A ‘very difficult’ business: low-priced retail serving poor communities

Some folks are so ignorant of markets that they think selling quality products at low prices in convenient stores such as Roses is “exploitative.” Michael Munger, Duke University professor

There is a debate going on in Southeast Raleigh over Variety Wholesalers bringing a grocery store and a Roses to the site vacated by Kroger. The debate is basically between (a) people who think it’s important to have a low-priced grocer serving a “food desert” and (b) well-off politicos with a revealed preference for political theater over making life better for the poor.

Obscured in this debate, though not in the reality of Kroger leaving and others unsuccessfully being able to start up, is just how difficult a business model it is to serve poor communities. Retail is already a very low-margin business. Even more so when trying to serve people with little disposable income, whose choice to buy a little more at the retailer has the opportunity cost not of, say, a movie ticket or a sporting event, but of a bus ticket or a delayed bill payment.

Andrew Silton, money columnist for The News & Observer, writes about that in his column today on Family Dollar’s struggles and future:

… Family Dollar is engaged in a very difficult business. For starters, retailing is a low-margin business, since it is selling other company’s products. Family Dollar operates in a particularly tough part of the market, discount retail in predominantly poorer rural and urban areas. The company’s customers are the folks who have been losing economic ground for the last thirty years. Moreover, Family Dollar is sandwiched between gigantic retailers such as Wal-Mart and more recent entrants such as Dollar Tree and Dollar General. In order to generate rising profits, the company has to squeeze out fractions of a penny through creative pricing and merchandising and/or cost reductions.

It is not at all a case of “exploitation” — as the politicos and naifs see it — of an Evil Business taking advantage of a captive market, poor people with limited options. It is a symbiotic relationship, delicately balanced. The successful low-priced retailer helps the poor family by expanding their limited dollars’ buying power. They in turn help the retailer by continuing to choose to shop there.

Family Dollar, Kroger, IGA, and others show just how hard it is to maintain that balance. It should sober people to the business reality and cause those who say they care about the poor to root for the success of retailers who choose to brave the difficulties of creating a “food oasis.”

Jon Sanders / Director of Regulatory Studies

Jon Sanders studies regulatory policy, a veritable kudzu of invasive government and unintended consequences. As director of regulatory studies at the John Locke Foundation, Jo...

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