Grocer, Can You Make a Profit?

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.

Comments

[Mhays]

The City of Chicago is getting involved: http://www.suntimes.com/business/1181486,CST-FIN-grocer24WEB-w.article
Interesting that they mention that Wal-Mart would have opened in a southside food desert, but for a campaign against "big box stores."

[NCInstitute]

There is more openness to new markets, but developers and retailers still want predictability of returns. One way is through comprehensive redevelopment planning of neighborhoods (whether its 15 blocks or 4), so that individual retailers know with greater assurance what the future of the neighborhood might be. It’s easier to be the first one in the area if there’s a redevelopment plan -- one that has been community driven and tested for economic viability. Phil Enquist, who heads Skidmore Owings & Merrill’s planning practice puts it beautifully (and, forgive me, Phil, I’m paraphrasing poorly): "So many people in planning always talk about the 'chicken and the egg problem'…e.g., to get retail you need households but to get households you need retail. The real goal is to establish the 'nest.' A well-done plan provides the nest: every piece reinforces the other and they don’t have to be in some pre-set order."

Sometimes market forces create a successful retail districts but often some simple attention to wise use of land and infrastructure can make a huge positive impact. A grocer will be far more likely to go to a food desert when: (i) the residents and other stakeholders have identified the area’s assets, (ii) they have also defined their collective priorities for the neighborhood’s future, (iii) they have had those priorities tested and adjusted for economic viability, and (iv) the grocer aligns with those priorities. To learn more about one approach, go to www.ncinstitute.org.

[AnneNagro]

I've enjoyed the discussion and just want to mention an interesting website: http://www.communitygardenwizard.com/who-is-rebel-tomato.php. It tells the story of how one person and eventually a community took over a vacant lot in Detroit to grow vegetables. The neighboring restaurant, Al's Carryout, even began purchasing produce from the gardening group because it tasted better than that shipped 1,000 miles away.
My point is, many communities in food "deserts" might have the potential to produce, and even supply, their own fresh produce. I believe the benefits of community and school gardens reach farther than the actual produce, itself. The challenge, of course, is getting people involved and interested.
Although the Rebel Tomato story is brief, it does point out that the initiative began with one person, a "kid."

[djlresearch]

To andywre : I don't think there are any hidden opportunities in the underground economy. Two problems we have. Despite decent sales projections, grocers in general don't want to build. Second, grocers that did built did not meet those sales projections. That has happened too many times.

We found that often that the sales potential is exaggerated in the food deserts. One reason is that public schools often provide free breakfast and lunch to low income children. Why should parents buy groceries for their kids when they can eat for free at school? I suggest that local grocers get involved in the school lunch program and we kick out those institutional wholesalers that sell canned processed crap. Outpost Natural Foods in Milwaukee has begun partnering with a school.

Save-a-Lot, Aldi, Cermak Produce, Moo & Oink, etc are doing a great job and we don't give them enough credit. We don't need big national names like Jewel and Dominicks to solve our food deserts. These smaller retailers are doing a better job than most realize.

[BillBMN]

The costs of not making progress in improving nutrition in low-income neighborhoods are so high that a multi-faceted approach must be pursued. There are a lot of dollars being spent, and most of those are being spent on relatively expensive junk food products and fast food. Detroit is an economically struggling city, but chip sales are strong. Yet chips are actually a pretty expensive food--especially when compared to oatmeal, peanut butter sandwiches, baked potatos, chicken or beans. It takes education, training AND availability to redirect those dollars to healthier alternatives. It may also take changes in policies around programs like food stamps. Without addressing BOTH the supply and demand side of the equation, progress will be hindered. If the people living in food deserts choose to continue to buy junk food for most of their spending, then even if a store offers healthy foods, it will fail, reducing the likelihood that the next business will try. But, if people know and understand the importance of healthy food and strongly prefer that, they still may end up buying junk food if they lack access to the healthy food. Significant progress will require innovative public/private/non-profit collaboration and people working together in ways that everyone wins.

We're working on some exciting innovations in Detroit that may provide some good models for progress in this area, and we'll keep you informed of our progress.

[djlresearch]

I agree that stores can be profitable in food deserts. However profit is not always the motive for opening or closing a store. I've seen profitable stores close in the inner cities. And I know just about all of you have seen that as well. Drive the inner city and see the skeletal remains of all those supermarkets. Bottom line is many supermarkets just don't want to be there despite the profit potential.

What I am reading from the other bloggers are the positives and the successes. I don't disagree. True appearances can be deceiving. But its human nature to avoid something that appears to be uncomfortable. True I am paid to make people money not to make them comfortable. I probably make a lot of executives uncomfortable.

But lets not give up. We need more people like Mari Gallagher banging her drum. We need to promote real ideas rather than feel good dreams. And we can do it too.

[andywre]

Urban issues such as security,shrink,limited land sites, high land prices and RE taxes have made the city in general and particularly Food Desert areas difficult for Big Box grocers. Everything is harder to do in the city and more expensive; from permits to deliveries. When all of the issues are added up typical big box grocers can't justify the economics.There have been some positive changes in Chicago with cooperation from the city. Food For Less at 69th/Ashland is a good example of a new big box grocer that stepped up. The store appears to be successful and could be a model for future growth. Ultra Foods is also expanding thier urban presence.In the meantime the independent grocers continue to do a better job than most of the big guys and generate strong sales . Chicago stores like Cermak Produce,Moo and Oink , Farmers Best and others are generating big numbers. Even stores like Save-A-Lot and Aldi (both corporate biggies) have learned the formula for success in the Food Deserts. So maybe the big boys can learn what the others already know.
Urban markets have an "underground" economy that is not reflected in census based sales models. When this is factored in sales projections go up and the numbers start to make more sense. At the end of the day it's just about the numbers. And no I don't work for Food for Less or the city of Chicago.

[NCInstitute]

A smaller store format that both djl and andywre refer to is a much easier decision for a corporate development committee. djl is right that Aldi’s doesn’t get enough credit for serving its customers; no one seems to notice that Aldi’s has the same ownership as the revered Trader Joe’s (and the same basic store size). Tweaking an Aldi’s or similar format to meet a community’s needs would be much easier than getting a Jewel or Dominick’s to come in. If I were in the food movement that’s where I would concentrate my efforts….

[SCOrganizer]

Grocers can make money in our communities. If name brand fast food vendors are located all over food deserts and are thriving than you know there are people that need food and have the money.
I started Healthy South Chicago 7 years ago and mapped out the grocery store. Our coalition found that out of 28 local grocery stores only 8 sold vegetables and fruit. We conducted free food samplings. We started to measure the grocers sales and found they had sold 3x the amount during the food sampling. Some of the outcomes included one grocer becoming a local wholesaler of vegetables and fruit while opening another mid size grocery store on the same block. We now have a Sav-a-Lot, 6 local mid size stores and 6 bodegas that sell vegetables and fruit, also three local urban vegetable gardens feeding over 100 families. In a Chicago south side community of 38,000 and in a food desert with a high unemployment rate.
We are the example of what is not on the big box grocer's market analysis - the community factor.
Given the opportunity the residents will support healthy, fresh, affordable food in their neighborhood.
Food market researchers need to learn how to work with community stakeholders to find that community factor that will support grocers in these neighborhoods. They also have to come up with stores that reflect the community needs and this means a new view of what a "Big Box" means in urban America.

[WKJ]

djlresearch uses an analogy that doesn't hold water. Choosing a neighborhood to live in is a very different decision matrix than how companies choose to do business. djlresearch may be correct that some grocery executives are not "comfortable" with every neighborhood. But as the Gallagher piece points out, appearances can be deceiving. The period of "ever expanding suburbs" is over. High fuel prices, congestion, increasing taxes for infrastructure and decreasing margins for developers are the reality. In fifty years, the suburbs far west of Chicago could be ghost towns. As the numbers of shoppers declines, the agglomertion(is that really a word Gallagher?)will start eating away at margins and profits. When markets, aka housing, was ever expanding away from the city, grocers could be influenced by their personal comfort level, because there were places to invest elsewhere. Well guess what? Those in the board room, and their advisors like djlresearch, get paid to make money, not to be comfortable.
We've seen in the past 72 hours that the best and brightest on Wall Street can look pretty dim when what they expected to happen just doesn't.. Thank goodness for this bunch its not too late to react differently. If djlresearch wants to continue being of service to grocers, the advice should be to turn off your comfort meters and get back into the city where there's money to be made and people that want good food choices from retail grocers. Last one to Lake Michigan is a rotten egg!

[GGsaubry]

djlresearch has bravely admitted to the discomfort factor that could deter some grocers. It may be more "comfortable" for a grocer to open a store a few blocks from an existing store, but could be more worthwhile to overcome the issue of comfort in order to make a profit in an untapped market, and help to strengthen a community that will benefit retailers. It seems like "risk" to veer slightly from comfortable business models, but may be riskier not to change. The communities that need grocery stores, also happen to need jobs; there are plenty of people comfortable enough to work in their own neighborhoods. As far as the vendors are concerned, I think most are willing to make money. Vendors located in a city, obviously benefit from market growth within the city. Full disclosure: I work for Goodness Greeness, an organic produce company located in a Chicago food desert neighborhood. GG Employees include several middle class suburbanites with grocery experience, as well as women and men from the neigborhood and from across the city.

[djlresearch]

Population and income are not usually why grocers don't build in food deserts. Keep in my many of the grocers asked to open stores probably had stores in these neighborhoods a decade or two ago. Grocers will cite population, income, and perhaps crime. But they are just trying to be nice. What they really mean is they don't want to open a store there just the same way you probably don't want to buy a home and live in the neighborhood. If you asked a typical middle class suburbanite if they would live in a difficult neighborhood the answer would probably be no. What if they got the house for free? Still no. What if they got the house for free and paid them $50,000 a year? Maybe, but probably no. I've sat in board rooms of grocers during real estate committee meetings. I know what is discussed. We would gently talk in careful code, not to offend any minority decision makers. But basically we said we don't want to build there because we feel uncomfortable in the area, our employees don't want to go there, and neither do our vendors.