Under-stored, ethnically diverse markets are the last frontier in domestic retailing. As suburban markets reach their saturation point, retailers must look to underserved markets for expansion opportunities. The International Council for a Competitive Inner City's report The Changing Models of Inner City Grocery Retailing estimates that America's inner city populations have spending power of more than $85 billion annually — and that power is growing.

The U.S. Department of Commerce says these markets will account for 40 percent to 70 percent of the total increase of U.S. purchasing power between 2000 and 2045. Retailers can't afford to allow the challenges of urban development to hinder their exploration of this untapped market. But there are problems:

Higher construction and development costs: Often, flexibility on parking and design is required due to limited land space and pressure from neighborhood groups.

Traditional income models: While the industry standard is an analysis of median household income, the retail potential of an urban market should be measured by aggregate income and concentrated retail demand. Despite lower incomes, these households often exhibit higher total average spending on basic items such as apparel and food. A study by PriceWaterhouseCoopers and the Initiative for a Competitive Inner City indicated the total average annual spending on apparel in these neighborhoods is $1,157, compared to a U.S. average of $1,124.

Employee recruitment and retention: Due to a lack of amenities in these markets, many retailers have found it challenging to recruit and retain employees outside of the immediate community. There is no formula for success in underserved markets, but those that do well share common traits and concerns:

Merchandise mix: The standardized retail model for the homogenous suburban target market has to be revamped to fit the diversity of an urban market. The market density and ethnic diversity make the standardized merchandise mix obsolete. Kroger has used the technology of its Preferred Shopper program to track shopping patterns and to better tailor stores to meet customers' needs with ethnic foods and produce. Also, with “regentrification” in most larger cities, retailers must create an exciting shopping experience for a full range of incomes, ethnic backgrounds and cultural groups.

Community involvement: To prevent theft and boost sales, retailers must take an interest in the surrounding neighborhood. Home Depot, in partnership with Habitat for Humanity, provides quality affordable housing for low-income families and uses its resources to build youth playgrounds. A strong community reputation will also reduce development time and save money.

Enlightened human resources: TJX's First Step Program is designed to take advantage of the underused workforce in urban markets. It offers classroom training, case management, internships and job placement. It also provides an English language-training program for associates.

The right location: Identifying submarkets and bringing together critical mass and the right tenants is key to success. Creating a strategy in these markets demands collaboration between the retailer, developer and government entities.

Who Maranda Walker
Manager for emerging markets, retail corporate services, CB Richard Ellis