THE RETURN OF THE RETAILER 2004-02-02 (2)

DAVID GHITELMAN

They're back!!!

Supermarket openings in inner-city neighborhoods are no longer the rarity they were a decade ago, industry observers told SN.

However, they also agreed that building stores in the no-longer-so-mean streets of the urban core requires considerable patience and the ability to cooperate with community organizations and government officials. There is no place in the inner city for my-way-or-the-highway types, they noted.

Still, the good news is clear. Retailers have returned, and they are prospering in neighborhoods they long ago fled and more recently avoided, observed Michael Beyard, a senior resident fellow at the nonprofit Urban Land Institute, Washington. "The log jam appears to be breaking," he said. "Many stores are looking for sites in the inner city. The pioneering stores have done extremely well."

G. Lamont Blackstone -- who, in his former job as vice president and chief investment officer at the New York-based nonprofit Local Initiative Support Corp.'s Retail Initiative, helped to match up underserved communities with venturesome supermarket operators -- offered a similarly positive assessment. "If you look at the last half of the last decade, a lot has happened in terms of getting the shopping center industry and retailers to refocus their attention on urban-core markets," he said. "Also, chains that would not have contemplated operations in inner-city areas are now at least looking."

Currently winding down, the Retail Initiative raised $24 million in equity funding in 1994, which it then used as seed money for the development of supermarket projects, the eighth and last of which is scheduled to open next month in the Crotona Park section of the Bronx in New York City. Blackstone is now principal at G.L. Blackstone & Associates, Mount Vernon, N.Y., a real-estate development service company specializing in urban markets.

The Retail Viewpoint

Although industry observers are quick to praise retailers for returning to the inner city, retailers themselves are not particularly eager to admit they've ever been away.

Pathmark Stores, Cateret, N.J., was the participating retailer in two of the Retail Initiative's eight projects, including one that opened in 1999 in New York City's Harlem and the soon-to-be opened store in the Bronx. In 1990, the company had also launched a highly regarded store in Newark that has been frequently cited in the local press as the first supermarket to open in that northern New Jersey city since the race riots of the late 1960s.

Also, Harvey Gutman, a Pathmark spokesman, told SN the company's involvement in inner-city retailing goes back considerably further than that, noting that Pathmark opened a store in New York's Bedford-Stuyvesant neighborhood in Brooklyn as long ago as 1979.

"Pathmark has had a long-standing commitment to urban stores since the mid-1960s," he said. "It's a long-standing and on-going commitment."

Pathmark, like all retailers, is reluctant to give details on the performance of its individual units. Yet, Gutman said, "We're pleased with the performance of our urban stores. The fact that we continue to open stores is evidence that we consider them to be successful."

Gutman added that he doesn't think operating in the city is particularly different from running stores in the suburbs. "There are more similarities than dissimilarities," he said. "The components of running a good store -- offering customers a selection of merchandise at the right price in a clean environment -- are equally important no matter where you are."

He also noted that Pathmark takes the same approach to product selection in city and suburban stores. "All Pathmark stores are merchandised to the community they serve," he said. "We serve diverse suburban communities."

Security, Gutman observed, is another universal concern for the company. "It is incumbent on retailers to provide a safe environment, and that requirement is true in suburban and urban areas."

Save-A-Lot, the St. Louis-based limited-assortment subsidiary of Supervalu, Minneapolis, is another company that has flourished in the urban core, according to company spokesman Dan Kimack.

"Because of our successful business model and small-store footprint -- about 14,000 to 16,000 square feet -- Save-A-Lot has a unique ability to serve neighborhoods either ignored or abandoned by larger, conventional stores," he said.

Yet, Save-A-Lot, like Pathmark, takes pains to give its inner-city customers the same retail experience that its shoppers enjoy elsewhere, according to Kimack. "It's important to realize that our promise of high-quality foods and low prices is realized in all the markets we serve -- urban, rural and suburban," he said.

Too, like Gutman, Kimack noted that security is always a key retail concern. "It would be unfair to say that issues such as safety, security and shrink are greater challenges in a single marketplace," he said. "While we may employ a different level of security, we base such decisions not on market demographics, but on individual store requirements."

Along with large national chains, like Save-A-Lot, and large regional chains, like Pathmark, a number of considerably smaller independents are also carving out their share of the urban market. The Fresh Grocer, an eight-store chain headquartered in suburban Drexel Hill, Pa., operates four stores in nearby Philadelphia. Patrick Burns, Fresh Grocer's president, noted -- like his counterparts at the larger companies -- that his city stores are as individualized in merchandising as his suburban units. He said one serves a predominantly African-American neighborhood, another serves mostly Jamaican customers, and a third caters mostly to college students.

However, Burns said his urban stores do feature "an extensive security program" with more than 40 cameras and monitors in each unit -- not that he has had any particular problems with his supermarkets, which range in size from 23,000 to 51,000 square feet, he added.

The Development Difference

If operating a store in the urban core is no different from operating one anywhere else, as the retailers interviewed for this article insisted, they -- along with industry observers -- agreed that building such a store can be a singular experience.

Blackstone, the former Retail Initiative executive who now runs his own consulting firm, said all eight Retail Initiative projects had "some type of public sector involvement." Two of them, he recalled, were initiated by for-profit developers -- one in New Haven, Conn., anchored by a store operated by Shaw's Supermarkets, West Bridgewater, Mass., and one in San Diego, operated by Albertsons, Boise, Idaho -- but all required some government funding.

"You're talking about an emerging market," he said. "You're also talking about, in many cases, neighborhoods in which the traditional market forces have not worked. In order to get a project jump-started, you must overcome barriers that have grown over years of blight or what have you. It's necessary to have some type of public-sector infusion to address those initial hurdles."

The Urban Land Institute's Beyard pointed out that inner-city development tends to be comparatively expensive. "Often, it's a gray field in development, where the land may have been fouled by some previous commercial or industrial use," he said. "And the infrastructure may not be the best. Given the low margins in the supermarket industry, it's not something any retailer can take on by himself. It requires some kind of public involvement."

Pathmark's Gutman noted, "In the urban community, land is scare and expensive. Often, it needs to be rezoned. The fact is, opening a store in an urban community involves the participation and involvement of many political and economic entities."

Save-A-Lot also owes some of its urban presence to having been recruited by local groups, according to Kimack. "Our market entry into Baltimore a couple of years ago was aided in part by Mayor Martin O'Malley's call for grocery stores to operate in many of the city's underserved communities," he said. "Through Save-A-Lot's concerted efforts with the mayor's office, the Baltimore City Council and many community groups, we now operate approximately 12 stores in the city."

Jeff Lowrance, a spokesman for Food Lion, Salisbury, N.C., a subsidiary of the Belgium-based Delhaize Group, recalled the development process for an inner-city store the company opened in Charlotte, N.C., in 1995. "For that store," he said, "the project included a developer, a local community development group, the city of Charlotte, and there were efforts to get federal support.

"There were a number of starts and stops. Getting a supermarket to agree to anchor such a shopping center is just one step. You have other retailers the developer must recruit, a dry cleaners, a nail shop. Usually, when you have so many parties involved, those deals just take longer to bring to fruition."

In the case of the Charlotte store, Lowrance remembered, "It just didn't progress from Point A to Point B to Point C. There were some time lags involved."

Blackstone noted that it helps if the developer and retailer involved have experience in working in the inner city. "These projects often require levels of creativity in terms of how to adapt to the constraints of urban areas," he said. "It may require looking at novel approaches to in-fill development that may involve mixed-use development.

"Case in point, the Harlem Pathmark project. Because of the smallness of the site, the parking lot was put on top of the supermarket."

Opportunity Zones

The Urban Land Institute's Beyard said he expects the number of such public-private projects to increase. "There is less opportunity now in the suburbs because of the big-box stores," he said. "This leaves many traditional grocery stores in trouble, just trying to hang on in the face of Wal-Mart."

The alternative, Beyard noted, is to come to or come back to the city. "The trend is only going to accelerate," he said. "These are underserved markets."

Patrick Burns, who is planning in two to three months to open the largest unit in his Fresh Grocer chain, a Philadelphia store that occupies a full city block, noted that in the urban core, well-run stores are well-received. "My customers enjoy a nice, clean, beautiful store," he said.

Save-A-Lot's Kimack observed that his company is accelerating its efforts in the inner city. "Save-A-Lot's development team continues to look at prospective sites in existing and new urban markets," he said. "We are actively identifying sites in Philadelphia to further penetrate the market and have a sincere interest in serving the Pittsburgh market."

Still, retailers cannot expect to succeed simply by showing up, warned Pathmark's Gutman. "Community support has to be earned and re-earned every day," he said. "In many urban neighborhoods, there are different types of competitors. There may be few large competitors, but there are many smaller stores that have catered successfully to the local community for years."

Which is to say, yet again, that operating a store in the urban core is very much like operating a store anyplace else. A lesson that more and more retailers appear eager to learn.