Grocers, Consumers Profit As Shopping Giants Return To Forgotten Inner City

LOS Angeles entrepreneur Darioush Khaledi is proudly bucking conventional business wisdom: He is making a profit in the inner city.

Mr. Khaledi's company, KV Markets, is Southern California's largest independent grocery chain, with 13 inner-city stores averaging $17 million in annual sales per store, a profitable level of business. ``We love the communities and we work with them very well,'' Khaledi says, ``But we went into business to make a profit.''

Khaledi may soon have competition other than the higher-priced ``mom and pop'' stores that typically dot low-income neighborhoods. Saturation of suburban markets and new opportunities for profit are enticing many regional chains and some national giants to consider a move to urban centers.

The Local Initiatives Support Corporation, a New York-based nonprofit group, last month announced it raised $24 million from ``bottom-line oriented'' institutional investors, including G.E. Capital, J.P. Morgan, and Bank of America. The agency and its investor group say they are committed to this project, ``The Retail Initiative'' (TRI), and plan to finance 12 to 14 new stores.

Most grocery chains left inner cities in the 1970s and '80s, joining ``white flight'' to the suburbs. And until recently, many have been unwilling to return to those areas because of crime and a perception of low-income residents' weak buying power.

But South Central Los Angeles - an emblem of urban decay - is ``a multibillion-dollar community in terms of spending power,'' says Ted Berkowitz, manager of industrial development for the Los Angeles mayor's office.

Inner-city pioneers

A number of stores are already in the inner cities. In Washington, there is a Safeway grocery store in Ward 7, one of the city's poorest areas. A successful Jewel store sits in the depressed Chicago Lawn area, and there is a Winn-Dixie on a site vandalized during Miami's Liberty City riots in 1980.

For blighted areas, a new supermarket can mean hundreds of new jobs, an economic center around which local merchants can cluster new stores, a much-needed influx of capital, and increased tax revenues for the city government.

``Although a supermarket can't turn a neighborhood around, it can provide a sense of place, like the old-fashioned town hall,'' says Greg Longhini in Chicago's mayoral development office.

Inner-city grocers are reaping profits by providing convenience - something residents have long done without. Denise McCoy, who lives in one of the poorest neighborhoods in Newark, N. J., used to travel 45 minutes to the nearest grocery store. Before opening a store in Newark, Pathmark Foods Inc. found that 90 percent of residents shopped outside the city.

McCoy, who works two jobs and has little time for shopping, now walks five blocks to the Pathmark store. ``The convenience is great,'' she says. Opened in 1990, the Newark store is outselling other Pathmark stores of comparable size, the company says.

Yet inner-city ventures do have problems:

* Security. Costs for security are typically higher in urban areas. Some stores have had to hire guards and install metal detectors. In 1986, when Khaledi bought a vacant supermarket building, there were often gun fights in the parking lot, he says. But crime had stopped when the new store opened because ``when you clean up, people take their crime elsewhere.''

* Financing. Many investors are still skeptical. Some, such as J.P. Morgan, which has $2 million in TRI, have contributed from their ``social investment'' money - small portions of their portfolios, where investment is driven as much by altruism as profit. Yet others say altruism is not enough of a motive. ``You need more than a good heart'' to entice tough investors, says Ian Campbell, spokesman at Great Western Financial Corporation in Chatsworth, Calif. ``You also need sharp pencils and hard heads.''

Both Great Western Financial and Home Savings in Irwindale, Calif., have $1 million in TRI's venture and millions more in low-income housing loans. Supermarkets help stabilize local economies, thereby bolstering their loan repayment rates. ``To the extent that the community prospers, we prosper,'' says Charles Rinehart, chief executive officer of Home Savings.

Getting help from the city

Some cities and banks also are willing financiers. Every project in the Chicago area has received some city financing, Mr. Longhini says. Average city contributions are $4 million to $5 million per store.

But after one attempt to work with the City of Los Angeles, Khaledi now spurns its assistance. ``We tried once, but such red tape,'' he says. Khaledi found funding from Sumitomo Bank in Los Angeles and in four months was constructing a new store.

* Serving a diverse customer group. Companies can no longer use ``the cookie-cutter approach'' that worked in suburbia, Borges says. ``They end up in areas that are multiethnic ... and they have to respond to the needs of each group - Haitians, Senegalese, Hispanics - a little differently.''

* Community politics. Longhini warns that erecting a supermarket ``can be impossible in the highly politicized realm of neighborhood politics.'' Enter community-development corporations. Many consider these nonprofit community groups essential to any successful inner-city venture. They are a source of federal, state, and local grants and can serve as liaisons between grocers and citizens, whose support and trust are key to success.

Despite the added complexities, financial incentives are enticing more businesspeople into the cities. At the prospect of other grocers invading his turf, Khaledi laughingly says, ``I hope they don't come. Who needs more competition?''