Retail Incubator Models and Downtown Revitalization: Understanding the Options

Many corridors across the country struggle to retain and attract viable retailers. In the same way, establishing a retail business in a downtown corridor is a capital and knowledge intensive endeavor. This post introduces different retail incubator models and explores how they can bridge the gap between empty storefronts and aspiring entrepreneurs.

Retail incubators are a specialized type of business incubator. Just as business incubators nurture the development of new businesses (tech, manufacturing, etc.), retail incubators provide critical assistance to retailers in their early start-up phase. This assistance encompasses multiple aspects of opening and running a business that range from coaching, access to capital and physical space to marketing and networking connections. A key aspect of a retail incubators that many groups excited with the concept fail to grasp is that an incubator is not simply a building with many stores, but it is a program of targeted services. In fact, retail incubators can be of various types and structures, including space-based models and program-based models.

Space-based retail incubators allow retailers to occupy small spaces within a larger facility that shares a number of services (think of the typical flea-market) at reduced rents. In this model vendors benefit from the proximity to other vendors (potential for increased foot traffic) as well as shared cost of typical operating expenses (utilities, etc). Also, the close proximity to other vendors allows the exchange of ideas and lessons among them and thus boosting collective learning and innovation. In this model, however, technical assistance to individual businesses is not the emphasis since space-based incubator facilities tend to house a mix of new and established retailers.

In fact,this type of retail incubator has been often established by property owners and developers to fill vacancies with innovative and creative retailers and generate interest in these properties and even in the neighborhoods they are located. For example, Shops @ MoDiv, a collection of tiny spaces housed in a historical building in downtown Grand Rapids was created Rockford Construction with the intent to incubate businesses that once established in the downtown facility will want to stay in the area and generate additional demand for other retail spaces downtown.

Shops @ MoDiv, a space-based retail incubator in downtown Grand Rapids, MI

Rockford Construction decided to experiment with the retail incubator concept when the developer could not attract tenants to fill the first floor of a historic downtown building during the 2008 recession.  Modeled after successful retail incubators in Ann Arbor and Portland, the developed created Shops @ MoDiv to be an innovative and flexible space mixing both start-ups and established retailers in an open and integrated floor-plan. The incubator contains ten retail spaces ranging from 100 to 1,000 square feet and leases range from six-months to five years. Tenants include boutiques, an apothecary that sells remedies and spices, artists selling their work, a bakery, and even a brewery.

It is important to note that for a real estate developer to build small spaces that require multiple tenants can be risky and not worth their investment, especially when compared to building a typical commercial building for a few tenants. In fact, Shops @ MoDiv were originated due to the lack of traditional larger tenants to lease the space. This is where a developer can potentially partner with a reliable public or nonprofit entity to take the lease and handle the work of filling all the incubator spaces. Such a partnership can mitigate the risks to the developer and help to activate the streetscape in the corridor while helping small businesses to get the exposure and experience needed to get established.

Another type of retail incubator is the program-based model. In this model, businesses are incubated in their permanent location rather than in a smaller space in a shared venue where it will outgrow. Thus, a key component here is that businesses are incubated to be able to stay where they were established. The rationale is that the location of a business is a key component of its success and that incubating a businesses at its permanent location right from the start-up phase will give new entrepreneurs a stronger understanding of the location, its local customer base and neighborhood dynamics and as a consequence enhance the business ties to the community and increase its chances of success.

A well-known example the Downtown Kalamazoo Inc. (DKI) Retail Incubation Program. Established in 2009 when downtown Kalamazoo, MI struggled to attract retailers, DKI spearheaded its creation enabled by a state legislation that allowed local Downtown Development Authorities to create, operate and fund retail businesses incubators. The program is managed by DKI’s Business Recruitment and Retention Committee and provide the following support to retail start-ups willing to open downtown:

• Eighteen months of subsidized rent, incrementally reduced from a maximum of 50% or up to $830 monthly
• Training in Merchandise Managements, Marketing, Human Resources, Financial Management and Customer Service
•  Mentoring from a successful downtown business

In exchange, the program required participants the following:

•   Attend all the training sessions
•  Hire a bookkeeper or CPA approved by the program
• Provide sales, inventory and expense information to allow tracking of success
•  Keep the business open for 6 days a week or 50 hours a week

In four years the street-level vacancy rate in Kalamzoo’s downtown dropped from 20 to 2 percent. As the program filled key locations with new retail concepts, business attitudes towards downtown changed. In fact, similar programs followed suit throughout the country and are still active today, primarily led by downtown organizations focused improving downtowns’ vibrancy and overall business environment.

Regardless of the model, a retail incubator can never completely eliminate the challenges of operating a business. Many stores open and many will close. There is not a single blueprint for downtown revitalization. But for corridors struggling to attract established retailers like national chains, the retail incubator model might be an option to bring vibrancy and economic activity to the area while providing opportunity for local entrepreneurs who already understand the characteristics and demand of the local market. As with any downtown revitalization initiative, having an organization with the capacity and commitment to lead the effort is a priority.

For further information and resources on business and retail incubators, check out the National Business Incubation Association (NBIA) website.


References:

National Business Incubation Association, Tips for Developers, www.2.nbia.org/resource_library/tips_dev.index.php

University of North Carolina Community and Economic Development Program Blog, Retail Incubators and Main Street Revitalization, ced.sog.unc.edu/retail-incubators-and-main-street-revitalization, August 2016

Downtown Idea Exchange, First store opens under retail incubation program enabled by state legislation, www.DowntownDevelopment.com, 2013