by John Weiser, Contributing Editor
Underserved markets neighborhoods with high concentrations of ethnic minorities and immigrantsare fast growing and overlooked by major retailers. There are significant profit opportunities in these neighborhoods for savvy convenience store operators. But how do you know whether a particular location would be right for your store?
Traditional data sources, such as those based on the U.S. Census, can steer chains in the wrong direction. In fact, part of the reason these neighborhoods are underserved by retailers is that traditional data sources underestimate population, demand and growth making these markets seem less attractive than they truly are.
The good news is convenience store operators can turn this data problem into an opportunity if they can learn how to use alternative strategies to get a better estimate of true market demand.
Why are traditional data sources often wrong? Because they are geared to a world shaped by the middle-income class. These approaches often don’t give an accurate assessment of market demand and cost in underserved markets. For example, many companies use income data to estimate purchasing potential. But research shows clearly that consumers in underserved markets often purchase much more (often as much as 30% more) than their income. This occurs, in part, because of cash they receive through the “informal” economy, such as payments not reported to any government authority. It also occurs through gifts, remittances and transfer payments that are not captured in income data.
Even when companies use purchasing data rather than income data, the translationfrom mainstream to underserved markets may not be accurate. For example, considernational consumer purchasing surveys, which are often the bedrock on which manyconsumer market analyses rest. Because purchasing per household in underservedcommunities is smaller than national averages, the national data sets oftenundersample these groups and are inadequate predictors of the purchasing patternsand costs associated with consumers in underserved communities. In additionto the problem of sampling, underserved communities are often difficult to surveyin cost-effective ways like telephone, mail and the Internet.
These markets are also considerably more diversethan suburban markets, with many more cultures and income groups living togetherin a single trading area. For example, when Shaw’s decided to open a supermarketin inner-city New Haven, Conn., it found that there were 42 different ethnicand religious affiliations within the two-mile trading area.
So what’s a convenience store operator to do? Companies that have succeededin underserved markets have found many ways of addressing these challenges.These strategies can be distilled into three primary approaches:
1) Use alternative data sources.
There is a wealth of data that can helpmarketers understand the market size, growth potential and consumer preferencesin underserved neighborhoods, but you have to know where to look. For marketsize, it is critically important to get beyond estimates based on U.S. Censusdata. Additional sources of data on population size can be found from: vehicleregistrations, school enrollment, utility payment centers and building permits,especially multi-family dwellings.
For information on total consumer spending, it’s important to get data that can help you estimated the size of the informal economy. Most of the important sources come from the financial services and utility industries and includes the percent of bills paid in cash, the number of households with no banking relationship, the percent of rental units, and the percent of first-generation immigrants in the community.
For estimates of growth trends, look at indicators of the willingness of individualsto invest in the neighborhood. Data sources include:
- Property sales;
- Housing values;
- Residential building permits;
- New construction permits; and
- Reported crimes.
2) Capture real-time information with on-the-street interviews.
Residentsin these neighborhoods can be hard to reach through the typical market surveytools of phone, mail and Internet. Successful companies in these markets havefound that it is important to supplement quantitative data with onthe-streetinterviews talking to prospective customers one-on-one.
When Shaw’s management team was deciding on its product mix, it worked with community groups and organized meetings with community leaders to discuss product offerings. Meeting in a former YWCA, Shaw’s buyers and category managers, sitting at tables arranged by category, conversed one-on-one with the community representatives and solicited ideas on what products to carry. From this dialogue, the company customized its merchandising approach to fit the community’s ethnic mix. As an example, the store chose to stock fresh goat meat to satisfy the needs of consumers from some Caribbean countries, which has helped to attract customers and increase profits.
When the data from alternative sources is put together with real-time information from community interviews, you may end up with a picture of the neighborhood that is remarkably different than that developed from standard sources.
Social Compact, a nonprofit coalition of business leaders committed to promoting successful business investments in underserved communities, has pioneered The Neighborhood Market Drill Down. The Drill Down adds alternative data to the standard market sets, and it supplements them with direct collection of primary source data in the markets. Social Compact has analyzed neighborhood economies in cities across the U.S.
When Social Compact analyzed the Columbia Heights community in Washington, D.C., its research showed that this market is far larger and growing much faster than standard sources would suggest. The total population was 51% higher than the U.S. Census reported, and the rate of market growth was 55.9% higher than that predicted by the U.S. Census. The difference in market size and growth were primarily a function of multiple households residing within one residence and the large influx of immigrants into the market. Both populations are undercounted by standard approaches.
The Drill Down also found higher average annual household consumption thanthe Census did, $58,752 versus $43,606. This dramatic increase is due primarilyto the inclusion of a cash economy projection that averages $10,000 per householdin this market. Putting together the larger population and the greater consumption,the Drill Down found a much larger total market, $1.4 billion versus $851 million,an increase of 70.7%.
3) Tap the expertise of community groups and national nonprofits.
Companies that have succeeded in these neighborhoods often rely on knowledgeablegroups that understand the communities and can help spot new opportunities andavoid pitfalls. There are several national nonprofit organizations specializingin providing information and advice on underserved markets, including SocialCompact (www.socialcompact.org),Metro-Edge (www.metro-edge.com)and the Initiative for a Competitive Inner City (www.icic.org).These groups can help to provide key information and insights. The Initiativefor a Competitive Inner City has conducted surveys on consumer preferences ofinner-city residents. The surveys provide detailed information on the uniquebuying habits of inner-city consumers and allows retailers to compare them tothe buying habits of c
onsumers elsewhere. Survey results can be downloaded withoutcharge from the group’s Web site.
In every city, there are also community-based organizations that can help retailerscustomize their merchandise to the interests of local consumers and identifyeffective ways to reach new customers. In the case of Shaw’s in New Haven, thelocal community development corporation, Greater Dwight Development Corp., wascritical in helping to site the store, find competent employees and adjust themerchandising to meet community needs.
Underserved markets may not be right for every c-store operator. But armed with successful strategies for gathering and analyzing data from alternative sources, you can find out whether they offer a profitable opportunity for you.
John Weiser is the author of “Untapped: Creating Value in UnderservedMarkets,” and a partner in Brody * Weiser * Burns, and adjunct professor theCenter for Corporate Citizenship at Boston College. He can be reached at (203)481-4199 or via email at [email protected]