Grocer, Can You Make a Profit?

10/16/2008 05:12 am ET | Updated May 25, 2011

In our first post, "Brother, Can You Spare an Apple?," we addressed a very serious condition affecting millions in America: not enough good food in the food desert. More diet-related deaths and disease. Too much pre-packaged, high-salt, high-fat junk food. Mothers and children suffering. You get the picture.

In advancing solutions to America's food desert, we need to be careful in our framing. Two cautionary notes:

1) The grocer is a friend, not an enemy.

2) The grocer needs to run a sustainable business.

Why food deserts exist is a complicated issue. There are many overlapping factors. Topping the list are the real and/or perceived low levels of income and buying power in food desert communities. Translation: not enough sales or density to support a store.

In our own work, we often find that "below the radar" data and analysis can illuminate untapped opportunities for grocers and other retailers. Those sustainable opportunities do indeed exist. Not everyone in the food desert is poor, and sometimes they are even quite well off: an important point of emphasis not well understood.

But this is not always the case. There are communities that desperately need a grocery store but can't financially support one. Profit margins in the grocery industry are very thin. The reality is that grocers have to make money to remain viable. They can't function as charities and there's just no way around that.

Yet in combating the food desert dilemma the common focus is almost exclusively on all the bricks-and-mortar development challenges: low capitalization and financing ability among smaller grocers, the time it takes to get permits approved, the cost of land and labor, finding an appropriate vacant site, and so on. Of course, not all sites are ready for development, especially in the inner city. Harder yet is all the time and money it takes to acquire multiple sites with multiple owners and multiple structures and multiple demolition and environmental issues and wrap them up neatly into one clean package. I can say this from experience: what a nightmare. I worked on shopping center project where one particular local business owner just about begged me to find a buyer for his building. He said that he wasn't making any money. Couldn't hold on any longer. Had to sell and quoted a price. But when we finally had a major development shaping up with his parcel and several around him, that price tripled. That was just one of several legal battles that bedeviled our efforts. In the end we did succeed, but what an effort!

But let's go back to thin profit margins. Overcoming all these development challenges doesn't necessarily speak to them. So in addition we need to address operational challenges: things that affect the cost of the grocer doing business day-to-day, after the "open for business" ribbon is cut and the headlines go away. Many operational costs (keeping the lights on, paying staff, etc.) are solely in the hands of the grocer. External factors - such as the economy overall - plays a role, too. But are there additional operational costs (such as fees and special requirements) that local municipalities might be able to eliminate or soften? This is one of several areas where we need some creative exploration.

Another challenge that's been left alone in the dark is agglomeration (don't fall asleep just yet - I'll try to make it interesting). In retail, agglomeration means the attraction of stores to the same cluster or corridor, especially similar and complementary stores. Retailers agglomerate because they perceive that any negative effects from increased competition are outweighed by:

• Lower investment risk

• Lower cost of development

• Increased number of shoppers

• Better bottom line

So in the food desert - a place with no or distant grocery stores - we have a very Yogi Berra problem on our hands: grocers don't want to go where grocers aren't already.

No grocers in an area sends the signal to the marketplace - rightly or wrongly - that there's no money to be made in that area. Case in point: two business school economists are walking down the street and one says to the other as they keep walking, "wasn't that a twenty dollar bill we just passed on the sidewalk?" and the other responds matter-of-factly, "No, if that was a twenty dollar bill, someone would have picked it up already."

So the first challenge is identifying genuine market power. If there is enough to sustain a grocery store, we still have the second challenge: convincing that grocer to be first in (the agglomeration factor).

In those cases where the market is iffy and we need grocery stores anyway, what can be done? Incentives and overcoming development challenges are important and can help - let's keep working on them - but we also need to look at operational issues and how government agencies across America and others can strengthen the grocer's bottom line. For example, if we said we'll give you one million dollars to build a store in the food desert (or 50,000 twenty dollar bills) the grocer might still walk away. What if we said instead, we're strengthening the local market and will help support your day-to-day operations so that you can thrive there?

And how about inspiring the health care industry to chip in out of self-interest if not strictly in defense of human life? We spend billions of dollars in this country treating diseases that could be moderated or prevented by better and healthier food access and choice. A great number of these treatments are for the uninsured and take place in the emergency room. This is not cost-effective. We spend over one hundred billion dollars each year on obesity. If 5 percent of that were invested in sustaining grocery stores in areas of greatest need, that would generate $100 million per state to enhance the sustainability of new business opportunities. Paired with healthy eating and exercise campaigns, we might get somewhere.

We need to get creative and energized; there is no one silver bullet. Identifying market as well as needs-based solutions that increase access to healthy food will require input and support from the food desert residents themselves as well as from grocers, banks, brokers, developers, planners, the health care industry, educators, government, foundations - ultimately everyone - to achieve even a modest level of success.

Food for thought.

Thank you to everyone who posted a comment. Keep them coming. Lots still to talk about.

Stay tuned.