Formula Retail in the Computer Age

As we reported recently, formula retail is a very hot topic in San Francisco.  There has been a strong push to limit formula retail stores, and while controls may seem strict now, there are many who would like to see even more restrictions on new formula retail in the City.

Currently, formula retail is defined by the San Francisco Planning Code as a “type of retail sales activity or retail sales establishment which, along with eleven or more other retail sales establishments located in the United States, maintains two or more of the following features: a standardized array of merchandise, a standardized facade, a standardized decor and color scheme, a uniform apparel, standardized signage, a trademark or a servicemark.” (Planning Code Section 703.3.)  When most people think of formula retail, they think of large national chain stores, and while large chain stores are in large part, the kind of stores formula retail regulations are aimed at, smaller businesses are also impacted. Some recent discussions have turned to the adequacy of the definition of formula retail stores. As applied today, this only applies to brick and mortar stores, but there are those who believe internet stores should also be included in the overall count when determining if a use is formula retail. While the increase in internet shopping has undeniably changed how retailers do business, would including online stores in the formula retail calculations really be wise? As more and more neighborhoods in San Francisco are strictly limiting and even outright banning new formula retail stores, the answer to that question could have a huge impact on which stores are allowed in the City. But, a policy like that may end up harming those it’s aiming to protect because big national chains won’t be the ones affected, if such policy becomes a law.

Online Instead of in Line

Shopping online has greatly increased in popularity over the past several years. (See http://www.nytimes.com/2012/01/16/business/some-shoppers-rebel-against-giant-web-retailers.html?pagewanted=all&_r=0.) 

In response, retailers have had to completely re-think their strategies to get customers into their brick and mortar stores.  Despite these efforts, for many shoppers, the allure of possibly finding a better deal online is too much to resist.  One Survey showed that as many as 44% of Americans prefer online shopping. (See http://www.marketingcharts.com/wp/interactive/6-in-10-americans-prefer-shopping-in-store-to-buying-online-25244/.)

Recently, much attention has been given to a practice called showrooming. Showrooming is when a shopper goes to a store to view and test a product, and then later purchases that product online.  One study showed that as many as 21% of shoppers engage in this practice.  To counteract this, and get people in the door, retailers use price matching, special “in store only” deals, and in some cases coupon apps that only work in the store.  Despite these efforts online sales are becoming an integral part of the retail experience.  This paradigm shift in retail sales is not only limited to large retail stores.  Small business and restaurants, and even people without physical stores, are using the numerous online retail “stores” like Etsy, Facebook, Amazon, and personal websites, to reach a wide array customers and expand their sales.

Internet Stores and Formula Retail

Because online stores play such a large role in retail, there are those who would like to see them included in the calculation of the total number of stores a retailer has, when determining if it is formula retail.  The current definition of formula retail, without question, already covers big name national retailers.  Including internet stores in the definition will not impact their status.  And while these large stores do need to be concerned with legislation limiting and banning them entirely form portions of the City, any changes in the definition of formula retail will likely have little or no impact on their prospects in San Francisco.  The ones who will be greatly impacted by a policy like this are the little guys who formula retail controls are aiming to protect in the first place.  The mom and pop store that has grown over the decades into a local household name, local restaurants with online ordering, and entrepreneurs and artists who use online stores to earn the seed money for a new business.  These are the businesses that would be most impacted by the inclusion of internet stores in the calculation of total stores in the United States.  A locally owned business with stores all around the Bay Area could be completely banned from certain neighborhoods in the City because its online stores put it over the permitted eleven stores.  An artist or craftsman with a strong internet sales presence could have trouble opening a brick and mortar establishment if online sales meet enough of the formula retail criteria.  Even small local restaurant chains could suffer if individual stores maintain separate online ordering systems.

Thoughtful regulation is important for any issue, and a wide array of locally owned businesses is part of what makes San Francisco such a great City.  It is important that in the rush to protect these businesses, we don’t make it even harder for them to survive here.

 

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.
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