By Julie Moline

When Wal-Mart announced plans to build a 240,000-square-foot superstore in Austin, a struggling neighborhood on Chicago’s West Side, the outcry was instantaneous—and loud. Labor unions decried Wal-Mart’s low wages and paltry benefits; mom-&-pop storekeepers feared the monolith would crush their livelihoods; community leaders fretted about everything from losing affordable housing to increased air pollution, noise, and danger from traffic. Less strident and more hopeful were the store’s potential customers, the residents of low-income neighborhoods like Austin, which have been “grossly” under-served by retailers for decades, according to Lyneir Richardson, Vice President of Urban Land Development for General Growth Properties and an expert in retail and mixed-use development.

The furor illustrates the complex, contentious, and often surprising reality of urban retail.

One surprise: Wal-Mart is trying to appear less like a villain and more like an ethics-driven corporate citizen. Clobbered by relentless criticism about its business practices and facing tough opposition in cities like Los Angeles and New York, the company launched a “Jobs and Opportunity Zones” program in 10 cities, including Chicago, Cleveland, Indianapolis, and Decatur, that is meant to support local small businesses upended by the presence of the superstore. To create the “opportunity,” Wal-Mart will partner with local chambers of commerce and minority- and women-owned businesses within these zones to direct hundreds of thousands of dollars in grants; the idea is to help small businesses thrive when shoppers flock to the neighborhood to go to Wal-Mart.

Wal-Mart will also choose five small businesses in each zone for “Small Business Spotlights,” funding local newspaper advertising and offering free spots on its in-store radio network for them. While critics point out that that these opportunity zones can’t possibly offset the effect Wal-Mart will have on the small businesses in its shadow, some mayors are grateful for the effort.

In Cleveland, where the Wal-Mart will anchor Steelyard Commons, a $120 million commercial redevelopment of an abandoned 125-acre industrial site, Mayor Frank Jackson said that the company’s involvement will “continue to spur economic development” in the part of the city once given up for lost. Whether it’s a transparent public relations ploy or a genuine attempt to be responsible, Wal-Mart knows that persuading cities that it does have the community’s interests in mind is paramount, since the company hopes to build 50 stores in inner-city locations in the next two years.

Another surprise: Lawmakers are playing hardball with big-box retailers trying to mine what music mogul Russell Simmons calls “gold in the ‘hood.” In late 2006, after two years of bitter debate about the Austin project, the Chicago City Council passed an ordinance man-dating that any retailer occupying at least 90,000 square feet raise its minimum wage to $10 an hour by 2010 (far above even the newly-raised federal minimum wage), plus an additional $1.50 to $3 per hour for benefits. It was the first time a municipality was able to set a floor for hourly wage earners, and it set off a fresh wave of protests.

Wal-Mart, Target, and Home Depot immediately announced they were revisiting their plans for projects in Chicago, claiming that the new law would ratchet up their operating costs. The Illinois Retail Merchants Association said it would challenge the ordinance in court. Many local politicians feared it would dash opportunities for job growth in the very neighborhoods that needed entry-level jobs the most.

Still, many economists are convinced that the profit potential in Austin, and in other urban locations with similar demographics, is strong enough to offset any higher operating costs, from wages to insurance to anti-theft initiatives, that come with doing business in the inner city. “We’re very confident that retailers want and need to be in Chicago,” said Annette Bernhardt of the Brennan Center for Justice at the NYU School of Law, which helped draft the Chicago bill and has done economic studies of its likely impact. The other impact of the Wal-Mart brouhaha is already clear: There’s been a rush of interest in the Austin site. Following in Wal-Mart’s slipstream are CVS, an Aldi grocery store, Starbucks, and Menards, a home-improvement store. All plan to open across from the Wal-Mart when it debuts in 2008.

If you build it…
It’s a pattern that’s being played out in inner cities across the nation. A bell-wether—usually a big box retailer or a major grocery chain—identifies an urban location ripe for development. Creative, sometimes groundbreaking (literally) private- public partnerships with multiple players—banks, developers, urban planners, not-for-profits, city councils, retail executives, and often a celebrity or two—lead to carefully wrought shopping environments that, in turn, jump-start massive urban revitalization efforts.

It’s been seen in Houston, where in 2002 developer Ed Wulfe of Wulfe & Co. took a ramshackle and nearly vacant mall, razed it, and transformed the site into Gulfgate. It’s now a paragon of profitability, both for Wulfe’s firm and for its tenants, which include H-E-B (a regional grocery chain), Lowe’s (the home-improvement store), and Old Navy. Gulfgate’s Washington Mutual branch is reportedly the bank’s busiest in Texas. With 99 percent occupancy, Wulfe is getting ready to expand from the current 450,000 square feet to 700,000. Gulfgate’s quick and rather astonishing success—it was the first new construction in the city’s urban core in 50 years—has acted as a catalyst for other southeast Houston commercial revitalization and redevelopment projects.

In New York, the same pattern was repeated in Harlem when a massive (50,000-square-foot) Pathmark supermarket opened on 125th St., the neighborhood’s major thoroughfare. It is now the chain’s highest-volume store, according to Michael Rubinger, president and CEO of Local Initiatives Support Corp. (LISC), a lender and broker of funds from government sources that helped in the long, arduous struggle the bring the project to fruition. Since its opening, various national retailers, including Blockbuster Video, The Body Shop, CVS, Foot Locker, Marshalls, Staples, and Starbucks have all established themselves on 125th St. Pathmark opened a second store in Harlem a mile north, on 145th St., another major east-west artery, in 2005,drawing another cluster of national retailers with it.

Why the intense interest in the inner city, and why now? Experts say retailers have fully saturated the suburbs and exurbs. To keep growing, they’ve got to forge new markets. And they’re finding that the inner city, while filled with a variety of obstacles and unique challenges, is a mother lode of opportunity. “The inner city is really the last frontier in the domestic retail market,” says Hope Knight, Chief Operating Officer for the Upper Manhattan Empowerment Zone (UMEZ), an organization that uses government funds and tax incentives as catalysts for private investment. “Companies are very quickly finding out that once they get past some vivid stereotypes and erroneous assumptions they can do quite well in the inner city.”

One of the first erroneous assumptions is that inner-city residents don’t have sufficient purchasing power. “The opposite is in fact true,” said Teresa Lynch, research director for the Initiative for a Competitive Inner City (ICIC). “The spending power per square mile in the inner city is $25 million vs. $3 million in the suburbs,” she said, referring to ICIC research, “Realizing the Inner City Retail Opportunity: Progress and New Directions,” conducted in collaboration with Boston Consulting Group.

While it’s true that most inner-city residents are poor—ICIC defines the inner city as an urban core where the poverty rate and unemployment rate are at least 1.5 times higher than elsewhere in the city—the density of population, along with the scarcity of basic retail services, drives up demand so significantly that it more than makes up for lower rates of personal income. Grocery stores in innercity Boston and New York sell 40 percent more per square foot than suburban stores, the ICIC research shows.

And here’s another surprise: Innercity residents aren’t necessarily poor. More than one-third of inner-city households (38 percent) fall comfortably in the moderate-income category, earning between $20,000-$50,000 a year, Lynch pointed out. More often than not, they want to use that spending power in their own neighborhoods. “Keeping spending local is a point of pride for many innercity residents,” said UMEZ’s Hope Knight. “They want to support their neighborhood, and they want the convenience of a variety of retailers within easy reach.”

The alternative is unpalatable on a number of levels. Having to trek to the suburbs or another part of town for basic needs (banking, groceries, drugstore, etc.) is time consuming, expensive, and awkward, especially with kids and packages in tow.

Another erroneous assumption is that the local labor pool is unreliable. “Again, the opposite is true,” says Knight. “There’s a much lower turnover rate in low-wage jobs in the inner cities, and because the labor force can be pulled from the neighborhood, you have employees who can get to work easily on foot or by local transportation.”

That accessibility, she explains, is important on several levels. “When work is convenient, when workers feels a connection to the neighborhood and the customer, when management works hard to provide ways for employees to thrive in their work environment—all of this creates a loyal and stable workforce.” A motivated and local labor pool also means lower recruitment costs, she added, which is especially important to employers like fast-food chains that struggle with high turnover rates.

Concerns about expense are valid, experts point out, but those high costs can be mitigated by the existence of solid infrastructure. According to Victor MacFarlane, managing principal of MacFarlane Partners, pioneers in the financing of urban development, certain costs are actually much lower in cities than suburbs, because roads and utilities such as electric power and telephone services already exist.

Barriers to entry remain
For all of its potential, urban retail presents a variety of issues. Real estate is one huge obstacle, says Otis Pannell, Senior Vice President of Operations for Staples. “It’s not just the cost of land, but availability, both for the store’s footprint and for parking,” he said. “You can’t just drop down a big box store in a densely populated urban neighborhood, even if you find the right parcel. You’ve got to make adjustments for customers who come on foot, and who can only physically carry out so much merchandise; you’ve got to plan to go vertical, which necessitates new construction paradigms.”

Going vertical also creates issues for stocking, staffing, and security. Still, Pannell says Staples, which has been working in inner-city neighborhoods for 20 years, doesn’t appreciably alter its business plan for urban stores. “We might adjust the merchandise mix at some locations to reflect local spending habits that vary by ethnicity,” he said. “But we can clearly predict a store’s performance based on the exact same metrics we use for suburban stores.”

Another serious barrier to entry is community resistance, which can tie up plans for years. Getting that Pathmark supermarket into East Harlem took more than two decades of sustained effort, said Hope Knight.

A third barrier is safety. Ten years ago, banks and insurance companies balked at underwriting urban retail development, believing that high crime rates and unsavory blocks surrounding new stores would deter shoppers. Today, safety discussions also include environmental hazards left behind by factories, incinerators, and dumps. To improve safety along with aesthetics, many developers and retailers are working closely with enterprise zones, the EPA, law enforcement, and other community groups, coordinating on everything from adding street lights to improving trash collection to adding anticrime patrols.

In some cases, there’s even a police station inside a new mall. In Milwaukee, the Midtown Center, redeveloped in 2001,includes a branch of the Milwaukee Police Department, along with a rather novel mix of traditional retail (Foot Locker, Payless Shoes, Wal-Mart), higher education (Concordia University), and national-brand specialty retailers (TMobile, Starbucks, Ashley Stewart).

If anything, urban retail is actually making neighborhoods safer. According to LISC, in neighborhoods where the organization is active, crime is dropping faster than in comparable areas, because new businesses, housing, and stores displace the areas troubled by blight.

So who is blazing the trail for urban retail success?
Consortia of public and private entities, using a combination of public and private financing. The Midtown Mall in Milwaukee, for example, was made possible through a public-private partnership with the City of Milwaukee, which offered the developers a $6.5 million Tax Incremental District (TID). Financing came from Boulder Venture, a Milwaukee-based real estate development firm specializing in retail, office, and senior housing facilities, and The Canyon-Johnson Urban Fund, a closed-end real estate fund managed by Canyon-Johnson Realty Advisors LLC, itself a partnership between Canyon Capital Realty Advisors LLC and Johnson Development Corporation.

Retailers who have seen success in one city, then export that model elsewhere.

Harlem USA, which includes NYSC, an upscale gym, full-service Chase Manhattan and Commerce Bank branches, Old Navy, Modell’s Sporting Goods, Nine West, Hue-Man Bookstore and Café, and a nine-screen Magic Johnson Theatre complex, has spawned DC USA, which will be anchored by Target and Staples. Retailers are also talking a page from Johnson Development Corp.’s creative partnerships with T.G.I. Friday’s, Starbucks, and Loews Cineplex, which are bringing capital, credibility, experience, and momentum into under-served urban markets.

Retailers whose low-cost models work around barriers to entry. In Chicago, grocery retailer Food 4 Less has a much lower operating budget than, say, Safeway, Albertson’s, or Kroger, its parent company. Partly it’s from no-frills service; shoppers bag their own groceries, and grab what they want from a carton rather than from a neatly stocked shelf.

Retailers that create a compelling shopping experience. In Gary, Indiana, a seven-store apparel chain called The Lark has produced consistently strong profit margins for the past 25 years by providing its customers with upscale brands (Polo, Nautica, Versace) and an ambiance to match. The stores are posh, the displays sophisticated, and the customer service is provided by knowledgeable sales staff doubling as stylists, advising on building wardrobes and coordinating with accessories. ICIC research has found that specialty retailers and off-price specialty retailers like Marshalls and TJ Maxx are having similar success, largely because name brands resonate well with inner-city customers.

Full-service restaurants. Fast-food restaurants already well represented in the inner city, are finding competition with full-service restaurant chains for the first time. International House of Pancakes, T.G.I. Friday’s, Chili’s, and Denny’s are all moving into urban areas. Why? The answer again has to do with density—not just of residents but of large institutions, such as hospitals and universities, that provide a steady stream of customers. An IHOP franchise was the first national full-service restaurant chain to open in Harlem last year; it scored one of the company’s best new-store openings in the history of the chain, according to spokesperson Patrick Lenow. (Its owner: an African-American orthopedic surgeon.)Even Denny’s, which has had to overcome an image problem in the African-American community, has seen a surge in minority franchisees in inner-city Miami, Washington, D.C., and Los Angeles.

Banks. When BBVA, the Spanish bank, went on an acquisition spree in the United States three years ago, it concentrated on small lenders in cities in Southern California and Texas with large Latino communities. Why? The company found that these customers were significantly “underbanked,” and that their need for financial services was largely unmet by local savings & loans. By offering a wide array of products, from checking and savings accounts to credit cards and mortgages to student loans, and by delivering upscale customer service to individuals and small businesses, BBVA was able to build enormous customer loyalty while grabbing market share from U.S. banks.

Retailers whose product offerings resonate with the ethnic markets in the inner-city neighborhoods they plan to enter. “We do everything in our power to sell pizza to Latinos—or anyone who wants one,” says Antonio Swad, who founded Pizza Patron in Dallas in 1986 and is working on turning the local chain into a national brand. New pizzarias are opening in cities with a high population of Latinos, or in areas transitioning from an older Anglo neighborhood into a Latino community. “It’s a growing demographic and a good fit,” Swad says. High population density, he says, means that one unit can serve a lot of people. Storefronts, he says aren’t always in the best shape, but rents are often more reasonable than the suburbs, which helps the company handle the renovation costs.

A virtuous loop
As inner-city retail grows, it’s not just the supplier and the consumer who benefit. Employees stand to profit as well. According to Michael Porter, the Harvard Business School professor who helped form ICIC, inner-city companies tend to be superb corporate citizens. They disproportionately offer health care, retirement benefits, life insurance, homeownership incentives and education and training, he says.

The net result is that urban retail sets a virtuous loop in motion, says UMEZ’s Hope Knight. As retailers help transform dodgy streets, there’s a ripple effect throughout the surrounding neighborhood. The quality of life improves, bringing new momentum to development and energizing the residents. New jobs come in to support those stores, bringing more opportunity and household income, which expands consumer spending power.

A more active local consumer supports existing businesses, then lures developers to renovate housing, which in turn lures more retailers. Eventually, Knight says, you have residents from elsewhere in the city flocking to the inner city for dining, culture, and shopping. Harlem’s second renaissance, she says, “is the perfect example of this cycle—of success begetting success.”