Formula Retail—A Bay Area Paradox

Formula retail, San Francisco, Hayes Valley, North Beach, Cow Hollow, Fillmore Corridor, Mid-Market, JLL, Cushman & Wakefield

Union Square San Francisco real estate The Registry
By Robert Carlsen

For the past 11 years, San Francisco’s restrictive formula retail law, which prohibits chain stores to open in certain neighborhoods unless they have 11 or fewer outlets worldwide, has been tweaked continuously by city supervisors, administrators and neighborhood retailers, with the end result of all parties feeling wholeheartedly dissatisfied.

[contextly_sidebar id=”vkORQ0SVA3EJ3mTHs7bi5Cv4H5xJujud”]Take the most recent episode involving a Vancouver, B.C.-based luxury clothing and accessories retailer, Kit & Ace, which was recently approved by the San Francisco Planning Dept. to open a location at 371 Hayes St. in Hayes Valley even though the retailer currently has more than twice as many locations as allowed by the law.

The kicker, though, was the retailer’s timing: When Kit & Ace applied for a permit earlier this year, it had eight locations open, including an outlet on Fillmore St., so the Hayes Valley request moved on for approval. Neighborhood merchants, however, discovered that the firm has plans to open more than 30 outlets in the U.S., Australia and Canada by the end of 2015 and had actually passed the 11 outlet threshold in early May. In approving the application supervisors accepted the retailer’s argument that its “intent” at the time of permitting was valid.

An appeal filed against the city’s zoning administrator by the Hayes Valley Neighborhood Association was denied in August by San Francisco’s Board of Appeals, said Gina Simi, communications manager at the planning department.

According to the city, formula retailers are establishments with multiple locations and standardized features or a recognizable appearance. “Recognition is dependent upon the repetition of the same characteristics of one store in multiple locations,” the planning department said. “The sameness of formula retail outlets, while providing clear branding for consumers, counters the general direction of certain land use controls and general plan policies that value unique community character and therefore needs controls, in certain areas, to maintain neighborhood individuality.” Formula retail, by nature, is repetitive, the city said. If not properly regulated, this repetition can detract from San Francisco’s “vibrant neighborhoods by inundating them with familiar brands that lack the uniqueness the city strives to maintain.”

In addition to the 11 or more other retail sales establishments located worldwide, the firms would be considered chains if they feature “a standardized array of merchandise, a standardized façade, a standardized decor or color scheme, a uniform apparel, standardized signage, a trademark or a service mark.” Types of formula retail apply to bars, drive-up facilities, liquor stores, restaurants, tobacco paraphernalia establishments, massage outlets, movie theaters, video stores, amusement or game arcades and sales and service retail establishments. The planning department said it would work with applicants to improve their aesthetics, including signage, storefront design, transparency and pedestrian accessibility to help them integrate.

Protected commercial neighborhoods include Hayes Valley, North Beach, Cow Hollow, the Fillmore Corridor and the mid-Market Street area between Sixth and 11th streets.

As predicted, formula retail has become a huge issue for retail real estate brokers, whose clients can sometimes wait six months and spend tens of thousands of dollars to receive approvals.

“It has changed the landscape for brokers working in San Francisco, many of whom can no longer make a living just serving the city,” said Christine Firstenberg, senior vice president at JLL Retail Brokerage in San Francisco.

“The most frustrating part of the law is that it seems quite unjust,” added Firstenberg. “For example, many of the new retail stores that want to open in the city are franchise operations and while the franchise will have more than 11 stores, the individual franchisee will most often not. But because he or she is planning to operate a store that is franchised and has a national brand, the individual is penalized.”

She added that the reaction her firm’s retail brokers had upon learning about the Kit & Ace decision was “great.”

“We are all glad that the city ultimately made the right decision to move forward and let Kit & Ace open their store in Hayes Valley,” said Kazuko Morgan, vice chairman on the retail brokerage services team at Cushman & Wakefield. “At the time that they received approvals, they were in compliance with the formula retail law. The fact that the city is trying to hamper a retailer in their expansion plans shows other retailers how dealing with San Francisco can sometimes be difficult. This discourages many potential retailers who we would love to have a presence in San Francisco.”

Morgan added that many of their clients have had to undergo similar challenges that Kit & Ace endured, but with “patience and time, they have ultimately been able to receive approvals. Quite a few retailers, however, have expressed that they prefer to go to a city that embraces and welcomes them.”

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