Tuesday, April 14, 2015
What's the Formula for Staying in Character?
Jersey City now joins a select group of cities, most notably San Francisco, that aim to limit the number of chains in their communities. In Jersey City, the proposed city regulation would set a limit of 30 percent of commercial space in downtown rented to businesses with 10 or more locations within 300 miles of the city. This kind of regulation is also known as "Formula Business Restrictions", and in general seek to limit chain stores with "multiple locations within the region that exhibit standardized characteristics such as logos, menus, store decor" and more. In Jersey City, grocery stores will be exempt. Typically, the goal of these restrictions is to support a vibrant retail sector by limiting the number of chain stores competing for space and thereby reducing commercial rents - or at least the rising pressure of rents over time. Whether the facts on the ground bear this result out over time are yet to be seen. To my knowledge, there is no longitudinal study that would allow us to definitively determine whether these restrictive ordinances do what they intend to do - keep rents down in a way that results in a vibrant independent business environment.
What I do know is that San Francisco's Office of Economic Analysis recently completed a study of the impact of the 2008 Formula Restrictions and found that on balance, a significant impact of the regulation has been the higher prices that local residents are forced to pay for goods and services on the whole. They also conclude that formula restrictions "increase vacancy rates". According to the OEA, the conclusion of the study was as follows: "expanding the definition of formula retail in the city will not expand the local economy". Strong words from the very City that has led these efforts nationwide. It should be noted that the study's findings have been criticized by the Institute for Local Self Reliance, a think tank that has long supported such restrictions, for overestimating the price differential between chains and non-chains and not accounting for the higher percentage of expenses that small businesses spend on wages. However, OEA looked at this assumption and found that larger retail establishments employed 4.3 workers per million dollars in sales than smaller retailers, who employed 3.2. So it seems the verdict is still out on this one.
But back to New Jersey. Not surprisingly, business and real estate groups are opposed. New Jersey Retail Merchant Association president, John Holub, noted "We totally are obviously supportive of a vibrant, independent retail sector in the city, but to artificially try to control market forces is troubling."
Mayor Fulop wants to see Jersey City as a destination that pulls in visitors from all over and noted that chain stores such as TGI Fridays, Starbucks, Applebees, and Gap don't have that magnetism that draws destination seekers to them. That may be true - and laudable goal overall - but it is not without costs and impact felt by all.
Authored by Larisa Ortiz, Principal of Larisa Ortiz Associates
and Scott Landfried, LOA staff