What happens to small businesses when big retailers shut down?

New York (CNN) — When the AMC 24 Hamilton closed in November 2020, many local New Jersey residents may have collectively sighed or shrugged it off as another foregone casualty of the pandemic economy.

But for the neighboring businesses, the theater’s absence was a tough pill to swallow.

“We were down 30% or 40% (in sales),” said Jim Danay of Bock Group, which owns UNO Pizzeria & Grill in Hamilton.

Danay said the UNO location has bounced back since the AMC 24 Hamilton closed, but sales still lag from when the theater was in business. The restaurant once shared a promotion in which customers could get a discount movie ticket.

The case of UNO and AMC 24 Hamilton speaks to a much broader issue involving the relationship between big and small business, the importance of foot traffic for retailers and what matters most for brick-and-mortar businesses.

Losing local interest

The closing of destination businesses, such as movie theaters or a sporting complex, can have serious consequences beyond near-term sales for the smaller businesses in the area.

The mere presence of such businesses provides crucial exposure for restaurants, specialty stores and kiosk businesses, which may otherwise go unnoticed by many consumers.

“Having this type of tenant results in people visiting a center and being exposed to the other tenants. This is inexpensive advertising for a small business that results in a heightened awareness of the brand,” said Stephanie Cegielski, a vice president at retail-trade organization ICSC.

When a major source of foot traffic closes, local economies can also feel the pinch.

“It reduces the overall demand and activity in the whole community and can even shrink it,” said John Deskins, director of West Virginia University’s Bureau of Business and Economic Research.

Closures could mean job losses as well as important tax revenue for local governments. Consumers who prefer shopping centers over buying online can take their business to a nearby town.

Between 2019 and the end of 2021, many retailers shut down locations in dense city centers and shifted to the suburbs, according to research from the JPMorgan Chase Institute. This economic rearrangement was particularly driven by the rise of remote work during the pandemic, in which erstwhile commuters started spending more money where they live, rather than in the cities where their offices were located.

Location and appearances matter

The lion’s share of foot traffic is ultimately driven by where businesses are located, not just which businesses are open, said Brandon Isner, CBRE’s head of retail research for the Americas.

Demand for retail space in prime locations is still extremely high and availability is at an all-time low, experts say. With big-name retailers vying for room in the bustling centers, businesses become less reliant on one essential retailer.

And now when big businesses shut down in less-energetic commercial areas, those holes likely won’t be filled, because the strategy guiding new openings has grown more focused in recent years.

“A lot of these retailers are quite sophisticated in using data on where to locate,” said Isner. “It’s not like the past where they would open 20 stores in a market and just hope they’ll do great. They can use big data to really find the exact place that they should go. If it’s a great new center that’s great, but if it doesn’t already have good foot traffic and they don’t know whether they can draw from that community, then they probably won’t locate there.”

Appearances matter for luring and keeping big retailers in spaces like strip malls. Small businesses can perform better when they are surrounded by popular big businesses, but a drab location can be a red flag for major companies.

“These tenants are not going to want to go into a center that looks tired, because the first thing they think is, ‘This is not maintained very well,’” said Isner.

According to Isner, one solution for a struggling retail center is a significant reinvestment.

“Someone once said that ‘Paint is one of the best returns on a dollar,’ and it’s true,” he said.

One brick-and-mortar staple stands out

A small business may be best served by setting up near a grocery store — the clear mainstay in the shifting retail center landscape.

Isner notes a grocery store remains a reliable source for foot traffic.

He said many retailers are now looking to relocate to grocery-anchored centers to maximize in-store customers because even when economic headwinds blow, people still need to eat.

“Even in a recession, grocery stores will maintain their traffic because people will be eating out less at restaurants and so they’ll be buying more groceries,” said Isner. “There’s a lot of power in being next to that traffic that’s going into a grocery store all the time.”

Retail companies like clothing stores, sporting good stores, and businesses selling personal care items are especially profitable in these grocery-centric retail centers because they sell products that typically don’t overlap with customers’ weekly grocery list.

Because grocery stores remain proven sources of foot traffic, a ShopRite or a Publix vacating a retail center has the power to do significant damage to its neighbors.

“If a grocery store would close in a smaller center, it would be pretty rough on all the retailers within it,” said Isner.

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