The
Pandemic Will Change American Retail Forever
The
big will get bigger as mom-and-pops perish and shopping goes virtual. In the
short term, our cities will become more boring. In the long term, they might
just become interesting again.
· APRIL
27, 2020
Last weekend, I walked a
mile along M Street in Washington, D.C., where I live, from the edge of
Georgetown to Connecticut Avenue. The roads and sidewalks were pin-drop silent.
Movie theaters, salons, fitness centers, and restaurants serving Ethiopian,
Japanese, and Indian food were rendered, in eerie sameness, as one long line of
darkened windows.
Because the pandemic pauses
the present, it forces us to live in the future. The question I asked myself
walking east through D.C. is the question so many Americans are all pondering
today: Who will emerge intact from the pandemic purgatory, and who will
not?
In the past three weeks,
I’ve posed a version of that question to more than a dozen business owners,
retail analysts, economists, consumer advocates, and commercial-real-estate
investors. Their viewpoints coalesce into a coherent, if troubling, story about
the future of the American streetscape.
We are entering a new
evolutionary stage of retail, in which big companies will get bigger, many
mom-and-pop dreams will burst, chains will proliferate and flatten the
idiosyncrasies of many neighborhoods, more economic activity will flow into
e-commerce, and restaurants will undergo a transformation unlike anything the
industry has experienced since Prohibition.
This is a dire forecast,
but there is a glimmer of hope. If cities become less desirable in the next few
years, they will also become cheaper to live in. In time, more affordable rents
could attract more interesting people, ideas, and companies. This may be the
cyclical legacy of the coronavirus: suffering, tragedy, and then rebirth. The
pandemic will reset our urban equilibrium and, just maybe, create a more robust
and resilient American city for the 21st century.
1. THE BIG ACCELERATION
To see how the pandemic is
already reshaping American retail, you don’t even have to go outside and count
storefronts. Your receipts and credit-card statements tell the whole story.
On Thursday, the U.S.
Commerce Department reported that retail spending in March
collapsed by the largest number on record. Travel spending—including on
airlines, hotels, and cruises—is down more than 100 percent, if you include refunds.
Department stores and clothing stores are facing an extinction-level event
after having experienced years of decline. Pockets of resiliency and even
strength include grocery stores and liquor stores, which in March had
their best month of growth on record.
Home-improvement spending is up as well.
Some of these changes are
violent interruptions to modern life, like the closing of gyms and cessation of
sit-down restaurant service. But in the long term, COVID-19 probably won’t
invent new behaviors and habits out of thin air as much as it will accelerate a
number of preexisting trends.
One obvious example is that
the pandemic is accelerating the retail reckoning. Over the past 50 years, the
number of American malls grew almost twice as fast as the U.S. population, to the
point that in 2015, the U.S. had 10 times more shopping space per capita
than Germany. Such abundance makes no sense in the age of Amazon.
Overleveraged, overbuilt, and oversprawled, American retailers had a long way
to fall as the country moved toward online shopping. In 2017, and again in
2019, physical-store closures reached an all-time high, led by the decay of suburban
totems like Sports Authority and Payless.
The year 2020 may
bring the death of the department store, marking the
end of that 200-year-old retail innovation after decades of decline. Macy’s has
furloughed more than 100,000 workers. Neiman Marcus has filed for Chapter 11.
More legacy department stores and apparel retailers will almost certainly
follow them to bankruptcy court or the corporate graveyard. As these anchor
stores shutter, hundreds of malls that were already wobbling in 2019 will be
knocked out in 2020.
The pandemic will also
likely accelerate the big-business takeover of the economy. In the early
innings of this crisis, the most resilient companies include blue-chip
retailers like Amazon, Walmart, Dollar General, Costco, and Home Depot, all of
whose stock prices are at or near record highs. Meanwhile, most small
retailers—like hair salons, cafés, flower shops, and gyms—have less than one
month’s cash on hand. One survey of several thousand small
businesses, including hotels, theaters, and bars, found that just 30 percent of
them expect to survive a lockdown that lasts four months.
Big companies have several
advantages over smaller independents in a crisis. They have more cash reserves,
better access to capital, and a general counsel’s office to furlough employees
in an orderly fashion. Most important, their relationships with government and
banks put them at the front of the line for bailouts.
The past two weeks have
seen widespread reports of small businesses struggling to
secure funds from the federal government. Larger companies do not seem to be
experiencing the same delays. In one particularly controversial case, Ruth’s Chris
Steak House—a public company with 159 locations and $87 million of cash on
hand—announced that it had secured $20 million
from a small-business rescue program that ran out of money before it could help
countless independents. (Ruth’s Chris later pledged to return the money, and
the federal government replenished the pot, though it will likely run out again
quickly.)
These preexisting strengths
will continue to matter during what will likely be a shaky recovery. As stores
face new demands—like the installation of temperature-taking devices at
entries, or additional sanitation controls—larger companies will have the
resources to invest without becoming insolvent.
What’s more, by holding on
through the next few months, America’s largest companies will be in a stronger
position to incorporate millions of workers when the recovery picks up. “In the
medium run, it’s probably going to be larger companies and chains doing the
hiring,” Arindrajit Dube, an economics professor at the University of
Massachusetts at Amherst, told me. In fact, at a time when the economy is
shedding several million jobs per week, Amazon, Instacart, Walmart, Dollar
General, Walgreens, and Kroger collectively have job postings for more than 700,000
full-time employees or contract workers. In the David-versus-Goliath battle
between big and small businesses in America, COVID-19 is, contrary to New York
Governor Andrew Cuomo’s recent assessment, no “great equalizer.” It’s a toxin for
underdogs and a steroid for many giants.
2. THE FLATTENING OF THE AMERICAN CITY
The growth of online shopping
and big business will be hard to ignore for many city residents. It will make
cities feel more desolate and less singular, for the next year or longer.
As e-commerce grows, it
will pull more stores out of ground-floor retail locations. Many of these
spaces will stay empty for months, removing the bright awnings, cheeky signs,
and crowded windows that were the face of their neighborhood. Long stretches of
cities will feel facelessly anonymous. With fewer independent stores and more
Americans working from home, the streets will be quieter, too. Some urban
residents might enjoy the feeling of a half-filled city; it will carry the
eerie vibe of an awkward, permanent holiday. But even those cheered by the
ample sidewalk room will find, in the darkened windows to their left and right,
a shadow of the city they knew before the plague.
While mom-and-pops and
department stores will close, those industries that survive and are resilient
to e-commerce encroachment—such as grocers and restaurants—are more likely, in
the short term, to be dominated by chains that survive the flood. Cities will
still be convenient, but their conveniences will be homogenous: a dependable
array of CVS locations, bank branches, fast-casual franchises, and coffee
shops. (This development is not entirely new: From 2008 to 2018, New York City
added a new Dunkin’ Donuts franchise approximately every 12 days.) Everything that
urban residents typically despise about chains—their cold efficiency,
sterility, and predictability—may come to feel like mixed blessings during a
period when people feel stalked by murderous pathogens.
For decades, American
cities have fought a battle against monotony, and, according to some, the war
was lost long ago. It was Tennessee Williams who allegedly said, “America has
only three cities: New York, San Francisco, and New Orleans. Everywhere else is
Cleveland.” In a period where many mom-and-pop stores die and chains expand, it
seems inevitable that what once separated the New Yorks and San Franciscos will
be flattened through the mass commodification of the streetscape, as everywhere
you go feels even more like everywhere you’ve been.
A steep drop in immigration
could also homogenize the urban experience.
President Trump seems to
want to stop immigration to the U.S. entirely, and the
administration has now closed the southern border to migrants. Many
Central American countries have implemented domestic curfews, making most
border crossings impossible. But even without these measures, the pandemic has
effectively frozen international travel and migration.
Curtailed immigration will
hurt immigrant families and communities first and foremost. It will also change
the face of American cities. Immigrants aren’t just more likely to start
companies than native-born Americans. The companies they start are twice as
likely to be restaurants and retail outlets like bodegas and nail salons. In
some places, like San Jose, California, 60 percent of all new companies,
including new restaurants, are started by immigrants, according to research by
the economists William Kerr and Sari Pekkala Kerr.
“If we shut the door on
immigration because of the pandemic, something important will be lost on
American streets,” William Kerr told me. “What’s obvious is that this will be
really bad for immigrant communities and for people who live in cities. What’s
less obvious, but also important, is that talent flows to these cities because
of these amenities. If immigrants in New York suffer, that makes the city less
attractive to young immigrants, but it also makes the city less hip-seeming to
some 20-something in Albany thinking about moving.”
If the pandemic has a strong
hangover effect on global migration, American cities like New York, Los
Angeles, and Miami will not be the same. And nowhere would the absence of new
immigrants be felt more in our cities than in the restaurant industry, which is
perhaps facing the most serious crisis of all.
3. THE END OF THE GOLDEN AGE OF RESTAURANTS
Exactly 100 years ago, the
U.S. dining industry faced its first extinction-level event with the
ratification of the Eighteenth Amendment, which banned the production and sale
of alcohol.
While it lasted only about
a decade, Prohibition cast a long shadow over the restaurant landscape. The war
on alcohol forced hundreds of fine-dining establishments to shut down, by
eliminating their most dependable source of profit. The number of restaurants
in the U.S. still tripled in the 1920s, in part due to the rise of “lunch car”
diners that specialized in food that kids could enjoy with their sober parents,
like hot dogs, hamburgers, and milkshakes. As the economist Tyler Cowen
explained in his book An Economist Goes to Lunch, the ban of
alcohol sales put children at the center of our culinary culture. For decades,
he contended, Prohibition infantilized the American palate, making every meal
fit for a kid.
Over the past few decades,
U.S. restaurants have become world class. Dining out in America has become a kind
of art form, leading the writer Eugene Wei to declare, in 2015, that “food has
replaced music at the heart of the cultural conversation.” Food critics have
noted a restaurant renaissance in Portland, Oregon; New Orleans; San Francisco; Chicago; Washington, D.C.; Los Angeles; and New York City. Honoring this achievement,
Americans before the crisis spent more money dining out than in grocery stores—something
that had never happened before 2015.
But COVID-19 could bring
this golden age to an abrupt close. OpenTable reservations have collapsed all
the way to zero. Restaurant spending has fallen by about 60 percent across the country, with
the sharpest declines in fine-dining, lunch,
and late-night food. The situation is especially bad for independent
restaurants. “There’s no question that mom-and-pops have disproportionately
suffered during this time,” said Jack Li, the managing director for
Datassential, a food-and-beverage-research firm.
In the past month, chains
have taken $3 out of every $4 spent eating out. That figure is significantly
higher than average, according to Datassential. Chains don’t just have more
cash flow; they also have more cash savings. The typical local burrito joint
barely has enough money to cover a few weeks of employee pay and utilities.
Chipotle, meanwhile, has public stock and more than $900 million on hand. The
companies that survive the recovery will be those that can hold their breath,
with or without government assistance, and there is no doubt that chains have a
significant advantage in lung capacity.
Things may get even worse
this summer when restaurants are open for business but customers are scared—or
local laws require dining establishments to operate at 50 percent capacity. “A
lot of restaurants might come back in June and realize they can’t make a profit
all summer, during their peak season,” said H. G. Parsa, a restaurant
consultant and professor at the University of Denver. Most people I spoke with
expected cities to enact social-distancing rules that will limit restaurant
capacity in order to discourage large crowds. Several chains are saying they
plan to stagger seating and reduce the number of
tables in their establishments. Others are talking about installing dividers
between booths or adding temperature checks at the door.
Empty space is bad enough
for downtown restaurants, where thin margins require filling every square inch
with paying customers. But at a deeper level, these adaptations will create a
whole new ambience, making restaurants more awkward, more expensive, and less
fun. One of the joys of getting a drink in a crowded space is the soundtrack of
a hundred strangers’ conversations humming underneath the intimacy of a private
exchange. Social-distance dining prohibits the thrum of a full house. “Until
there’s a vaccine, I don’t think dine-in restaurants and bars will get anything
back to normal in this country,” Steve Salis, a Washington, D.C.–based
entrepreneur who owns several restaurants, told me.
“I think that retail
capacity will be reduced, relocated, and repurposed,”
said Daniel O’Connor, a veteran retail adviser and visiting executive at the
Harvard Business School. Reduced means that thousands of
restaurants will go out of business. “Flat out, I’m telling you a lot of
today’s restaurant locations are going to become gyms,” O’Connor said. Relocated means
that many restaurants that hang on will recognize in the next few months that
they can’t survive in expensive downtown areas. They’ll look to open new
locations in the suburbs, or shift their business to a food truck.
“Repurposed means
the restaurant of 2010 isn’t going to be the restaurant of 2025,” O’Connor
said. “The pandemic is going to accelerate the shift to contactless delivery of
meals, groceries, and products of all kinds.” As more restaurants recognize
that they cannot make rent by filling hygienically spaced seats, they will
become, simply, for-profit kitchens—a place where food is prepared but less
commonly eaten.
Once again, this shift was
already happening slowly, but is being accelerated by the pandemic. Last year I
wrote that given the growth of “off premise” dining, 2020 would likely be the
first year that American restaurants made more than half of their revenue from
delivery, drive-through, and takeout. Nobody could have predicted that this
milestone would be reached due to the absolute zeroing-out of on-premise
dining.
Like Prohibition did 100
years ago, a delivery-first restaurant business could change the American
palate. Pizza and Chinese food are well positioned for the transition, since
they already account for 70 percent of the U.S. delivery market, according to a
report by the investment firm Cowen and Company. But not every entrée is made
to be left in a car for 30 minutes. Grilled salmon and medium-rare steak don’t
benefit from a microwave zap. Neither do Michelin-star entrées, which is why
some of America’s most famous restaurants have gone back to basics. Alinea in
Chicago has scrapped its $395-per-person menu and
replaced it with comfort foods, like beef Wellington and mashed potatoes. In a
strange historical rhyme, the kid-friendly fare that became hegemonic in the
American diet after Prohibition isn’t so different from common delivery food:
pizza, wings, burgers, and pasta.
It would be glib to suggest
that most restaurants can survive by simply pivoting to delivery. Indeed, many
won’t—and not just because some consumers might be afraid of lukewarm trout.
The bigger problem is that the most popular delivery items (appetizers and
entrées) tend to be the least profitable, while delivery consumers rarely order
the higher-margin items, like dessert and booze, that actually pay the rent.
One solution: takeaway
booze. “I’ve spoken to lots of restaurants who say that alcohol delivery has
saved their company,” H. G. Parsa, of the University of Denver, told me. “I
think there is room for innovation here. Imagine a restaurant delivers to you
the ingredients for a fancy cocktail, with the right amounts of each
ingredient, with instructions for you to shake it up yourself.” Parsa sees this
approach—half delivery, half DIY—as a possible evolution for more restaurants
that want to expand their delivery business. It is a vision of restaurants as
prepared grocers, from whom you might order several finished sides, the bottled
ingredients for three cocktails, and a sirloin you’ll sear at home.
Summarizing these dizzying
changes to the food industry, Parsa said: “Food that travels is the future.” As
sweeping as that statement is, it might even be an understatement. In the past
month, the all-delivery economy has gone from a notion to a necessity.
4. THE ALL-DELIVERY ECONOMY
The spatial logic of a
plague is unforgiving. If crowds are toxic, then stores cannot be crowded. And
if stores are off-limits to the masses, then mass commerce must shift to the
internet.
In the past month, online
shopping has gone from a regular habit for a minority of consumers to a crucial
part of America’s recreational infrastructure. One-third of Americans bought groceries
online in the past month, and tens of millions of them did it for the first
time. Walmart deliveries have skyrocketed, and Amazon now delays deliveries of
nonessential items to deal with unprecedented demand. Online
shopping’s share of total retail sales has been increasing approximately one
percentage point per year, but a recent UBS analysis predicted that COVID-19
will immediately increase that share from 15 percent to 25 percent—a decade of change
concentrated in several months.
Dan O’Connor, of Harvard,
believes “offline” activity will increasingly be geared to online delivery, and
will transform almost every aspect of urban retail. He pointed me to Hema, a
Chinese supermarket chain operated by the e-commerce and technology giant
Alibaba. Hema triples as a high-end grocer, restaurant, and fulfillment center.
When you walk into a typical store, it looks like a Kroger or Whole Foods.
But Hema delivers more than half of its volume
through an app, making it more like a walkable fulfillment center than a
traditional grocer. “If you asked me where retail is headed, I would encourage
you to look at China,” O’Connor said. “If we’re going through 18 months of
social distancing, which makes crowded stores impossible, then we need to
significantly repurpose our retailers for increased delivery.”
This all-delivery economy
will require either a quantum leap in autonomous vehicles and drone technology
or a significant increase in delivery workers. In the short run, I’m betting on
the latter. Instacart is currently seeking to add 300,000
contract workers in the next three months—more than the total anticipated new
hires by Amazon, CVS, Walmart, and Walgreens combined. The delivery industry,
including not only Instacart but also Uber Eats and DoorDash, has
received substantial criticism for its treatment of workers,
who are typically denied benefits like health care and paid leave. If social
distancing accelerates the delivery economy, it will also expedite policy
conversations over how to adequately compensate the essential workers who are
allowing Americans to remain safely distanced.
By obliterating the
face-to-face economy, the coronavirus will return Americans to a blend of
virtual commerce and home prep that is reminiscent of the late 19th century. In
the 1890s, Sears, Roebuck delivered a bible of goods to the doorsteps of
families who cooked at home. In the spring of 2020, Amazon and its ilk deliver
an infinitude of stuff to the front steps and mailrooms of families who
couldn’t dine out even if they wanted to.
The return to the Sears
economy will chill the kinetic energy of downtown areas. Cities are built for
touch, yet we are entering an era of what Tim Wu, a law professor at Columbia
University, calls virtually assisted “touchlessness.” Movie theaters, crowded
gyms, full-capacity stadiums, packed clubs and bars—all of these features of
urban life will have to be paused, or downsized, to reduce viral spread.
In a plague, the social
returns to density flip from positive to poisonous. In the next few years, some
people who can work remotely at tech, media, and marketing companies may try to
save money by moving their living-room office to the suburbs. Young college
graduates may feel that moving to a city with dense public transportation is an
untenable risk. Or they’ll decide that “socially distanced downtown” is an
unappetizing oxymoron. If they do move to America’s largest metros, they may
prefer those—like Nashville and Phoenix—where distance is already designed into
the city’s sprawling infrastructure.
5. AFTER THE FIRE
The song of American
urbanization plays on an accordion. Americans compressed themselves into urban
areas in the early 20th century. By mid-century, many white families were
fanning out into the suburbs. Then, in the early 21st century, young people
rushed back into downtown areas. But in the past few years, American cities
have begun to exhale many residents, who have moved to smaller metros and
southern suburbs. As with so many other trends, the pandemic will accelerate
that exodus. Empty storefronts will beget empty apartments on the floors above
them.
The American cities waiting
on the other side of this crisis will not be the same. They will be “safer” in
almost every respect—healthier, blander, and more boring, with fewer tourists,
less exciting food, and a desiccated nightlife. The urban obsession with
well-being will extend from cycling and salads to mask design and social
distancing. Many thousands of young people who might have giddily flocked to
the most expensive downtown areas may assess the collapse in living standards
and amenities and decide it’s not worth it. Census figures will show that
the urban exodus went into hyperdrive in the
COVID years. There will be headlines exclaiming the decline of the American
city or, more punchy, “Americans to New York: ‘Drop Dead.’”
Then something interesting
will happen. The accordion will constrict again and American cities will have a
renaissance of affordability.
“Right now, you see rich
people literally fleeing New York for their upstate homes,” Jeremiah Moss, the
author of the book Vanishing New York, told me. “What’s happening
to New York is traumatic, and strange, and post-apocalyptic. But I reserve a
dark optimism about all this, if cities become less expensive over the next few
years.”
In the decade after the Great
Recession, American cities became very popular—and very expensive.
Neighborhoods that were once jewel boxes of eccentricity became yuppie depots.
Wealth elbowed out weirdness, and rents soared to suffocating levels that
pushed out many of the families and stores that made the cities unique.
“Cities have historically
been places for outsiders, but they became ruinously expensive in the last
decade when they became popular with mainstream people,” Moss said. “If cities
become less expensive in the next few years, it might allow artists and weirdos
and the counterculture to come back to New York and places like it. It could
make cities interesting again.”
As Moss spoke, I thought of
a forest fire that rages through the underbrush and leaves a legacy of ash. To
look at the aftermath of the fire is to see little but death and ruin. But in
time, the equilibrium of the environment is reset. Sunlight reaches the forest
floor. New things grow that couldn’t have before the fire changed the
landscape.
The COVID-19 pandemic will
leave two legacies for the American streetscape. In the next few years, the
virus will reduce to rubble many thousands of cherished local stores. Chains
will surge, restaurants will feel desolate, and the density of humanity that is
the life force of cities will be ruinously arrested by the disease.
But the near death of the American city will
also be its rebirth. When rents fall, mom-and-pop stores will rise
again—America will need them. Immigrants will return in full force when a
sensible administration recognizes that America needs them, too. Cheaper empty
spaces will be incubators for stores that serve up ancient pleasures, like
coffee and books, and novel combinations of health tech, fitness, and apparel.
Eccentric chefs will return, and Americans will remember, if they ever forgot,
the sacred joys of a private plate in a place that buzzes with strangers. From
the ashes, something new will grow, and something better, too, if we build it
right.
