August 29, 2006
Retail Lessons from the Inner-City
Much of New Orleans remains a scene of devastation one year after Hurricane Katrina ripped through the city, overwhelming its levees and washing away the hopes and dreams of thousands.
The rebuilding continues (more in some places than others) with many retail chains having reopened stores and, in some cases, building new ones.
Why, some wonder, would retailers build new stores in a city where large segments of the population have yet to return?
Herb Tyson, vice president of state and local government relations with the International Council of Shopping Centers (ICSC), has the answer. “Most large scale suburban retail development is done. So the inner cities have become the new hot retail market. It’s a market that has a lot of potential but it’s still largely underserved,” he told CNN/Money.
But, why build in New Orleans? Haven’t retailers seen the many obstacles the city has yet to overcome?
According to Deidre Coyle, a spokesperson for the Initiative for a Competitive Inner City (ICIC), “Gateway cities like New Orleans are more attractive retail markets because merchants realize they can pull customers both from local residents and from tourists.”
Other cities that may be less of a tourist destination than New Orleans, said Ms. Coyle, but they too represent a major opportunity for retail businesses.
For one, inner-cities with 21 million consumers across the country represent a $90 billion retail market.
Many of these consumers, contrary to popular belief, have financial means with 38 percent falling into the moderate to middle income category ($20,000 – $50,000 a year).
The density of consumers in inner-city areas also works to the advantage of retailers, according to Ms. Coyle, because “inner-city residents with lower per capita income tend to spend a higher percentage of that income on retail purchases.”
Research from the ICIC, shows that a grocery store in the suburbs of New York needs to bring customers in from a 20-mile radius to match what it can get from a 10-block radius in the city.
Once retailers begin to build in inner cities, said Ms. Coyle, there is a rolling effect that takes place.
“Harlem is a great example of successful inner-city retail penetration,” she said. “Once the mass market retailers went to Harlem, we started to see the next wave of business activity develop through new hotels, restaurants and other types of retailers selling better-quality products.”
Not looking to sugar-coat things, Ms. Coyle said retailers need to be aware of challenges that will inevitably pop-up with opening an inner-city store.
“Unfortunately, retailers get caught in a quagmire of regulations and city and community politics. But then again, the most successful business models are established in collaboration with everyone involved.”
Space for stores is also an issue. “If you can’t find space, build vertically and make smaller stores. Inner cities are heterogeneous markets with various ethnic and income groups. You can’t have a one-size-fits-all model here,” she said.
Burt Flickinger, managing director with Strategic Resources Group, said drugstore chains have done a “brilliant job in positioning themselves to cater to the urban inner city markets.”
“Between 35 and 40 percent of their stores are devoted to conventional supermarket categories like dairy, foods and other refrigerated products even though they operate as drugstores,” he said. “These companies almost operate as mini supermarkets in inner cities.”
Discussion Questions: Please give your view on opportunities and the challenges faced by retailers looking to open stores in inner-city neighborhoods.
What retailers, in your opinion, have done the best job of operating in the inner-city?
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With regards to New Orleans, I’ve been doing quite a bit of work there. While the population has declined, retail is as strong as ever. There are many reasons for this. A higher percentage of stores remain closed compared to the percentage loss in population. For the stores that are back open, its an economic boom.
Secondly, there is a large influx of immigrant recovery workers, often packed 6 to 8 in a motel room or packed in a tent at a local park. I don’t think these people are included in the population estimates.
From the studies I’ve done on the Gulf Coast, retail sales are much higher than what the estimated population justifies. Using population estimates on the Gulf Coast is almost useless. A more accurate barometer is the level of retail sales. It reminds me of trade areas that have year-a-round heavy tourist sales or the Rio Grande Valley that has thousands of undocumented residents that don’t show up in a Census.
Contrary to Ms. Coyle’s assertion, Harlem isn’t an example of successful inner city retailing growth. Harlem’s retail growth is driven by the huge real estate inflation elsewhere in Manhattan. Manhattan is a small island, and Harlem is the last large territory left to renovate. Renovated Harlem townhouses are selling for seven figures for the first time in history. More typical depressed inner cities (Newark, Camden) show no major retailing growth. Crime, minimal incomes, atrocious schools, ineffective government-initiated development, and no credible changes on the horizon mean most depressed inner cities have low potential for retailing. It’s unlikely that New Orleans will enjoy a fabulous retail renaissance until the city is rebuilt. At the rate progress is being made, that could take an easy ten years or more (if ever).
Until a few years ago, my answer would have been Kmart. They did a very good job of opening in relatively tough urban markets, such as Memphis and Chicago, and they became pretty good at assorting the stores to a more urban audience, both racially and in the sense that most urban customers live in apartments, not houses, and have very different needs.
And, something that surprised me, Martha Stewart goods were wildly popular in the inner city. I never expected the Westport mentality to do well there, but it did.
Today, I would have to say Walgreens and Target are the two most effective. Target’s stores here in Chicago (despite the spat with the city council over big-box wages) are a retailer’s dream. The velocity at one Northside store is reputedly the highest in the chain, just as a nearby Best Buy is that chain’s leader. There are a lot of problems with operating in an urban setting, parking being a main one, but the rewards are great.
Walgreens continues to improve their GM assortment, upgrading and adding products they rarely carried in the past, such as small RTA furniture, at very attractive price points. My apartment has several of their furniture products.
The weakness continues to be food retailing. Most inner city neighborhoods are greatly underserved. I have noticed that Dominick’s here in Chicago has targeted some such neighborhoods, but I suspect they knew that the neighborhoods were in transition to mixed income.
I agree with Burt; drug stores have done the best job of opening stores in the inner city. However, for retail, especially grocery stores, inner city locations can be a nightmare. All those canned statistics really don’t mean much. There is a good reason why America’s inner cities are underserved — retailers just don’t want to go there.
First, it is a HR nightmare just to hire people. Qualified, experienced managers will refuse to transfer without substantial combat pay. Finding local employees with basic reading and math skills, clean criminal, credit and driving records, etc is difficult. Often companies must violate the integrity of their hiring standards just to staff a store.
I’m sick of hearing that this group or that group spends “X%” of their income on retail purchases. What is important is the actual per capita expenditure per person, which generally turns out not to be all that much.
Personal safety, crime, real or perceived, is an issue. From my experience, each violent crime or severe act of civil disobedience that takes place at an inner city supermarket will result in a permanent 10% loss in sales. So just one or two murders or armed robberies can end up closing a store forever. No retailer wants to build a store and have to close it in a year. And it’s not worth risking lives just to open a store. I once worked for a retailer that made it a policy that if the propensity for certain crimes to occur were too high for a certain location, we would not build a store there – period.
Retailers must often raise prices to cover the extra costs involved in security and shrink. Sometimes retailers get bad press for charging more in poor neighborhoods and less in wealthy areas. This includes accusations of racism. The easiest way to avoid this is simply not opening in poor neighborhoods.
Finally are the headaches resulting from the quagmire of regulations and politics. It seems with the proposal of a new store, every non-profit “make work” organization wants to stick their nose in the project. Wal-Mart is currently experiencing this in Chicago.
Who has done the best job at serving inner city markets?
#1. The Independents! (those mom and pop’s that Andrew Young dislikes…)
#2. Drug Chains. Burt’s assertions as to their phenomenal job of adaptation ring true.
#3. Dollar Stores. Watch out for the Extreme Value Retailers. We think their urban stores strategies will be very successful. In fact, they are much more likely to displace the mom and pop’s of today than Mr. Young’s former employer.
With two inner city Baltimore stores, our business continues to grow.
Specializing in athletics, we find the biggest thing we sell is convenience. Everybody works, and it’s a lot easier to shop the neighborhood. Now we even find the price of gas is bringing in more customers who are not driving out to the suburbs.
New Orleans real estate is up for grabs. All of a sudden, prime locations have been cleared of low-income housing and have become available for retail development and gentrification. Already there are reports that the balance of the returning population has dramatically shifted away from U.S. minorities. In essence, much of the previous so-called inner-city neighborhoods can no longer be considered so.
The Louisiana Gulf is still oil-rich, is one of our country’s most important shipping centers, has legalized gambling, and is a tourism Mecca. With confidence in the ongoing levee project, developers will swoop in to invest and build. It’s the American way.
I’ll stray a bit from some of the previous comments and look at the “inner city issues as being somewhat broader than New Orleans specifically. New Orleans could be a separate topic on its own.
Retailers operating inside the city limits in mid to large size cities across the country face similar issues. Some mentioned so far — some not. First, there are far more regulatory issues to deal with in many cases such as have been discussed many times regarding Chicago. Beyond that, there are many issues relating to the retail model itself.
To operate within the inner city, it takes the ability to be flexible and innovative with regards to your store model. Many large scale retailers lack this ability. They typically have one or two models that they are capable of operating within and lack the ability to shift into a completely different retail model to meet the needs of an inner city customer.
We tend to think of inner city customers and environments in one way. In many cities, that thinking has kept retailers out while other types of development have been and are thriving, especially mid-sized cities. In some cases, those that don’t fit the typical stereotype of inner city customers’ needs go unfulfilled.
Different types of stores, different sizes, different product selection, different store hours, different services, etc. are all needs of these customers in particular; convenience being of real import. Yet, we continue to look to major retailers to fulfill these needs while completely losing sight of those that do fill them or the opportunity for those that could.
While certainly, if willing to change their entire model, large retailers like Target, Kmart, Wal-Mart and others could be taking advantage of these markets, but they do not. They do not because of the obvious reasons, but the answer that is not so obvious is that they simply can’t, don’t know how or simply choose not to develop the type of retail model that could. This leaves a gaping hole in the market and a wide open opportunity for others. Certainly there are challenges to operating within these markets, yet those that do find the ways around them in order to profit greatly. I think we are simply overlooking them and how successful they have been in some cases, simply because they happen to be independent in many cases.
Further, simply due to demographics being so diverse from city to city and region to region, it makes it even more difficult for a large retailer to become so diverse to fit into these markets with a consistent molded format and develop the flexibility to respond to the differences between these markets even though there remain wide similarities.
This is a great topic and one where there is much to learn and explore.
I would say I pretty much second the comments on David’s (first post) – at least in direction if not in degree.
I think overall this discussion is suffering from a certain confusion in terminology: “inner city” (downtown) vs. “inner city” (slum). The former may well have potential, the latter is unlikely to.
But the whole topic seems incredible: are we really to believe that there are mother lode markets sitting out there, untapped by every single (successful) retailer in the country? (Certainly this would be a failure of our economic system, without parallel!) We’ve heard this claim for years, but it’s usually by consultants or politicos, who seem to be playing with people’s hopes more than realities.
Urban stores have a fundamentally different customer than suburban or rural stores. The revitalized downtown shopping areas reveal the great divide in American society between the haves (and wannabes) and have nots. In the last twenty five years, retail centers have flourished in older cities like New York City, Chicago, Boston, Philadelphia, Washington, San Francisco and Baltimore. You also see very successful upper-end malls in Houston, Dallas, Los Angeles, Seattle, Miami, Atlanta and Phoenix.
Each one of these developments has embraced the upper-end customer, the business traveler and the tourist. And, like an organ with tremendous vitality, the centers spread in all directions.
We also see the resurgence of centers catering to the legions of working poor and immigrant populations which concentrate in the cities.
How will these developments play out as New Orleans gets back on its feet? More of the same. New Orleans will attract an upper class resident lured by nostalgia and the opportunities to exploit the coming real estate boom. High end centers are already reopening to serve them and the stream of tourists.
The working class centers will come too. Developers have an extraordinary opportunity to capitalize on sites made available by the devastation there.
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With regards to New Orleans, I’ve been doing quite a bit of work there. While the population has declined, retail is as strong as ever. There are many reasons for this. A higher percentage of stores remain closed compared to the percentage loss in population. For the stores that are back open, its an economic boom.
Secondly, there is a large influx of immigrant recovery workers, often packed 6 to 8 in a motel room or packed in a tent at a local park. I don’t think these people are included in the population estimates.
From the studies I’ve done on the Gulf Coast, retail sales are much higher than what the estimated population justifies. Using population estimates on the Gulf Coast is almost useless. A more accurate barometer is the level of retail sales. It reminds me of trade areas that have year-a-round heavy tourist sales or the Rio Grande Valley that has thousands of undocumented residents that don’t show up in a Census.
Contrary to Ms. Coyle’s assertion, Harlem isn’t an example of successful inner city retailing growth. Harlem’s retail growth is driven by the huge real estate inflation elsewhere in Manhattan. Manhattan is a small island, and Harlem is the last large territory left to renovate. Renovated Harlem townhouses are selling for seven figures for the first time in history. More typical depressed inner cities (Newark, Camden) show no major retailing growth. Crime, minimal incomes, atrocious schools, ineffective government-initiated development, and no credible changes on the horizon mean most depressed inner cities have low potential for retailing. It’s unlikely that New Orleans will enjoy a fabulous retail renaissance until the city is rebuilt. At the rate progress is being made, that could take an easy ten years or more (if ever).
Until a few years ago, my answer would have been Kmart. They did a very good job of opening in relatively tough urban markets, such as Memphis and Chicago, and they became pretty good at assorting the stores to a more urban audience, both racially and in the sense that most urban customers live in apartments, not houses, and have very different needs.
And, something that surprised me, Martha Stewart goods were wildly popular in the inner city. I never expected the Westport mentality to do well there, but it did.
Today, I would have to say Walgreens and Target are the two most effective. Target’s stores here in Chicago (despite the spat with the city council over big-box wages) are a retailer’s dream. The velocity at one Northside store is reputedly the highest in the chain, just as a nearby Best Buy is that chain’s leader. There are a lot of problems with operating in an urban setting, parking being a main one, but the rewards are great.
Walgreens continues to improve their GM assortment, upgrading and adding products they rarely carried in the past, such as small RTA furniture, at very attractive price points. My apartment has several of their furniture products.
The weakness continues to be food retailing. Most inner city neighborhoods are greatly underserved. I have noticed that Dominick’s here in Chicago has targeted some such neighborhoods, but I suspect they knew that the neighborhoods were in transition to mixed income.
I agree with Burt; drug stores have done the best job of opening stores in the inner city. However, for retail, especially grocery stores, inner city locations can be a nightmare. All those canned statistics really don’t mean much. There is a good reason why America’s inner cities are underserved — retailers just don’t want to go there.
First, it is a HR nightmare just to hire people. Qualified, experienced managers will refuse to transfer without substantial combat pay. Finding local employees with basic reading and math skills, clean criminal, credit and driving records, etc is difficult. Often companies must violate the integrity of their hiring standards just to staff a store.
I’m sick of hearing that this group or that group spends “X%” of their income on retail purchases. What is important is the actual per capita expenditure per person, which generally turns out not to be all that much.
Personal safety, crime, real or perceived, is an issue. From my experience, each violent crime or severe act of civil disobedience that takes place at an inner city supermarket will result in a permanent 10% loss in sales. So just one or two murders or armed robberies can end up closing a store forever. No retailer wants to build a store and have to close it in a year. And it’s not worth risking lives just to open a store. I once worked for a retailer that made it a policy that if the propensity for certain crimes to occur were too high for a certain location, we would not build a store there – period.
Retailers must often raise prices to cover the extra costs involved in security and shrink. Sometimes retailers get bad press for charging more in poor neighborhoods and less in wealthy areas. This includes accusations of racism. The easiest way to avoid this is simply not opening in poor neighborhoods.
Finally are the headaches resulting from the quagmire of regulations and politics. It seems with the proposal of a new store, every non-profit “make work” organization wants to stick their nose in the project. Wal-Mart is currently experiencing this in Chicago.
Who has done the best job at serving inner city markets?
#1. The Independents! (those mom and pop’s that Andrew Young dislikes…)
#2. Drug Chains. Burt’s assertions as to their phenomenal job of adaptation ring true.
#3. Dollar Stores. Watch out for the Extreme Value Retailers. We think their urban stores strategies will be very successful. In fact, they are much more likely to displace the mom and pop’s of today than Mr. Young’s former employer.
With two inner city Baltimore stores, our business continues to grow.
Specializing in athletics, we find the biggest thing we sell is convenience. Everybody works, and it’s a lot easier to shop the neighborhood. Now we even find the price of gas is bringing in more customers who are not driving out to the suburbs.
New Orleans real estate is up for grabs. All of a sudden, prime locations have been cleared of low-income housing and have become available for retail development and gentrification. Already there are reports that the balance of the returning population has dramatically shifted away from U.S. minorities. In essence, much of the previous so-called inner-city neighborhoods can no longer be considered so.
The Louisiana Gulf is still oil-rich, is one of our country’s most important shipping centers, has legalized gambling, and is a tourism Mecca. With confidence in the ongoing levee project, developers will swoop in to invest and build. It’s the American way.
I’ll stray a bit from some of the previous comments and look at the “inner city issues as being somewhat broader than New Orleans specifically. New Orleans could be a separate topic on its own.
Retailers operating inside the city limits in mid to large size cities across the country face similar issues. Some mentioned so far — some not. First, there are far more regulatory issues to deal with in many cases such as have been discussed many times regarding Chicago. Beyond that, there are many issues relating to the retail model itself.
To operate within the inner city, it takes the ability to be flexible and innovative with regards to your store model. Many large scale retailers lack this ability. They typically have one or two models that they are capable of operating within and lack the ability to shift into a completely different retail model to meet the needs of an inner city customer.
We tend to think of inner city customers and environments in one way. In many cities, that thinking has kept retailers out while other types of development have been and are thriving, especially mid-sized cities. In some cases, those that don’t fit the typical stereotype of inner city customers’ needs go unfulfilled.
Different types of stores, different sizes, different product selection, different store hours, different services, etc. are all needs of these customers in particular; convenience being of real import. Yet, we continue to look to major retailers to fulfill these needs while completely losing sight of those that do fill them or the opportunity for those that could.
While certainly, if willing to change their entire model, large retailers like Target, Kmart, Wal-Mart and others could be taking advantage of these markets, but they do not. They do not because of the obvious reasons, but the answer that is not so obvious is that they simply can’t, don’t know how or simply choose not to develop the type of retail model that could. This leaves a gaping hole in the market and a wide open opportunity for others. Certainly there are challenges to operating within these markets, yet those that do find the ways around them in order to profit greatly. I think we are simply overlooking them and how successful they have been in some cases, simply because they happen to be independent in many cases.
Further, simply due to demographics being so diverse from city to city and region to region, it makes it even more difficult for a large retailer to become so diverse to fit into these markets with a consistent molded format and develop the flexibility to respond to the differences between these markets even though there remain wide similarities.
This is a great topic and one where there is much to learn and explore.
I would say I pretty much second the comments on David’s (first post) – at least in direction if not in degree.
I think overall this discussion is suffering from a certain confusion in terminology: “inner city” (downtown) vs. “inner city” (slum). The former may well have potential, the latter is unlikely to.
But the whole topic seems incredible: are we really to believe that there are mother lode markets sitting out there, untapped by every single (successful) retailer in the country? (Certainly this would be a failure of our economic system, without parallel!) We’ve heard this claim for years, but it’s usually by consultants or politicos, who seem to be playing with people’s hopes more than realities.
Urban stores have a fundamentally different customer than suburban or rural stores. The revitalized downtown shopping areas reveal the great divide in American society between the haves (and wannabes) and have nots. In the last twenty five years, retail centers have flourished in older cities like New York City, Chicago, Boston, Philadelphia, Washington, San Francisco and Baltimore. You also see very successful upper-end malls in Houston, Dallas, Los Angeles, Seattle, Miami, Atlanta and Phoenix.
Each one of these developments has embraced the upper-end customer, the business traveler and the tourist. And, like an organ with tremendous vitality, the centers spread in all directions.
We also see the resurgence of centers catering to the legions of working poor and immigrant populations which concentrate in the cities.
How will these developments play out as New Orleans gets back on its feet? More of the same. New Orleans will attract an upper class resident lured by nostalgia and the opportunities to exploit the coming real estate boom. High end centers are already reopening to serve them and the stream of tourists.
The working class centers will come too. Developers have an extraordinary opportunity to capitalize on sites made available by the devastation there.