WWD.com/fashion-news/fashion-features/san-francisco-stores-battle-seismic-shifts-in-economy-tourism-750234/
View Slideshow

LOS ANGELES— It was the last thing San Francisco retailers wanted to hear.

This story first appeared in the September 25, 2002 issue of WWD.  Subscribe Today.

While its counterparts in the southern half of the state manage to squeak by last year’s recession, already hard-hit San Francisco is forecasted to limp along well into 2003 and beyond, according to a Sept. 16 economic forecast released by the Los Angeles Economic Development Corp.

Retailers in the high-end shopping district of Union Square had already been reporting little reprieve from two arduous years brought on by the burst dot-com bubble and compounded by severe drops in international and business travel to the city since 9/11.

“[San Francisco’s] taxable sales through the third quarter of last year were headed straight down and they dragged down the rest of the state,” said Jack Kyser, chief economist of the LAEDC. San Francisco’s third-quarter total retail sales plunged 13.4 percent, dragging California’s gross domestic product in 2001 to $1.309 trillion.

His counterpart, John Crapo, economic development and research director for the Chamber of Commerce’s San Francisco Center of Economic Development, concurred, calling the simultaneous convergence of the recession, the dot-com bust and 9/11 an “ultimate triple-whammy. Many refer to it as an economic ‘perfect storm,’” he said.

Or more like a major earthquake. San Francisco’s problems are reportedly rippling throughout the rest of California, costing the state one place in the lineup of the world’s largest GDPs, if it were considered a nation. California now ranks sixth behind the U.S., Japan, Germany, Britain and France. The last time California was behind France was in 2000. However, they have been neck-and-neck for years.

Officials from major chains, including Nordstrom, Macy’s West and Neiman Marcus, are reticent to comment on the performance of individual stores. Yet many of those operating in the 32-block Union Square area, which remains highly popular among locals and visitors, echo Rosemary Nightingale, director of visitor services for Macy’s West: “The stock answer is business is challenging for everybody.”

Nightingale, who keeps track of visitors to the Union Square flagship, noted that during the peak month of August, the store traditionally “looks like the League of Nations.”

But, “the Japanese travelers vanished overnight,” she said. “I would say, looking at the first six months of this year as a whole, the main difference we see is that convention attendance is down, and that’s a large part of business here.”

European and Japanese tourists typically blanket the historic public square in August. But this year, while the area was noticeably busier in August and early September than in June and July, thanks to the slow return of European visitors, traffic has been far from good enough to declare a recovery.

Some even say it will be a while. Located on a hilly peninsula, the city is mostly reached by air travel — some 80 percent of visitors stream through airports in San Francisco and nearby Oakland. In 2001, the total number dipped by 9.2 percent to 15.7 million visitors, while total visitor spending last year plummeted 20.3 percent to $6.1 billion, according to the San Francisco Convention and Visitors Bureau.

In the last six months, air travel has plunged 50 percent, sending hotel occupancy rates falling 59 percent, according to Smith Travel Research. That’s the steepest decline in the U.S. Leisure travel fell 15 percent, according to PFK Consulting, a firm that feeds visitor stats to the visitors bureau.

Adding to the problems, domestic vacationers have also stayed away from the Bay Area, perceiving it as too expensive. And local consumers, many still nursing their dot-com wounds, are facing rising unemployment. The LAEDC expects San Francisco, San Jose and Oakland to lose 80,500 jobs this year and regain only about half of those in 2003.

All of this has left gaping holes in Union Square’s retail landscape, not to mention the rest of the city, as well as a chunk out of the estimated $1 billion in retail sales that is generated in the Union Square area. For the longest time, vacancy rates were under 1 percent. But now, once unheard-of empty storefronts dot the area.

Estimates put the commercial vacancy rates in Union Square in the 10 percent range, although real estate firm Cushman & Wakefield pushes it to 13.4 percent. City-wide, it’s in the 15 to 20 percent vacancy rate range, according to Mayor Willie Brown’s office. Real estate brokers estimate rents have fallen 25 to 30 percent since the height of the real estate boom two years ago.

DFS Galleria, a unit of LVMH Moët Hennessy Louis Vuitton, vacated its two-story space on the corner of Stockton and Geary Streets in February. The site, located adjacent to Macy’s West, was home to a Céline unit poorly located in the back lobby that also shuttered. Only the Louis Vuitton and Ferragamo stores in the same building remain.

Other closings this summer: Timberland on Grant Avenue, Bally on Stockton Street and Laundry Service and Planet Planetia on nearby Sutter Street.

The Stockton Street branch of Rolo, one of the city’s best-known directional men’s and women’s retailers, also threw in the towel. Rolo owner Roland Peters said the still-high Union Square rents — currently hovering at a monthly average of $18 to $22 per square foot versus around $30, or annual rents of $216 to $264 per square foot, or up to $360 — made it increasingly difficult to eke out a profit there. Two months ago, he opened a new store on Howard Street in the neighborhood known as SoMA, or South of Market Area, the second in that neighborhood after a long-standing unit on Market Street. There are five Rolo stores in the city.

Barneys New York also abandoned plans to come to the city after last Sept. 11. Barneys had been in negotiations with Millennium Partners, a retail venue at the Four Seasons hotel on Market Street. A search for tenants continues for the 100,000-square-foot retail venue.

Retailers had hoped a facelift of Union Square would temporarily flood the 155-year-old park with visitors over the summer. The square, in sorry decline for years, complete with trash and homeless campers, underwent an 18-month, $25 million reconstruction. When the fences came down in July, people stopped to gape at palm trees towering over a sparkling, peach-and-gray granite plaza and a swath of green lawn.

But balance sheets so far have little to show for it.

“I think uncertainty about what’s happening in the world continues to affect business,” observed Linda Mjellem, executive director of the Union Square Association, representing 250 members from the retail, hotel and restaurant industries. Mjellem noted that the area — named during the Civil War for Union rallies — is largely preoccupied with the possibility of another war: Iraq.

Increasingly, retailers are turning to creative ways to drum up business. Macy’s Nightingale has stepped up marketing to visitors. An international card printed in seven languages offers 11 percent off goods at any Macy’s West store. The store sends out a representative to local concierges on a daily basis to keep Macy’s front-of-mind. “It’s definitely helped,” she said.

But she and others concede that it will take more. “You can keep giving stuff away, but you can’t take market share to the bank,” said PFK Consulting’s Gary Carr.

Indeed, some believe a more radical approach is in order.

“I think retailers have to reevaluate what the market will bear,” offered Crapo of the SFECD. “To support rents, they’ll need volume. They’ll have to cater to middle-class buyers to make up that difference.”

New faces on the retail landscape could likely include Kohl’s early next year (as it starts its statewide competition against Macy’s) and Mervyn’s. Sites remain to be announced.

But it is hard to imagine a middle-class scenario in Union Square when stores like Prada continue to move in. The luxury brand has said it has no plans to abandon its long-awaited, Rem Koolhaas-designed unit at 185 Post Street at the corner of Grant — never mind some vehement public opposition decrying the unit’s futuristic, “cheese grater” facade. But construction has yet to begin.

There are other signs that retailers still see the relevance of the shopping district:

An 18,000-square-foot, three-story building, the former home of Bullock & Jones clothiers, had stood empty for two years until Williams-Sonoma took the lease in August.

A|X Armani Exchange has already signed Rolo’s former Stockton spot.

Grant Avenue will welcome a door from luxury French beauty brand Sisley in the coming year.

Loro Piana, the upscale Italian women’s retailer, is slated to take the prominent former Hermès spot on Stockton early next year; Hermès is moving to a space at 125 Grant Street.

Jeans retailer Miss Sixty is also planning a 6,000-square-foot, three-level unit at 45 Grant Avenue. “We have two major wholesale accounts there that are selling our product amazingly well,” noted Andrew Pollard, Miss Sixty’s director of sales and marketing. “I think that our product has a better versatility because we’re able to attract the consumer who was buying luxury but cannot justify that price point anymore.”

Neiman Marcus, an institution on Geary and Stockton Streets for generations, is readying to spiff up its unit there by adding an adjacent 65,000 square feet to its existing 197,000-square-foot store. The addition would make the branch the largest in the 35-store fleet. Completion is expected by fall 2005.

Construction has not started on the long-awaited arrival of Bloomingdale’s, the Federated Department Stores division that will eventually bow on Market Street. Details are sketchy, but the delays are said to be due to the project being mired in the city’s complicated building permit process.

Elsewhere in the city, small specialty stores report they are in better shape than downtown retailers because of a loyal neighborhood customer base. That’s not to say they have escaped unscathed, however.

Contemporary store Wednesday & Proud is among the casualties in nearby Hayes Valley. Fillamento, a hipster lifestyle store with a sprinkling of women’s clothing on Fillmore Street, gave up this summer. Designer Deborah Hampton said she plans to close her Hayes Street store — a favorite among dot-com executive women — to concentrate on her wholesale business.

“General optimism is down. I’ve seen the changes,” observed Hampton. “Although I’ve increased my quantity of customers, I can see the amount of their spending is lower.”

Similarly, others are finding it hard to anticipate the radical dips and surges. Catherine Jane, owner of a contemporary boutique near Haight Ashbury, said she watches Union Square’s business for clues on how to handle her own store.

“I can go for days and traffic can be bleak and I think I have to find a restaurant job to supplement my job,” she said. “Then it will be very, very busy. I can’t explain it. It’s hard to make plans that way.”

The SFCED’s Crapo likens the plight of San Francisco to the dips of the stock market. “What you’re seeing is the correction of a lot of speculation,” he said. “[The dot-com boom] was almost like the second California gold rush. It’s not that business is going away. But it’s going to change as we know it.”

Neiman Marcus, an institution on Geary and Stockton Streets for generations, is readying to spiff up its unit there by adding an adjacent 65,000 square feet to its existing 197,000-square-foot store. The addition would make the branch the largest in the 35-store fleet. Completion is expected by fall 2005.

Construction has not started on the long-awaited arrival of Bloomingdale’s, the Federated Department Stores division that will eventually bow on Market Street. Details are sketchy, but the delays are said to be due to the project being mired in the city’s complicated building permit process.

Elsewhere in the city, small specialty stores report they are in better shape than downtown retailers because of a loyal neighborhood customer base. That’s not to say they have escaped unscathed, however.

Contemporary store Wednesday & Proud is among the casualties in nearby Hayes Valley. Fillamento, a hipster lifestyle store with a sprinkling of women’s clothing on Fillmore Street, gave up this summer. Designer Deborah Hampton said she plans to close her Hayes Street store — a favorite among dot-com executive women — to concentrate on her wholesale business.

“General optimism is down. I’ve seen the changes,” observed Hampton. “Although I’ve increased my quantity of customers, I can see the amount of their spending is lower.”

Similarly, others are finding it hard to anticipate the radical dips and surges. Catherine Jane, owner of a contemporary boutique near Haight Ashbury, said she watches Union Square’s business for clues on how to handle her own store.

“I can go for days and traffic can be bleak and I think I have to find a restaurant job to supplement my job,” she said. “Then it will be very, very busy. I can’t explain it. It’s hard to make plans that way.”

The SFCED’s Crapo likens the plight of San Francisco to the dips of the stock market. “What you’re seeing is the correction of a lot of speculation,” he said. “[The dot-com boom] was almost like the second California gold rush. It’s not that business is going away. But it’s going to change as we know it.”

View Slideshow