How To Develop New Grocery Stores
About
In communities without access to a quality, full-service grocery store, bringing a new grocery store to the area is a high priority. Often, residents want a large, suburban-style supermarket or a “superstore” with a recognizable name to locate in their community. Supermarkets are defined by the industry as full-service grocery stores that bring in over $2 million in sales annually, though the average sales volume is much higher—over $18 million.31 Attracting such a store to an underserved community can bring many rewards, but because of their business models and size, large supermarkets are usually the most difficult type of grocery store to bring to a low-income community.
Other types of grocery stores, such as smaller, independently owned stores, can be successful in low-income communities and may offer comparable prices as well as more specialized products that are attuned to local consumers’ tastes and preferences. Independent grocers have proven that they can be successful in low-income communities, and they have greater flexibility to adapt their merchandise mix and practices to meet consumers’ needs. “Limited assortment” stores like the national Save-A-Lot chain offer deeply discounted merchandise. That chain, in particular, has committed to locating in urban and rural areas that lack access to larger, more conventional stores, as well as enhancing its produce department in response to customer demand.32 “Specialty” stores such as Whole Foods Markets can be successful in “dual market” areas that comprise both low-income and middle-income neighborhoods.
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Because supermarkets need to move large quantities of merchandise in order to turn a profit, they serve areas that are much larger than one neighborhood and require very large sites that are extremely difficult to assemble in dense urban areas. Not every community can support this food retailing model.
One potential solution to this dilemma is the development of viable smaller-scale grocery stores that can provide the variety, quality, and price of supermarkets while relying on a smaller customer base and fitting into smaller spaces. Neighborhood groceries can both increase food access and fit into community visions for walkable, livable neighborhoods that promote physical activity, thus addressing the obesity problem from multiple angles.
Finding a scaleable small-store model should be a priority for food advocates, communities, and retailers. Ethnic markets, greengrocers, specialty stores, and limited assortment stores could prove useful in developing these models since they sometimes successfully locate on smaller sites in underserved communities. |
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Developing a new grocery store can bring many health and economic benefits to communities, but there are also many barriers to overcome. As previously described, when supermarkets fled the city for suburban locations in the 1960s, they developed business models suited for the suburbs. In addition, food retailers rely on information sources that undercount the population and spending power—and thus the profitability—of inner city locations, and that rely on stereotypes of both urban and rural communities. In spite of significant challenges, a number of innovative strategies are being developed across the country to overcome these barriers.
Benefits
Selection, Quality, and Price
Full-service grocery stores carry a wide selection of low-priced goods. Supermarkets enable one-stop shopping and often house additional services that are difficult to find in underserved neighborhoods, such as pharmacies or in-store banks.
Jobs
New grocery stores bring needed jobs to communities that often have high levels of unemployment. Each supermarket creates anywhere between 100 and 200 permanent jobs, many of which go to local residents, and they also provide temporary construction jobs.33 A large proportion of grocery employees belong to unions and receive benefits.
Community Economic Development
Grocery stores can spur local economic development in underserved communities. New developments often pave the way for additional private sector investment, since grocery stores are high-volume magnets that support complementary stores and services like pharmacies, video rentals, and restaurants. With more places to spend money locally, these stores capture residents’ dollars that were formerly “leaking” out to other communities. When community-serving institutions like community development corporations (CDCs) hold ownership interests in the stores, they reinvest profits into the community through their other activities such as local affordable housing construction or small business development.
Tax Revenue for Municipalities
Grocery store developments bring needed revenue to cash-strapped municipalities through sales and property taxes. Community residents benefit through tax-financed city services.
Physical Revitalization
New stores contribute to the physical revitalization of communities by returning abandoned and vacant land to productive use.
Challenges
Perception of Profitability
Supermarkets—with annual profit margins averaging one percent—are focused on a very tight bottom line and often cite lack of profitability as a barrier to investment in underserved communities. A survey of retail executives found that their top three concerns were insufficient customer base, lack of consumer purchasing power, and crime or perception of crime. Other concerns included higher operating costs in urban locations due to additional expenses for security, insurance, and real estate taxes.34 Customers’ smaller average purchase sizes and more frequent shopping trips can also lead to higher operating costs since stores need to hire additional cashiers to cover the higher volume of transactions.
Securing a Site
Grocery stores have large and growing site requirements. They need ample parking lots and are often built as a part of much larger retail developments that sit on 10 or more acres of land. Such sites are difficult to find in densely built urban areas, where land is expensive, ownership is fragmented, and sites may be environmentally contaminated. Negotiating the zoning and regulatory processes involved in land acquisition can also be burdensome.
Assembling the land needed to build a new store can take years, and may require litigation and municipal intervention. For example, acquiring the 62 parcels for the NCC Pathmark development in Newark, New Jersey, described on page 11, took eight years, including six years of lobbying the state to exercise its power to condemn some of the properties, and two years of legal battles involving the last six absentee owners.35
Obtaining Financing
Grocery store developments are multi-million dollar real estate deals that require high levels of start-up and operating capital. Financing these costs means combining grants and loans from multiple public and private sources, including commercial banks, community development intermediaries, state and local economic development programs, and federal agencies such as HUD, the Department of Human Services, and the Department of Commerce.36 Harlem’s Abyssinian Development Corporation assembled loans from four private banks, a community development intermediary, and a state economic development agency; federal and state grants; and an equity investment from a private equity fund to finance the $15 million development of the first Pathmark supermarket in Harlem.37
Meeting the Needs of Diverse Consumers
Shifting their operations from models that suit historically homogenous suburban communities to ones that meet the needs of racially-mixed communities and the increasingly diverse suburbs presents a challenge for large chain grocers. They lack sound, unbiased information on community demographics and consumer preferences, and they are locked into contracts with suppliers to stock the same merchandise in all of their stores based on what sells in suburban markets.
Complexity
One of the biggest obstacles for communities that want to bring a grocery store to their area is the amount of time and complexity involved in commercial real estate development. Supermarket developments are exceptionally large, risky, and difficult deals to pull together, and often require specialized negotiation skills and expertise.38
Innovative Strategies and Policy Options
Create Financing Options
Public and private institutions can develop non-conventional sources of capital that can be used to finance grocery store ventures in underserved communities.
- State and city agencies can create funding pools earmarked for grocery store developments. In 2003, Pennsylvania passed landmark legislation to fund the development of fresh food retailers, including grocery stores and farmers’ markets in underserved communities throughout the state.
- In 2000, the federal government enacted the New Markets Tax Credit (NMTC) program, a $15 billion federal tax initiative designed to increase investment capital in low-income communities. Community development organizations can apply to receive the tax credits, which are offered to private investors who commit to equity investments in business developments that serve low-income communities.39 The Food Trust and Pennsylvania legislation case study shows how the NMTC program can contribute to grocery store development.
- Community development intermediaries can also help community/grocery store partnerships access needed capital. From 1992 to 2000, the Local Initiatives Support Corporation (LISC) operated The Retail Initiative, an equity fund that provided development financing and technical assistance to supermarket developments in nine low-income communities. Though The Retail Initiative is no longer operating, local LISC offices continue to assist with financing the development of grocery stores.
Develop and Use Better Information Tools to Assess Underserved Markets
- Innovative market analyses. Responding to the inadequacy of traditional marketing analyses, companies such as Social Compact and MetroEdge have developed alternative market assessment methods that more accurately describe the business conditions in underserved communities. Their results often indicate much higher investment potential than shown by traditional analyses.
- Accurate and timely information databases. To bridge the information gap in underserved communities, cities and community development intermediaries around the country are developing sophisticated databases on property availability, crime conditions, local demographics, and other indicators to inform development. The Urban Markets Initiative of the Brookings Institution, for example, is partnering with the National Neighborhood Indicators Partnership and affiliated organizations in Baltimore, Indianapolis, Milwaukee, Providence, and Washington, DC, to develop comprehensive information databases to guide investment decisions in these cities.
- Existing free resources. There are free resources already available online that can provide insight into how a community might be viewed by retailers. The University of Wisconsin-Milwaukee Employment and Training Institute offers free profiles of purchasing power, business activity, and workforce density for Census tracts and zip codes within the 100 largest metropolitan areas in the United States.40 Another free resource is www.esribis.com, which provides profiles of any community based on zip codes. Though this resource is less relevant to the largest grocery store retailers, smaller retailers do use these reports in their decision-making.41
Reduce Operating Costs While Better Serving the Community
- Provide return transportation to increase purchase size. Grocery stores can reduce costs that relate to the more frequent, smaller per-trip purchases of consumers by providing free or low-cost return transportation to customers in exchange for minimum purchase sizes. In Los Angeles, Numero Uno Market and Ralphs operate such transportation services from some of their stores. The Ralphs located in the West Adams neighborhood adjacent to the University of Southern California, for example, offers a free return trip to customers who spend $25. A feasibility analysis of grocery shuttle services found that they can pay for themselves within two to 10 months.42
- Partner with community groups to find and keep good employees. Community organizations can assist stores in identifying and training employees. This reduces the stores’ costs for employee recruitment and training, improves employee retention, and can increase the likelihood that jobs in the store will go to neighborhood residents.
Facilitate Site Identification and Development
- Reclaim vacant and abandoned properties. Many distressed communities contain thousands of parcels of vacant land that can be returned to productive use. In recent years, many cities including Baltimore, Flint, Philadelphia, and Richmond have launched ambitious initiatives to reclaim their vacant properties by streamlining the land acquisition process, actively scouting out sites, and marketing sites to potential developers.43
- Clean up brownfields that are potential store sites. Aggressively cleaning up brownfields, or contaminated sites, can free up land for productive use and provide sites for new grocery stores. Cities can assess which brownfield sites have the potential to house grocery stores, prioritize these sites for remediation, and apply for funding sources— such as HUD’s Brownfields Economic Development Initiative—that seek to harness brownfields for economic development in low-income communities.
- Adapt store formats to fit existing sites. Given the difficulty in finding large sites in cities—and increasing interest in more compact urban development patterns—some supermarkets are adapting their site requirements to work within the constraints of the existing urban environment, experimenting with smaller store formats, reducing their parking requirements in areas with heavy foot traffic, and renovating existing structures. In Boston’s Lower Mills neighborhood, for example, the Shaw’s chain located a new 40,000-square foot supermarket—70 percent of its average store size—in a retrofitted chocolate warehouse.44 Smaller grocery stores can also be a more feasible option for areas with limited land.
Adapt Practices to Meet Consumer Needs
- Cultivate relationships with local suppliers. Stores can better meet the specific preferences of diverse consumers while contributing to economic development and building goodwill in the community by developing relationships with local suppliers. When Schnucks opened the first supermarket in the predominantly African-American North St. Louis community in 50 years, it faced the challenge of meeting customer demand for certain products, such as a good sweet potato pie. After searching for a supplier, the store found a popular pie at Hooper’s Better Bakery, a local store, and provided the bakery with capital and technical assistance to improve its production process. The improvements were so successful that the bakery reorganized as a supplier and now provides over 15 Schnucks supermarkets with a growing variety of pies.45
- Gather better information on customer preferences. To capture markets in diverse communities, retailers need to make the extra effort to learn how to cater to these communities’ needs and tastes. Successful retailers are meeting this challenge by obtaining information more directly from employees and area residents. They have conducted focus groups with residents, solicited community input on products at community meetings, and ordered new products upon customer request.46
- Develop partnerships. Community organizations are often critical partners in grocery store development. Community development corporations (CDCs) may advocate for a city to provide assistance, garner community support, negotiate zoning and regulatory issues, help stores obtain below market-rate financing, and assist with employee selection and training. Community-based organizations and food councils can advocate for local grocery store development by engaging public agencies, seeking high level political support, and conducting neighborhood activities designed to solidify resident backing.47 Retailers say that community involvement is essential for success in underserved markets and can increase community acceptance, which leads to higher patronage and lower theft rates.48
- Increase community capacity to partner in store development. Community organizations need various skills, including advocacy, research, market analyses, and commercial real estate expertise, to engage in grocery store development. Technical assistance and training programs that are specifically geared toward these needs can help build their capacity to bring new stores to the communities in which they work. Community development intermediaries such as LISC, the Enterprise Foundation, and National Congress for Community Economic Development often provide such assistance. Local political leaders also can be important allies in advocating for grocery store development.
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