Supermarkets: From marginal to profitable in low-income neighborhoods

Tight margins are a given in the supermarket business, where they historically hover around a measly one percent of sales and are based on high-margin items offsetting loss-leaders. So how does the math work in lower-income neighborhoods where cash-strapped customers bypass high-margin items in favor of commodity goods? There's no one answer, says Jeffrey Brown, founder of Brown's Super Stores ShopRite supermarkets and Uplift, a nonprofit that works to bring supermarkets to under-served areas.

Question: How do you adjust the product mix in a lower-income neighborhood?

Answer: That’s a really good question. [Merchants said,] `Wow, we do the exact same thing we do in the suburbs and we make like 5% of sales less.  So instead of making a 1% profit, they have a 4% of sales loss.  That’s a mammoth loss.  

Q: You've said they first suspect a theft loss and over-spend on preventative guards and gates, but it turns out that theft really isn't the problem. It is, as you said, the mix. 

A: Part of it is just the nature of [having] a modest income. You can’t [stock] as much high margin, gourmet stuff.  You’re not going to be able to fix all of that.  An entrepreneur won’t be able to.  I’ve been at this a long time and I haven’t been able to. 

Q: You have to do something, though. You can't lose money.

A: Public officials ... are saying that not having these grocery stores has a bad ripple effect, a downward spiral effect on society.  We have to have them because it’s costing us so much money in obesity, the loss jobs, the loss economic stimulus.  So we have to have these grocery stores.  So there’s been a lot of attention around how to engineer some mitigating cost or savings factor.

Q: Like what?

A: Over time, we’ve tried different things but what I’ve come to learn is every sort of government has a culture of how it wants to do things.  You have to solve the problem with what they have already.  I’m going to give you an example. At the federal level we’ve become very, very experienced at using something called new market tax credits.  It’s a very sophisticated program out of the U.S. Treasury that you can only use impoverished areas that meet certain criteria.  So we’ve become pretty advanced at using that tool and that tool mitigates a fairly good part of the problem.  I want to say of the entire five percent [profit margin] gap, maybe 25% of it could be mitigated with just that.

Q:  With that 25 percent, now you’re down to what -- a  3 percent loss?

A:  Right, 3.5 percent. 

Q:  Okay.  So now what?

A:   So, obviously, I’m working on that side and I’m also working on the entrepreneurship side.  So the entrepreneurship side has to do with observations and communicating and being close to your customers. That is not a completely new thing in entrepreneurship, but it rarely gets used among people of modest means. That's because a lot of grocers, assume that what [low-income customers]want is the cheapest stuff they can get.  It turns out is we’re all human and none of us want the cheapest stuff we could get.  There are things that are of more value to us and less value to us.

Q: For example?

[At this point in our interview, Brown gestures over at a sweet potato bundt cake he had served me earlier -- yes, this job has its perks. One of the company's bakers developed it for Brown's stores, many of which serve an African-American clientele enamored of sweet potato pie.]    

A: So it has to do with this cake.  We’ve invented items to serve our customers that have driven our overall volume way up and helped mitigate some of the margin, not by charging more, because that’s what other people have tried.

Q: But by having the right…

A: The right items. The money we make on having the items others don’t have mitigates a good part of that gap.

Q: It’s still not going to be a high margin item really.

A: There’s no one magic bullet.  So you keep on going down the line.  We’ve pieced together through finance and entrepreneurship creativity, we’ve pieced together a complete solution.

Q:  I guess one solution is you’re not going to have a one percent margin.  You’re going to have to be happier with maybe a 0.5 percent margin.

A: That’s not the case. It's not that I have to have a certain profit level.  I’m happier with a lower profit margin too.  But for this to be sustainable and for this to be a solution to this massive problem of  poverty and all the consequences of poverty, you have to develop a strategy that’s going to have comparable returns to get capital to flow into this.  If it has inferior returns, you always have problems with attracting capital. Things will suffer.

Q: It will be okay for the first five minutes. 

A:  Exactly.  This has evolved.  We’ve learned.  Literally, we’ve come up with new ideas, sometimes week to week.  Some work and some don’t work.

Q:  What’s been a bomb?  What did not work?

A:  Well, we tried sushi in some places.  That was not successful.  We’ve tried a number of contract restaurant type people and one has been successful so far.  We have had some things that haven’t worked, but they’ve been small tests.  

Q:  I guess that’s the beauty of having a chain of stores.

A:  Yes, we have 11 stores and we’re constantly experimenting with stuff.  I think an overriding concept it’s finance and it’s entrepreneurship and creativity. The other thing is include everyone you can, because the solution may be more of a partnership of different people. You have to be open to that.  So we have constantly created new entrepreneurs to help us do better and solve problems for our customers.

Q: What do you mean? You mentioned an entrepreneur who developed a water ice product.

A: He had a water ice stand and he made his own water ice.  Our guys loved his water ice and they took me and I tasted his water ice and it really was exceptional.  He made it all by hand.  We just really liked him.  So we said that we feel that ice cream does not cater to our African American customers.  The flavors they have are not appealing.  I'd like to come up with a more Southern line that had all flavors my customers would be interested in. 

Q: For example?

A: Sweet potato pie. Strawberry shortcake ice cream. I think this is a good example. We’ve created a new entrepreneur, a minority start-up entrepreneur, right where our stores are. By the way, we have a couple thousand of these small entrepreneurs that we’ve created.

Q: And they have their own fan base?

A:  Right.  It’s part of taking what’s depressed and lifting it up.

Q: Tell me about the health clinic.  Maybe another element is drawing customers to the store who wouldn’t come otherwise.  Is that it?

A: Yeah and I’ll tell you my thinking on that.  I don’t know if you noticed that we have a credit union.  We have other services.   My thinking is that every problem that creates a problem for all of us is an unmet need.  So we have to do financial services.  We have to take care of our health.  In the suburbs it’s very easy.  There are banks all over.  There are doctors all over.  In the city it’s not so easy.  It’s almost a desert, like the food was a desert. In talking to my customers, and it’s not like they have an exact vision of how to fix this the approach, they just tell me the problem they have and they explain to me that they go to emergency rooms because there isn’t a plentiful amount of doctors' offices.

Q: Like an easy urgent care.

A: It’s changing now, but there wasn’t.  So we thought that would be a problem that we could solve and we came up with QCare.  QCare is a partnership of our nonprofit and various federally qualified healthcare centers.    

Q: Plus you can have extended hours here.

A:  We have seven days a week, extended hours. The store’s open until 11:00.  The healthcare [clinic] isn’t open that late, but it has nighttime hours.  If you take it step-by-step, SEPTA drops off on the front door so you don’t need to have a car.  It’s very convenient.  The health clinic, the credit union are all services that are available most of the hours we’re open.  We also have a nutritionist in this store.  We don’t charge for that to help you put a plan together for improving your health through diet.  We have sort of like a social worker in this store.

Q: Who pays for all this?

A:  I pay for them.

Q: Those things erode your margin, don't they? Is each individual store profitable?

A:  Yes. The smaller, older stores may not be profitable, but we’re always working on trying to replace them with bigger stores that have all of the amenities.  It turns out that the bigger stores with all the amenities do the best. The formula works. I think our work has demonstrated that all of us like clean places.  We like professional, nice service, good products.  We all like that.  It doesn’t matter our income.  

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