Pent-Up Spending Energy

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Westgate Plaza, a shopping center in Lorain, Ohio, has seen better days. Fifteen years ago, the downtown plaza boasted two grocery stores, a discount department store, a drug store, and about a dozen other retailers. Today, it's known more for what stores it doesn't have than those it does.

Most people in Lorain now drive 20 minutes to a mall in the suburbs to shop, and who can blame them? It has everything they're looking for, from department stores to sit-down restaurants.

But soon, the city's nearly 70,000 residents may be able to shop closer to home. Westgate was recently purchased, says city planner Don Romancak, adding, "Some significant money will be put in to rehabilitate the center and bring tenants in." Those new stores will come none too soon. "I believe a lot of people would like to have a certain level of convenience in their neighborhood, be it a hardware store or grocery store," Romancak says. "We hear a lot of people reminiscing about how the downtown used to be, and how they'd like it to come back."

There are many cities like Lorain across the country, where local residents of economically distressed urban areas have been largely abandoned by the retail industry and forced to travel miles to shop. And those folks aren't just window shopping. America's inner-city neighborhoods possessed an estimated $331 billion in retail purchasing power last year - one-third of the total buying potential of the central cities in which they are located, according to a recent study by the U.S. Department of Housing and Urban Development. (Central cities are defined as either the city with the largest population in a metropolitan statistical area, or each additional city in an MSA that meets certain population, employment, and employment/ residence ratios.)

In most areas of the country, each person is served by 18 square feet of retail space, says Russell Pratt, president and founder of San Francisco-based Community Marketplace Development Institute, an organization that helps bring retailers into underserved urban areas.

In inner cities, that number drops to between 5 feet and 8 feet. In the 48 inner-city areas, including Lorain, where HUD found a "retail gap" - residents' purchasing power outweighed sales - retailers lost out on $8.7 billion in sales last year.

Although inner-city residents earn much less than their surrounding urban neighbors, they tend to buy relatively more. People who live in inner cities make just 54 percent of what other central city residents earn, but their expenditures are 62 percent higher, according to special analyses by the U.S. Treasury Department of the Bureau of Labor Statistics' Consumer Expenditure Survey. Consumer expenditures per residential square mile average $33,500 in a low-income, inner-city area, compared to $25,900 in other parts of the cities. In fact, those in inner cities spend 67 percent more on clothing and 89 percent more on food eaten at home than other central-city residents.

Not surprisingly, grocery stores have been among the first retailers to enter or strengthen their positions in these urban markets. Those chains include Pathmark, Stop and Shop, Giant Foods, and Safeway, as well as wholesalers like Rich Foods, Fleming Foods, and Certified Grocers. "In trying to get one person to make the first move, [community development organizations] tend to target grocery stores," says Eric Cohen, vice president of Arlington, Virginia-based CACI Marketing Systems, a consumer information and market research firm. "People use them as an anchor to build other retail around."

The Kroger Co., the nation's largest food retailer, has served inner-city residents for a number of years, says Gary Rhodes, manager of media relations. At the end of 1998, the chain operated 105 stores in inner cities, with more stores proposed for construction, he says. One of those new locations in downtown Detroit is part of an ambitious 23,000-square-foot shopping center called The Shops at Northeast Village. Several smaller, as-yet-unnamed retailers, including a video store, a dollar store, a take-out pizza chain, and a women's apparel retailer, are slated to join Kroger.

The Shops at Northeast, which is expected to open next year, will bring the suburban shopping experience to the inner city, says developer William Watch, president of First Commercial Realty and Development Co., Inc. in Southfield, Michigan.

"One of our battles was that the people in the city administration wanted us to rebuild the storefronts that were there," Watch says. "We didn't want to do that. We were buying them to tear them down, to build a shopping center with well-lit, secure parking, which would attract retailers like Kroger."

How do developers and retailers choose the best inner-city locations? Ultimately, population density is the biggest draw. At Home Depot's future location in South Los Angeles, at the new Chesterfield Square shopping center, 1 million people live within a five-mile radius of the site, and 500,000 people live within a three-mile radius. The area's average income is $38,000. In addition to focusing on income levels, CACI's Cohen says retailers considering inner city sites often examine other demographic elements that may affect sales, such as age, ethnicity, number of children in the household, crime rates, traffic volume, and the propensity of area residents to buy certain types of products.

Home Depot compares sales data from existing locations to determine whether a site will be profitable. The home-and-garden-center chain, which has turned its attention to urban markets in the last ten years, has opened stores in inner-city Chicago, New York, Los Angeles, and Denver. The chain will soon open a site in East Harlem, and is also pursuing a location in Kansas City, says Ken Stephens, vice president of real estate for Home Depot. To project a potential store's sales volume, Home Depot compares demographic data of the site - such as the area's median household income, the percentage of single-family, owner-occupied homes nearby, and the proximity of the population to the location - to the corresponding demographics of existing stores.

Still, a database full of demographic info may not capture the intricacies of a local inner-city neighborhood. Mapping software can pinpoint the best site on a computer screen, but the location may actually have poor access or be surrounded by abandoned buildings. "You can use standard demographic data and consumer profiles to make macro conclusions, like whether or not to enter the marketplace, but not to reach a micro decision like where to locate a store," says Steve Himmelfarb, managing director for Martin Geller CPA's real estate services group. GIS mapping, he says, can't adequately show the mix of ethnic groups in a particular area. In the inner city, it's not unlikely to find several ethnicities living side by side - for example, a Puerto Rican neighborhood bordering a Korean community, which may be next door to an area populated mostly by Dominicans. Potential retailers should visit sites, talk to local merchants, and watch how people move through the area during diff! erent times of the day. "If you' re a quick-service restaurant and set up in the Dominican neighborhood, for example, you might be able to pull people from the Korean community over for lunch, but not after dark," Himmelfarb adds.

Tailoring merchandise to the local population is also essential. "In the inner city, white rice in a box isn't likely to be a big seller," Himmelfarb says. "But in certain neighborhoods, yellow rice will be a huge seller, and not necessarily in a small box, but in five to ten pound bags."

Sometimes, though, smaller is better. Rather than stocking azaleas and pine trees, which are popular in single-family, owner-occupied suburbs, garden centers in the inner city should carry small houseplants. Residents are more likely to buy four-foot than eight-foot shelves at hardware centers, and purchase window air conditioners or portable box fans instead of ceiling fans, says Himmelfarb. Adds Home Depot's Stephens: "We don't sell riding lawn mowers at inner-city locations."

New shopping centers like Detroit's Shops at Northeast may look like they've come straight out of the suburbs, but don't expect urban shoppers to act like suburbanites. "The suburban market is extremely homogeneous," says Himmelfarb. "If you go to an upper middle class, white suburban mall in Chicago, and then go to a mall in Phoenix with the same consumer profile, the look will be the same. The mix of stores, even the food court, will have the same offerings. The malls are geographically different, but their buying patterns are the same." Such predictability is one of the main reasons why retailers like the suburbs, he says.

In inner city areas, however, each segment of the population has its own buying patterns. Inner-city African Americans, who represent 42 percent of the inner-city population, tend to spend 20 percent more on women's apparel, 75 percent more on men's apparel, and twice as much on children's apparel than the average U.S. household, according to a study on inner-city shoppers conducted last year by PricewaterhouseCoopers and the Initiative for a Competitive Inner City. (See "Meet the Inner-City Shopper," December 1998.) In 1997, 37 percent of inner-city Hispanics, who make up 31 percent of the inner-city population, purchased a TV, VCR, or stereo, compared to 25 percent of the general U.S. population.

"Retailers who take the time to understand the inner-city consumer, choose the locations that maximize product offerings, and provide a more customized inner-city shopping experience are going to do phenomenally well," says Himmelfarb. And, adds Home Depot's Cohen, if a retailer succeeds in one urban market, they're more likely to go into another one.

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