Wal-Mart, by Debbie Howell,DSN Retailing Today,

January 5, 2004.17 Dollar Store, No Frills: The New Retail Landscape, by Todd Hale,ACNielsen, 2004.

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visits to supermarkets and drug stores decline)18. Partly this isbecause the discount-variety format, with its small footprint andneighborhood locations, has such an advantage in the area ofconvenience in-fill (as opposed to weekly stock-up) shopping. Also,large chains like Family Dollar and Dollar General are not only

competitive on pricing, but increasingly so on merchandising, with anever-larger assortment of national brands. Moreover, a highpercentage of their customer base does not own an automobile (seeabove) and cannot so easily reach the nearest Wal-Mart. And in an eraof stratospheric gas prices, the budget-conscious households that dohave cars might be more likely to favor a nearby store to one furtherafield.

The business model of the discount-variety format also helps to makestore closures unlikely. With such low overhead (see above), thebreak-even point for the typical Family Dollar is thought to be just

$500,000-$800,000/year19

, which was 38-62% less than the averagerevenue of an urban location20 (as of 2002)21. Furthermore, the largechains are partly financed by Wall Street, and the stock price would beseverely impacted if existing locations were terminated22. Finally,macroeconomic factors (e.g. higher gas prices, the inevitablerecession, etc.) force budget-conscious households to defer largerdiscretionary expenditures, leading these retailers to rely even moreheavily on low-margin consumables / perishables and a high-volume(i.e. aggressive-growth) strategy. Dollar General has yet to stake aclaim in the study area, but it is reportedly looking at Clark Avenue(Clark-Metro), further evidence that the nearby presence of a Wal-Mart

Supercenter does not deter such retailers. Family Dollar locations,meanwhile, can be found on Pearl Road (Old Brooklyn), Clark Avenue(Clark-Metro), West 25th Street (Ohio City) and North Broadway (Slavic

18 According to Core demographics expand beyond traditional blue collar shopper, in

DSN Retailing Today, November 8, 2004. ACNielsen defines dollar stores as

including both discount-variety chains as well as single-pricers such as Dollar Tree.19 According to an interview with Mark Jablonski of Great Lakes Resources, on

Thursday, June 1, 2006.20 In a July 12, 2002 article by Ashley M. Gibson in the Charlotte Business Journal,

entitled Urban developments: Family Dollar lured by the big-city lights, George

Mahoney, Family Dollars Executive Vice President, comments that an urban locationcould do 30% more [in sales] than the $1 million grossed by the typical established

store.21 The as of 2002 qualifier was inserted because it is possible that the sheer number of

urban locations opened by Family Dollar since this 2002 remark has resulted in some

internal cannibalization and lower per-store revenue.22 According to Mark Jablonski of Great Lakes Resources, in the Thursday, June 1, 2006

interview.

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Village), and given the above, it is unlikely to close any of them.

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Chapter 3District Impacts

The following provides our assessment of the impact that the SteelyardCommons development (and future big-box development) is likely tohave on a district-specific level.

Again, with such a wide scope of inquiry, it was necessary when writingthis chapter to remain focused. For example, only the six corebusiness districts were considered, and not any of the othercommercial corridors or nodes within their host neighborhoods. Onlyexisting tenants were assessed, and notpossible future ones. Only thekey anchor stores and the most common retail categories in eachdistrict were studied, and notevery single business. Finally, only theeffects of Steelyard Commons and other big-box development wereanalyzed, and not other variables (e.g. demographic change,infrastructure initiatives, new retailers within the core districtsthemselves, etc.).

Finally, this chapter takes into account the transit service that will beprovided to/from the Steelyard Commons development. The onlyaccess planned is via the 807 Circulator23, which currently runsbetween the W. 25th Street & Detroit Avenue intersection and the so-called Denison Loop (i.e. Denison Avenue & Ridge Road), servicing

the Ohio City, Tremont and Clark-Metro neighborhoods. This bus willnow make a short excursion to the big-box center upon arriving atClark Avenue & W. 14th Street. It will stop at shelters along SteelyardDrive, on the perimeter of the center (requiring a walk across theparking lot to get to the Supercenter). Existing headways of 20-30minutes on the weekday and 30 minutes on the weekends will bemaintained. RTA plans no further access improvements at this time(e.g. for Old Brooklyn, Slavic Village), but might revisit the matter inthe future based on changing demographic and traffic patterns,customer requests, etc.

OLD BROOKLYN: The core of the Old Brooklyn business district, onPearl Road between the Brooklyn-Brighton Bridge and the Pearl Road /State Road split, includes three retail anchors: Walgreens, CVS andFamily Dollar. Old Brooklyns relatively high percentage of seniorsprovides a large market for prescription drugs, but the four drug-storechains in the area presently presently Walgreens, CVS, Rite Aid (onBroadview Road) and Discount Drug Mart (on Fulton Parkway) might

23 According to Mr. John Phlagyi in RTAs Service Planning Division.

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be exceeding current demand, with CVS struggles suggesting acondition of oversupply. Indeed, the Supercenters low pricing mightdiminish CVS sales to the point where it would have to close. Andalthough it is unlikely to suffer the same fate, Family Dollar couldexperience some loss as well, since this location might rely to a greater

extent than others on automobile-owning households.

Steelyard will also impact Old Brooklyns potential for new retail. Forexample, not only is Daves likely to shut its branch at Denison &Ridge, but it will no longer be considering a new store at Pearl &Broadview. On the other hand, since many local residents will beaccessing the big-box center from either Jennings

Documents

CNDC BigBox Impact Study 2006 - ORD. 766-11