Formula Retail Decoded—City Considers Study of Its Economic Effects

​Today, a long-awaited economic study of formula retail controls in San Francisco was presented to the San Francisco Planning Commission.  Before diving into the details, some background: in response to a number of recently-enacted and pending proposals at the Board of Supervisors which would increase formula retail controls in San Francisco, the Planning Department in June 2013 commissioned an economic analysis of San Francisco’s existing formula retail controls and the impacts of the proposed legislation.  A retailer which has eleven or more other stores in the United States with certain standardized features is considered a formula retailer.

The study, prepared by Strategic Economic Consulting Group, confirmed some hard truths about San Francisco’s formula retail controls, particularly that they are successful at deterring companies which would qualify as formula retailers from pursuing new locations in San Francisco’s neighborhood commercial districts.  At the same time, the results of the study emphasized the positive impact these retailers have on blighted neighborhoods, demonstrating that these companies are ideal tenants for large-scale spaces and can prevent long-term vacancies—if only the barriers to entry were lowered somewhat.  The study also questioned the utility and effectiveness of many proposed changes to formula retail controls in the city.

Controls May Deter Formula Retailers…

Among the highlights of the study are its conclusions regarding the effects formula retail controls have on a neighborhood.  The study—which included the first comprehensive mapping of all formula retail stores in San Francisco—concluded that the relatively low concentration of formula retailers in neighborhood commercial clusters likely means the cost, uncertainty, and delay associated with the conditional use approval process deters retailers from attempting to open stores in these neighborhoods.  

Formula retailers are also most highly concentrated downtown, South of Market, in tourist-oriented areas like the northeastern waterfront and Union Square, and in shopping centers.  With the exception of most shopping centers in neighborhood districts, these areas do not have formula retail controls.

…Which Might Not Help Other Retailers or the San Francisco Economy

Formula retailers generally tend to occupy larger spaces than non-formula retailers — approximately 85% of formula retailers occupy spaces over 3,000 sq. ft. in size, while 80% of non-formula retailers use less than 3,000 sq. ft.  This seems to suggest that often formula and non-formula retailers do not compete for the same spaces, or at the very least most other retailers cannot or do not wish to lease large-footprint spaces.  Indeed, the study concluded that there is not a consistent relationship between the approval of a new formula retail application and an increase in local rents and subsequent vacancies.

In fact, the disapproval or withdrawal of a formula use application may lead to long-term vacancies at the site:  the large and deep retail spaces that are natural fits for many formula retailers can sit vacant for extended periods of time after a project is disapproved or abandoned, and these large vacant spaces can act as a drain on the surrounding district’s overall performance as a shopping and commercial destination.  

Assessing Current 11-Store Threshold and Proposed Legislation

Finally, the authors of the study addressed the existing formula retail controls, as well as the many pieces of legislation proposing changes to these controls. 

The study recognized that many local companies can become victims of their own success—such as San Francisco locals Philz Coffee and Pet Food Express, each of which recently passed the 11-store threshold.  The authors suggested raising the store threshold to twenty or even fifty stores.  Because the majority of formula retailers (approximately 75%) have fifty or more stores nationwide, raising the threshold could protect local fast-growing companies from the time, cost, and uncertainty associated with the conditional use authorization process, while at the same time requiring most formula retailers to still navigate that process.  

San Francisco’s legislators have proposed a number of potential changes to the existing controls.  These changes include augmenting the definition of formula retail to count businesses with more than 10 stores worldwide—as opposed to in the United States; expanding the types of businesses which may be considered formula retailers; and including subsidiaries of formula retailers.  Additionally, the Planning Department recently began to apply numerical thresholds for concentrations of formula retail stores in certain districts.

The study concluded that most of these changes would not have their intended effect.  For example, the international expansion would likely affect international companies seeking to place their first United States store in neighborhoods with a strong ethnic identity, such as Japantown or Chinatown, as well as in high-end shopping districts like the Upper Fillmore.  Subsidiaries would only account for three percent of formula retailers, and many of these subsidiaries already have more than 11 stores in the US, meaning they would already be subject to the conditional use process.  Making new categories of uses subject to formula retail controls—such as personal, business, and medical services, which include salons, gyms, and dialysis centers—could impact residents’ daily needs and make maintaining vacancy rates more difficult in many neighborhoods.    

Finally, case studies of the Upper Fillmore, Ocean Avenue, and Geary Boulevard neighborhood commercial districts demonstrated that it is impossible to define a single ideal level of formula retailers across multiple neighborhoods of differing character, urban form, and demographics.  A single formula retail concentration threshold across the entire city would not have its intended effect.

Next Steps

In early May, the Planning Commission will adopt the results of the study, as well as make policy recommendations.  This final report and policy recommendations are slated to be presented to the Board of Supervisors later that month.  The hope is that the report’s conclusions and recommendations increase the Board’s understanding of the economics of formula retail controls before any new legislation is enacted.  We will continue to monitor the progress of the new legislation.

The issues discussed in this update are not intended to be legal advice and no attorney-client relationship is established with the recipient. Readers should consult with legal counsel before relying on any of the information contained herein. Reuben, Junius & Rose LLP is a full service real estate law firm.  We specialize in land use, development and entitlement law.  We also provide a wide range of transactional services, including leasing, acquisitions and sales, formation of limited liability companies and other entities, lending/workout assistance, subdivision and condominium work.