Why large chain stores should tap into the $90B potential of inner-city markets like New Orleans.
NEW YORK -- In the year since Katrina devastated New Orleans, large chain stores like Home Depot and Wal-Mart have reopened most of their damaged stores there. More significantly, retailers like Walgreen and CVS are already looking to add new stores in the area.
What's the catalyst?
Industry watchers say these retailers want quickly to regain their foothold in one of America's most lucrative, yet largely untapped, retail markets: the inner cities.
"Most large scale suburban retail development is done. So the inner cities have become the new hot retail market. It's a market that has a lot of potential but it's still largely underserved," said Herb Tyson, vice president of state and local government relations with the International Council of Shopping Centers (ICSC).
Prior to Katrina, the inner city of New Orleans was a booming $2 billion retail marketplace, according to a Boston-based nonprofit group called the Initiative for a Competitive Inner City (ICIC), which has assessed the retail potential for 100 of the largest inner cities across the nation over the past eight years.
To put that number in perspective, the size of Boston's inner-city market is about $1.5 billion, Chicago's market is valued at $6.5 billion and Los Angeles's at $7.3 billion.
According to ICIC's spokeswoman Deirdre Coyle, most of those cities - with the exception of New Orleans - showed a lack of mass-market retail penetration.
"Gateway cities like New Orleans are more attractive retail markets because merchants realize they can pull customers both from local residents and from tourists," Coyle said.
Why go to Detroit or Philly?
At the same time, Coyle said retailers are making a costly mistake if they think other cities like Detroit or Philadelphia aren't good business opportunities because they don't have the same customer appeal as the Big Easy.
Here's why.
First, the U.S. inner-city population of about 21 million people represents a retail market of more than $90 billion, according to the latest estimate available. That's a sizable expansion opportunity for retailers at a time when most big-box chains are threatened by saturation in their more typical suburban markets.
Secondly, about 38 percent of inner-city households are classified as "moderate to middle income," meaning they earn an annual income ranging from $20,000 to $50,000. That is slightly more than the national average of 36 percent, Coyle said.
Inner-city businesses are also at an advantage because of higher population density. "Our research shows that inner-city residents with lower per capita income tend to spend a higher percentage of that income on retail purchases," Coyle said.
For example, the group's research showed a grocery store in the suburbs of New York City requires a 20-mile radius to achieve a customer base with the same buying power as a 10-block radius in Harlem.
"Harlem is a great example of successful inner-city retail penetration," Coyle said. "Once the mass market retailers went to Harlem we started to see the next wave of business activity develop through new hotels, restaurants and other types of retailers selling better-quality products."
As retailers set up shop in these secondary markets, it also creates more jobs for local communities. New Orleans's clothing stores, for example, employ 13 of every 1,000 of its inner-city residents, Coyle said.
Obstacles remain
"We feel there is a very compelling business case to be made here for the business opportunities in cities like New Orleans. But we're also not na飗e to the challenges retailers face in those markets," Coyle said.
Higher rates of crime and poverty in many of these urban markets also act as a deterrent to retailers. ICIC defines an "inner city" as having a rate of poverty 20 percent or higher, an unemployment rate one and a half times or higher than the surrounding metropolitan area or median household income one-half or less that of the surrounding metropolitan area.
Other obstacles include restrictive zoning laws and limited land availability and higher land costs, she said. It's much harder for Wal-Mart, Target and other large format retailers to find the space in inner cities to build their supercenter stores.
Wal-Mart (Charts) continues to face opposition in some cities in California where residents fear the big-box format will cause traffic congestion, hurt smaller independent businesses and drive out better-paying jobs.
"It's an attitudinal challenge," Coyle said. "Unfortunately retailers get caught in a quagmire of regulations and city and community politics. But then again, the most successful business models are established in collaboration with everyone involved."
The retail road map for inner cities calls requires that retailers literally think outside "the box." "If you can't find space, build vertically and make smaller stores. Inner cities are heterogeneous markets with various ethnic and income groups. You can't have a one-size-fits-all model here," Coyle said.
Innovation helps
ICSC's Tyson said Wal-Mart, Target, Starbucks are a few retailers that have aggressively been targeting new locations in the densely populated inner cities.
Burt Flickinger, managing director with consulting firm Strategic Resources Group, credited drugstore chains CVS (Charts), Rite Aid (Charts) and Walgreen (Charts) with doing a "brilliant job in positioning themselves to cater to the urban inner city markets.
"Between 35 and 40 percent of their stores are devoted to conventional supermarket categories like dairy, foods and other refrigerated products even though they operate as drugstores," said Flickinger. "These companies almost operate as mini supermarkets in inner cities."
Other than innovating with the conventional store model, Flickinger suggests, inner-city retailers also up the ante on prices, service and products as a way to battle the growing dominance of family-owned retail chains.
"The other side of the urban retail story is the real growth of Latino-owned and operated retailers," Flickinger said. "They're quickly becoming very successful, high-volume chains because they can effectively cater to niche demands of a growing ethnic consumer base in these markets."
Starbucks, Wal-Mart, Target and Home Depot were not immediately available for comment.
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