A Mass of Buying Power : Low-Income Neighborhoods Prove They Can Drive Markets
One of the most persistent raps on the Los Angeles and Southern California economy in recent years has been the simple statement that it had a lot of low-income people. To the conventional wisdom, this meant that many neighborhoods would never again develop much beyond palm-lined slums.
But anybody with a sense of business knew that was wrong. Low-income working people in their great numbers used to be called a mass market. And they fueled the American economy, just as Southern California’s mass market now is generating growth and vitality in the streets of Los Angeles, Santa Ana, Anaheim, Pacoima and other areas.
“The strength is in the purchasing power of the people,” says Daniel Villanueva, the former pro football player and broadcaster who is now a partner in Bastion Capital, a venture capital firm with $125 million to invest in local businesses.
“We did a survey of retailing and found 700 mom and pop stores have opened up in areas we weren’t aware of,” says Linda Griego, president of RLA.
Two entrepreneurs who saw opportunity and acted are Darioush Khaledi, an immigrant from Iran who started Top Valu and Valu Plus supermarkets, and Gary Cypres, a one-time money man from the most rarefied precincts of corporate finance who six years ago bought Central Stores, an appliance and furniture retailer.
Each has built successful businesses in neighborhoods that conventional wisdom had written off; each has suffered destruction, fire and looting and come back stronger than before.
In their stories we are reminded not only of the dynamics of Southern California’s economy but of the human drama in all business and the immigrant experience in our national life that too many Americans, sunk in conventional thinking, have forgotten.
Khaledi came to the United States in 1976, a 30-year-old civil engineer with a wife and two children. Not knowing English and unable to qualify as an engineer here, he pooled resources with his brother-in-law Paul Vazin, who had come from Iran five years earlier, and bought a failed supermarket in Torrance in March 1977.
“I had never been in a supermarket before and didn’t speak English,” Khaledi recalls. But the Iranian in-laws’ first insight was that the business hadn’t failed because of the employees, who were hard working.
So they listened to the employees and restocked the store with Mexican specialty fruits and vegetables and attracted neighborhood customers.
There are now 14 Top Valu and Valu Plus stores, selling $200 million worth of groceries a year in Long Beach and Lawndale, Wilmington and Compton, Santa Ana and San Fernando. Their customers’ average checkout bill is $15 to $20 compared to $20 to $28 at major supermarket chain stores in more affluent neighborhoods.
But Khaledi’s stores succeed because densely populated neighborhoods give them more customers and average sales of $800 to $850 per square foot compared to $350 to $400 per square foot for the major chain markets.
Larger companies failed in special stores for Latino neighborhoods--Vons with its Tianguis markets and Yucaipa Cos. with the Viva chain--because they built big stores, forgetting that low-income people live in smaller homes and buy selectively rather than in bulk.
Khaledi’s stores make smaller space--18,000 to 28,000 square feet--work by stocking essentials and dispensing with general merchandise. They also have lower prices--five avocados for 99 cents, 10 pounds of potatoes for 98 cents.
And they are nonunion, employees having decertified the Food and Commercial Workers Union in a 1984 election. Union members still picket Khaledi’s stores.
“We hire from the local unemployment offices,” he explains, “taking 3,000 names, interviewing 700 or so and choosing 100 to 150 for a new store.” His workers get $9 an hour compared to $13 to $14 an hour union scale, but have more full-time work than they would at major chains, Khaledi says.
They also get uniforms and six weeks of human relations training based on Dale Carnegie courses. Khaledi describes it as human improvement. “When they start classes, some are reluctant even to stand and say their names. But at the end, when they are required to give a two-minute speech, many run overtime. They speak with self-confidence.”
Gary Cypres, a former investment banker for Lazard Freres, knows about building self-confidence among immigrants. In 1990 he bought Central Stores, a business that now sells $100 million a year in furniture and major appliances on credit to immigrants and first-generation Americans in Los Angeles and Orange counties. It also sells cars and makes small loans.
Central’s loss ratio is 7% of credit outstanding compared to 4% to 5% at national merchandisers and credit card companies serving affluent areas. “These are working people who have no credit history,” Cypres explains. “But they pay their bills if they can possibly do it.”
Central charges 23%-24% for installment credit and small loans, compared to 18% at the larger retailers but also compared to 35% to 75% loan interest at finance companies in states without California’s usury laws and 200% at pawn shops. There’s not much credit available to low-income people.
But Central gives its customers a start by requiring borrowers to pay significant principal before borrowing again. “When they get a TRW rating, it’s based on their history at Central,” says Cypres.
Both businesses cope with crime, and worse. After the 1992 riots, Khaledi went to his Compton store and was touched to see customers come to help clean up. “We reopened that store in eight days,” he says. In the next 12 months, he plans to open five Valu Plus stores and hire 500 people.
Cypres was in his store in 1992 when police came. “But they said, ‘We can only stay five minutes, so get your people out.’ The system had broken down,” he says.
Yet the attractions of the Latino market were so overpowering--”they pool resources, kids work when the family needs money”--that Cypres has opened seven more stores and plans a public offering to raise $20 million for expansion.
“There is great opportunity to fund small companies,” says Villanueva, who has purchased Pan American Savings to make small loans to Latino businesses.
He doesn’t have to look far for opportunity. Veteran grocer Joseph Sanchez Jr., owner of La Quebradita market for the past 33 years, plans to open two more stores because, like all of Southern California, the low-income Latino market is growing again.
So much for conventional wisdom.
