Penco Graphic Supply has struggled with the recession and lighter-than-expected business in Minneapolis' North Loop neighborhood.
If the Great Recession has chosen a blank canvas upon which to leave its mark among local small businesses, it may well be at Penco Artists' Supply Warehouse.
Canvases, for that matter, are one of the few expanded product lines at Penco, the art and drafting supply retailer. Co-owner Conrad Segal said the company has struggled since a costly 2007 expansion of its 20-year-old headquarters in Minneapolis' North Loop neighborhood.
Segal and his brother and business partner Fred Segal bought additional space on the ground floor of the SoHo Lofts building for an expanded retail store, Penco Artists' Supply Warehouse. The space also included new corporate offices, a larger warehouse for parent company Penco Graphic Supply and room for Penco's online store, ArtSuppliesOnline.com.
The investment appeared to make sense at the time: Penco already had a good commercial business with nearby advertising, architecture, graphic design and creative firms. It enjoyed strong online sales. And the retail expansion -- 15,000 square feet with new fixtures and a much broader selection -- surely would capture business from North Loop loft and condo dwellers and from fans descending on the Twins' new ballpark just a few blocks away.
But Penco's plans went awry as the retail business failed to take off. There was less neighborhood foot traffic than expected and little to no bump from the new stadium, Segal said. The recession, meanwhile, put some commercial customers out of business or sent them packing elsewhere. With little cash for upgrades to the website, online sales declined.
Penco found itself scrambling to cover monthly overhead that was now five times greater, Segal said. The value of its property, which he said the company had borrowed to buy as real estate prices and interest rates peaked, has fallen sharply.
"We're a microcosm of the macrocosm," Segal said. "Every component of what's gone wrong has attached itself to us. The recession, the mortgage crisis, the debt crisis. We invested in it on the come. The neighborhood is still on the come, it hasn't arrived yet. But the pricing had."
Penco sales in recent years have been about $2.5 million, down from a pre-recession high of $5 million, Segal said. The company has 10 employees. When Penco needed cash to pay bills over the summer, it sold a smaller, profitable location in Menomonie, Wis., to an employee there. "We cut off the healthy arm to save our disease-riddled body," Segal said with a laugh.
Segal said he's trying to add products -- canvases and spray paint, for example -- to meet customer demand. Technological changes -- laptops and tablet computers -- have replaced pen and paper for many clients' needs, hurting Penco's sales. But Segal is finding some customers looking for print-making, silkscreen and letter press supplies as an alternative.
For now, Segal is reviewing options such as whether to seek a buyer or whether to leave the North Loop to open smaller locations in the suburbs.
"I give us credit for still being here," Segal said. "I'm proud every day when people come in and say, 'I love this place!' I say, 'Why aren't there more people?'"
Joe Grunnet, founder of Minneapolis real estate brokerage Downtown Resource Group and a North Loop resident, shares Segal's concern.
"There's about 8,000 people living in the North Loop, which is more than you would think," Grunnet said. "At the end of the day you could run naked down Washington Avenue on a Saturday or Sunday and no one's going to see you. We need more people to live in this neighborhood to support the small businesses."
Two new apartment buildings under construction in the North Loop, after years without such activity, will add some density, Grunnet said. A number of bars and restaurants have done well despite the slow economy, he pointed out, including Be'Wiched Deli, Black Sheep Coal Fired Pizza, the Loop Bar and Restaurant, and Bar La Grassa.
Veteran retail consultant Jim McComb of the McComb Group Ltd. in Minneapolis said he sees more storefront businesses on Washington Avenue now than in years past. To succeed, they'll likely need to count on more than the neighborhood.
"The key ... is to attract business from outside the area so they don't have to rely solely on the people that live in the buildings around them," McComb said. "They need to attract from a larger geography."
The expert says: Dave Brennan, marketing professor and co-director of the Institute for Retailing Excellence at the University of St. Thomas' Opus College of Business, said the North Loop with its mix of residential, office and retail space, and bars and restaurants still holds promise.
While the area has yet to attract chain restaurants or retail, which could confirm that it's hot, that may be a good thing for business owners there, Brennan said. "When the chains move into an area, they move into the high-volume areas, and what that often does is increase the rents," he said. "As the rents increase, the local business owners find it difficult to operate in that circumstance. We see that in the Hennepin-Lake area, in the Uptown area."