Overlooked?

Why don't grocery stores locate in poor neighborhoods?:

It shouldn't take a road trip to shop, by Nathan Berg, Dallas News: ...[M]any of us take it for granted that there are grocery stores in our neighborhoods selling a wide variety of nutritious foods at relatively low cost. But not all residents of ... cities are so lucky, especially if they live in low-income areas.

Lack of access to a grocery store often means lack of access to fresh vegetables, fruits and meats. Imagine buying your food primarily from convenience stores and fast food chains. More than convenience is at stake. Costs are generally higher. And the foods typically contain high concentrations of unhealthy fats, carbohydrates and additives, which contribute to obesity, diabetes and heart disease.

My colleagues at the Center for Urban Economics ...[at] the University of Texas at Dallas made a map of Dallas County showing which neighborhoods have no grocery stores within one mile. These neighborhoods are concentrated in southern Dallas. And there are stark differences between them and neighborhoods that have three or more grocery stores within one mile...

The typical no-grocery-store neighborhood has half the white residents, twice the black residents, roughly the same number of Hispanic residents, $20,000 less in median annual income and twice the number of HHS clients.

Is this what economic theory predicts? No. It may not surprise you that grocers open few stores in low-income neighborhoods, but economic theory actually predicts the opposite.

Economic theory predicts that the typical low-income resident spends a lot less on luxuries like vacations, but not very much less on necessities like food. Everyone has to eat. And because there is no good substitute for food, low-income residents spend a higher fraction of their incomes on food than high-income residents do.

Economic theory suggests other reasons why grocery stores should thrive in low-income neighborhoods. Rents are lower, which means stores can save on costs by locating there, and there are few competitors nearby to steal away sales.

It seems that store owners are not behaving as economic theory would predict. That led me to investigate ... how business owners choose where to locate their businesses.

Economists expect business owners to choose locations by considering a long list of possible locations and picking the one with maximum net benefits. But this leads to the conclusion, which economists are beginning to challenge, that abandoned neighborhoods are abandoned for good reason – because there are no profitable opportunities there.

However, in interviews with a number of top executives, I found that most of them consider only a few locations for new stores and that these locations are nearly always discovered more or less by accident – while the executive is running errands or driving through town on other business. This ... can lead to an unhealthy side effect: Neighborhoods that are ignored today may be ignored for a long time, despite their advantages.

The positive side of these findings is that ... cities facing shortages of grocery stores in low-income neighborhoods possess a number of policy tools for attracting businesses. ...

Rather than expecting small tax incentives to attract new stores, the mayor and City Council members should directly try to persuade two or three grocery chains to open new stores... To do that, they can cite the growing number of success stories that demonstrate the surprising profits retailers can reap by locating in overlooked neighborhoods. Once other businesses see the potential for stores to thrive in low-income neighborhoods, they will want to follow. ...

Does the suggestion that there are fewer grocery stores in low income areas because executives don't happen to be in those areas very often ring true? I would have guessed other forces are at work besides simply being overlooked - a market failure we don't expect to see - but I suppose it's possible.

Comments

[David]

Could security also be an issue? There may, for example, be less of a police presence and a higher crime rate, increasing insurance premiums and the owner's fear of becoming the victim of a crime. (probably more of an issue for small stores)

Haven't given it much thought, but that's the first thing that came to mind when I read the article.

[Karl Smith]

It always irks me when people say "economic theory suggests" . . . There is some model whose predictions don't seem to match the data.

That's fine we just need a better model for this situation. But, the decleration makes it seem like this observation is somehow at odds with fundemental economics.

In this case, first we can tact on a search cost which is higher in poor neighborhoods. Second, we can look at the things like traffic density. Third, we can think about magin differences on non-food items.

My understanding is that there is little money is selling green groceries and that they are often loss leaders to get you to other items such as the in store bakery and deli.

I also know that this niche is trying to be caught. Family Dollar for instance is looking to offer relatively low cost chilled food.

[ken melvin]

"I would have guessed other forces are at work besides simply being overlooked -..."

You would have guessed right. Our observer, Mr. Berg, wasn't very observant, nor, were his respondents being honest. Is shoplifting a crime when you or your family is hungry? I've seen white middle class steal from markets when they were unemployed and couldn't afford to pay for groceries. Maybe poverty is the crime.

[anne]

This is an important issue, but not one I understand properly. Israel Scheffler showed me an older book he was reading, "The Poor Pay More" by David Caplovitz, and noted that Jane Jacobs had suggested the book to him. Scheffler and Jacobs were thinking about how "planning" segregated neighborhoods by class.

Though I have come on writings on "poor paying more" cases for several years, I have not considered the issue with care. However, the suggestion of relative executive familiarity with differing neighborhoods little impresses me. There have been a set of recent studies showing the African Americans of all income levels routinely pay more for more dangerous mortgages. Executive familiarity is not the issue. What is then?

[save_the_rustbelt]

It isn't all that complicated:

1) Higher in-store crime
2) Security concerns for staff and shoppers
3) Inferior infrastructure
4) Being jerked around by city politicians
5) etc.

All of which adds up to inferior profit margins (or losses), in a business with razor thin profit margins to begin with.

[anne]

There is happily a close Whole Foods market that was wildly popular from opening day on, but the market is peculiar. Whole Foods has a reputation of being expensive, and for selected items such a organical carrots free grown in Himalayan mountain meadows, but for a remarkable selection of healthy products Whole Foods is actually cheaper, far cheaper, than the sort of national chain stores I stop by now and then in poorer neighborhoods. Why?

[spencer]

New grocery stores generally go into new shopping center developments. The developers contact the various chains and
sell them on putting a store in the new development. It is part of a whole package generally with a large drug store and other allied shops. But if no one is developing such centers in a poor area there will be no new grocery stores.

The argument that grocery store executives just happen to spot a likely site while running errands just does not match reality. Grocery store chains have professional staffs working on developing new locations.

[pgl]

When I was in grad school, one of the econ faculty did an an analysis of prices charged in the poor areas of the city v. the rich areas. Seems the poor paid more for the same products. His hypothesis is that not having access to a car, the poor were less price elastic than the rich. But Greg Mankiw can tell us to all eat healthier as he seems to own a BMW. Don't we all own BMWs?

[anne]

Also, the Whole Foods market I am referring to has wildly high profile security and sits on expensive land and was built at significant expensive involving infrastructure development. The idea that relative poorness means danger is a stereotype that should not be accepted with no serious question. There is far more to understand.

[Brooks]

"Does the suggestion that there are fewer grocery stores in low income areas because executives don't happen to be in those areas very often ring true?"

I am very skeptical. And if true, there are a lot of lazy and analysis-aversive executives who should be fired.

My first thought was similar to that of David and Save the Rustbelt: risk of crime. Risk of crime on a daily basis, and risk of the whole darn store being cleaned out, trashed, and perhaps burned to the ground the next time people in the neighborhood get p*ssed off at some verdict that angers them or some other provocation and decide to riot and steal everything in sight. Every time I see that I wonder who the heck would take the risk of investing in a store location there. (I don't mean no one ever should. That's just an exaggerated thought I have upon viewing such event.)

Also, as for rents being lower in poorer areas, I wonder to what extent that is actually true. If the comparisons involved urban vs. suburban/rural, it's possible that rent per square foot is higher in the poorer areas, or at least not much lower. I don't know to what extent that would be true, nor to what extent it was controlled for.

[dd]

A walk through both an upscale chain grocery store and the typical "poor" non-chain grocery store (I shop at both) reveals much. The chain profit is generated by the non-necessities like flowers, cosmetics, fine wine, upscale cheese, organic products, herbal vitamins, etc. The non-chain features no such luxuries and if it's lucky it has a liquor license that generates a modest profit. The profit is much easier to generate when the consumers have disposable income as opposed to only necessity shopping with little left for luxuries.

[Brooks]

Karl Smith,

Great point re: margins. I'll expand a bit and speak in general terms, at risk of stating the obvious. Yes, everyone has to eat, and may even eat the same amount of food, perhaps even (arguendo) the same amounts of the same TYPES of food, but not everyone is going to pay premium prices for premium goods, and store owners are not in business just to move merchandise in terms of volume, but rather to make revenue, profit (one key metric, for example, is profit per square foot of shelf space), and ultimately ROI. A store buying some food item for $3 and selling a unit of it for $5 (40% margin or 66% markup, depending on how you look at it) is very different from a profitability standpoint than buying it for $2 and selling it for $3 (33% margin or 50% markup), so even if the same number of units are sold, the profitability and ROI will be much higher for the former.

[save_the_rustbelt]

Ok class, time for a quiz:

1) When a grocery chain sells $1 of groceries, how many cents likely gets to the bottom line

A) .20
B) .15
C) .10
D) .03

Back later with the answer

[anne]

"Risk of crime on a daily basis, and risk of the whole darn store being cleaned out, trashed, and perhaps burned to the ground...."

Rubbish, complete and utter stereotyping rubbish; with the point being to spread fear and loathing. I wonder what sort of neighborhoods we have in mind with such rubbish. Shame, shame, shame.

[anne]

There we have an overarching problem; the need we evidently have to stereotype and spread fear and loathing about people living in relatively poorer neighborhoods as justification for our stereotyping.

[dd]

The car not only allows price mobility it allows bulk purchases and no need to worry about transporting heavy or frivolous items. Inner city grocery stores attract walking consumers who carry their purchases home. That tends to limit purchases, motivates consumers to buy higher priced but lower weight products and allows the store to charge higher prices per ounce.

[btgraff]

this phenomena of a lack of supermakets in poor areas doesn't just occur in the US - i recall a similar problem being mentioned with regard to Vancouver, and even here in Toronto a small, lower end grocery store located in Moss Park (a public housing complex) closed down a year or two back, meaning that people had to go farther afield to newer grocery stores located in other neighbourhoods.

and of course, in Canada, there isn't the same degree of racial segregation, or the extremes in income distribution, as found in the US.

Probably the neighbourhoods in Dallas once had supermarkets that cllosed down - the question would be to go back and find out why they closed, not just why big chains don't open new stores. why haven't smaller more entrepreneuial merchants exploited the gap in the marketplace?

there may also be the issue that poor people will go to better neighbourhoods to shop, but rich people will avoid poor neighbourhoods. i doubt that the bit about executives not driving through the poor neighbourhoods has any validity - most companies have access to databases showing demographics, competition, income levels, etc. and seek to blanket each city as fully as possible.... and the utives of big chains do not live in every city that they serve - just the city where the head office is located.

[Patrick Trombly]

Why aren't there are lot of supermarkets in the inner city?

Supermarkets are BIG. They require significant warehouse, storage and delivery space in addition to the floor space. They are HIGH FIXED COST. They are EXTREMELY LOW MARGIN in terms of percentage of sales, and even lower margin in terms of profit per square foot of space. Inner city real estate is expensive - too expensive to profitably operate a regular supermarket, which is why they have very few supermarkets, and only very upscale, smaller, specialty stores where you can buy star fruit for $15/lb, in the fru fru city neighborhoods either....

And there are much more profitable uses for the property, thus the property is put to those other uses. Since profit is the measure of what the aggregate of the consumers are telling you to do with the resource, I'm not sure why we should be upset that the consumers rule here. If you want to interfere to overturn the consumers' judgment, that's your prerogative - my only beef is with people who say they're interfering FOR the consumers - that's by definition impossible.

That's why you DO have supermarkets in poorer rural areas and in poor urban areas that are outside the major cities - - - there ARE supermarkets in Lawrence, Brockton and New Bedford. It's not a conspiracy, it's not racism, it's not even fear of crime.

A good question might be, why do poor people have to locate themselves in the inner neighborhoods of a major metropolis anyway? Most of them aren't civil servants - actually most civil servants aren't poor, the people who take your tolls on the Mass Pike and the T are in the top half of income earners.... The major cities haven't been "mill towns" in decades - - and even the ones that do work in the city, does that give them a "right" to work there? If my daughter gets a job as a teller at Wellesley Coop does that entitle her to a house in Wellesley?

[anne]

"Please use your own Email address for future posts."

Notice the crazed intimidation. We are watching you and we know how to find you, and when we find you we will come for you with clubs and pikes. Notice the interesting and sadly typical reminder of earlier tragic times. Such is the intimidation we might think only possible for others or only possible in times long distant.

Notice how intimidated I am by crazed intimidation.

[Zero]

Rust Belt - Define profit.

Do the wholesalers have any impact on small stores opening up?

In our area the profit is $0.03 but the wholesalers are partially owned by the supermarkets which means the real profit is somewhat larger. Last time I looked the gross profit was around 30% or so for Safeway.

When the local farmers market tried to start selling some dry goods they found a lack of interest from the wholesalers.

[save_the_rustbelt]

Zero:

Each store must function as a profit center, although it is true the vertical structure has some role in enhancing investment center level profits.

Still a tough business, urban development is tougher than
suburban and exurban development, and urban operations are generally tougher.

By the way, I do think large regional chains have some social responsibility in all of this, and could profit from intelligent urban development if done properly.

[save_the_rustbelt]

and risk of the whole darn store being cleaned out, trashed, and perhaps burned to the ground...."

I have to agree with Anne on this much, the risk of this catastrophic occurrence is very low.

[anne]

http://www.nytimes.com/2007/05/25/us/25market.html?ex=1337745600&en=bf56966a49126e6e&ei=5090&partner=rssuserland&emc=rss

May 25, 2007

In Market, Hopes for Health and Urban Renewal
By ERIK ECKHOLM

PHILADELPHIA — It seems that anyone you talk to in the streets around Progress Plaza, a tattered shopping center in a mainly black, poor part of North Philadelphia, is excited.

There has not been a supermarket nearby since the last one in the plaza suddenly shut down in 1999, part of a nationwide flight from blighted urban areas by many large chains.

But soon a large Fresh Grocer supermarket is set to open here.

"Everybody will be so happy to see a new store," said Anna Keller, a retired nurse's aide, as she took home a large bag of items from Popeyes, the fast-food chicken restaurant, in the plaza. In the last seven years, Ms. Keller said, she has driven miles away to shop "because the food around here isn't worth buying." But that also means that she has shopped less frequently and often relied on takeout.

"I know I'll eat better," she said, talking about the ready access to aisles of fresh produce and meats. "I know this greasy food is killing me."

Carol Smith, 50, who sat on the stoop of her apartment in a rundown row house, minding her five grandchildren, said she felt the same way. Like many of her neighbors, Ms. Smith does not drive, and she has been walking the 12 blocks to the nearest grocery store, then paying a livery car to drive her back. "It's hard to keep real fresh things around," she said.

Depopulation and the loss of industrial jobs in recent decades have taken an especially harsh toll in this neighborhood. They left row houses abandoned or in disrepair, and vacant lots strewn with trash, broken whiskey pints and hypodermic needles. Progress Plaza, which was founded with great hopes in the 1960s by an association of black residents, fell on hard times. Even mom-and-pop stores are rare.

Subsidized development is starting to bring in new houses and families, a longtime development of black-owned homes has survived to the east of the plaza, and nearby Temple University is expanding. But still, within a half-mile radius of the plaza, 39 percent of people live below the poverty line, more than twice the rate for Philadelphia over all.

Whether easy access to the bounties of a supermarket will actually transform eating habits remains to be seen, but the fight against obesity has become a major rationale, along with lower prices and the promotion of wider retail development, for efforts to bring supermarkets to what have been called the food deserts of poor urban areas.

The National Institute of Environmental Health Sciences has sponsored a before-and-after study of eating habits around the future supermarket here, looking especially to see if consumption of fresh fruits and vegetables, rather than chips and soda, will rise.

The new grocery store is part of a broader renovation of the plaza, aided by millions in public and private loans. The store was lured here by the Fresh Food Financing Initiative, which has subsidized development of two dozen supermarkets in deprived urban and rural areas of Pennsylvania and is considered a national model. The Legislature put up seed money and joined forces with the Food Trust, a private group that promotes healthy diets, and the Reinvestment Fund, which marshals money for community development. The initiative provides cash grants of up to $250,000 and, sometimes, millions of dollars in loans to prospective supermarket developers.

In the case of Progress Plaza, inducements were needed in part because the lot of the former store, at 18,000 square feet, was far too small for today's supermarket model, said Pat Burns, who owns other stores in the city and will operate the new one here. Most of the plaza is being rebuilt to make room for a flashy 46,000-square-foot market with rooftop parking.

More generally, supermarket operators say, moving into a blighted neighborhood brings special costs and risks that can be partly overcome through subsidies and advice from groups like the Food Trust.

Jeff Brown said he was encouraged to build a ShopRite in another part of Philadelphia by a $250,000 grant from the Food Initiative, which he used to train local workers, many of whom had never held real jobs.

Store operators in poor areas say they have substantially higher security costs and, in contrast to suburban chains that carry essentially the same inventories in all stores, they must stock a variety of lower-volume items geared to multiethnic tastes. Because many customers are poor, a new store must be in a heavily populated area with convenient public transportation if it is to be profitable, they said.

On Broad Street, the supermarket and plaza will have 24-hour lighting, and "that will do a lot for the sense of safety and community in the neighborhood," said Wendell R. Whitlock, chairman of the association that owns Progress Plaza and has received loans for the overhaul. "This is going to be a happening," Mr. Whitlock said of the new store, and should give a boost to the area's renewal.

When Pathmark opened the first supermarket in decades in East Harlem, in 1999, many local store owners were fearful. But by drawing in more shoppers, the entire neighborhood was uplifted, local residents and economists say.

Around Progress Plaza, no one admits to being worried.

Taufiiq Colbert, who just opened a barbershop west of Broad Street, said he expected the increased foot traffic to help his own struggling business.

Even Alexander Faynberg, who has for years sold a small sampling of fruits, nuts and eggs from a truck next to Progress Plaza, said he welcomed a new store. "It will bring in a lot of people," Mr. Faynberg said. "It will be good for me."

[Don]

We'd have to assume that folks in the grocery industry are irrational if money is to be made in poor neighborhoods, yet they don't locate their stores there. As the rational economic actor is the foundation of classical economics, I'd say it might be best we looked elsewhere, so let's assume that there is no money to be made in poor neighborhoods. Why?

I'd speculate, like many already have, it is a matter of risk. Returns must be greater in poor neighborhoods to compensate for the increased risk, and by risk, I mean crime, and anyone that thinks crime is not higher in poor neighborhoods is actively ignoring reality.

Combine the need for higher returns to compensate for the increased risk of locating a store in a poor neighborhood with the fact that there is less money (by definition) to be spent at a store in a poor neighborhood, and there is no economic conundrum here at all. The risk/return ratio fails, perhaps as an absolute, but--at least for national chains that can locate anywhere--certainly in relation to locating stores in wealthier neighborhoods. It would be amazing really, if stores, especially big national chains, clamored to locate in poor neighborhoods, and would be economically interesting to find out how those few stores in poorer neighborhoods survive, and why they locate there in the first place.

Also, it is not just the immediate risk of losses at the store in the poor neighborhood that is at stake for a national chain. It is the stain on their reputation that comes with having a store in a poor neighborhood, and any publicity incidental to any immediate losses that might accrue. No national chain wants their store's parking lot to be the place where a customer is gunned down for a drug deal gone bad, or as happened in my old neighborhood at a national discount chain--where a woman was gunned down by a guy trying to steal her purse. The store promptly closed after the incident, and now sits a massive, vacant building on the same ground where I once played football (prior to its sale to the national chain). I don't often return to my old neighborhood, which has been in decline for the balance of the last three decades, for the same obvious reasons that the national chain left.

[Brooks]

Save the Rustbelt,

True, it's low probability, but it's high magnitude (to put it in terms of "expected value"). Although I assume insurance covers losses in such events to some extent, although I don't know that for a fact. Even if so, there is probably still some substantial reduction in ROI when that occurs.

[reason]

If Anne can tell us why the last store shut down:

There has not been a supermarket nearby since the last one in the plaza suddenly shut down in 1999, part of a nationwide flight from blighted urban areas by many large chains.

then we'll have the answer.

[F. Frederson]

"Does the suggestion that there are fewer grocery stores in low income areas because executives don't happen to be in those areas very often ring true?"

No, it doesn't. Billion-dollar multinational chains aren't siting stores based on executives' whim. Something else is clearly at play.

I think that the difficulty of securing a large, empty lot would be the most important barrier. Very few major grocery store chains deploy anything less than 50,000 sf at a time, and many are pushing the 100,000 sf mark these days. The size also forces a certain lot layout model - sufficient parking in front for the people that live beyond walking distance (a large store requires a lot of customers), and multiple loading docks in rear. Both add considerably to lot size. Those three things - lot size, parking, loading docks - are also hard to combine in an urban-friendly form. The one-entrance interior layout and desire to use the interior walls for display or something else means most of the exterior needs to be blank walls, which deadens the surrounding streetscape, and a large parking lot is totally incompatable with a healthy urban streetscape. Overcoming all these obstacles - basically, underground parking and a multi-use building - would lead to a very expensive building, one that would almost certainly blow the overhead numbers for a typical chain.

[William Smith]

Prof Thoma,
The market failure here is that scouting is a cost that is direcetly associated with where a new store opens but one that is only marginally associated with the pay (performance) of the person doing the scouting. I.e. the scout can find a decent place and expect to make as much as if they were to find a much better place, so the scout puts less effort into it.
That's my explanation of how the described market failure works. The alternative is that grocery chains have a profile of their average customer and look for locations where that average customer is located.

[jamzo]

"However, in interviews with a number of top executives, I found that most of them consider only a few locations for new stores and that these locations are nearly always discovered more or less by accident – while the executive is running errands or driving through town on other business."

yeh! sure!

by the way, i heard about a bridge in brooklyn that you can buy cheap, interested?

[anne]

"Returns must be greater in poor neighborhoods to compensate for the increased risk, and by risk, I mean crime, and anyone that thinks crime is not higher in poor neighborhoods is actively ignoring reality."

Show us the studies or all this reality, since I "thinks" this is simply a pernicious stereotype and beyond the stereotype has liitle to do with locating services from markets to banks in or near poorer neighborhoods. Show us all the studies.

[robertdfeinman]

What is really meant is that there are fewer or no supermarkets in poor neighborhoods, or if there are they are local and not part of big chains.

There are several reasons for this which I don't think the authors considered. The most important is that supermarkets are big and retail spaces in the inner city (especially in poor neighborhoods which have older buildings) are small. A chain that is set up to offer thousands of products doesn't fit this model.

Second delivery is difficult in the inner city. Streets are narrow and clogged with traffic, there is no room for unloading bays and there may be restrictions on when deliveries can be made to reduce noise or traffic.

There are plenty of places to buy food in the inner city, they just aren't supermarkets. They have higher prices, but their owners aren't wealthy. They pay higher rents, the cost of delivery is higher, they pay a premium because they must get smaller shipments and they need a proportionately higher staffing level.

I worked in Harlem for four years and there were plenty of people shopping for food locally. The only supermarket was near the Hudson river where there was enough room for the store. Plans to build a new supermarket in the middle of the district ran into all sorts of problems including resistance from existing merchants.

[anne]

"If ---- can tell us why the last store shut down:

'There has not been a supermarket nearby since the last one in the plaza suddenly shut down in 1999, part of a nationwide flight from blighted urban areas by many large chains.'

then we'll have the answer."

The answer is alreay given in the reason for the opening of a supermarket in the self same neighborhood. Development policy makes a difference in the well-being of neighborhoods.

[save_the_rustbelt]

My brother, Left_the_rustbelt, inherited the "brilliant construction manager" DNA from my father and has been in commercial construction for about 30 years.

Early in his career he took a break and received a Masters of Public Administration, on the hunch that the toughest part of commercial construction was working with the government. He was correct.

When he scouts a piece of land he start with a checklist with about 300 questions, and then he gets into detail.

Urban development is much more complicated than suburban and exurban development, as he tells it. Inner city urban development can be even tougher. The technical and political issues are a massive headache.

[Frazier]

West Oakland has 58 liquor stores and 0 grocery stores. It is also a very poor and black neighborhood. People who want to eat decently apparently travel outside of their neighborhood to get food. The nearest grocery store (Pack 'n Save, like safeway) has definite security problems. They hire full time security at the front door and have a few designated parking spots for the police department up front. Meanwhile the nicer neighborhoods of Berkeley and Oakland have Berkeley Bowl, two whole foods, two trader joes, and a few other places.

[reason]

Anne - no that is not an answer - because in the same paragraph it talks of the success of a store that opened in the same year 1999 and the positive effect it had on the neighbourhood around it.

A chain that is set up to offer thousands of products doesn't fit this model.

Somebody send Aldi a note. Maybe they are already aware of the possibilities since they have used Australia as a testing ground.

[Noni Mausa]

a few points:

--neighbourhood distance is not "as the crow flies", but "as the single mom walks", or "as the disabled veteran hobbles".

A disabled Air Force veteran friend of mine (on welfare - of course) couldn't get bus tickets from social services to go to his physiotherapy appointments because he lived less than a mile from the hospital. What was he being treated for? Gradual disintegration of the small bones of his feet.

Another problem of the poor is simple storage of food items. Often the freezer in a cheap apartment refrigerator isn't even cold enough to keep ice cream solid, and too small for anything bigger than a chicken and a bag of frozen corn. Bulk purchase of meats is not possible. Other bulk items need to be completely enclosed to prevent mouse and insect access, but that's not so difficult as long as you have the space. (Of course, lose your apartment and what do you do with all that flour and lentils? "A permanent residence is the wealth that makes all other wealth possible.")

Another problem with bulk purchases is balance. Another friend, made poor by her choice to raise an autistic daughter rather than give her up to the state, bought a 20 lb sack of rice as part of her sensible preparation for poverty. Money was impossibly tight that month, so they ended up eating rice. Just rice. Ever after, she has refused to eat rice in any form.

Did I mention she was an Air Force vet too? Kind of a pattern here...

Noni

PS doesn't Japan require the presence of stores every few blocks in metropolitan areas? Something like that?

PPS My apologies if it upsets you, Anne, but I agree with Student. I haven't mentioned it because so many other contributers are far more annoying.

[reason]

For those of you who don't know Aldi are a German down-market grocery chain who sell a limited number of all own brand products, with occasional non-grocery specials (mostly clothing and electronics).

[Farrar Richardson]

Curious, so curious, that so many commenters doubt the following paragraph:

"However, in interviews with a number of top executives, I found that most of them consider only a few locations for new stores and that these locations are nearly always discovered more or less by accident – while the executive is running errands or driving through town on other business. This ... can lead to an unhealthy side effect: Neighborhoods that are ignored today may be ignored for a long time, despite their advantages."

Have we all been hyped into the belief that business execs always make rational decisions?

My own experience is that many successful business execs (alfa male types) have egos as big as a barn, and are just as likely to make decisions based on whim, and then bully their subordinates into finding the data to support the decision.

[reason]

Noni
Student?

[richard]

This is probably a quantitative problem that a grocery store chain could answer and likely has reconsidered over time. It would be interesting if someone with that experience could comment.

That being said, I suspect the three largest drivers are costs, margins and reputation. Urban costs tend to be somewhat higher than suburban locations, poorer incomes notwithstanding. And margins are poorer -- my impression is that grocery stores offer fresh foods nearly at cost but make their profit on non-grocery items: cleaners, paper products, hygene (only half the aisles in local grocery stores is given over to food -- most of the space is non-grocery products). Finally, stores offering food still have the same reputational issues that other stores do: there is more cachet to Whole Foods than local grocery chains, and that cachet could translate to higher margins. Cachet can be dilluted by building in non-chic neighborhoods.

[anne]

"I haven't mentioned it because so many other contributers are far more annoying."

Remember, what is important is intimidation because intimidation is what intimidators must be about, with apologies and not being rude even while wanting to know where you live for purposes of real real real intimidation, of course.

What is interesting about intimidation is how attractive it is. Sort of like the American intimidating of women bridge players in China who dared to say they did not vote for Geore Bush. The American game has become intimidation, not bridge, and women are the preferred target.

Notice how much I care.

[anne]

Also, I believe the relatively poor are now more likely to be located in suburban than urban communities which is a reason why raising taxes on gasoline could be a special problem for poorer households. But, I wonder whether the same pattern of the poor paying more exists in the suburbs. I expect so.

Remember, as well, there have been recurring studies in a number of American communities showing patterns of price discimination on mortgages for African Americans regardless of income. I know there is current concern among African Americans with access to community services from banking on.

[Noni Mausa]

Reason:

Sorry-- brain-fart.

Anne:

As much as I agree usually with your sympathies, I must say that a long string of posts or very long posts -- whether from you, marek, anonymous or whoever -- is tiring and not likely to engage the reader. It also has the effect, intended or not, of turning off the casual reader who might otherwise have joined in the discussion.

Do you truly believe I am trying to intimidate you? Get a grip, dear.

Noni

[cm]

"It is the stain on their reputation that comes with having a store in a poor neighborhood"

Ah, there we go. Given the scale of general (not just store) brand awareness and related judgementalism I have observed, this sounds quite plausible.

But then as has been pointed out, some chains maintain different "tiers" of brand names.

[Farrar Richardson]

Now that I read all the comments, especially Frederson, I see that Execs in big American supermarket chains are even stupider than I thought.

Why?

They seem to have only one development model, and if they can't find space for 100,000 sq ft plus a huge parking lot, they don't bother.

Why does an inner city supermarket need a parking lot? That's one reason we live in the city - to avoid the hassle and the rising expense of car ownership. In city shoppers come by public transport or on foot. Don't roll'em carts for shoppers exist in USA?

Paris, for example, has "superettes" practically everywhere. Thes are usually junior labels of the big chains, which with few exceptions, stay in the suburbs. They are smaller, and slightly higher priced, but have a wide selection of foods, including fruits and veggies. And, of course, there are the marvelous street markets in every quarter.

Of course the residential pattern is different. The poor ar stuck in inaccessible suburbs, and I'm not so sure they have easy access to super markets. Security is a problem. New stats out yesterday on rising losses due to shoplifting - but not just in poor districts.

[cm]

In my general neighborhood there is both a Safeway and a Pak'n'Save (perhaps 1-2 miles apart), which appears to be positioned as a "lower tier" Safeway variety. They are part of Safeway and take the "club card", but with self-bagging and without attempts at a spiffy appearance.

Long years ago their prices in some categories were marginally lower than Safeway's, then they became marginally higher, in my unscientific observation. But then the selection I buy is rather narrow, and I'm quite the cherry picker.

But it still looks like it's mostly positioning, cheaper "looks", and reduced service, not actually lower price.

[F. Frederson]

"Have we all been hyped into the belief that business execs always make rational decisions?"

No, but don't most big companies perform market research and have well-developed expansion plans? If supermarket chains were all regional - contained to one or two metropolitan areas that the executive(s) could investigate in person - then the anecdote relayed in the story might be plausible. But it's just ridiculous to think that a company like Tesco or Ahold or Carrefour or Safeway or whomever would operate in such a haphazard fashion, or could.

Perhaps the author of the article only interviewed executives at small chains. And food retailing Dallas might be unique in being dominated by such chains. But the author does not say one way or another.

[Mark Thoma]

Quick note -

One reason for the confusion above is that I removed two comments (hoping to keep us on the topic of the post).

[Don]

"Show us the studies or all this reality, since I "thinks" this is simply a pernicious stereotype and beyond the stereotype has liitle to do with locating services from markets to banks in or near poorer neighborhoods. Show us all the studies...

Remember, as well, there have been recurring studies in a number of American communities showing patterns of price discimination on mortgages for African Americans regardless of income. I know there is current concern among African Americans with access to community services from banking on."

Anne...

I'll show you my studies if you can show me yours, but please do provide a study that doesn't compare income levels (which are not the relevant metric) but which compare credit scores, and shows that blacks have to have a higher credit score than whites to get a loan. The single most important factor in the provisioning of credit is the credit score, and credit scores can be high for low-income folks and low for high-income folks. It depends mostly on whether money is paid back according to its terms, the income level be damned.

If you want a study showing that crime is generally concentrated in poorer neighborhoods, check the FBI crime statistics, or better, just get the police blotter of your (or any) home town. But defending the assertion that poor neighborhoods have higher crime is about as much a waste of time as wondering why, like Nathan Berg, when all that money is there to be made, doesn't some grocery store open up across from the drug dealer's den?

[spencer]

The grocery business is an extremely low margin high turnover business. A good grocery store completely turns over its stock several times a week. The reason grocery stores are laid out the way they are with cold, items and fresh food around the perimeter and bulk items in the middle is not because of the need for electric connections to the freezers and coolers around the edge. Rather, they are the high margin items they want to expose you to the most. The bulk items in the middle are the lowest margins items. The reason milk and eggs are always in the back of the store is they hope that if you just run in for one of those items you will see an interesting snack or cheese as you walk to the back of the store and buy it on impulse.

Because groceries are such low margin items efficiencies and volume are extremely important. These considerations drive the business to maximize size because it maximizes efficiencies. Because small stores in urban areas can not
get the efficiencies the large, high volume stores in urban areas they are not as attractive to chain stores. Moreover, as was pointed out above in the poorer market they can not sell as many high margin impulse items like flowers, bakery and prepared foods that you see in modern large scale suburban groceries.

It is a vicious circle.

To put this in perspective remember the easiest way to understand Wal-Mart is that it has applied the grocery store model of low margin high turnover to the general retail area.

To see how this works consider an examples of two stores that carry a million dollar stock.

Store one makes a $0.05 profit margin and turns its inventory 10 times a month.

The second store makes a $0.50 profit margin and turns its
inventory 10 times a year.

The first store is the most profitable, but it is not an easy business and every penny counts.

[Michael Cain]

robertdfeinman's list of reasons why supermarkets are lacking in the urban core makes the excellent point that the supermarkets have particular models of how their business works, and that those models don't necessarily work well in the urban core: eg, tractor/trailer delivery trucks providing stock from a central warehouse during daylight hours. The supermarkets have models for how they obtain the other resources they require, such as labor. There is no doubt a perception, which may or may not be accurate, that their labor model won't work in poor urban neighborhoods.

[anne]

http://www.nytimes.com/2007/11/04/weekinreview/04bajaj.html?ref=business

November 4, 2007

What's Behind the Race Gap?
By VIKAS BAJAJ and FORD FESSENDEN

High-cost subprime mortgages have often been framed as loans that catered to people with blemished credit records or little experience with debt.

There has been less attention paid to the concentration of these loans in neighborhoods that are largely black, Hispanic, or both. This pattern, documented in federal loan records, holds true even when comparing white middle-income or upper-income neighborhoods with similar minority ones.

Consider two neighborhoods in the Detroit area. One, located in the working-class suburb of Plymouth, is 97 percent white with a median income of $51,000 in 2000. To the east, a census tract in Detroit just inside Eight Mile Road has a very similar median income, $49,000, but the population there is 97 percent black.

Last year, about 70 percent of the loans made in the Detroit neighborhood carried a high interest rate — defined as 3 percentage points more than the yield on a comparable Treasury note — while in Plymouth just 17 percent did.

Last year, blacks were 2.3 times more likely, and Hispanics twice as likely, to get high-cost loans as whites after adjusting for loan amounts and the income of the borrowers, according to an analysis of loans reported under the federal Home Mortgage Disclosure Act. (Asians are somewhat less likely than whites to take out high-cost loans.) ...

[anne]

http://query.nytimes.com/gst/fullpage.html?res=9F07E7D6143DF937A25752C1A96F958260

November 14, 1999

Study Discerns Disadvantage for Blacks in Home Mortgages
By BILL DEDMAN

When black and white homeowners refinance their mortgages to fix a roof or pay off credit card bills or bring down their monthly payments -- they often deal with vastly different lenders, according to a new study of lending in metropolitan Chicago.

Nine of 10 whites in Chicago borrow from top-drawer banks and mortgage companies, which the industry calls prime lenders. They lend to people with A credit ratings, making loans at competitive rates.

But even in middle-income neighborhoods, 5 of 10 middle-income blacks are borrowing from ''subprime'' lenders. These companies say they lend only to people who have bad credit ratings (A- or B or C credit). They are allowed by law to charge for the higher risk of default.

This segregated mortgage market is described in the new study, called ''Two Steps Back,'' which was based on reports that the lenders filed with the federal government from 1993 through 1998.

The study found that race was a stronger factor in predicting the pattern of loans than household income, home value, real estate debt, age of housing, education and location in city or suburb....

[anne]

http://www.nytimes.com/2007/10/17/opinion/17wed2.html?ref=opinion

October 17, 2007

Subprime in Black and White

Evidence is mounting that during the housing boom, black and Hispanic borrowers were far more likely to be steered into high-cost subprime loans than other borrowers, even after controlling for factors such as income, loan size and property location.

The Furman Center for Real Estate and Urban Policy at New York University released a study this week highlighting a disturbing pattern of racial disparities. Using data gathered by the federal government, the study showed that the 10 New York City neighborhoods with the highest rates of subprime lending in 2005 had black and Hispanic majorities, while the 10 areas with the lowest rates were mainly non-Hispanic white. The higher incidence of subprime lending to borrowers of color held up even when the median income levels of the neighborhoods were comparable.

And as The Times's Manny Fernandez reported this week, the Furman findings are consistent with a separate analysis of mortgage data by this paper, which found that high-income blacks and Hispanics in New York City were two to three times more likely than comparable non-Hispanic white borrowers to have subprime loans.

Other studies have shown similar racial disparities in Boston, Washington, Philadelphia and other cities....

[Brooks]

Spencer,

Good comment and not to nitpick, but I just want to clarify (and possibly correct) you regarding your illustration. First, I assume by "$0.05 profit margin" and "$0.50 profit margin" you mean 5% and 50%, respectively. Now, if by "profit margin" you mean gross margin or contribution margin, then we do not know from that information which store is more profitable in terms of bottom line profit (say, net income from operations or some other bottom line), let alone ROI or ROA, because we don't know the fixed costs of each. The gross margin (or contribution margin, if that's what you meant) for Store #1 would be $6 million and for Store #2 would be $5 million. If the fixed costs for Store #1 were more than $1 million higher than that of Store #2, then Store #2 would be the more profitable.

[Detlef]

Just to add to reason´s point.

Aldi Australia

Look for:
13/09/07 Australia: Aldi to Focus on Organic Foods

They are everywhere in Germany. Relatively small, with a limited amount of products but very, very cheap.

As in :

"Of the 38 NSW and ACT stores CHOICE looked at, the cheapest is the Coles Supermarket, corner of Macquarie and Edgar Streets in the Newcastle suburb of Belmont where a basket of 33 specific items cost just [Australian] $95.65."
...
"However, if you had shopped at an ALDI discount store the equivalent basket of goods would cost just $55.70."

[anne]

"But defending the assertion that poor neighborhoods have higher crime is about as much a waste of time as wondering why, like Nathan Berg, when all that money is there to be made, doesn't some grocery store open up across from the drug dealer's den?"

This is prejudicial rank rubbish; pretending to explain a social observation and problem by resorting to prejudice rather than explanation.

[johnchx]

Mark Thoma asks: Does the suggestion that there are fewer grocery stores in low income areas because executives don't happen to be in those areas very often ring true? I would have guessed other forces are at work besides simply being overlooked - a market failure we don't expect to see - but I suppose it's possible.

Conveniently, it's a cheap and easy hypothesis to test. A city can just have its economic development office write up an inventory of under-served neighborhoods, supplement that with relevant data about local costs (rents, utilities, local wages) and mail it to the managements of various chains. If these neighborhoods are the overlooked profit opportunities the authors suggest, the chains will send "thank you" notes and start construction.

I'm skeptical, but maybe one or two cities could give it a whirl. What the heck.

[Brooks]

johnchx,

Berg makes an undeniably compelling case for why that wouldn't work. He writes:

"in interviews with a number of top executives, I found that most of them consider only a few locations for new stores and that these locations are nearly always discovered more or less by accident – while the executive is running errands or driving through town on other business."

You see? Any location that these "top executives" would even consider would have to be one that they discovered incidentally and by accident, kind of like a lazy Winnie the Pooh in a suit. Hard to argue with Berg on the obvious intuitive and empirical validity of that contention. Case closed.

Why oh why did I bother to get an MBA and then spend all those subsequent years continuing to learn completely inapplicable stuff like methods of research & analysis, as well as strategic concepts?

[Winston]

A thought:

There are plenty of liquor stores in poor neighborhoods. Most of these are small and very responsive operations. If there were demand for fresh produce or staples such as bread and milk, they would dedicate floor space to selling them (as 2 of the 4 liquor stores near me do, despite being in an area very well served by other grocers). I think that it is very reasonable to expect that the reason that poor areas are "under served" by grocers has much more to do with the fact that residents of poor communities don't want the goods that they carry and prefer to eat fast food and convenience items. This isn't that unreasonable of an assumption given that the populations of such areas tend to be made up of people who are either working multiple jobs to support family members and who are thus very short on time or who are too lazy to work and thus too lazy to cook.

[anne]

Study on study has for years shown patterns of discrimination against African Americans for a range of financial services, as little as such patterns of discrimination can be attributed to problems in behavior or to the profit to be made from providing financial services to African Americans, so reasons for a possible absence of access to a range of products in poorer suburban or urban neighborhoods need to be examined beyond stereotypes that focus on reasons to be afraid of those who are poorer.

When Bill Cinton's presidency was over, Clinton chose to open an office in the middle of Harlem much to the immediate and continuing delight of residents and benefit of Clinton.

The general association of relative poorness and criminality which immediately emerged in various forms on the thread is only an expression of our prejudice.

[Winston]

Anne,

Poverty increases crime rates. It's been shown time and time again. Calling that an expression of prejudice is just stupid.

[anne]

"This isn't that unreasonable of an assumption given that the populations of such areas tend to be made up of people who are either working multiple jobs to support family members and who are thus very short on time or who are too lazy to work and thus too lazy to cook."

Notice the language of prejudice; over and over, notice the disdain of stereotyping, the disdain for those who are poorer. The poor being too lazy to work and too lazy to cook and despising vegetables even when not working and not lazy.

[Bob Dobalina]

There's a bit of moonbattery on the periphery here. Only spencer and Brooks seem to have any idea whatsoever about what the economics of a grocer look like.

[evagrius]

"Returns must be greater in poor neighborhoods to compensate for the increased risk, and by risk, I mean crime, and anyone that thinks crime is not higher in poor neighborhoods is actively ignoring reality."

Of course, this is visible "violent crime". I would think that "white-collar" non-violent crime occurs with probably just as much frequency in rich neighborhoods but, not being visible, it does does not affect investment decisions by grocery chains.

[Patricia Shannon]

Anne, you are being viscious and hateful to non-poor people, assuming that they steal as much as poor people do, just for fun, since they don't need to.

[anne]

Funny thing, Magic Johnson wondered why there were so few movie theaters in African American communities in Los Angeles, no matter the class structure of a community. Being Magic Johnson and with ample support, Johnson began opening theaters in underserved or unserved communities building a wildly successful business right in communities that so many ha turned away from.

[anne]

http://www.nytimes.com/2007/09/27/nyregion/27oreilly.html

September 27, 2007

O'Reilly Dines in Harlem, Talks About It, Then Hears About It
By MANNY FERNANDEZ and JOHN ELIGON

It was not your typical day at Sylvia's restaurant, the famous soul food institution in Harlem. A CNN crew showed up around lunchtime yesterday, interviewed patrons and filmed some close-ups of a plate of food. Reporters cornered tourists with questions about their dining experience, and the restaurant's regulars called, not to make an order, but to ask about the controversy.

The food, atmosphere and clientele at Sylvia's were a matter of nationwide attention yesterday because Bill O'Reilly, the Fox News Channel talk show host, recently described being surprised to find that the black-owned establishment was as pleasant as other restaurants.

"It was like going into an Italian restaurant in an all-white suburb in the sense of people were sitting there, and they were ordering and having fun," Mr. O'Reilly said on his nationally syndicated radio show on Sept. 19. "And there wasn't any kind of craziness at all."

His comments have outraged some black leaders and baffled black New Yorkers, many of whom said yesterday they were puzzled by what sort of craziness Mr. O'Reilly would expect to find at Sylvia's, since the Lenox Avenue restaurant is a favorite of Harlem residents, international tourists and former President Bill Clinton.

Indeed, yesterday afternoon, as Mr. O'Reilly accurately described, iced teas were ordered with civility, not hostility. Servers behind the counter were shoveling ice into glasses and dishing out macaroni and cheese, greens, chicken and some of the other specialties....

[evagrius]

"Anne, you are being viscious and hateful to non-poor people, assuming that they steal as much as poor people do, just for fun, since they don't need to."

I don't know about Anne, but I think "non-poor" people commit crime just as often as poor people but the crime is of a different nature and less visible.

"Behind every great fortune lies a crime" is often more true than not.

"Viscious" could mean "teary-eyed"?

[Don]

Anne..

Like I said, show me a study that takes account of credit scores...not income levels, race, anything else. Everything you've shown thus far is based on income, but income does not tell lenders but a small part of what they want to know before they lend. The credit score tells them about the credit risk they are undertaking for this particular borrower. Credit scores do not have a racial component.

It's a measure of why nothing is ever done for the poor in that we refuse to acknowledge the reality that crime in their neighborhoods is a devastating problem. Poor neighborhoods have higher (especially violent and property) crime rates, plain and simple. The poor, who are much more dependent on the state for their security than are the rich, are condemned to live in fear as people like Anne contemplate their navals and scream prejudice whenever someone points out the emperor's nakedness.

If you want poor neighborhoods to have grocery stores, then impose the rule of law upon the neighborhood. Get the police departments out of the headquarters and into the streets. Make people keep their houses and yards in a decent state, remembering the wisdom that one broken window can ruin a neighborhood. Providing the security of the rule of law, not the anarchy of gangs and criminals, would be the greatest subsidy to the poor any society could muster. But if we pretend that it's not about security, then we've lost the battle, and we leave the huddled masses to their fate, without any Safeways or Wal-marts along the way.

Security preceds investment. Ask the Iraqis how many new Safeways and Wal-marts (or their Iraqi equivalents) they have in their Sunni neighborhoods these days, and that's all you need to know about supermarkets in the ghettos of America.

[anon]

Karl Smith's points are great...I thought of the exact same reasons.
I used to enjoy your (Karl's) comments on Greg Mankiw's site, too bad it's closed.

[David in NY]

Lots of people here who get their ideas about poor neighborhoods from the TeeVee or racial stereotypes.

Let me say that I think the "crime problem," with one exception, doesn't have anything to do with this. One might theoretically be concerned that customers would shy away from stores situation in a neighborhood with more crime (assuming that to be true). But that is hardly the case when those customers already live and shop in that very neighborhood. Same for employees. This rationale is bullshit.

Second hypothesis. Cost of shoplifting. Unlikely to be true, since shoplifters come from every race and class. But if it were, the simple answer is to raise prices slightly (wouldn't take much) in those stores to cover the additional cost. The supermarket will still significantly under-price the competition, the corner stores, bodegas and small "supermarkets" of the inner city, and should do very well.

My guess is that it's racism of the type exposed on the comments in this thread that's the reason for the lack of supremarkets. Pure unthinking prejudice about certain kinds of people and their neighborhoods. Prejudice, and no economic rationale.

I happen to live in an underserved neighborhood and know what I'm talking about.

[Winston]

Anne, instead of responding to my snarky comment at the end of what I suggested look at my argument. The fact is that if there were money to be made selling groceries in poor, black neighborhoods, people would already be doing so. This is certainly the case in the Hispanic neighborhood where I work. While lacking a supermarket, it has plenty of liquor and convenience stores that sell staples (beans, rice, corn meal, spices (at great prices, I might add), numerous culturally appropriate canned goods and, yes, fresh veggies. If stores aren't selling such items, then it is probably because there is no demand. The only explanation I have for this lack of demand is that residents of "under served" communities place a very high value on the time that they could be using for food preparation.

[David in NY]

And Don:

Get a life. People don't take out a mortgage to buy their groceries. They use their income, like anne says. Credit scores are wholly irrelevant.

Racism. That all that this is about.

[johnchx]

Winston writes:Poverty increases crime rates. It's been shown time and time again.

No, it hasn't and it doesn't. It makes all kinds of intuitive sense. It's really hard to believe it doesn't. But no, there's no simple correlation between poverty, unemployment or rising/falling incomes and crime rates.

The history of crime rates in America since the 1950s is peculiar and perplexing. Nobody really understands it. Lots of people have pet theories that seem blindingly obvious ("Of course it must be X!"), but they don't stand up very well real statistical scrutiny.

[Winston]

David,

One big advantage that small stores have is that it is harder to shoplift at them because you have one or 2 people working there for say 2000 square feet. This really cuts down on shoplifting loses vs. a 40,000 square foot store. I suspect that loses from theft are great enough to eliminate the cost advantage that supermarkets have in high crime neighborhoods.
As a side note, yes, I have lived in neighborhoods without supermarkets, and they always had big enough theft problems to make the reason obvious.

[David in NY]

"if there were money to be made selling groceries in poor, black neighborhoods, people would already be doing so"

Winston, you are so deluded. Small shopkeepers have been making tons of money in blackest Brooklyn for years. The commercial rents along Flatbush and Church Avenues for miles are incredibly high and always have been. Same for downtown Brooklyn. But the lower-price supermarkets (and national chains of other kinds) won't come in, and people suffer from higher prices associated with smaller business. This is becoming less true lately in some areas as, say, the drug store chains are coming in with pretty good prices now. Bruce Ratner's group has begun to devlop Brooklyn, which was commercially treated like a third-world country until the last 5 to 15 years. But there's just no economic rationale for the failure of other retailers to enter the market here.

[anne]

"Ask the Iraqis how many new Safeways and Wal-marts (or their Iraqi equivalents) they have in their Sunni neighborhoods these days, and that's all you need to know about supermarkets in the ghettos of America."

Ah, the ultimate analogy.

[anne]

http://www.nytimes.com/2005/09/14/business/14lend.html?ex=1284350400&en=8a63d70db58adbe3&ei=5090&partner=rssuserland&emc=rss

September 14, 2005

Blacks Hit Hardest by Costlier Mortgages
By EDMUND L. ANDREWS

WASHINGTON - Regardless of income levels, blacks were about three times as likely as whites to borrow through more expensive "subprime" mortgages last year, according to a nationwide lending survey released Tuesday by the Federal Reserve.

The new report, based on data collected from 8,853 lenders, is the Fed's first attempt to look for evidence of racial and ethnic discrimination in the booming business in exotic mortgages and subprime lending....

http://www.nytimes.com/2006/06/01/us/01minorities.html?ex=1306814400&en=a6c77c65d8986cb9&ei=5090&partner=rssuserland&emc=rss

June 1, 2006

Black and Hispanic Home Buyers Pay Higher Interest on Mortgages, Study Finds
By ERIK ECKHOLM

Black and Hispanic home buyers entering the fast-growing market for subprime mortgages tend to pay higher interest rates than whites with similar credit ratings, a statistical study by an advocacy group says....

[Winston]

David,

If your neighborhood is so packed with local grocers, then it can't really be described as "under served," can it?

[David in NY]

Anyway, the quoted segment's ascription of the problem to the vagaries of supermarketing heads driving routes seems, as Mark suggests, a really shallow analysis of the situation. If it's race-neutral at all, it may be that the old development paradigm was to build a great big store on open land where people were about to move. That's apparently not so successful anymore.

See,

Attracting Supermarkets to Inner-City
Neighborhoods: Economic Development
Outside the Box
Kameshwari Pothukuchi
Wayne State University

"Recent studies have also documented the existing and emerging strengths of inner-city markets.
These studies fall into two major categories: (a) those showing how an information gap inhibits
inner-city retail development and how much conventional location models developed in a context
of suburban expansion have systematically underestimated inner-city potential (Brown, 1999; Initiative
for a Competitive Inner City, 1998; McLaughlin, 1998; Porter, 1995) and (b) those documenting
newpopulation and demographic shifts that have made some urban locations increasingly
attractive in recent years (see, e.g., Sohmer & Lang, 2001).

"Exemplifying the first category, Social Compact, a Washington, D.C.–based organization found
that the spending power present in Chicago’s LittleVillage, a low-income Hispanic neighborhood,
was $85,018 per acre, more than twice that of Kenilworth, an uppercrust suburb north of Chicago
with a much lower population density (McLaughlin, 1998). These and other findings challenge
supermarkets and development agencies to look at the density of dollars rather than simply aggregate
income and population statistics. They also call for greater attention to how mainstream market
assessments miss the large urban cash economy, some of which is underground."

[kthomas]

What I'd like to know is why there are fewer grocery chains and why the price of fresh produces has increased so much while the quality is dropped.

Too few players, too few choices for customers.

As for these large stroes operating less in minority areas, nobody should be suprised. Racsim is often colored green. What is suprising is how poorly some minorites have failed to fill in the gaps. Seems to me that if large chains don't operate in these areas, it should create an oppurtunity for minorty owned stores. In California and Texas, and even in places like Virginia, I've seen huge minority owned stores pop up, but none of them African-american. Usually hispanic or asian. Why?

says...

Wrong, wrong, wrong and wrong again.

Oh Boy!

You put a major super market in those areas and profitable prices will have to be higher then in white white bread suburbs.

That's racism. That's a major lawsuit for Johny Edwards and Johny Cochran.

[David in NY]

"then it can't really be described as "under served," can it?"

Only partly. My wife won't shop on our street because the prices are too high. We drive several miles to a supermarket. Many of our poorer neighbors don't have the cars or the time (remember those folks who couldn't evacuate New Orleans, no car?). We are at least lucky that there is nearby food that is nutritious. That's because we live right off a really big commercial intersection. There are areas near us not so blessed, more like I remember much of Detroit being -- good food hard to come by at a reasonable distance.

New York, including Brooklyn, is a bit of an anomaly in this regard because of the incredible small-business culture, largely fueled by immigration. But those small businesses charge more and in many areas provide less nutritious foods.

[David in NY]

"That's racism. That's a major lawsuit for Johny Edwards and Johny Cochran."

Not if it's true that costs are higher in the inner-city, which is the hypothesis. Easy to defeat such a lawsuit.

[paine]

obviously
our reporter or whatever "it" is
missed the 90/s back to the inner city
retail trend by the big chain players
and the crazed developers
that twinkle toe around em

-----------------
clever work mark

the thread generated by this dumbo article
u posted
if not stocked with insider info/savy
is none the less full
of very acute
amateur observations and opinions
folks
aren't you all
amazed at the complexity
this issue kicks up ??

btw

optimo net operating margins
are among much else
a function of turn

rent rates are best analyzed
by gross margin dollars per sq foot

at retail
all is just optimizing
the ratios
but they be always in motion

[Syaloch]

I think F. Frederson is closest to the mark regarding the explanation. There doesn't seem to be a lot of big-box retail of *any* sort close to most residential urban areas, and not just the poor. The major chains apparently plan their stores around a suburban, car-oriented model, and land in urban areas is too scarce and expensive to support it.

Farrar Richardson's right that there's no reason why all groceries have to be 100,000 sq ft superstores. As an American, I was surprised when staying near downtown London to find grocery shopping remarkably easy thanks to the small "superette"-type stores found every few blocks.

[anne]

"You put a major super market in those areas and profitable prices will have to be higher then in white white bread suburbs.

"That's racism. That's a major lawsuit for Johny Edwards and Johny Cochran."

Simply notice the language and implcations. By the way, are there any relatively lower income integrated or Anglo communities lacking in services in America; suburban or urban?

[paine]

its interesting to notice
people often assume adjustments are nearly immediate
in fact discovering costs and volume in a new sub market
take time
and are implemented over five - ten -fifteen year runs

the big retailers are retentering the inner city market
with models and chains designed for these sub areas
just takes time folks
on this one
racism either way cuts no ice
the post long hot late 80's freak out is largely over

yes planned cleansings --a la new orleans ---
show a preference
for a new higher rich /poor urban residence ratios

but again its about highest value lot use

btw
looking back

the slumlords
the inner city store front usury meisters
were getting gobbled up by
huge corporate operations

ever think
the past squalor
was more dynamically profitable ???

the numbers change there's hope in that

but capitalism as practiced by big corporations
is asocial
it does not generate racism
for emotional reasons
it merely employs racism
where and if its more profitable

directly or just "over all "

[paine]

anne

profit max corporations
if they act racist
why ???

or are you just battling the false explanations
of racist commenters here
and not "blaming" the corporations
who must have "other motives "
for the long retreat from the innner city market
between
65 and 93

[F. Frederson]

Thanks, Syaloch.

"As an American, I was surprised when staying near downtown London to find grocery shopping remarkably easy thanks to the small "superette"-type stores found every few blocks."

This brings up a third issue that no economist could ever grasp: cultural issues. I bet most Americans, poor or not, find the shopping experience of a single large store more enjoyable than visiting the several small specialist stores (butcher, baker, general grocer, chemist) that are found in many European cities. And most Americans probably also find the experience of shopping in a large store with a lot of items that they would never buy better than a small store that has everything they buy - the pleasure of perceived opportunity, if you will. (Even the small supermarket/co-op where I shop has 4-5 different selections of capers. Do I need this level of choice?) The same cultural expectations that shoppers have inform the decision-making processes of large chains. The chains might be unable to conceive of a business model that works in urban settings, just like Detroit is unable to conceive of a small car that is pleasant to drive, for reasons that aren't entirely tied to economics.

Anyway, the issue of inner-city food retailing seems to be a knot of issues that mere "economic theory" couldn't possibly hope to untangle.

[capital formation]

in many low income neighborhoods in NY, the corner stores/bodegas seem (now) to be run by Arabs or by Koreans

{I am sure that other ethnic groups were dominant at other times in history}

the key is capital formation, that is, "From whom will I get the money to open my market?"

while I am no expert, I have heard that there are informal loan networks in the Korean community that will lend you the money to get started -- there is H*ll to pay if you don't pay the money back! you are banished

even more importantly, the entrepreneur that shows up at the loan meeting to ask for the seed capital HAS ALREADY learned the business by working (very hard) behind the counter at some other store that has benefited from the loan network

so -- putting some fancy economist lingo around it -- making a loan to this individual has lower risk and lower information costs; further, default carries a non-monetary penalty!

I am sure that these same informal lending/peer networks must exist for the (black muslim?) stores on, say, Atlantic Avenue in Brooklyn.

CULTURE MATTERS!

i submit that you do not see stores in those low income neighborhoods that are marked by LOW SOCIAL COHESION

address the low social cohesion...and they will come!

[barry payne - economist]

SOME PERSONAL EXPERIENCE FROM THE LATE '60s

I spent a substantial amount of time in small mom-and-pop stores in poor, black neighborhoods in the South. In one:

- the owner ran everything except the front cash register, usually manned by his brother or sister;

- the whole place was about 1400 square feet on the corner, surrounded by run-down shacks - the next closest store was 2 blocks away and didn't do the business he did;

- he spent most of his time behind the meat counter, cutting on a chopping block and packaging custom orders on the spot like ham hocks (pigs feet) and sliced meats;

- a bunk bed was set up in a tiny room for naps;

- he knew every customer by name;

- most customers had a credit account and walked out without a receipt as he scratched amounts on a tablet; on payday, they'd pay on it from a wad of bills in their hand, never checking the details;

- most customers bought small amounts of few items and returned often, some every day;

- one in while, he'd put his thumb on the scale to skim a few quarters from a customer;

- deliveries from suppliers, particularly fresh meats, went on all day long; he pay them from a wad of bills in his pocket;

- he had an old pick-up to get the main grocery order from a warehouse every 2 weeks; sometimes he'd go to a large retail discount grocer and buy out their baby food and resell it at his store;

- he accepted food stamps for anything in the store at a discount off the face value of the stamps;

- the outside was covered with bars and chains on the doors and windows; multiple break-ins had occurred through the ceiling;

- he'd never been robbed directly but had a few close calls; occasionally a trouble maker would come in - he'd chastise him by name and verbally chase him out of the store; he carried a revolver on his person but never used it;

- he was Italian and sold out to some Koreans around '80; just before selling, he startled me with some strong racist language about not wanting those blacks around his daughter;

No regular supermarket could survive that area. They would never offer credit for groceries. Neither could they offer personal service at such a level to be trusted totally by the customer. Because most of the traffic was on foot, they would not be able to draw from the large radius necessary to maintain a minimum volume to stay open.

[paine]

cap form

you write of shops

we write of big corporate chain reactions

[James Killus]

Quick question for those who are asserting that large supermarket chains have big staffs and research departments who decide where to locate stores. Do any of you actually know someone who works in one of these departments.

I have an in-law who used to be the CEO of a large southern grocery chain. I never grilled him on the subject, but what conversations I've had with him on the matter supports Nathan Berg. Siting new stores isn't so common that there is a staff dedicated to it, (locating a site is a very small effort compared to actually opening a store, for example) so it usually comes under the responsibilities of people who do not specialize in it.

Next question: does anyone here have any statistics on the rate of shoplifting of food items as compared to other typical retail loses, such as spoilage? All I've seen here is a lot of jibber jabber, except from rustbelt (three percent is a pretty good profit margin for a high turnover retail business, by the way). But even there, rusty hasn't supplied the next important number, which is turnover. Turn your stock every week and 3% on sales is 150% on inventory for the year. I don't think it very likely that three out of every 100 loaves of bread just walk out the door, but if they do, an added 3% on price can take care of it. "Mom and Pop" stores tend to have a much higher overhead than chain stores (higher wholesale costs, to begin with), but they make up for that with higher prices. Larger chains could do the same but they don't.

Possibly, the people making the siting decisions have the same opinions that have been shown on this comment thread. That would slow them down, wouldn't it?

[robertdfeinman]

Just for the record Walmart has in the past only operated where they could set up a big box. This meant on the fringe of small towns, usually not too high on the economic scale.

Recently they have changed their shoplifting policy, they will no longer prosecute people who steal less than $25. Apparently the volume of such actions was costing them too much money to follow up on.

So much for the idea that crime is an inner city phenomenon...

[General Specific]

I haven't had time to read all the comments, but for the sake of convergence on what I'm hearing, I'd like to add the following:

1. Those who assume poor means inner city (e.g. with tall buildings and expensive land) are making an assumption not necessarily warranted. Thinks Watts in Los Angeles. Suburban sprawl. I grew up not far from there. A nice size lot is probably just waiting for development.

2. What is the (a) probability of a building burning down because of riot and the likes compared to (b) more natural accidents like fire, human error, etc. I think those who obsess with that topic are biased and perhaps bigoted.

3. The assumption that executives would never make uneconomic decisions--violating homo economicus--is similar to looking for lost keys near the streetlight because the light's better. Best to look at the facts, not assume something up front.

4. It doesn't make sense that executives would place new stores based on happenstance. But it does make sense that people want to develop stuff in cool areas, the nice new suburbs with disposable income and pretty palm trees and BMW driving customers. Why? I worked at a shoe store chain when I was a kid. Everyone wanted to work at the cool new store. Not the store in the middle of Watts. Crime fears, etc. Perhaps irrational.

5. Now here's a monkey wrench in some of the above theories. In shoe stores, we were supposed to sell a certain percentage of what were called fronts: Polish. Socks. Purses. This is just my personal observation, but African Americans were more likely to purchase such items, not the local Scottish penny pincher. I'm not trying to create or propagate stereotypes here, but I'd like to see evidence that all the flowers and bakery items would not sell in poor African American neighborhoods. Again, I'm hearing stereotypes that might not be warranted.

I think a focus should be on fear of crime--whether irrational or rational--and the cool factor of developing in pretty upper-class suburban neighborhoods.

[ken melvin]

Could look it up, but would you know any more after you did? Amazing, range. So, the conclusions. I wonder what the odds are against getting it right if you cherry pick going in. No doubt, Safeway closed the stores because they were profitable. So, Lucky's. Said you couldn’t pay them enough, in one way or another, they did. The subsidized didn't make it either. My then eleven year old son was with me when I automated the 7-up plant in SF’s Bayview/Hunters Point. The nearest lunch source was the then existing Safeway. Boy howdy, great way to get those old protective instincts going; it was more like a war zone than anything else that comes to mind.

Then there's the thing about no markets in downtown Seattle, Santa Rosa, ... though oodles of people, mostly young and employed, live there. SF has a downtown Safeway and Whole Foods now that they built the expensive high-rise condos. Heck, I bet Safeway and Whole Foods have stores downtown Seattle now that they have all those expensive downtown condos. But downtown Boston’s not downtown Oakland; not even close.

I've spoken of my daily walks through ChinaTown, SF and Oakland. A fifteen minute trip and I’m in China. So the people. They’re not in America, at least not yet. Some, even after generations, will never be. Many more than anyone would admit just got here and many more are coming today and tomorrow and they are not bothering with the niceties. They’re not here. You are there.

Once a week I go to Oakland's Fruitvale - Foothill area. Once the Dimond, an Irish neighborhood, now Latin American, mostly illegal. Fifteen minutes and you're in Mexico. Carts on the sidewalk, roachcoach cafes, Mexican Bakeries, peddlers selling stuffed toys, cotton candy, ... from sticks on their back, produce shops with a tropical selection, ... No Safeway. No Lucky's. Their stores have bags of rice, beans, ... on the floor. Go to SF Mission - same. Go down south to Monterey Park - same. The old Luck’s/Safeway store’s there, vacant.

[David in NY]

Actually, there's a big "literature" on this, but I'm not sure there's hard empirical research. There are standard responses by the supermarket chains: land is expensive and existing store sizes are too small (oddly, a store over 40,000 sq. ft. has less "shrinkage" from theft, damaged product, etc., than smaller stores); theft of food and shopping carts; zoning; and stuff. I think it may be just an inertia thing. It is different, and somewhat more difficult, than building a store in some farmer's field on the edge of the suburbs. But the lucrative farmers fields are beginning to diminish, and the inner city is a big untapped market. As I say, the drugstore chains are moving into my area; SM's may be next.

[Patricia Shannon]

BTW, a large percentage of poor people are Euro-American.