Reverse Migration

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Reverse Migration

By W.B. King - 10/22/2007
As urban sprawl gave way to suburban America, both the residential and retail industries were significantly impacted. With the general idea to flee the perceived perils of metropolitan living for a better quality of life outside city limits, people left in droves. Today, a reverse migration is occurring, with baby boomers, empty-nesters and young professionals leading the charge. Metropolitan hubs such as Chicago, Boston and New York are experiencing an up-tick in residential real estate absorption rates. And where people go, business follows.

"New York City is continuing to experience a boom," said Gregg Annunziata, sales associate for New York-based real estate firm Halstead Property. "While many areas of the country have seen a drop in real estate prices, Manhattan real estate prices continue to rise. We are seeing a mix of young professionals and older couples looking to downsize from large suburban homes."

Michael Dee, senior vice president and national director of retail for Grubb & Ellis Co., noted in a recent report, "Recent Retail Trends Summer 2007," that while urban retailing is showing signs of improvement, it's not being experienced across all channels.

"Downtown retail is spotty. Some cities are huge success stories -- the traditional 24-hour cities and aspiring 24-hour places like San Diego, Portland, Fort Worth, Denver and Oklahoma City. Downtown retailing has been successful around sports stadiums and arenas, for example in the Victory development near downtown Dallas and the Arena District in Columbus, Ohio," he noted. "In a lot of markets, retail has been more successful in midtown or uptown neighborhoods that already have a strong residential base. Smaller, mixed-use developments offering condos and street-level retail, woven into the fabric of popular in-town neighborhoods, can make those areas stronger."

While countless store operators followed consumers to suburbia, and continue to, many c-store operators are now looking over their shoulders and reconsidering the urban market, seeking those neighborhoods Dee underscored as ripe for the picking. There are many considerations, however, such as higher real estate costs and making do with converted space since the ability to build from scratch is usually nonexistent.Additionally, distribution costs, operational costs, taxes and labor present challenges, some of which are difficult to surmount.

"We are definitely seeing a lot of formats going after the convenience channel in urban centers," said Jennifer Halterman, senior consultant for the Columbus, Ohio-based, TNS Retail Forward. "There are huge opportunities for convenience stores that aren't 'cookie-cutter' and deliver on multiple formats. Many retailers, not just convenience stores, are looking at new locations with smaller stores."

Creating New from Old

As an example, Halterman pointed to Rockland, Mass.-based Tedeschi Food Shops, which recently acquired the Store 24 chain that serves the greater Boston area.

"Tedeschi acquired Store 24 as part of its growth strategy for a number of reasons, mainly to strengthen and diversify its market position in urban and college markets," said Joe Hamza, the retailer's vice president of sales and marketing. He explained that of the 197 stores, 102 operate in urban environments. "We are seeing more and more people moving into the city and downsizing from homes to condos," he said.

With the demographics changing quickly between neighborhoods and districts, a concerted effort is required to evaluate and deliver merchandize that meets consumer expectations. For example, from location to location, which could be a matter of blocks, the consumer base might change from Latin American, to collegiate, to a more refined downtown clientele.

"The old hot dog on a roller stigma still exists for convenience stores," Halterman said. "In this market, concentrating on a specific urban strategy is important and that involves elevating foodservice options." And the key to understanding these demographics is research and marketing, a seemingly never-ending process as many neighborhoods remain in flux.

"We have completed market segmentation and a demographic study a while back, which we use to determine what category extensions, besides our core offerings, should be offered in a given market," Hamza said. "It's also important to note that our urban stores are located in diverse markets that vary greatly in demographics and market characteristics. For example, a number of our urban stores cater to college students; others are located in office districts downtown and many more in working neighborhoods."

Maintaining brand identify when catering to various clientele is a challenge. Whereas suburban and rural stores are often stocked with similar merchandise, an amended planogram is essential to successful operation in urban environments. "All stores have our core products, but stores in urban environments do not have the same market characteristics," Hamza said. "For example, all stores will carry cigarettes but certain stores might also carry premium cigarette brands."

In college neighborhoods, more "on-the-go" items are featured. In working neighborhoods, Middle Eastern products such as hummus, tabouli and Asian noodles are featured. In the financial market, which has "transient traffic," there are more organic food offerings. Downtown stores carry single-serve items as opposed to 12-packs, or a quart of milk instead of a gallon. "We focus on category extension," Hamza said.

Retail Rivalry

With the price of business a considerable factor, c-stores operating in an urban market are met with various competition. While not necessarily a new trend, drug stores, department stores and supermarkets are trying to cash in on consumers while they are a captive audience by offering convenient options. For instance, Walgreen's -- in select urban locations -- now offers a coffee bar and prepared foods to go.

"The convenience metric is a major trend and a lot of retailers are capitalizing on it," said Will Ander, senior partner at Chicago-based retail consulting firm McMillan Doolittle, whose clients have included McDonald's, Wawa and Target. "We have seen this urban trend increase more so over the past five years. People are returning to the city, but it can be risky because there are a lot of areas still experiencing gentrification. When you talk about urban areas, it is important to note that there are two different markets: low income-ethnic and upscale; cities always have multiple dimensions."

Chicago is beginning to see an influx of retail chains from Home Depot and Target to Kohl's, Ander said. Convenience chains should take note. "It is more expensive in terms of rent and operating costs, but retailers are finding ways to make money -- and that includes the convenience model, which is being rethought."

Competition is also coming from unlikely areas, said c-store architect and designer Dinesh Doshi, president of the Long Island, New York-based Architectonics International Inc. "I recently completed a store in an unconventional setting -- a hotel lobby. Businesses are realizing that they can capture market share by providing services under one roof and it won't be long before more hotels in urban environments catch on to this trend."

When architect Blaine Weber of the Seattle-based firm Weber and Thompson was asked if he had designed hotels with convenience stores, he responded: "None of our current hotel or condo projects have anything that could be called a convenience store, but one of our current projects has a 50,000- square-foot Whole Foods outlet," he said, adding that his firm has completed 12 high-rise residential/mixed-use towers in downtown Seattle, all of which have or will have retail or hotel uses incorporated."I like the idea of having a convenience store, but it would have to be classed up a bit for a four- or five-star hotel, which is the product I deal with."

Weber's idea of a sophisticated c-store model is concurrent with new trendsetters such as the San Francisco-based Bi-Rite, which is considered a five-star convenience store redefining traditional c-store offerings. It provides grab-and-go items as well as free-range chicken Caesar salads, among other specialty offerings.

Revenues from these premium-styled stores are in some cases needed when taking a look at urban rental rates. Existing commercial spaces in metropolitan areas are often two to three times more expensive per square foot than suburban rates, which make groundup builds an anomaly. A quick search on yielded one downtown Boston location for sale at $42 per square foot. At 900 square feet, it would be a considerable investment. The owner lists this business, which opened in 1966, for $80,000 plus inventory. Interested parties must agree to a fixed seven-year lease.

A similar listing in Queens, N.Y., also underscored the significant capital needed to operate an urban location. The 2,234-square-foot, ground-floor location touting heavy pedestrian traffic on Queens Boulevard costs $12,000 per month. The tenant is required to pay three months security deposit, one month rent, and sign a five-year lease with a five-year option to renew, along with a 4-percent rent increase per year. "In exurbia, land is cheaper and the risks are lower," Ander said. Tedeschi's urban store locations are leased and smaller than suburban counterparts, Hamza said. "The urban stores do tend to be smaller, with the average around 400 square feet, although some are larger," he said.

Like Halterman, Ander said convenience store operators are facing increasing competition from the likes of Wal-Mart and Target, which are said to be developing smaller versions of their respective box-store designs to assume spaces in urban environments, between 10,000 and 14,000 square feet. "These larger retailers are altering their brand position by entering different markets," he continued. "Retailers are finding ways to making it work in the city."

Hamza said Tedeschi is used to retail rivalry. "We face competition all the time. I don't think there has been an increase at the end of the day though. We've seen acquisitions by 7-Eleven, but we are not yet seeing new competition like Wal-Mart in the market."

Key to maintaining brand loyalty is assuring customers their respective experiences will be similar regardless of location. "Our costs are much higher in the city, from labor to merchandise," Hamza said. "Our philosophy is to try and not have these increases reflected in pricing. We try not to have any price discrepancies between stores. It comes down to how tolerant the customer is -- they will tolerate reasonable increases, but not prices that are obnoxiously higher."

Inner-City Operations

Distribution costs run higher in the city. Sometimes receiving a late delivery can throw off a full day of business. And while companies like Tedeschi try not to raise prices, numerous variables make it difficult not to, including the fabled sticky-finger discount.

"Higher shrinkage rates come with the territory when operating in the city," Hamza said.

Managers operating in urban environments are required to provide additional training to their employees on various issues such as shrinkage and other crime-related scenarios.

"Our training program is similar throughout all stores," Hamza said. "In an urban environment, for example, management might have to train employees how to best deal with panhandlers, which is a problem for us at some downtown locations. It is important that they learn how to effectively deal with these issues without upsetting our customer service model."

One of Tedeschi's stores is located next to Boston's famed landmark Fanueil Hall, which provides an opportunity to be more creative with merchandising techniques due to the transient, tourist demographic.

"At this location, we place emphasis on single-serve drinks, sweet and salty snacks, and energy drinks," Hamza said. "We have a relationship with the supplier, so we receive new products first. We roll out these products in the urban stores where there are younger customers and students who are more daring with new products choices. We use this information to gauge new product offerings and what we can use throughout the rest of our stores."

According to Grubb & Ellis Co.'s Dee, by catering to the younger demographic, many bases are covered.

"I don't see retailers targeting the baby boomer generation per se because most of them don't want to limit their client base. To some degree, the older generation has always sought to look, act and buy younger, so most retailers want to project a hip, multigenerational image and don't want to do anything to alienate younger consumers. The baby boomer generation is probably more like this than any generation in history."

To this end, Tedeschi's identifies anywhere between five and 10 stores in key urban zones and uses resulting sales statistics as a guide to determine what products or services should be added to core offerings. It is this fluid approach that sets the company apart from its competitors, Hamza said.

"We believe it should all come from the customer and what they are looking for when it comes to convenience," he explained.

"But, we also want to provide products that customers didn't anticipate in a convenience store. We are not a cookie-cutter in the urban, micro-market. You have to be different and reflective of your market, like a chameleon, to remain successful."