On April 17, Fairway Market, a regional northeastern grocery chain, had an initial public offering of its stock, and although the offering price was towards the high end of expectations, the shares rose 39%. Sterling Investment Partners, which has held 80% of the company since 2007, expressed its intentions to expand the chain from its present 12 stores to 300, opening 3 to 4 new locations each year. On the same day, Tesco, Britain’s largest food chain, announced that it was closing its United States operation, Fresh & Easy stores, and taking a loss of $1.8 billion.
Food shopping is one of the most competitive areas of retailing, and has been heavily studied. Traditional supermarkets are competing with each other, with big box stores, and drug chains, as well as convenience stores and farmer’s markets. For the most part, supermarkets are generic, with similar layouts and services. Whole Foods modified the model slightly, but only by targeting a more affluent shopper with different purchase patterns. Both Fairway and Fresh & Easy went further, with divergent results. In an industry based largely on low markup and high turnover, where every inch of shelf space is tracked for profitability, Fairway offers an aisle of specialty olive oils, a section of British imports, and a department devoted to different types of smoked salmon. In contrast, Fresh & Easy opened in smaller stores, with an accent on wrapped goods, and automated check-out. The Fresh & Easy model was something between Trader Joe’s and the traditional neighborhood grocery. According to the Los Angeles Times, Tesco did an intensive study of American grocery shopping and purchasing patterns, but their failure is one of the most costly in food marketing history.
Although Tesco did its research, it may have imposed its own preconceptions on the results. The Fresh & Easy stores assumed a European shopping model, where shoppers drop in several times a week. They relied on automated self check-out systems, although these devices have generally been unpopular.
The relative success of Fairway seems to have been based on a better understanding of their shoppers, who, for the moment, are clustered in New York, New Jersey and Connecticut, and are generally affluent and well educated. The Fairway model relies on favorable pricing, but also on the sense of adventure. This relates to macroeconomic studies including a 1991 paper by Paul Krugman, “The New Economic Geography.” When a new industry begins, the area where it develops is likely to become a locus, and other firms in the industry cluster in the same vicinity. This was the case in Silicon Valley in the west. When the industries require highly skilled employees, the workers they need may not be available outside of the industry’s center. When the workers are also well compensated, they will attract merchants with specialty products. This is the pattern that made Portland a center for both computers and coffee. These specialized retailers, in turn, are faced with competition which moderates prices. The availability of high end restaurants and other amenities continues to draw well compensated workers who can afford these luxuries. Rebecca Diamond, of Harvard, in a 2012 paper “The Determinants and Welfare Implications of US Workers’ Diverging Location Choices by Skill: 1980-2000,” wrote “Local wage and amenity growth generates in-migration, driving up rents. My estimates show that low skill workers are less willing to pay high housing costs to live in high-amenity cities, leading them to elect more affordable, low-amenity cities.”
The Swiss banking giant UBS learned this lesson when they located their main United States Headquarters in a suburb of Stamford, Conn. While this was far less costly than buying space in Manhattan’s financial district, they found that the young bankers whom they wanted to retain preferred to live in Manhattan or Brooklyn, in spite of the higher costs, both for proximity to other potential employers and for the cultural diversity.
States and cities have generally given huge tax breaks to companies willing to locate in the state, but this may be counterproductive, particularly when the jobs created are low skill, low wage. A more profitable investment night be to improve the quality of state colleges to attract students who will gain greater skills, and draw industry to the skilled labor pool. Corporations are happy to have states and cities bid to be the location of a new warehouse, but they’ll also move for a better offer. Invest the same money in education and the corporations will bid for a chance to come to your state.
Sam Uretsky is a writer and pharmacist living on Long Island, N.Y. Email firstname.lastname@example.org.
From The Progressive Populist, June 1, 2013
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