Retailers shop for profit in inner cities

/ Source: CNBC

After a holiday period just passed that has been called "lackluster" by many analysts, these are tough times for the nation's retailers. Yet some retail names are finding a great new market for their products where you'd least expect it: in the nation’s inner cities.

For the first time, there's a comprehensive analysis of census data on those inner city economies.  And guess what?  It turns out those poor neighborhoods frequently inside America's downtowns offer something unexpected: lots of cash.

“What we have in inner cities is very much more poor people, very fewer wealthy people — but the middle is exactly the same as the rest of the country,” said Anne Habiby, co-executive director for the Initiative for a Competitive Inner City. “And I think retailers and many others have largely missed the middle.”

Habiby’sorganization recently finished an 18-month study of U.S. census data to survey the state of 100 U.S. inner city economies.  Amazingly, it is the first work of its kind.

The biggest finding of the study is a bombshell. Because so many people live in them, inner city neighborhoods in the U.S. have eight times more spending power than the neighborhoods that surround them. What's more, the study found that 38 percent of inner-city households aren't low-income at all — but moderate to middle income. That means they earn between $20,000 to $50,000 a year.

It is a discovery already made by Home Depot, the second-largest U.S. retailer behind Wal Mart.

“For us, its been a great road to success,” said Tom Taylor, the Home Depot senior vice president in charge of U.S. stores.

Taylor was on the team that first approved a Home Depot location in northeast Washington D.C — hardly a toney suburb.

“You have people that live in these metropolitan areas that don’t have transportation so they can’t get out of the city,” he said. “And then there’s not a lot of selection for where to buy things. So we come there. We bring prices down. They get the opportunity to come into our store and buy things at a cheaper price. And I think it’s a great opportunity for us — and them.”

In fact, Home Depot is credited as a national leader among retailers who take a chance and go where others have not been in years.

Washington D.C. Mayor Anthony Williams told us his city first approached Home Depot management about opening in the inner city while he was visiting a national shopping center convention. Today, after less than a year, that D.C. store is a success. And other names have started to follow suit, including Costco, Target and even the giant Wal-Mart.

Tax breaks help
Some critics have argued that thetax breaks sometimes demanded by retailers are, in effect, giving away the store — especially for cash-strapped cities like Washington.

“The taxes are important where they’re necessary,” he said. “But the heavy lifting (of attracting retailers) is the basic quality of life. It's the public works being in place, public safety in place, that demand is in place for the product.”

As inner city business conditions improve, retailers are moving back. Even so, Habiby says there's still a long way to go.  Miles of streets paved with gold.

“If you’re in a supermarket, for example, and you're in suburban New York City, you need a 20-mile radius to capture the same amount of spending as you would in 10 blocks in Harlem,” she said. “That's the power of density.”

The initiative for a competitive inner city actually gives the retail industry improving marks for beginning to see opportunities where it never used to.  And Home Depot’s Taylor said their inner city stores are every bit as profitable as others — in some cases, more so.