Discovering New Markets in America's Urban Neighborhoods: The Last Retail Frontier

by G. Alfred Kennedy, Albert L. Zucca, and C. Howie Hodges II


Introduction:
During the latter half of the 1990's, there was little doubt in most American exporters' minds that the markets of opportunity for the new millennium were the big emerging markets. After all, these markets were home to half of the world's population and accounted for more American exports than Europe and Japan combined. By the same token, US foreign investment abroad has reflected the astonishing attraction of high return opportunities, a process that began after WWII and continues through today.

On the domestic front however, an expanding economy offers vast opportunities for the female and minority investor whose focus is primarily domestic rather than international. Take, for example, America's major urban centers. There is a reservoir of human energy and potential within many of our inner cities which, if tapped, developed, and organized, could create opportunities to foster profitable partnerships between community-based organizations, private sector capital and technical know-how, and enlightened public policy officials from City Hall.

A spirit of cooperation, bold business plans, shrewd investments in human capital and community institutions, selecting an appropriate local partner, and a commitment to define and create a system, a process that works, are the basic elements of success. The inner city, as the last retail frontier, might be the new domestic market for the female- and minority-owned companies reluctant to navigate markets abroad they fear are beyond their reach. Other successful CEOs have blazed a trail in inner city development which attests to the viability of inner city investment. They have been rewarded for investing in an inner city workforce that others have written off. Some CEOs report employee-retention rates of 80 percent while competitors in their industry are suffering averages of 50 percent turnover. Customer loyalty is high. The average five-year growth rate among the 100 most successful inner city CEOs is 742 percent; average compound annual growth rate is 50 percent. In cities like Austin, TX; Denver, CO; and, Chicago, IL, there are focused efforts to revitalize the inner city core and expand the retail sector.

Studies conducted by The Brookings Institution in Washington, DC reveal the vast untapped market potential of America's inner cities. As a result of concentration, neighborhoods like South Shore in Chicago have more spending power per acre than even the wealthiest suburbs. Income is not a good indicator of spending power. Estimates of market potential based on reported income dramatically underestimate inner city market potential. It should come as no surprise then that those with reported incomes under $30,000 annually make almost one-third of all consumer expenditures in the United States. This amounts to $920 billion annually, a major business opportunity by any standard of measurement.

We believe female- and minority-owned firms are strategically positioned to forge the partnerships we suggest and explore the competitive advantages of the inner city because of simple demographics. In minority employment, for example, only a third of non-minority-owned firms located in African American communities employ at least 50 percent of their work force from the African American labor market. The other side of this equation is the fact that 80 percent of the workers at Black-owned firms of any size are African American. African American, Asian American, and Latino businesses provide most of the basic goods and services where they are the majority population. The owners of these firms are likely to be knowledgeable about or represented on the most active community-based organizations. They would be the most effective bridge between the communities they serve and the majority-owned firms that possess the capital and technical know-how needed to turn community-based organizations into major community business entities.

The basis for this statement is simple and direct: The public sector does not bear the ultimate responsibility for the long-term prosperity of America's urban communities. The communities and their businesses must assume more responsibilities themselves to develop homegrown community capitalism that works. Capital or income flight is a major obstacle to community prosperity. Another obstacle is the lingering perception of crime - public safety. Working together willingly and successfully, the urban business community and their local organizations (labor, social services, police services) could forge strategic partnerships with local banks, the larger business community, and public officials. The objective is to conceive strategies for targeted growth and revitalization that elevate inner cities to the status of contributors to this nation's prosperity and its ability to compete globally rather than net absorbers of public resources.

The premise of this article is that America's cities can, and must, play a larger role in competing in the national and global economy. In Washington, DC; Cleveland, OH; Atlanta, GA; and Dallas, TX (there are others), this fact has been well recognized. Opportunities are being created, urban investment is on the rise, and the resulting prosperity - or the promise of it - serves as a magnet to other investors and those who would populate these new urban centers. Female- and minority-owned firms must create a larger footprint among these urban pioneers.

The authors were surprised to learn that 76 percent of the CEOs of the 100 fastest -growing businesses in America's core urban centers are Caucasian while African-Americans represented 12 percent, and Hispanics 6 percent. Many of this nation's larger inner cities are on the move to economic rebirth. For the African American, Asian American and Latino investor who feels that markets abroad are beyond their reach, then inner city markets must be viewed as an acceptable challenge. A number of factors may be contributing to the under-representation of African American and Hispanic CEOs in the inner city: lack of access to working capital for investment, expansion, or acquisition. There is the perception of crime and the public safety concerns of employees. In addition, many investors note the unavailability of reliable information on which to base business decisions (e.g., how to assess market strength in inner city neighborhoods and, misinformation about the strength of niche markets or barriers to entry in inner city markets).

To some in the business community (including SMEs), the idea that cities can compete borders on the unthinkable; it is too far out on the limb. In the words of that great American, Will Rogers, "Why not go out on a limb? That's where the fruit is." My point is simply this: The minority investor can ill-afford to be hesitant about advancing into the new urban market. The reason that 76 percent of the CEOs or the fastest growing businesses in this country's urban centers are non-minority is simple: they have made the transition from thinking that the challenge of the inner cities is one of reducing poverty. They now see urban centers as new markets that offer lucrative possibilities to create income and wealth. Take the retailing sector, for example. Major retailers are beginning to see the attractions of previously under-served urban areas. "Major retailers understand that the urban environment is a ripe market in which to develop and establish stores....it's a captive market", says Butch Hopkins, President of the nonprofit Anacostia Economic Development Corporation, in Washington, DC. In the Anacostia section of the nation's capitol, retailers can anticipate community support because Anacostia's neighborhoods - filled with potential customers - have been involved in planning new retail development.

There is a corollary lesson for the public authorities, non-governmental organizations (NGOs), and urban self-help groups in the inner city. This is that the story of urban growth and attractions needs to be professionally told. Promotion must be undertaken systematically to interest the new investor. That means that attractions must be spelled out, without hype, and packaged attractively. The target investor community must be identified, whether in the slower growing surrounding suburban areas, or in more distant locations. Telemarketing, mail campaigns and, eventually, personal visits to intending clients by trained professionals must be budgeted. In other words, the same techniques used by foreign countries and US states that have been used to attract investors must be employed by the local urban community. While it is all well and good to believe that "our community" will "sell itself", in practice, the marketing of communities to outside investors requires time, effort, and capital. Communities that do not realize this truth and act effectively upon it will lose to those urban communities that do.

Professor Michael E. Porter of the Harvard Business School made the best case for cities in a 1997 speech in Washington, DC when he said "cities can compete. Cities have competitive advantages. Cities are aligned with the nature of modern competition, with its emphasis on fluidity, information flow, and innovation. Cities are centers of knowledge and expertise, the most precious assets in the global economy."

The Impact of Demography
The numbers tell the story. A new survey conducted by the Center on Urban and Metropolitan Policy at The Brookings Institution in the nation's capitol, shows that this country's inner cities are experiencing an unexpected resurgence. In other words, there is a population boom happening in many urban areas across the United States. The survey looked at 26 American cities and found that all of them expect the number of their downtown residents to grow by 2010. Even cities that experienced population declines for decades expect that the number of downtown residents will rise. Again, take the example of Washington, DC. Out-migration has leveled off for the first time in years. Suburbanites from the more prosperous suburbs surrounding the city are moving into the District of Columbia creating demand for new housing downtown. Remodeling is on the rise.

Other indices of this new demographic shift are declines in commercial space vacancies and unemployment, and, metro ridership and construction are up. A key positive development in Washington, DC is that crime rates are diminishing. Crime in the District fell 32 percent from 1993 to 1998. In 1999, it dropped an additional 14 percent, according to police figures. Of greater significance to new investors is violent crime - murder, rape, robbery and aggravated assault - is down 60 percent. There is a related development. Recently, Washington Post story noted the increase in the number of weekend visits by suburban residents to inner city Washington, DC. Their purpose was to take advantage of the District's diverse entertainment, cultural, and culinary opportunities. While America's suburbs are not threatened by this phenomenon, more and more Americans are coming to realize that urban life, beyond its complexities, offers greater diversity in most aspects of life and ensures greater freedom of choice. Roger Lewis, architect and professor of architecture at the University of Maryland says, "decades from now, the onset of the new millennium may be remembered as the turning point for some of America's troubled cities, a transitional period when increasing numbers of citizens discovered the benefits of living close to the heart of metropolitan areas previously in decline." This gradual transition "reflects a shift in both perception and attitude about the qualities of urban life, notwithstanding continuing suburbanization."

To the female and minority investor, this demographic shift portends opportunity: increased demand for housing, new schools, improved services, retail outlets, performing arts/culture, and jobs. Proximity to federal, state, and municipal governments offers opportunity to compete for government procurement dollars. As a final commentary here, many of today's youth attest to the fact that life in the suburbs is not as ideal as many would think.

Incentives
The bold, visionary inner city investor we describe, views incentives on a continuum from the micro to the macro level. On a macro level, this investor makes a shrewd assessment of his/her likely partners: cities, their populations, and their leadership - all responsive to change. This increases the likelihood of a profitable relationship with this investor who sees urban centers as today's last retail frontier. On a micro level, other incentives include small business lending, nationally certified through the Small Business Administration and USDA programs. The Community Reinvestment Act offers loans through participating banks like the Bank of America. The Bank of America is a market leader actively involved in urban market development through its support of The Community Reinvestment Act; through Community Development Investment, direct equity in small business, and by offering innovative mortgage products - Neighborhood Advantage Credit Flex and Neighborhood Advantage Zero Down programs. These actions follow a major commitment the Bank of America made in 1998 to make $350 billion in loans and investments for community development over the next decade. This is the largest and most comprehensive program for community development lending and investment ever undertaken by a US bank. The commitment calls for $180 billion for small business loans, $115 billion in affordable housing, $30 billion in consumer loans, and $25 billion in economic development.

A comprehensive strategy is needed to increase the flow of investments in inner cities and government at all levels must play an important role in providing the necessary stimulus. A major incentive for many CEOs to invest was the creation of Empowerment Zones and Enterprise Communities. In addition, there was legislation proposed by the White House in January of this year which would create a number of financial and technical assistance programs to development projects in inner cities and rural communities. Needed are additional tax incentives, e.g. (tax credits for businesses that locate in inner cities, tax credits for job training). At the municipal level, public officials should work with business chambers and trade organizations to remove or reduce bureaucratic regulations that impose barriers to business development. For example, in the District of Columbia, the local chamber drafted a letter to the Mayor and City Council listing the "top ten" impediments to doing business with the City.

A Competitive Strategy for the New Investor
The savvy new investor to the inner city begins by developing a competitive growth strategy that builds on inner city assets. What are those assets? To list a few: working families, consumer loyalty, changing demographics, downtown cores/waterfronts, enlightened municipal leadership, universities, cultural amenities, medical research centers, active community-based organizations. The strategy identifies potential partners (corporations, capital providers, and individuals who want to get involved in inner city business development, but often do not know how), best practices for operating in the targeted inner city location, federal and state legislation that offer incentives (loan guarantees, tax credits) to the private investor, a municipality with strong economic development policies. The growth strategy should give special attention to selecting an appropriate local partner, someone who is familiar with the local social and economic terrain, who can help steer the new investor through the thickets of start-up, local bureaucracy, finance, and possible local alliances with distributors, retailers, and chambers of commerce.

Summary
Investing in America's core urban communities requires a leap of faith, a willingness to seize opportunities where they exist, not wish that they were elsewhere with less risk. Sometimes, the greatest risk for an entrepreneur is not taking the risk. Vision, aggressiveness, and the ability to forge effective partnerships define this new breed of female or minority investor. As noted earlier, what distinguished the CEOs of the fastest-growing businesses in this country's core urban centers was their ability to look past the problems. Due diligence on their part revealed that inner city people, like their suburban neighbors, want the same thing: a nice, clean, safe environment to live, work, and, most important, to shop. Their success confirms a truth they embody: developing inner city markets offers the under-represented female and minority investor the opportunity to earn a profit while revitalizing urban communities from which their citizens reap benefits.


G. Alfred Kennedy is an international consultant and retired senior Foreign Service officer with the US Department of State. He was the US Consul General in Toronto, Canada (1993-1996), a Senior Advisor to former Commerce Secretary Ronald H. Brown, and a Deputy Assistant Secretary of State with the US Department of State in Washington, DC. Mr. Kennedy has lived and worked in Europe, North and Southeast Asia, and Canada specializing in trade promotion, communications and public affairs. Currently, he is a partner and owner of Source International, Inc., an international consulting firm in the Washington, DC area. Web site:Source International, Inc.. He is a contributing editor of The Black Business Journal.

Albert L. Zucca is a retired US Foreign Service officer and international consultant, currently Vice President of Patuxent International Corporation in Maryland. He has lived and worked in Europe, Southeast Asia, Africa, and Latin America for extended periods, specializing in investments and trade promotion.

C. Howie Hodges, II is Senior Vice President for Bank of America in the Community Development Division where he is manager of Public Policy and Resource Development. He was the Assistant Director for Policy and Program Development at the US Department of Commerce and has traveled extensively in Latin America and Africa. Mr. Hodges is a partner and owner of Source International, Inc.