February, 2012

Fruits of Thought

Independent Retailers Step In Where Chains Falter

In urban areas all across the country, independent retailers are booming, often filling up spaces vacated by conventional chain stores. These new independents are typically ethnic stores, very often Latino or Asian.

The success of such retailers deserves careful study by anyone who cares about things such as food deserts or, for that matter, about the policies necessary to revive the economy. If you go to a city such as Los Angeles, you quickly find that there are lots of locations in which firms such as Safeway and Kroger couldn’t succeed but that thrive under other management. The question for policymakers to investigate is, why this is so?

The easy answer is to credit the focus of the management of these stores. Unlike the major chains that try to serve a broader audience, these owner-operators have a laser-like focus on their particular clientele. They know what items these customers want, how to get them, how to merchandise them and so how to capture this customer.

All this is true and important, but is not really explanatory. Large chains know how to micro-market, and if they could compete simply by changing assortment, many would do so. There is a bigger story here, a story with public-policy implications.

First, these stores are all non-union. This may result in lower wages and thus a cost advantage, but, in many cases, the big win is not so much lower wages, but enormous flexibility. A clerk can be working the produce aisle one minute, doing some carpentry in the back room the next and fixing the bathroom when it overflows. If business is slow, they send the clerk home. If they are busy in the morning and at night but dead during the day, they put people on swing shifts. Union contracts, whether through wages, benefits, job restrictions, minimum-hour requirements, etc., can sometimes turn a viable business opportunity into a business failure. Thus we have all these empty locations abandoned by the major chains.

Second, these stores are often located in marginal neighborhoods that require vigilance in reducing theft and crime. Sometimes they deal with this by violating anti-discrimination laws and hiring kinsmen while rejecting other employees due to race or religion. Because these people are in the same community, there are powerful communal pressures to not steal. These retailers often deal with shoplifters and others through non-official channels. They know how to take a thief downstairs and teach him a lesson so that, next time, the thief will find some other store to rob. It is very difficult to compete with this by just calling the police.

Third, these stores can often fly under the radar on procurement policies. Imagine the local wholesale market overloaded with, say, a rejected load of foodservice packages of spinach. Big chains can’t buy this — it is illegal to sell these unlabeled bags at retail. These independent ethnic stores will often take a chance, reorganize their displays and will be sold out before anyone notices.

These are powerful advantages, and if one is looking to encourage economic growth in the country, there is a lesson here. Free labor markets and non-bureaucratic approaches that allow businesses to procure what they choose where they choose — combined with a government that can actually protect businesses against theft and physical harm — is the kind of recipe that leads to economic growth.

At the same time, such a freewheeling approach poses many challenges. If we actually want national food safety standards, it means we have to avoid expecting retailers to play any role at all. Big chains have to compete with these ethnic independents, and that means they have to pay the same price for goods. So the whole infrastructure of retailers demanding audits and segmenting suppliers based on food safety criteria disadvantages large chain retailers against these ethnic independent competitors in a manner that is unsustainable.

This is a big deal in fresh produce. In grocery items, these ethnic independents often have such specialized offerings that the mainstream consumer wouldn’t find the products they want on the shelves. This is, however, not the case in produce.

So these ethnic independent retailers are offering great bargains on fresh produce and succeeding in wooing consumers just for fruits and vegetables, so the fresh produce departments are often disproportionately large in these stores.

The success of these ethnic independents should be humbling to the industry. Few of these stores are involved with trade associations or other communal industry institutions. Few commodity boards or companies are able to reach them with their merchandising efforts. These ethnic independent retailers achieve quite nicely without any help.

Many stores have had to close because a Wal-Mart Supercenter moved into its marketing area; many more will also close because new competitors such as the ethnic independents are primed to take market share by serving the fastest growing segments of the U.S. population.                                pb