Some Supermarkets Thrive in Inner City

At first blush, Vons Cos.’ decision this week to close its 6-year-old Compton store--the first major supermarket to return to that city since the 1992 riots--appears to illustrate how tough it is for huge grocery chains to succeed in diverse inner-city communities.

The company insisted that despite its best efforts at reworking the store, it just couldn’t turn a profit.

However, just down the road, one of Vons’ biggest rivals, Ralphs Supermarkets, operates a profitable store. And Ralphs’ sister chain, Food4Less, just completed a $4-million expansion of its Compton store at Central and Rosecrans avenues.

The lesson from this apparent contradiction, industry analysts say: When a grocery store fails in the inner city, it probably has more to do with how the store was run than the neighborhood itself.

They point out that a number of grocery heavyweights, such as Stop & Shop and Pathmark Stores Inc. in the East, as well as Ralphs and Food4Less in Southern California, have figured how to unlock the profit potential in more densely populated lower-income neighborhoods and are opening new stores.

“The [inner-city] market was always stereotyped and underestimated,” says John Konarski, senior vice president of the International Council of Shopping Centers. “There are huge volumes of people with money to spend. Retailers are now beginning to see that there’s a lot of promise there.” Konarski said Pathmark now counts stores in Harlem and the Bronx among its most profitable.

Of the 11 new stores that Food4Less will open this year, four will be in underserved South-Central Los Angeles--a couple of them just down the street from a site that Vons pulled out of three years ago.

“We’ve opened 90 stores [in Southern California] since the riots, more than half of those in inner-city areas,” says Dave Hirz, president of the Food4Less chain, which is now owned by Kroger Inc. “With each store we’ve learned more about what our customers need.”

The first of these new stores will open in Chesterfield Square, a $75-million center under construction at Western and Slauson avenues, which is scheduled to open late next year. Another, which is still in escrow, is being developed by a South-Central community development group at Slauson and Central avenues.

Why do operators like Food4Less flourish in urban areas like these that Vons is retreating from?

Konarski’s view is that how a store is operated is more important than where it is. Providing low prices and services that customers need is key to succeeding in urban neighborhoods, he said.

Cesar Arauz and his mother, Theodora, take the bus a couple of miles from their house near Olympic Boulevard to the Ralphs on Western and Wilshire Boulevard. Cesar says it’s the only major supermarket close to where they live and one of the few places that offer double coupons and cash his mother’s disability check.

Warehouse stores like Food4Less have in recent years thrived because of their large stripped-down stores and lower prices, which are possible in part because a special union contract allows them to pay employees less than at other types of supermarkets.

However, low prices alone are no guarantee of success in the inner-city. Nonunion independents such as Superior Super Warehouse Foods, Top Valu and Jons have done well not just with rock-bottom prices on produce but also by offering a wider range of ethnic specialties and more specialized service, such as shuttle service for customers without cars and butchers who know that their Latino customers want their skirt steak or carne asada cut a little thinner.

“You have to be extremely sensitive to the needs of your neighborhood,” says Jose Legaspi, a Montebello-area commercial real estate broker and developer.

However, shoppers say independent chains often carry lower-quality meat and produce. Arauz says he shops at Ralphs because its meat is fresher.

And for Maria Gomez, it’s not so important that stores carry exotic produce or special cuts of meat; she just wants the produce and meat she buys to be fresh and inexpensive. She says she goes to Ralphs because it’s only three blocks from her house.

“It’s convenient and the fruit is much better quality than at other stores,” she says.

However, many shoppers say they make occasional trips to an ethnic market to pick up ingredients they can’t find in a Ralphs or Vons. This is where independents truly shine, Legaspi says, because they understand such things as subtle differences between what their Central American customers buy and what Mexican customers prefer.

Large chains such as Vons are still trying to figure out how they can best serve these communities without changing their formula or their offerings too dramatically. Vons’ previous attempt to cater to the Latino market, the short-lived Tianguis chain, was a financial blow and in the long run did little more than provide its smaller competitors with new locations, including Superior Super Warehouse Foods, which is also taking over the lease on the recently closed Vons store in Compton.

Although Vons has closed more stores in low-income urban neighborhoods than it has added, officials insist they are just as committed to serving the inner city. Rather than invest in new stores, however, they intend to renovate the ones they have, says Vons spokesman Kevin Herglotz.

Many analysts say Vons will simply have to concede some of this business, but other chains such as Vons parent Safeway Inc. say there are small ways for big companies to adapt to ethnically diverse communities.

Safeway changes only a small fraction of the items it stocks to reflect local tastes but promotes these items heavily and offers steep discounts, says spokeswoman Deborah Lambert.

As the country’s largest chains have consolidated, however, it’s become more difficult for managers to change the items in their stores. In Ralphs’ case, managers can only alter a single store’s offering by 5%, says Ralphs President Sam Duncan. Varying its stores’ inventories too much would undercut the big chain’s advantage of volume purchasing power.

As a result, the top chains, which control almost 70% of the Los Angeles market, have begun to look strikingly similar. That’s opened up the niche for independent operators, and a series of merger-related divestitures by the big chains have given the independents an unprecedented opportunity to expand by acquiring divested stores.

Not everyone welcomes this expansion. Some community activists and city officials are opposed to these nonunion stores moving into their community and bringing lower-wage jobs.

But most municipalities welcome these stores, the sales tax revenues they generate and other retail businesses they attract.