The Suffering of NYC Businesses in the Current Economic Downturn

Freakoutonomics
New York Magazine, 8-Feb-09
By Michael Idov

But the thrill of the bargain should not be confused with the empty pleasures of abstemiousness. At the end of the day, New Yorkers are people with appetites. We’re not going to stop eating at restaurants: Most of us have no real kitchens in our apartments, and we don’t know how to cook anyway. Women are not going to stop getting their nails done. They may cut back, but, as one struggling spa owner says approvingly, “New York women are quite spoiled. Even if they’re getting a mani-pedi once a month, they still want someone else to do it.” More people have their roots showing—one colorist reports significant time lags between treatments—but few are going natural either. At the city’s three Fairways, the famously high-low grocery stores, a major growth area is gourmet-coffee sales: People may be cutting back on Starbucks, but they still want a quality cup of coffee. And at the sex-toy mini-chain Babeland, to the owners’ own surprise, it is the “luxury vibes”—sophisticated, often programmable vibrators with a price point of $125 and up—that are proving to be a recession-era blockbuster. September through December sales of those items have doubled compared to the year before. “This is not a beginner’s toy,” says Babeland’s head of publicity. “People are upgrading.” And why not? The very fact of living in this city means our life is guided by pleasure rather than value. Otherwise we’d be living in Philadelphia.

A friend of mine likes to walk to work from his home in the Village to his office in Tribeca. Lately he’s begun passing the time engaging in what you could call retail anthropology, a sport many New Yorkers seem to have taken up. A partial list of the changes he’s noted in just the past six months reads like this: Cosi, the upscale sandwich shop on the corner of Sixth Avenue and 13th Street, closed; a pop-up Halloween-costume shop temporarily took its place; and the space now sits vacant with a RETAIL SPACE AVAILABLE sign above the door. The Jamba Juice on the same block, which at the height of the city’s economic boom was routinely packed with stroller-pushing moms and NYU kids, is now nearly always empty, while the Murray’s Bagels right next door remains jammed, despite raising its prices substantially because of rising wheat costs. Kuhlman, the mid-price men’s-clothing boutique on the corner of Sixth and 12th, gradually began advertising ever-more-desperate sales before quietly going belly-up just a few weeks ago. The always-busy, beloved local diner Joe Junior, right across the street, is busier than ever. Business is also brisk at Laurent Tourondel’s BLT Burger, a few doors down—where the burgers cost a few bucks more than they do at Joe Junior and in fairness are a good bit better—but only on peak days, and at peak hours (a recent Tuesday lunch there was positively Hopper-esque). Jefferson Market, the decades-old grocery store of choice for many a die-hard Villager, slowly ran out of inventory, citing money problems, last fall, then closed for months and now has a sign in the window promising a full remodeling followed by a grand reopening—meanwhile, there’s a neighborhood rumor that the landlord has been showing the space to new tenants. A bit further south, business at the Duane Reade on West 4th Street seems unchanged, and Starbucks appears to be faring less badly than you might expect, though you certainly don’t have to wait in line to use the bathroom like you used to. The formerly trendy Da Silvano, wan as the crowd is most nights lately, feels like a relic from a hazy past. To cap matters off, the Banana Republic on Sixth above Houston just closed. I can’t remember the last time I saw a Banana Republic close.

New York, as any amateur anthropologist can see, is in the midst of a retail shakeout of historic proportions. On the broadest and most visible level, it appears that people have simply snapped their wallets shut. Nationally, retail and food sales fell by 9.8 percent in December (Standard & Poor’s holiday outlook, at the time the most pessimistic, was 5 percent) and by 1.8 percent more in January. And consumer spending has been steadily dropping for six months. In New York, which caught up with the rest of the country economically just when the rest of the country caught up with New York politically, the decimation began in earnest in the fall. Local outlets of national chains are clanging to the ground: The bankrupt Circuit City is gearing up to leave nine massive vacant spaces in the five boroughs. Times Square’s Virgin Megastore, the highest-volume music store in the country, is out come April. The formerly unstoppable Starbucks will shutter eleven locations by summer. The city’s most storied shopping districts—Fifth Avenue, Madison Avenue, and Soho—are suddenly pocked with empty storefronts looking out onto empty sidewalks. More recently gentrified shopping corridors like North Flatbush are faring even worse; commercial vacancies in that neighborhood are edging toward 20 percent. The city’s legendary department stores are all having their struggles. And that’s not counting the myriad tiny tragedies befalling every block. All over the city, notable restaurants, boutiques, and other mom-and-pops are pulling down the chain-link gate one last time: Fleur de Sel one day, the Oscar Wilde Bookshop the next, Mondo Kim’s video store the day after that. Almost everyone recognizes a name in the roll call of the dead.

And yet there’s more going on than an abject bloodbath. Despite the mutually perpetuating doomsday headlines and foul civic mood, stores still in business outnumber those that have gone under by orders of magnitude, and New Yorkers have not stopped shopping. Every day, millions of us still spend billions of dollars right here in the city. We eat. We wear clothes. We buy sofas. God knows, we drink. The real question, then, is not whether money changes hands, but how both buyers and sellers are adapting to the newly Darwinian economy. To find out, New York conducted a survey of more than 100 city merchants in all five boroughs, from department-store executives to Canal Street sidewalk vendors, from high-end restaurateurs to bodega owners. The results have allowed us to pinpoint a few basic truths of recession retail, some self-evident, some surprising. The one indisputable finding is this: When the dust of ’09 settles, New York will be very different. It already is.

In market-research terms, purchases fall into two categories: staple and discretionary. In the past decade or so, New York consumers have had these things, the need and the want, mixed up. Now, that distinction is being reestablished, and forcefully. The wealthiest of the wealthy may be immune to the downturn, but they’re the only ones. For everyone else, the indulgences of the precrash years—the $275 nine-course tasting menu at Per Se or an impulse purchase of a pair of Louboutins—are mostly out. At high-end jeweler David Lee Holland, items priced between $2,000 and $4,000, the point a manager calls “a lady’s personal discretionary purchase,” are barely moving. “That lady,” the manager says, “is not shopping right now.” Sales of so-called super-discretionary purchases, big-ticket items like cars and home improvements that can be put off, are similarly comatose. Statistics for five-borough car sales aren’t readily available, but with the national figures for January at their worst level since 1982, the implications for New York are clear. Sales at Barney’s Hardware Store, meanwhile, are down 40 percent because, in the words of owner Willie Meistelman, “everything people use for electrical work, painting, and building—none of that has been selling.” About the only luxury items still being bought by people without billions are what you might paradoxically call luxury necessities—wedding rings, for example. The other exception is what might be called the One Thing, the special item a person values so highly—the $10,000 vintage Les Paul for the guitar junkie, say—he simply won’t give it up (though he might scrimp elsewhere to pay for it).

What is holding up well is the “staples”: groceries, basic clothing, medicine—stuff people can’t live without. Still, New Yorkers are cutting back even on the basics, buying less than usual or making do with what they already have (business at cobblers and other repair stores is generally up). Liquor, a traditional tough-times standby, is holding steady, although Greenpoint’s Mark Bar, for one, now makes its margin on the $2 “PBR special” while top-shelf booze gathers dust above. The ratio of espresso drinks to less expensive drip coffees sold at coffee shops has, in the words of one owner, “flip-flopped.” What we’re witnessing, in other words, is not a single fatal blow, but death by a thousand spending cuts.

Along the way, New Yorkers appear to have reassessed what they value. One of the hallmarks of the boom was the triumph of “aspirational” branding: a pair of Gucci-stamped sunglasses did not cost three times as much to produce as a pair of Ray-Bans, but commanded three times the price. Flush with cash (or easy credit), consumers bought the proposition that the brand itself—the status it conferred—was worth a 300 percent markup. Not any more. Not only are real designer bags hard to move off the shelves but the Canal Street knockoff market is in free fall too. A zebra-patterned fake Versace bag, which used to sell for $45 in the summer, now barely fetches $25. With the arrival of the crisis, the price tag on status has come up for renegotiation. Today’s consumer is demanding less and better at the same time.

The corporate largesse that helped inflate the retail bubble is also gone. As panicked penny-pinching has spread through the system, it has hit the city’s businesses in ways both obvious (nightclub owners report fewer Wall Streeter outings) and less so (Smash Studios, a high-end rehearsal space in Midtown, had a slim December because bands who play corporate parties had less need to practice). Corporate dollars have spectacular reach in this town—few visitors to the twee-hip Sugar Sweet Sunshine bakery on the Lower East Side, for example, would guess that 70 percent of its business comes from accounts like Goldman Sachs and AIG. That well has dried up considerably. Florists’ margins wilt as fewer firms splurge on weekly bouquets for the conference room. Times Square–area pizza joints are suffering without the twenty-pizza lunch orders from Hearst, Newsweek, or MTV. And it’s no coincidence that, of the eleven New York locations Starbucks is closing, all six Manhattan ones are in corporate-to-the-bone midtown.

The tourist deficit hasn’t helped matters. The white-hot domestic economy and the cheap dollar once drew armies of visitors to the city, both American and foreign. In 2008, tourists spent an estimated $30 billion here. But in 2009, the city expects the number of tourists to drop by 2.5 million, about 5 percent.

Emotionally speaking, for some, shopping has become a miniature psychodrama in which the customer feels equally guilty if he buys something and if he doesn’t. In January, word began making its way around town that a Fifth Avenue boutique had begun offering customers a plain brown-paper shopping bag. Even if apocryphal, the story is telling: consumption feels dirty. On the other hand, abstention feels like you’re killing the city. Who hasn’t bought something at a corner store just because the owner looked so heartbreakingly hopeful when the door chime rang?

All these factors add up to a do-or-die moment for New York’s merchants. “Retail is historically about birth and death,” says psychologist Paco Underhill, the author of Why We Buy. “If you have a sign ‘open since 1927,’ it’s because everybody around you has closed. And right now there is blood in the water.”

In response, New York retailers are being forced to radically alter the ways they do business. Prices, of course, are plunging. Del Posto has cut the cost of its tasting menu from $175 to $125. Coach has reduced the price of some of its major handbag lines by 15 percent. “Under $100” seems to be the new magic number for shoes and apparel. J.Crew’s ballet flats, previously sold at a minimum price of $130, now start at $98. Repricing can be even more extreme at smaller stores desperate for cash flow.

Sales, meanwhile, are ubiquitous. Deals that haven’t been seen in this town in decades are now commonplace. Last week alone, Eleanor Duffy sold coats and jackets at a 60 percent discount, ABC Carpet & Home was burning off its antique furniture at up to 40 percent off, and West Village pet shop Groom-o-Rama advertised a sad-sounding “Dog Sale 20% Off.” “It’s become literally necessary to have this kind of 50 percent off, 70 percent off sale,” says a manager of a women’s boutique in Forest Hills. “As you go down the street, there are stores that have covered their entire window with a sale banner. There’s nothing in the window, but what’s getting people inside is the sale.”

To adapt to these new price points, retailers have had to alter what they sell. Restaurants are going for cheaper cuts of meat (less rib eye, more hanger steak), and burgers are popping up at all manner of restaurant all over town (not the discretionary $50 foie gras–stuffed haute burgers of yesteryear; the staple burgers). Down on Forsyth, the outer edge of the Lower East Side’s fading shmatte district, Harris Levy has been selling luxury bedding in the range of $200 to $1,500 for a set of sheets; a recession-era best seller is a recently added under-$100 option (again), sourced from China. “These new items may not be crème de la crème, but they’re very nice,” says the fourth-generation owner, Bob Levy, without much conviction. Belle Fleur, instead of offering an “overabundant” bouquet of expensive peonies, now floats three flowers and some candles in a “really really cool vessel.”

Preciousness is out as a guiding retail principle. More and more businesses are abandoning their original lofty purposes—only deadstock wool, only vinyl records—to stay afloat. In the ultimate hipster sacrifice, an indie sneaker store in Soho has put up the sign reading we have uggs. A compromise, yes, but an understandable one: Sales of the well-past-their-moment boots are up 57 percent for the past year.

Sellers with no option to switch merchandise are becoming more inventive—read thrifty—about the ways to deliver it to the buyer. Experts predict a rise in so-called pop-ups, stores leased for a short period of time for a quick hit of cash. (There’s certainly a growing wealth of empty storefronts to choose from.) Target has put a pop-up in Times Square, with good results. Local handbag designer Jennifer Lagdameo is selling her Ananas collection in a six-week pop-up in Nolita. Delis have started home delivery.

Our survey findings were emphatic about a few more things: Foot traffic is dead. Impulse buying is disappearing fast. Nobody is shopping anymore on weekdays—Mondays and Tuesdays in particular—but weekends are still busy. Where people used to buy three items, they are now buying one. Where they used to freely spend $200, they are now spending $99. (Says Jonathan Rubinstein, owner of Joe the Art of Coffee, of his own consuming habits, “When I go out to dinner, I look at an entrée that’s $26 versus $18. I definitely stop for a second and think, ‘Recession.’ ”) While some retailers are expanding hours to catch that elusive 10 p.m. shoe shopper, others are cutting their losses on the slowest days of the week. Restaurants are starting to close earlier, boutiques later: It costs a lot more, after all, to keep the kitchen open than to pay a lone clerk for a few extra hours.

Service, an all-but-forgotten notion in the boom years, is now an essential means of survival. The name of the game is regulars—creating new ones and holding on to old ones. Restaurateurs are plying customers with amuse-bouches, managers are visiting and revisiting tables. Stores are offering free gift wrapping and delivery. Shopkeepers who once treated customers with haughty indifference now practically sprint to the door to greet them. Henri Bendel recently gave away brownies.

Retailers are also looking for cheaper leases—and finding them. That’s the good news in a city small businesses have been priced out of for years. With commercial real-estate inventory piling up, more and more landlords are willing to renegotiate even before the lease is up. West Village’s Biography Bookshop, a onetime stop on the Sex and the City tour, is facing a possible move within the year, but manager Juan Vallejo isn’t worried. “The environment is changing so quickly, you know, in terms of what spaces become available, where we potentially could look.” Operations large and small are cutting staff or cutting back on workers’ hours. “What else can you do?” says a boutique owner who just laid off four employees. “Verizon is not going to give you a break.”

This isn’t the first time, of course, that New York’s retail landscape has undergone a seismic shift. The city’s near-bankruptcy in the seventies killed off many large, family-owned department stores and immigrant-owned mom-and-pops that used to define commerce in New York. That and the crippling early-nineties recession paved the way for Rudy Giuliani, who cracked down on crime, cleaned up Times Square, and lured national big-box chains with tax incentives and other sweeteners. The hedge-fund boom of the aughts redrew the map once again, ushering in the age of Masa and the meatpacking district. How will the current crisis reshape the city’s retail economy?

The immediate future appears to belong to deep discounters, 99-centers, and people who will sell you a nice desk but make you assemble it. On recent weekends, the Red Hook Ikea has been so spectacularly mobbed that bloggers took pictures—even as the small neighborhood businesses like LeNell’s, which the arrival of the Swedish giant was supposed to pull up, were closing down around it. The somewhat grimy, old-school Gristedes grocery chain is doing fine. John Catsimatidis, the billionaire and on-and-off mayoral hopeful who owns Gristedes, gleefully points out that “people are trending away from organic. People are thinking, well, if the regular gallon of milk has been okay for me to drink for the last 50 years, why not again?” Forever 21, the deep-discount, shamelessly derivative fashion chain, took in $1.7 billion in 2008 and projects a $2.3 billion revenue for 2009. Just last month, they took over a number of bankrupt Mervyns locations, and shortly before that 150 stores of a Texas chain called Gadzooks.

Another near certainty is that companies with deep pockets and little to no debt will be best positioned to survive. Because the downturn could take years to ride out, and credit is still devilishly difficult to come by, capitalization is king. The Gap’s sales, for example, are down 23 percent in January alone. But the company is tremendously liquid: It has $1 billion in cash. “It’s not going anywhere,” says S&P analyst Marie Driscoll. The same can be said about Macy’s, which, for all its staff cuts, has the sheer size to hunker down for years. At the same time and somewhat paradoxically, the prospect of cheaper rents, looser credit, and other small-business incentives creates fertile ground for the next crop of one-of-a-kind boutiques, bars, and galleries. Some day in the not-too-distant future, New York may once again be cheap enough to take a risk on.

One long-term concern for retailers big and small is that the consumer, spoiled by constant and massive markdowns, might be permanently hooked on sales. “There’s no question that huge markdowns are a necessity,” says Gilbert Harrison, the CEO of Financo, an investment bank that works with major retail stores. “The question is, how do you get the consumer to go back to full price? They’ve been brainwashed. All they do now is look for sales. It will take years to retrain them.”

In the meantime, the next few years are looking to be, quite literally, a buyer’s market. “The only people who will benefit in this city,” says S&P’s Driscoll, “are the shoppers.” This year will be an ideal time, in other words, to reclaim the mentality best encapsulated by the words “I never pay retail.” Creative bargain-hunting was all but forgotten in the hedge-fund years, yet knowing a guy who knows a guy is one of the New Yorkiest things to do. It harks back to our origin myth as the city of scrappy immigrants: This town was buying off the back of a truck before the truck was even invented.

But the thrill of the bargain should not be confused with the empty pleasures of abstemiousness. At the end of the day, New Yorkers are people with appetites. We’re not going to stop eating at restaurants: Most of us have no real kitchens in our apartments (and now no money for home improvements), and we don’t know how to cook anyway. Women are not going to stop getting their nails done. They may cut back, but, as one struggling spa owner says approvingly, “New York women are quite spoiled. Even if they’re getting a mani-pedi once a month, they still want someone else to do it.” More people have their roots showing—one colorist reports significant time lags between treatments—but few are going natural either. At the city’s three Fairways, the famously high-low grocery stores, a major growth area is gourmet-coffee sales: People may be cutting back on Starbucks, but they still want a quality cup of coffee. And at the sex-toy mini-chain Babeland, to the owners’ own surprise, it is the “luxury vibes”—sophisticated, often programmable vibrators with a price point of $125 and up—that are proving to be a recession-era blockbuster. September through December sales of those items have doubled compared to the year before. “This is not a beginner’s toy,” says Babeland’s head of publicity. “People are upgrading.” And why not? The very fact of living in this city means our life is guided by pleasure rather than value. Otherwise we’d be living in Philadelphia.