I have three main reactions to this. First, to my amateur legal eye, the city's ordinance seems impossibly vague. It is described in the article as:
The zoning ordinance does not allow the sale of “devices of simulated human genitals or devices designed for sexual stimulation” in the D1 District of downtown if these items account for more than 20 percent of a business’ sales, according to city documents.
The second bit about "devices designed for sexual stimulation" seems loose enough to apply to every one of the women's clothing boutiques on Main Street. I suspect the ordinance would have fallen quickly to a legal challenge by the owner of Bongs and Thongs, though he has simply given up and changed his business plan without a fight (and I can't honestly argue that his is not the strategy that maximizes expected profits as the city would likely have just replaced the vague ordinance with a more specific one).
Second, the article does not mention it but there is already a sex shop in Ann Arbor, right on South University in the midst of an undergraduate-oriented commercial district, and it seems to do a good business (though, despite its name, it does not actually sell safe sex, just safe sex accessories). In particular, it does not appear to cause people to avoid walking on the north side of South University nor does it seem to cause parents to worry about the well-being of their children attending the university. Could it be that the various prudes interviewed by annarbor.com are just projecting their own, rather than the community's, morality onto Bongs and Thongs?
Third, I was entertained by quotes like this one:
“No one liked it. No one,” Stamoulis said.
Ya know, if it was really true that "no one liked it" then the businesses in Ann Arbor's old red light "district" (which apparently consisted of one side of the street on one block!) all would have disappeared quite quickly due to lack of sales. Instead, they apparently persisted for many years until shut down by a prudish landlord. Someone liked them!
The fact of the matter is that this article, and the thoughts and municipal behaviors it describes, show that Ann Arbor, though a fantastic place to live, is much less hip and tolerant than it likes to think it is.