Understanding the retail business potential of inner cities.

Author:Weiler, Stephan

Inner city areas are often significantly "under-stored" (Loukaitou-Sideris 2000), with inadequate opportunities for residents to shop near their homes. More residents are transit dependent in inner cities than in the general metro area, making them even more constrained to local choices. But which types of establishments are needed in which locations? Given their isolation from the economic mainstream, marginalized communities may be the least able to provide information regarding development possibilities. Yet they would also be likely to benefit substantially from such knowledge, given that inner city markets are the focus of less attention than those of economically successful communities.

This paper develops methods to bridge this informational gap. Such gaps produce particularly regressive forms of market failure, where economic isolation and stagnation reinforce each other. Business opportunities are likely to exist in the inner city, but private capital's focus needs to be reoriented to such possibilities. Public entities may help more by analyzing and providing information than by organizing and implementing top-down programs. Universities may be particularly well suited to bridging informational gaps (Weiler 2000a). In that spirit, this study represents a further effort in constructing a new form of public-private partnership, where each party concentrates on its relative advantage. Under this scenario, publicly supported actors analyze and disseminate promising economic information, while private actors construct and manage the resultant entrepreneurial efforts.

Retail sales gaps have been found to be significant for a number of cities. Boston, New York City, Miami, Chicago, Atlanta, Oakland, Baltimore, and Memphis have been examined closely (BCC and ICIC 1998; Porter 1997; and REDC 1998). The U.S. Department of Housing and Urban Development (HUD) published a report estimating retail sales gaps for dozens of cities across the nation (HUD 1999), which highlights many substantial retail gaps in inner city areas. However, total dollar sales gaps do not provide important details about specific shopping needs that go unmet, such as the lack of grocery stores. Inner city areas can be large and often need to be understood as separate market areas. Finally, most studies have been done with proprietary data and analytical methods, which makes standardized comparisons virtually impossible. Given these concerns, municipalities need standardized methods to address specific retail needs by geographic area.

This paper asserts that missing information is a key element hindering economic development in inner city areas and sets forth a replicable method to provide such information on potential retail business opportunities in such areas. The key element of this method is a set of econometric techniques that can be applied to publicly available data to estimate retail sales gaps using Denver, Colorado, as a case study. The technique is equally applicable to more rural areas facing similar gaps, which suggest similar opportunities. While the issue of missing information and resulting methodologies are the major scholarly contributions of this paper, the case study of inner-city areas in Denver itself suggests numerous retail gaps that present the practical potential for private capital to leverage socially beneficial entrepreneurship. Objective clarification of business opportunities is likely to be especially useful for resource-constrained potential local entrepreneurs and their small-scale shops, who can use such information to sharpen business plans and support financing applications.

The next section evaluates previous research in the area of inner city gaps. The third section considers informational barriers to entry in inner city markets. A detailed description of our methodology is presented in the fourth section.

The Overlooked Promise of Inner Cities

When many retailers consider locating in the inner city, they think of the drawbacks and decide to move elsewhere. Companies' perceptions of the inner city are that crime is too high, local governments are obstacles rather than facilitators, and good employees are difficult to find, to name a few of the most common problems (BCC and ICIC 1998). The negative aspects of the inner city, conventional wisdom suggests, are greater than the positives. This thinking is shortsighted at best. Inner city areas offer numerous benefits that may outweigh the negatives on which retailers initially focus (Porter 1997). The inner city may in fact be an unusually promising place for business development.

To satisfy an inner city's retail shopping needs, a variety of stores may be needed. In some cases, local entrepreneurs with detailed, personal knowledge of the target market can successfully fill niche markets. Their stores may be small to mid-sized, depending on the needs of the community and their accessibility to start-up capital. Other times, existing stores will be able to fulfill local demand by expanding their operations on a scale determined by community needs. In extremely under-stored areas, local demand may warrant the introduction of a large retail establishment. Under each scenario, specific information about the size and type of retail establishments (food, clothing, household goods, or department store) that are lacking can aid entrepreneurs and established business owners in securing funding for retail development.

Inner city households have under-appreciated buying power. Residents' low average household incomes tend to deter potential retail firms. However, this number is misleading, since households with low averages often spend more than they apparently earn. This ratio of household expenditures to reported income is very large (around 4) for the poorest households, then declines as income increases to a ratio of approximately .6 for the most affluent households (REDC 1997, 1998). Even though their incomes are just 54 percent that of other urban residents, inner city households spend 62 percent as much in total, 89 percent as much on food at home, and 67 percent as much on clothing as other urban residents (HUD 1999). Inner city spending on retail is greatly underestimated if only comparative household average incomes are considered rather than expenditures.

Common methods of reporting income--medians or averages--thus distort the market potential of a community and create misleading information about inner city neighborhoods, particularly given their relative density. The informal economy tends to be particularly important in struggling rural and urban populations, which can lead to significant undercounting of actual household income (Weiler 1997; Eisner 1988). Part of this is due to the estimated $1 trillion--more than 10 percent of current GDP--that goes unrecorded in today's economy. Legal activities such as gardening, childcare, housekeeping, tips, and street vending represent most of this income, although illegal sources contribute as well (BCC and ICIC 1998). In addition, temporary unemployment, savings depletion, student loans, and self-employment income losses can give residents with low incomes higher purchasing power than their earnings indicate (REDC 1998).

Population density per square mile makes inner city markets especially appealing. Even though median household incomes may be low, the density of suburban purchasing power pales when compared with inner city purchasing power per unit area. For example, a 3.5-square-mile area of inner city Memphis, Tennessee, has the same retail spending as the 700 square miles of a nearby urbanized Kentucky county (REDC 1998). As suburban markets become saturated with retail stores and profits per square foot decrease, the higher untapped profits in the "under-stored" inner city should become more attractive to retailers, given proper information on prospects. Store after' store bears out this hypothesis, with many chain stores reporting their highest earnings from inner city locations (Taneja 1998). The opportunities presented by inner city markets are becoming simply too large to ignore.

Even practiced estimates of consumer demand within the inner city tend to underestimate actual sales. For instance, after seventeen years of refining their methodology for projecting store sales, one successful fast food company reported that for fully half of their stores, the average underestimate of sales ranged from 20 percent to 25 percent (Okoruwa et al. 1994). This finding is mirrored in a grocery store chain's claim that they must generally add 20 percent to presumably reputable estimates of food expenditures by inner city residents. Currently, firms gain experiential knowledge like this only through time, trial, and error (HUD 1999). Better initial information on retail prospects is clearly needed, which still is likely to result in conservative assessments of market potential.

Another factor that determines the demand for retail establishments close to inner city neighborhoods is the percentage of residents who are transit dependent. For the United States as a whole, some 90 percent of people commute to work by car. The remaining 10 percent are divided almost equally between those who use transit and those who work at home or walk to work (Mills and Lubuge 1997). However, inner city residents are more likely to use transit, since as many as 30 percent or even 50 percent of them may not own cars (Loukaitou-Sideris 2000; REDC (S. Memphis) 1998). Shopping far from home is therefore more difficult for many inner city residents, particularly for items needed regularly such as food. They will often use available retailers, such as drug stores or smaller grocery stores, to fulfill shopping needs (BCC and ICIC 1998). This situation is less than ideal in terms of price and merchandise options for the inner city customer and represents yet another indicator of retail gaps in the inner city.

Given these...

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