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T H E W I L S O N Q U A R T E R LY

Stores and the CityMany cities launched revival efforts with downtown festivalmarketplaces such as Boston’s Faneuil Hall. Can retailerswork the same magic in less affluent neighborhoods?

B Y D AV I D Z I P P E R

Pennsylvania Avenue is one of America’smost iconic streets. But if you follow it a few miles eastof the White House and across the Anacostia River, youwill find yourself in a very different world. The avenueis lined with gas stations, check-cashing shops, andtake out restaurants that serve the area’s predominantlyAfrican- American population. Many of the storefrontsare faded and worn, and it’s often difficult to tell whethera functioning business operates inside. Few people strollthe sidewalks.

You wouldn’t know it from looking at this stretchof Pennsylvania Avenue, but the District of Columbiawas recently ranked among the top cities in the UnitedStates for retail development by Marcus and Mil-lichap, a national real estate advisory firm. The Dis-trict’s downtown has boomed recently, with 54 restau-rants and many stores opening since 2007, along withnew office and apartment buildings. But the 130,000Washingtonians who live east of the Anacostia areserved by only four sit- down restaurants. The unem-ployment rates in the area’s two wards are roughly 19and 30 percent, compared with a District average of

10 percent. A third of the residents live below thepoverty level.

So it was a big event last August when a new super-market opened at 2323 Pennsylvania Avenue S.E., in therelatively prosperous Fairlawn neighborhood. Then-mayor Adrian Fenty and Councilmember Marion Barry,a former mayor, came to give speeches and mingle withthe crowd. More than 300 people turned out to taste thefree samples of sushi rolls and organic hot dogs andexplore something Washington had never seen before:an organic grocery store east of the Anacostia.

Because I work for the city government trying tobring new businesses to the District’s underserved com-munities, I was on hand to savor the moment. One of thepeople I met was an unemployed chef named Dominicwho kept himself working with occasional catering jobs.A tall, muscular man with long dreadlocks, Dominic toldme how happy he was that he wouldn’t have to travelover the Anacostia anymore to get the quality ingredientshe needed. Indeed, the owner of the new store haddecided to open this location partly because he noticedthat many of the customers at his store in the Capitol Hillneighborhood were coming from east of the Anacostiato shop. The nearest conventional grocery store is morethan a mile from Fairlawn. The grand opening was justthe latest piece of good news for neighborhoods east of

David Zipper is director of business development and strategy in theDistrict of Columbia’s Deputy Mayor’s Office. He previously served in NewYork City government as executive director of NYC Business Solutions andwas a senior associate at the Initiative for a Competitive Inner City.

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the Anacostia, where some of the benefits of Washing-ton’s economic stability are finally beginning to arrive.Close to downtown and blessed with falling crime rates,the area has seen its population grow in recent years.

The new supermarket is the latest addition toYes! Organic Market, a small Washington- based chainwhose owner, Gary Cha, a cheerful middle- aged Koreanimmigrant, has found success with stores that are essen-tially smaller, more affordably priced versions of a WholeFoods supermarket. The new store on PennsylvaniaAvenue sells both organic and conventionally grownfruits and vegetables, and shoppers can find a ready

supply of products ranging from freshly packed meats tobulk rice and boxes of macaroni and cheese (10 differentkinds, no less). When it opened, Yes! Organic becameonly the fourth supermarket east of the Anacostia, wherethere is now one grocery store for every 33,000 residents.Elsewhere in the District, the average is close to one storeper 10,000 residents.

It’s a big victory when a grocery store opens in aneighborhood like Fairlawn. Health and anti- obesityadvocates such as Michelle Obama point out that manypoor people have little access to fresh fruits and vegeta-bles. They say it’s imperative to have more grocery stores

First mover: A city subsidy helped persuade Gary Cha to open a new branch of his local grocery store chain in a developing neighborhood.

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The City Bounces Back

in inner cities. Urban development boosters such as thenonprofit Initiative for a Competitive Inner City (my for-mer employer) suggest that enlightened businesses cansolve urban problems, and are quick to applaud thesavvy retail executive who follows the invisible hand toa neighborhood with unmet demand. Yet events like theYes! Organic opening are all too rare. By ICIC’s own esti-mates, inner- city residents’ unmet demand for retailproducts remained constant at about $40 billion from1998 to 2007. There is no reason to believe the gap hassince closed.

When I’m trying to interest businesspeople in newareas, I’ve found that the “consciousness raising” of thesort these advocates promote is a useful but limited

tool. In my many meetings with retailers, I’ve neverknown statistics about childhood obesity to motivate agrocery store executive—whether out of altruism orguilt—to open a new outlet in a poor neighborhood.Nor do I know of any executive who ever drafted anexpansion plan solely on the basis of a neighborhood’sunmet demand, even when cities offered a subsidy.

The executives who make the decisions aboutwhere to open new stores are a conservative bunch,often preferring to see a competitor move into a newarea first. Chains and supermarkets generally trustlocal retail brokers to help them make location deci-sions, but the brokers have their own biases. In par-ticular, they have an incentive to recommend famil-iar neighborhoods, even if an emerging area offersmore profit potential, in order to avoid the risk ofalienating their client. They are also eager to close thedeal (and receive their commission) quickly, andbetter- known neighborhoods are an easier sell. Thesepressures can make it particularly difficult for under-served urban areas to attract the all- important “firstmovers” whose success can draw other retailers.

That’s why cities hire people like me: to help fixsuch glitches in the market. By educating retailers,helping them find suitable sites in emerging areas,and— when necessary— arranging to subsidize theircosts, I try to help residents in these communitiesgain the shopping options they want, along with newjob opportunities.

But the stakes don’t stop there. The scarcity ofretail establishments east of the river is one of the rea-sons why Washingtonians spend so much moneyshopping in nearby Virginia and Maryland. The Dis-trict’s Office of Planning recently calculated that localresidents buy more than $1 billion of goods in thesuburbs—roughly equivalent to 15 percent of all retail

sales within the city. Toput that number in per-spective, eliminating thisbillion- dollar retail “leak-age” would bring roughly$60 million in new taxrevenue to the District’scoffers. It would also cre-ate jobs. The NationalRetail Federation esti-

mates that one retail job is created for every$250,000 in consumer spending. This means thateliminating $1 billion in retail leakage could createenough jobs for 4,000 people, a significant numberin a city where more than 33,000 people are seekingwork.

Many city governments have recognized retail’spotential to employ lower- skilled residents, capturesales lost to the suburbs, and catalyze neighborhooddevelopment, and they have moved beyond high-profile downtown retail projects such as GhirardelliSquare in San Francisco and Faneuil Hall in Boston,hoping to grow more retail businesses in lower-income neighborhoods. Most of these efforts havefocused on retail chains because, while people like meare thrilled every time a new home grown neighbor-hood florist or clothing boutique opens, we realizethat the chains’ size means they can hire the most res-idents and generate the most tax revenue. Pennsyl-vania’s much- touted Fresh Food Financing Initiativeprovides a suite of financial incentives designed toinduce supermarkets to move into underserved areas.

RETAILERS ARE RELUCTANT to move

into a new area until they see a competitor

succeed there.

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The City Bounces Back

Many cities also encourage retail development in tar-geted areas through “tax increment financing,” a formof subsidy based on future tax revenues expectedfrom the project.

The enthusiasm for retail development isn’t universal.Critics say that new stores merely attract dollars that cus-tomers would have spent at other stores in the city ratherthan bring in new money the way, say, a corporate head-quarters or new technology company would. One of mycounterparts in Dallas told me flatly that he does not con-sider retail strategies such as the District’s to be economicdevelopment at all.

That surprised me, because retail has been a majordevelopment priority in Washington for more than adecade. The city has established a nonprofit organizationcalled the Washington, DC Economic Partnership to meetwith retailers and brokers, offer tours, provide demo-graphic information, and suggest sites for development.The Economic Partnership plays a central role in organiz-ing the District’s booth at the annual convention of theInternational Council of Shopping Centers in Las Vegas,where tens of thousands of retailers, developers, and realestate brokers converge to pitch opportunities and inkdeals. With private meeting rooms and scale models ofneighborhoods, the District’s exhibit is easily among themost sophisticated efforts by cities at the convention.

The District has also created financial assistanceprograms to bring “destination” retailers downtown andexpand residents’ shopping options in targeted devel-opment corridors, or “Great Streets.” PennsylvaniaAvenue east of the river is one of nine such corridors.Momentum seems to be growing, as retailers such asBed, Bath & Beyond, Home Depot, and Target haveestablished their first stores in the city. Walmart recentlyexpressed interest in opening four District stores aswell, including one east of the Anacostia. But Walmartis something of an anomaly among major retailers; hav-ing exhausted most suburban and rural markets, thecompany is effectively forced into urban areas in thesearch for growth.

The District’s efforts to attract grocery stores east ofthe Anacostia still face big challenges. When pressed,representatives of the major chains offer an array ofexplanations for their hesitation. Some complain abouta shortage of job- ready workers, though Yes! Organic’sexperience suggests that those fears are unfounded.

When the company began hiring for the Fairlawn store,150 people lined up to apply for fewer than 30 jobs, andCha says employee performance has been on par withthat in his other District locations.

The chains’ concerns about profit margins seemmore justified. Supermarkets already have among thelowest margins in retail, and a study of the Philadelphiaarea by the Reinvestment Fund, a community develop-ment organization, found that even before they opentheir doors, new inner- city stores spend seven timesmore on worker training and five times more on securitythan their suburban counterparts. Once the stores areoperating, they continue to absorb higher costs for main-tenance and ongoing employee training. In Washington,the city government has tried to offset these disadvan-tages by creating a tax exemption program that elimi-nates virtually all property taxes and license fees for 10years for grocery stores that open in underserved areas.

Profits in inner- city supermarkets are furthersqueezed by the fact that the stores can’t sell large quan-tities of high- margin items such as cheese and wine. Atthe same time, the lack of competition can lead to higherprices for consumers: One recent study found that iden-tical products cost 10 to 15 percent more in inner- citygrocery stores than in suburban ones. However, this isnot an ironclad rule; Cha adjusted to local conditions byshaving a little bit more off the prices at Yes! Organic’sFairlawn store.

But market dynamics are only part of the reasonwhy less affluent neighborhoods are under-served. The inherent risk aversion of many retail

executives is a less quantifiable but equally imposingobstacle. As a retail broker in Chicago observed recentlyin a trade magazine, the people he represents “never getfired for the deal they don’t do.” Brokers themselvesreinforce retailers’ conservatism through their desire tosign a deal as quickly as possible. Few are willing toinvest the time required to persuade clients that anunfamiliar community offers an opportunity worthpursuing. Brokers are well aware that pushing theirclients too hard toward those new markets could back-fire and cost them a commission. For those of us tryingto attract new stores, the result is a chicken-and-eggproblem when we try to bring the first large stores into

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The City Bounces Back

an underserved community.This obstacle can be overcome if local

government responds quickly when a par-ticular opportunity— at a certain site, at acertain time, with a certain retailer— presentsitself. Even if the deal requires a subsidy, itmay be worth pursuing if other retailers will follow. This isthe kind of potential my colleagues saw— I was not directlyinvolved in the effort— when the prospect arose of a newYes! Organic store in Fairlawn.

Yes! Organic’s path to Pennsylvania Avenue began sev-eral years ago, when Tim Chapman, a local developer,received a subsidy from the city government to build 118affordable apartments at the Pennsylvania Avenue site. Theground floor of the building was set aside for retail, and itwas Chapman’s responsibility to fill it. Unlike most locationseast of the river, the site offered the allure of being in anattractive new apartment building with a built- in cus-tomer base. Just as important, it was on what developerscall the “pm side” of Pennsylvania Avenue, meaning thatevening commuters on their way home to suburban PrinceGeorge’s County, Maryland, could make an easy right turnto park and shop and another right turn to be on their wayagain. Roughly 50,000 cars pass the site daily.

Chapman hoped to bring in a retailer that wouldappeal to the building’s residents, but he was rebuffedwhen he reached out to coffee shops and upscalerestaurant chains. One of the few retailers thatexpressed serious interest was a convenience storeoperator whose benefit to the tenants and the sur-rounding community would have been minimal.

At that point, Chapman shifted his focus to Gary Chaand Yes! Organic. Since Cha took over an existingorganic grocery store in the upscale Cleveland Parkneighborhood in 1982, his expansion has tended to fol-low a formula: A local leader from an evolving neigh-borhood tells him she is a fan of one of his stores and askshim to open a new one in her area. If conditions lookfavorable, Cha dives in. That’s how he moved into theCapitol Hill, Brookland, and Petworth neighborhoods.He likes to buy land or secure long- term leases in suchareas before competitors arrive and property values rise.“Neighborhoods like Cleveland Park are quickly satu-rated,” Cha observes. “I try to find others that don’t haveas many grocery options, and then get the benefit as theneighborhood grows.”

Even by Cha’s stan-dards, a move over theAnacostia would be a ven-ture into uncharted terri-tory, though he was some-what reassured knowingthat his Capitol Hill storealready attracted cus-tomers from Fairlawn andother neighborhoods eastof the river. Trying to offsetthe project’s risk, Cha andChapman presented aproposal to the citygovernment. If the citywould help pay for light fix-tures, flooring, and othercosts of buildout, Chaand Chapman wouldsign a lease for a 7,500-square- foot space. The cityultimately contributed$900,000 through theGreat Streets program,enough to cover more thanhalf of the capital cost. Adeal was signed in February 2010, six months before thestore’s August grand opening.

It is too early to know yet whether the Fairlawn storewill be successful. Cha claims that it is following thetraditional “j- curve” of a new supermarket, with sales

falling as the novelty of a new location wears off, but thenrising as the store builds its customer base. Initial saleshave led him to adjust his product mix to emphasizeitems that are selling well (organic green vegetables, forexample) and remove those that aren’t (microbrew beers).He also plans to add a hot table so he can sell ready- to- eatdinners to evening commuters.

The vista looking down Pennsylvania Avenuepast Gary Cha’s new grocery store is

full of promise— and question marks. Cityofficials hope the supermarket will spark

a retail revival in the neighborhood.

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The City Bounces Back

The Yes! Organic store’s arrival in Fairlawn came aboutthrough a confluence of factors that would be hard to repli-cate. But it could prove to be a pivotal moment for retaildevelopment in the District. City officials and retailers willbe watching what happens on Pennsylvania Avenue closely.If the store does prove profitable, my job will become mucheasier. Instead of relying on market data and incentives inmy appeals to retailers, I’ll simply point to Yes! Organic andask, “Why aren’t you there too?” Retailers and brokers area competitive bunch, and I suspect they’ll move quickly oncethey see someone else making money. That’s my goal: to cap-italize on human nature to catalyze inner- city retail devel-opment rather than constrain it.

The spillover benefits from first movers such as

Yes! Organic help explain why many cities are willing toprovide financial incentives to help businesses get started.Some level of longer-term subsidy may be necessary if themarket by itself does not produce enough results. The clearsocial benefits of inner- city supermarkets— jobs, conven-ient access to healthy food, and the potential to attractother development— suggest that they may merit thatkind of support.

City officials like me take no particular pleasure in sub-sidizing retailers. Indeed, I look forward to the day whenYes! Organic joins a long list of inner- city successes that areso widely known that I no longer have to worry aboutrecruiting first movers. But that day isn’t here yet. Theinner city’s potential is still waiting to be tapped. ■