The Silent Struggle in Ann Arbor and Beyond
Small businesses are closing at record rates
—By Jack Lam
“The hardest part wasn’t packing up the equipment or even telling our staff. It was the last day, when customers who had been coming in for their morning coffee for 15 or 20 years came by to say goodbye,” said Lisa Bee, founder and owner of Sweetwaters Coffee and Tea in Ann Arbor.
In recent months, Ann Arbor’s vibrant downtown has been marked by an unsettling trend: the increasing number of “Closed” signs appearing in once-thriving small business windows. While many residents remember these establishments as community cornerstones, recent economic challenges have forced owners to close shop. This phenomenon mirrors a larger national trend where not only independent small businesses but also major chain retailers and fast food franchises are scaling back their physical footprints.
Walking through downtown Ann Arbor today reveals a starkly different picture than just a year ago. According to data from the Ann Arbor Downtown Development Authority, commercial vacancy rates have increased to 14.6% in 2023, with vacancy reaching 303,723 square feet.
The city, once celebrated for its diverse small business ecosystem, has lost several beloved establishments in recent months, including Sweetwaters Coffee & Tea, Cottage Inn Pizza’s original location, and a satellite location of Detroit Cookie Co.
A national crisis
According to recent analyses published by the National Bureau of Economic Research, inflationary pressures, supply chain disruptions, and escalating rent have all significantly strained local business operations. In Ann Arbor, a boom in real estate prices and rising labor costs have proven particularly difficult for small business owners. Many small shops, unable to negotiate long-term leases at sustainable rates, have seen their profit margins wane.
Ann Arbor’s situation reflects a broader national trend. According to the US Small Business Administration’s Office of Advocacy, small business closures increased by 9.7% in the first quarter of 2023 compared to the same period in 2022. The Department of the Treasury reports that applications for new business formations have simultaneously decreased by 12%, suggesting a cooling entrepreneurial environment.
For larger chains and fast food franchises, the challenges are similar but compounded by shifts in consumer behavior. A 2023 study in Applied Geography found that the rapid growth of online shopping combined with pandemic-induced changes in foot traffic has forced many brick-and-mortar operators to re-evaluate their business models. Even once-stable chains are now closing individual stores as part of broader restructuring efforts.
“What we’re seeing now is particularly concerning because it’s happening during what should be a recovery period,” says David Miller, professor of Economics at U-M specializing in social networks. “Unlike during COVID, when closures were directly linked to lockdowns and capacity restrictions, today’s closures stem from a complex web of economic pressures that may prove more persistent.”
Behind the closures: voices from Ann Arbor
Lisa Bee, co-founder of Sweetwaters Coffee & Tea, which recently closed its Liberty Street location after 27 years, cites multiple factors that created a “perfect storm” for their business.
“Post-pandemic, we faced a completely different economic reality,” Bee explains. “Our labor costs increased by nearly 30% as we tried to retain staff in a competitive market. Meanwhile, our supply chain had issues…with costs increasing 15-40% for everything from coffee beans to paper goods.”
Bee also notes changing consumer habits as a significant factor: “The hybrid work model has permanently altered downtown foot traffic. Our morning rush, once reliable and robust, never returned to pre-pandemic levels.”
“I’ve always preferred going to Sweetwaters over other coffee shops because a lot of my friends and other U-M students work there part-time, just like the location inside the Michigan Union,” said Arete Song, junior at U-M studying Economics. With businesses like Sweetwaters closing down, some U-M students are also losing out on a little extra income from working outside of school.
Pizza tradition
The closure of Cottage Inn’s original location on William Street was most surprising, as the restaurant had been an Ann Arbor institution since 1948.
“[T]his wasn’t just a business decision, it was also heartbreaking,” says Jim Michos, whose family has owned Cottage Inn for generations. “We weathered economic downturns, changing food trends, and even COVID, but the combination of factors we’re facing now made continuing operations at our original location unsustainable.”
Michos points to inflation as the primary culprit. “Food costs increased by a third across our key ingredients. Cheese alone, which is essential for a pizza business, saw price increases steadily in two years. Meanwhile, consumers are increasingly price-sensitive and resistant to menu price increases.”
He adds that financing challenges compounded these issues: “Small business lending has tightened considerably.… When we sought financing to renovate and modernize the original location, the terms offered were prohibitively expensive compared to just a few years ago. Nothing has been the same since the more lenient Covid-era SBA (Small Business Administration) loans.”
Cookies crumbling
For newer businesses like Detroit Cookie Co., which closed its Ann Arbor location after less than two years, the current environment proved especially challenging.
“We opened with such optimism,” says Lauren Roumayah, founder and owner. “[B]ut we found ourselves fighting an uphill battle from day one. The rising interest rates hit us particularly hard because we were still paying off our initial startup loans.”
Roumayah notes that consumer spending habits have shifted dramatically: “People are much more cautious with discretionary spending now. Specialty food items like gourmet cookies are often the first to be cut from budgets when inflation concerns rise.”
“After years of battling rising ingredient and overhead costs, it became unsustainable.… We couldn’t keep going without compromising our quality.”
She also highlights the technology divide affecting small businesses: “Large chains can invest in sophisticated ordering apps and delivery integration, but as a small business, we couldn’t match that technological infrastructure,” referring to the ordering-ahead, digital ordering, and unmanned kiosks that many vendors use these days. “We saw a significant portion of potential customers gravitating toward businesses with more seamless digital experiences.”
Students also are sad that a great snack place is gone. “The thing about Detroit [Cookie Co.] was that unlike Insomnia on [South] University Ave., they rotate their menu often and were always coming out with new things, like a cheaper version of Crumbl,” said Eric Ly, junior at U-M Ross.
Looking forward
The shutdown of these establishments has far-reaching implications. Local economies suffer immediate setbacks, including job losses and diminished tax revenues. On a national level, the widespread closures among chain retailers and fast food outlets highlight systemic vulnerabilities in contemporary supply chains and labor markets. As companies downsize or consolidate operations, the resulting economic contraction has ripple effects that extend to the smallest communities, which accelerates the cycle of urban decline and inequality.
So what can we do about the current situation? A growing body of scholarly literature emphasizes the necessity of proactive policy responses. Urban economists argue for the implementation of targeted fiscal incentives, low-interest loans, and support mechanisms designed to cushion small businesses against abrupt cost escalations. Policy think tanks, such as the Urban Resilience Institute, have proposed pilot programs in cities like Ann Arbor to stimulate local entrepreneurship and curb the domino effect of store closures on community stability. In these programs, local small businesses in distressed communities apply and compete via their business pitch in order to get funding and investments to grow their businesses. This will then create and connect people to good jobs, resulting in renewed economic opportunity in communities.
“The small business landscape is undoubtedly changing,” says Miller. “But we’re also seeing innovation emerge from necessity. The businesses that survive this period will likely be more adaptable and technologically integrated than ever before.”
For Ann Arbor specifically, the city council recently approved a Small Business Support Initiative that will provide $2.5 million in grants and technical assistance to struggling local businesses over the next two years.
Bee of Sweetwaters Coffee & Tea offered a poignant perspective as she reflected on the closure of her original Ann Arbor locations:
“One elderly gentleman told me he’d proposed to his wife in our original location back in 1997. Another woman said she’d written her doctoral dissertation at our tables. That’s when it really hit me [that] we weren’t just selling coffee, we were providing a space where life happened. You can’t put a price tag on that, but unfortunately, you also can’t keep the doors open on memories alone. I hope whatever comes next in Ann Arbor can create those kinds of spaces for the next generation, but I worry that the economics just don’t work for small businesses like ours anymore.”
Feature Photo, Ivan Radic, Creative Commons Use License