Success in Pennsylvania Stirs Hope for Food Deserts

MICHAEL GARRY

Food deserts are hot.

About 23.5 million people in the U.S. live in these low-income, urban and rural communities that are more than one mile from a supermarket or large grocery store, according to the U.S. Department of Agriculture. Many food deserts have languished for decades without ready access to fresh foods, largely overlooked by the media, the government and the food industry.

Jeff Brown gave local and national officials a store tour last July.

But a blend of factors — including a successful Pennsylvania store financing program, the growing problem of obesity, rising health care costs and the attention of the White House — has suddenly thrust the food deserts issue into the national spotlight.

“We're very much at a place of great momentum,” said Judith Bell, president of PolicyLink, Oakland, Calif., a nonprofit institute heavily involved in this issue.

“Awareness of the food desert issue has exploded,” noted John Weidman, deputy executive director of the Food Trust, Philadelphia, another non-profit focused on the issue.

The Food Marketing Institute and the National Grocers Association are on board. “Our industry is committed to its role of learning about the unique issues facing a community and working directly with that community to overcome the barriers to entry that may exist,” said Jennifer Hatcher, group vice president of government relations, FMI.

The six-year-old Pennsylvania program, known as the Fresh Food Financing Initiative (FFFI), has helped develop 83 new or improved grocery stores — generally independent operators — in underserved urban and rural communities throughout the Keystone State. It has increased access to healthy food for 400,000 people, while creating or retaining 4,860 jobs. Out of the 83 stores, there have been six failures, half in the first year, mostly small, start-up businesses, said Patricia Smith, director of special initiatives, the Reinvestment Fund, Philadelphia, which helped orchestrate the program.

Drawing from both public and private financing, the FFFI is being cited as a model for helping supermarkets overcome the economic barriers that have kept them out of food deserts. (See “Raising the Money,” Page 25.) “It shows the food deserts problem is largely solvable,” said Weidman. Two independent food retailers who have opened stores in inner-city Philadelphia, Jeffrey Brown and Patrick Burns, have become nationally recognized ambassadors for the program.

Last month, President Obama adopted the FFFI as the template for a national program, the Healthy Food Financing Initiative, which earmarks more than $400 million for the food desert issue. First lady Michelle Obama referenced the FFFI in the rollout of her “Let's Move” campaign to reduce childhood obesity nationwide. Pointing to the connection between obesity rates and low access to fresh foods, she would like to see most food deserts eradicated in seven years. Food deserts are also linked to other health problems such as diabetes and heart disease, according to the Food Trust.

“By far, the most impressive progress [in addressing food deserts] has been made in Pennsylvania,” said Bell, whose PolicyLink organization helped develop the FFFI along with the Food Trust and The Reinvestment Fund. “The FFFI is at the core of what the president has proposed and what the first lady is pushing for. We all believe we are looking at a solution for what has been a vexing problem in this country for decades. This is one of those rare moments when we have agreement about a solution that can be implemented.”

Beginning last year, other states have begun emulating Pennsylvania's approach to food deserts, including New York, Illinois and Louisiana. More recently, Colorado and New Jersey have launched FFFI-inspired programs.

At the federal level, Weidman expects Congress to approve the White House's request for $400 million to address food deserts. “This has bipartisan support,” he said. “It's a 2-for-1, because you end up saving money on health care and creating lots of jobs.”

Bell ties the causes of the food desert issue to traditional modes of operating in the supermarket business. “Most national chains use a suburban format that needs a large number of square feet and lots of parking, which doesn't work well in urban settings,” particularly with the greater costs associated with cities, she said. The suburban format also doesn't translate well to rural areas with very low population density, she noted. Existing rural stores have also found themselves unable to make the capital investments needed to compete with new supercenters, said Weidman.

Both urban and rural retailers need an infusion of government support to transcend the intrinsic limitations of operating in these areas, many observers agree. But they hasten to add that the support is only to get over initial hurdles. “We don't believe it should be an ongoing subsidy,” said Bell.

In Pennsylvania and elsewhere, independent operators appear to be more proactive about entering food deserts than large chain operators. “Independents are more flexible with formats,” said Weidman. “Chains take a longer time walking up the ladder to make those decisions, but they are starting to be more interested.” Chains that are known for operating stores in inner cities include Pathmark and Fresh & Easy Neighborhood Market, which opened one of its small-format stores last month in South Los Angeles. “Chains are coming up with smaller formats that work in urban environments,” he noted.

TWO MODEL OPERATORS

In Pennsylvania, Brown, president and chief executive officer, Brown's Super Stores, Westville, N.J., and Burns, president and CEO, The Fresh Grocer, Drexel Hill, Pa., have become symbols for the success of the FFFI. Both recently garnered national attention for their efforts, with Brown chosen to sit with Michelle Obama during the State of the Union Address in January while Burns hosted the first lady at one of his inner-city Philadelphia stores last month. Brown also received the National Grocers Association's Entrepreneurial Excellence Award last month.

The experiences of Brown and Burns shed light on the challenges, complexities and rewards of selling groceries in the inner city.

As a member of the Wakefern Food Corp. wholesale cooperative, Brown, a fourth-generation grocer, operates 10 ShopRite stores, five in suburban areas and five in urban neighborhoods. Starting in 1988, he opened two suburban supermarkets and then a third that was a borderline urban/suburban store and “my first taste” of what running an urban store entails.

Brown kept opening suburban stores until six years ago when he attended a meeting set up by local non-profit groups to discuss how Pennsylvania “could help grocers fix this food desert problem,” he said. At the time, Philadelphia had the second-lowest number of supermarkets per capita of any major U.S. city.

Though other retailers left the meeting before the end, “out of curiosity, I stayed,” said Brown. Pennsylvania State Sen. Dwight Evans, Brown and a few others broke off into a smaller meeting. “He told me, “I want to solve this problem and the state wants to invest. There must be some way to do it.'”

Out of this discussion the FFFI was born. The state allocated $10 million (later to grow to $30 million) toward the food desert issue and Brown opened his first inner-city store on Island Avenue in southwest Philadelphia. “I wanted to try one store and stick our toe in the water,” he said.

Brown's first store received $5 million in New Market Tax Credits for construction and renovation and $250,000 in FFFI grant funding to help with workforce training costs, according to the Reinvestment Fund. The store includes a community meeting room.

Brown's interest in tackling food deserts stemmed from a mixture of altruism and self-interest. “I saw the need was great for people who live in areas like that,” he said. “But if you think of this as a business proposition, how often do you have no competition and everyone's willing to help you make the deal work?”

As for the problems facing an inner-city operator, Brown concluded, “There must be a way to solve the ones under our control, and the government was there to help with the others.”

The first store taught Brown what worked and what didn't in selling groceries to inner-city residents, and overall it did well. After a year, he decided he liked the experience and since then has opened three more stores in underserved areas, the last one two years ago, in each case leveraging the FFFI's financial assistance. “Each time we did it, we learned more and tried different things to perfect the model,” he said.

From the outset, Brown attracted visitors from around the country to see his inner-city stores. The last store to open, at 52nd Street and Jefferson in Philadelphia, received a convoy of federal officials last summer, including Cabinet members such as Agriculture Secretary Tom Vilsack and White House staffers. “I think that visit sold the White House on the [FFFI].”

Brown acknowledged that he had initial apprehensions about venturing into food deserts and getting involved with a government program. “There's been so much failure at inner-city locations,” he said. “How could I solve these problems when so many smart people couldn't before me? But as we started to do it, we realized it is doable.” He ultimately found it intellectually stimulating to “learn and solve problems that have been very difficult to solve.”

In fact, he said, his urban stores now generate about the same revenue and profit numbers as his suburban stores. “If you do this right, you can have a profitable business.”

THE FINANCIAL MODEL

Brown said the biggest issue he has faced in the inner city is making the financial model work. The traditional financial model employed in suburban communities — trying to make higher margins on more upscale products such as foodservice offerings — doesn't apply in an inner-city store, because shoppers can't afford those products. The store may be busy, “but you won't get the gross profit you would normally get,” said Brown. Compounding the problem, many costs in an urban environment are higher than in the suburbs, including rents and taxes.

The only way to make this highly constrained inner-city financial model work is by having the government step in with financial incentives. “Previously, it was thought that business people should do it on their own,” said Brown. “I proved to them that it wasn't possible because the numbers didn't work out.”

Thus, under the FFFI, the food retailer is able to leverage government funding and tax abatements to bring down overall capital costs, lowering debt service during the loan period, and cutting the cost of rentals to half of what they would normally be, explained Brown. “You have to build in a permanent cost advantage to offset the lower margins.”

But that's only half the story. The other half is “understanding your customers and serving them the way they want to be served” — a traditional food retailing imperative, but elevated in an inner-city community.

“There are a lot of differences in what these customers eat, how they view things and what is acceptable behavior for them from businesses,” said Brown. “Each thing you don't understand is revenue you're missing out on.”

One example among many is meat. In his inner-city stores, Brown has set up two meat rooms, one for regular shoppers and one for his many Muslim shoppers who follow halal, the Islamic dietary guidelines.

Brown also has to alter his traditional hiring practices in these stores. For example, he hires ex-convicts because to not do so would be “culturally very offensive in the communities I serve,” he said. “A lot of people have been in jail, so it's a problem and our shoppers expect the people they do business with to help with their problems. We have found that leading the way on social issues is a good thing for business in this type of neighborhood.”

Brown's new hires all go through a training program that is far more extensive than anything done for suburban employees. Employees who grew up under harsh circumstances are taught such basics as coming to work on time, dressing for success and handling conflicts. “When we started, it was shocking how high the turnover was,” he said. “But we figured out how to select better and train better and turnover was reduced.” He said the training costs for all employees at a new inner-city store run to more than $1 million, compared with about $150,000 in a conventional store.

Hiring ex-convicts is an example of the counter-traditional gambits that are customary in the inner-city, Brown said. “As grocers, we grow up with a list of things you should never do; I have to do most of them.” It's also necessary to be comfortable working in a culture that may be quite different from the mainstream. “In the evenings in our West Philly stores, the majority of the women wear complete head coverings and sunglasses. We're comfortable with that, but not everyone is. I meet a lot of resistance along the way.”

Security costs are higher in his urban stores, but shrink ends up being comparable to that of suburban stores, Brown said. In addition to security cameras, he budgets $125,000 annually for non-uniformed security guards, generally assigning three per store at any given time. Defusing arguments is one of their tasks, he said.

When shoplifters are apprehended, they are not prosecuted unless “they are drugged out and have no ID,” said Brown. In general, shoplifters are treated respectfully “because if you don't, the consequences could be bad.” One of the cultural mandates of the inner city is to treat everyone with respect, he said.

Last year, Brown decided to take his commitment to solving the food deserts issue to a new level, establishing a non-profit called UpLift Solutions (www.upliftsolutions.org). “We'd like to find one or two grocers in each food desert area interested in opening a store, and we'd help them,” he said, adding that he is in early discussions with retailers.

HUGS AND THANK-YOUS

Burns, president of The Fresh Grocer, operates seven inner-city stores (including one under the Great Valu banner) in Philadelphia and one in Wilmington, Del., as well as two in blue-collar communities just outside of Philadelphia. He opened six of the urban stores between 1999 and 2004, before the advent of the FFFI.

Last year, partly under the auspices of the FFFI, Burns opened his latest two Fresh Grocer stores in Philadelphia, including a 45,000-square-foot store in the Progress Plaza neighborhood — visited by Michelle Obama last month — that had lacked a supermarket for the previous decade.

Burns' motivation for running stores in underserved communities was that “we thought it was a great opportunity for us to grow,” he said. He was also struck by the gratitude of his shoppers. “When you open in the inner city, people are hugging you and thanking you,” he said. “It feels good and at the same time it's good for your company, too.”

Finding available locations in the city can be difficult, and often requires assembling two or three parcels, Burns said. “You have to be patient and do your due diligence, working with community groups and the city.” The Food Trust's Weidman cited the bureaucratic red tape — permits, licenses, environmental remediation — that must be cut through.

Like Brown, Burns acknowledged the additional cost burdens of opening in food deserts. His last two stores, in particular, each cost more than $15 million including equipment. “There's no way we could have done it without state aid,” he said.

Burns observed that a challenge in the inner city is serving the large number of food-stamp shoppers who tend to spend a lot at the beginning of the month and very little at the end. “It's a balancing act to have enough employees and products at the start of the month, and vice versa at the end,” he said.

The Fresh Grocer hires employees from the immediate area surrounding a store. At the Progress Plaza store, 90% of employees live within a one-mile radius, and 25% were previously receiving public assistance. “They're proud of their jobs,” Burns said. Employees often serve as “ambassadors” for the stores, helping to bring in shoppers.

Burns employs one uniformed security guard in each of his inner-city stores along with a camera system at the front of the stores. Shrink is about the same as at his suburban stores. “We don't have a big problem with security and safety,” he said.