Beth Plutchak Consulting LLC

These last two years have taken a toll on retail establishments. Small retail businesses, particularly those which focus on selling non-essential items, or competing on service and experience rather than price (basically doing all the things we’ve been telling them to do) have been particularly hard hit as consumers tighten their belts and count their pennies. The Labor Dept. reports that an additional 85,000 jobs were lost in December and that national unemployment remains around 10.0%. Not good statistics for anyone hoping consumer spending will bring us out of the recession. Consumer optimism may indeed be improving, Wall Street may be improving; however, people still have to have money to spend money.

As I watch rural communities struggle with how to revitalize downtowns, I become more and more convinced that we need to take another look at the questions we are asking. We need to go all the way back to the original “why”. “Why go downtown?” Not why shop downtown vs Walmart or the strip mall, but simply “why go downtown?” When I do follow-up survey work with local constituents the “because” is the interesting part of the question’s answer.

Fr’instance, when talking to a local trustee at a community I was working in he insisted that a particular building needed to be refurbished and a restaurant tenant needed to be found. When I pointed out that that particular building was far from the vibrant corners of the street and that rents for the building were higher than those in a nearby more populous community, he countered with: “When I was in high school, this is where everything in town happened. People came in from the country to get together and hear the bands. Weddings were held here. It was the spot in town where everyone came together.”

He was describing the community’s third place. [the first place is where you live, the second where you work, the third where you gather] What we need to understand is what functions as third places in this community today and how foster that in the downtown. People may continue to go elsewhere to shop for low prices, parking convenience, whatever, but where and why do they gather?

This is a conversation I will be watching. What about your community? What are third places that work for you?

Part Two – Rethinking Business Types-Marginal or Troubled Businesses

It is common practice when talking about market studies or zoning to think about business categories in a specific way, usually broken down as retail, commercial, and industrial. This categorization is useful in many ways, but there is a better way to think about business when making a determination of which businesses will be financially successful and which will have a long-term positive impact on the communities in which they operate. As a banker, it didn’t take me very long to come up with a totally different classification system based on long-term business viability. I broke businesses down into the following categories:

• marginal or troubled businesses
• static businesses
• growth businesses

As a lender I needed to find and identify the growth businesses. They were my best bets for making loans to customers with the ability to repay.

Marginal businesses are businesses with problems which seem insurmountable without some kind of financial assistance. The problems may be caused by poor management, changes in economic conditions, changes in local conditions, lack of access to capital, etc. The key commonality is that the management seems to be stuck yet unwilling to make significant business changes. This is a fairly harsh assessment, but I think a key one for Economic Development Professionals to make. Applying the old 80/20 rule these types of businesses are likely to be 80% of demand for services, but only 20% of them will be successful in turning their businesses around. Municipalites and Economic Development Professionals need to do a strict cost/benefit analysis when providing services to these types of businesses.

There is a fundamental difference in mindset of the entreprenuer who will turn the business and the entreprenuer who will always be on the edge of disaster. One is forward thinking and one continually second guesses the past. I want to compare two retail owners and their response to the economic downturn of early 2001. Both had multiple retail locations. One took the opportunity to close down her poorest performing location and write off the loss over the next ten years. The other could not make a decision and kept second-guessing her long-term commitment to keeping the business running. She wondered if she should have closed all her locations five years ago, or ten years ago, or fifteen years ago, but could not bring herself to make any current changes to the way she ran her business. In the end, she also lost one of her locations, but at a much greater financial loss. Business at her remaining location is still struggling. The first entreprenuer has been able to expand her business and even though growth is slowed in the current economy she has a stronger capital base to see her through.

It is likely in your community that the second business owner will be the one asking for some form of help, for instance TIF financing. The first business owner may never ask for help. If the first were located in a TIF district, TIF returns could be used to enhance the amenities in the district rather than to shore up the viability of the business owner. This would have a measurably greater positive impact on the downtown district.

Part One – Defining the Process of how businesses function, grow and contribute to the community.

I came at Economic Development sideways. I spent twenty-one years as a commercial banker, doing every job imaginable on the commercial lending, deposit and ops side of a number of regional commercial banks. When I first became a lender I was encouraged to join a community service group as a business development exercise – Chamber, Optimist’s, Kiwanis Club. I joined the local Chamber of Commerce and helped the Chamber organize a local Economic Development Group. At the time there was a great deal of concern in my community about empty storefronts. This was in the late nineties. Stil sound familiar? Personally, I thought this would be a great opportunity for an up and coming new loan officer. Those storefronts needed to be filled. People needed to buy and rent buildings and start and grow businesses. I needed to make new loans.

Soon after I got involved on the committee loan applications did start to come in. I got a chance to look at the cash flows of businesses that were looking for financing to continue to operate in a declining downtown. Most of these businesses did not cash flow unless they had owned their building long enough for it to be paid for. If they were buying an existing business that did cash flow, the cash flow went out the window when their new cost of financing was figured in. In those years I turned down more loans than I made. However, working on that committee I found out about many of the tools and theories that municipalites and communites have in their toolbelts to try to turn some of these things around.

Unfortunately, I discovered that many although not all of the tools, were directly responsive to requests from business owners that had bigger business problems than a community developer or municipality was equipped to deal with. This didn’t mean that the tools didn’t work. It meant something more was at play than how the tools were applied. Municipalities and Agencies typically operate under different constraints than entrepreneurs or developers operate under. They have broad constituenties they must be responsive to. Their budgeting processes are completely different than a private businesses. They are limited by law in the kinds of impact they can make. If they are elected officials a mis-step in one of these areas can result in the loss of a job, where success often seems to go unnoticed. I have seen many municipalites and agencies apply the tools at their disposal in efforts to stop naturally occuring trends. Interactions with their constitutiencies are often in the form of citizen or business owner complaints. Agencies and municipalites are forced into a re-active role.

I believe there is a better way. But, first we need to reframe the entire conversation and re-think how we can use the tools at hand in business terms. Economic development is a process problem. There are ways to reapproach solutions and rely on process analysis rather than product. I’ll go into more detail on process vs product in my next post.

It was a successful conference on Recapturing Your Downtown in Wausau on October 22nd. The keynote speaker was Barbara Wold, who is an expert on retailing. She has been all over the world speaking for the International Association of Shopping Centers. She entertained us over breakfast with stories of retail marketing hits and misses. Her keyword was “experience”. If you can’t compete for the lowest price (Walmart) then you need to provide shoppers with a perfect experience. It is amazing how many retailers fall far far short.

I have been toying with re-applying the old 90/10 rule outside of sales. You know, 90% of your sales come from 10% of your customers. Based on Wold’s anecdotal presentation 90% of retailers leave shoppers with an unsatisfying experience. Even though as I have been saying for years retail is overbuilt, a savvy retailer can still win, because in effect they are only competing with 10% of the retailers in their market. You just have to be the one to step ahead.

I had great conversations at the event, with economic developers and small business owners all over the state. What about Rural Downtowns? was a common theme in those conversations. If 50% of the population now live in urban areas that leaves 50% who still care about rural downtowns. Linda Stoll talked about using the idea of the Third Place to revitalize Rural Downtowns (1st place-where you live, 2nd place-where you work, 3rd place-where you gather). The Center for Land Use Education is collecting data for a report on Third Places that Work.

My presentation on Finding & Nurturing Home Grown Entrepreneurs was very well received. Much of it was condensed to fit the hour and a half slot I was given. I will be posting expanded versions of the talk over the next few weeks. Please add any of your memorable conference moments to the comments.