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Freakoutonomics

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Retailers are also looking for cheaper leases—and finding them. That’s the good news in a city small businesses have been priced out of for years. With commercial real-estate inventory piling up, more and more landlords are willing to renegotiate even before the lease is up. West Village’s Biography Bookshop, a onetime stop on the Sex and the City tour, is facing a possible move within the year, but manager Juan Vallejo isn’t worried. “The environment is changing so quickly, you know, in terms of what spaces become available, where we potentially could look.” Operations large and small are cutting staff or cutting back on workers’ hours. “What else can you do?” says a boutique owner who just laid off four employees. “Verizon is not going to give you a break.”

This isn’t the first time, of course, that New York’s retail landscape has undergone a seismic shift. The city’s near-bankruptcy in the seventies killed off many large, family-owned department stores and immigrant-owned mom-and-pops that used to define commerce in New York. That and the crippling early-nineties recession paved the way for Rudy Giuliani, who cracked down on crime, cleaned up Times Square, and lured national big-box chains with tax incentives and other sweeteners. The hedge-fund boom of the aughts redrew the map once again, ushering in the age of Masa and the meatpacking district. How will the current crisis reshape the city’s retail economy?

The immediate future appears to belong to deep discounters, 99-centers, and people who will sell you a nice desk but make you assemble it. On recent weekends, the Red Hook Ikea has been so spectacularly mobbed that bloggers took pictures—even as the small neighborhood businesses like LeNell’s, which the arrival of the Swedish giant was supposed to pull up, were closing down around it. The somewhat grimy, old-school Gristedes grocery chain is doing fine. John Catsimatidis, the billionaire and on-and-off mayoral hopeful who owns Gristedes, gleefully points out that “people are trending away from organic. People are thinking, well, if the regular gallon of milk has been okay for me to drink for the last 50 years, why not again?” Forever 21, the deep-discount, shamelessly derivative fashion chain, took in $1.7 billion in 2008 and projects a $2.3 billion revenue for 2009. Just last month, they took over a number of bankrupt Mervyns locations, and shortly before that 150 stores of a Texas chain called Gadzooks.

Another near certainty is that companies with deep pockets and little to no debt will be best positioned to survive. Because the downturn could take years to ride out, and credit is still devilishly difficult to come by, capitalization is king. The Gap’s sales, for example, are down 23 percent in January alone. But the company is tremendously liquid: It has $1 billion in cash. “It’s not going anywhere,” says S&P analyst Marie Driscoll. The same can be said about Macy’s, which, for all its staff cuts, has the sheer size to hunker down for years. At the same time and somewhat paradoxically, the prospect of cheaper rents, looser credit, and other small-business incentives creates fertile ground for the next crop of one-of-a-kind boutiques, bars, and galleries. Some day in the not-too-distant future, New York may once again be cheap enough to take a risk on.

One long-term concern for retailers big and small is that the consumer, spoiled by constant and massive markdowns, might be permanently hooked on sales. “There’s no question that huge markdowns are a necessity,” says Gilbert Harrison, the CEO of Financo, an investment bank that works with major retail stores. “The question is, how do you get the consumer to go back to full price? They’ve been brainwashed. All they do now is look for sales. It will take years to retrain them.”

In the meantime, the next few years are looking to be, quite literally, a buyer’s market. “The only people who will benefit in this city,” says S&P’s Driscoll, “are the shoppers.” This year will be an ideal time, in other words, to reclaim the mentality best encapsulated by the words “I never pay retail.” Creative bargain-hunting was all but forgotten in the hedge-fund years, yet knowing a guy who knows a guy is one of the New Yorkiest things to do. It harks back to our origin myth as the city of scrappy immigrants: This town was buying off the back of a truck before the truck was even invented.

But the thrill of the bargain should not be confused with the empty pleasures of abstemiousness. At the end of the day, New Yorkers are people with appetites. We’re not going to stop eating at restaurants: Most of us have no real kitchens in our apartments (and now no money for home improvements), and we don’t know how to cook anyway. Women are not going to stop getting their nails done. They may cut back, but, as one struggling spa owner says approvingly, “New York women are quite spoiled. Even if they’re getting a mani-pedi once a month, they still want someone else to do it.” More people have their roots showing—one colorist reports significant time lags between treatments—but few are going natural either. At the city’s three Fairways, the famously high-low grocery stores, a major growth area is gourmet-coffee sales: People may be cutting back on Starbucks, but they still want a quality cup of coffee. And at the sex-toy mini-chain Babeland, to the owners’ own surprise, it is the “luxury vibes”—sophisticated, often programmable vibrators with a price point of $125 and up—that are proving to be a recession-era blockbuster. September through December sales of those items have doubled compared to the year before. “This is not a beginner’s toy,” says Babeland’s head of publicity. “People are upgrading.” And why not? The very fact of living in this city means our life is guided by pleasure rather than value. Otherwise we’d be living in Philadelphia.


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