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Retailers Thrive in Inner City

Could it be that some of America's seemingly destitute inner cities are actually untapped gold mines of consumer desire - that they're ready to hand a handsome profit to retail stores willing to venture into struggling neighborhoods?

There's new evidence that the answer is a surprising yes. And if true, it could be a key link in restoring vitality to America's urban cores.

Take Little Village, a mostly Hispanic area on Chicago's West Side. In a by-the-numbers sense, it's a fringe area. The median household income is $30,000. Many residents are on welfare. The average home price is about $110,000.

But there's a lot more economic vitality than these numbers let on. Residents and visitors spend money here, lots of it. On weekends, they dress in their best - starched pink bows, spit-shined shoes, even the occasional sombrero - to stroll the bustling main drag.

They make retailers thrive. The Ameritech cell-phone and beeper store, for instance, is the fastest-growing in the region. The local McDonald's has the second-highest revenues in the city.

Indeed, it seems that - contrary to conventional wisdom - low income doesn't necessarily mean little spending. High population density, less penny-pinching, and a big underground economy make the spending power of poor neighborhoods higher than the median income numbers suggest.

"They spend it as they get it," says entrepreneur David Andalcio, president of Interface Cellular Communications and owner of Little Village's Ameritech store. "Especially the younger generation, they love the toys, and they don't forecast their spending." Not only do they want the cell-phone, he says, "but they want the colorful one that vibrates."

His firm is one of the fastest-growing Hispanic-owned companies in the nation.

It's successes like this that prompted Social Compact, a Washington-based community-development group, to begin to quantify inner-city strengths. The organization's corporate backers - which include Allstate Insurance Co., Commonwealth Edison, and Bank of America, Illinois - are interested in the markets it may uncover.

These and other potential corporate prospectors know that doing business in the inner city can be high-risk. Bad infrastructure, crime, a poorly educated workforce, and other troubles have sunk many urban ventures.

Furthermore, no one expects high-end shops like Neiman Marcus to rush into impoverished areas. But members of the Social Compact believe that in neighborhoods that show good profit potential - as determined by a new measurement system - there are solid investments to make.

After years of failed federal subsidies, this could bring a wave of private investment to inner cities - and represent a switch to a more-capitalist form of development. "The chance of success is highest in these neighborhoods when people are pursuing their own self-interest," says William Goodyear, chairman of Bank of America, Illinois. "They know the market. They know the people. They have the energy."

In its first effort to quantify inner-city possibilities, Social Compact is comparing Little Village with Kenilworth, an upper-crust Chicago suburb. In this genteel North Shore community, quiet oak-shadowed streets run along sprawling estates with mansions that often have tennis courts or four-car garages, or both.

In a small cluster of stores, the Groseille bakery offers French pastries, dark-roast coffee, and wrapped gift baskets.

The Chicago Live Poultry Shop in Little Village, by contrast, has caged chickens and ducks that employees butcher while you wait. Kenilworth's median income is much higher than Little Village's. But consider spending power on a per-acre basis: In Kenilworth it's $37,754. In Little Village it's more than double that - $85,018 - according to Social Compact.

Population density explains some of the gap. But there are also different spending habits.

In Little Village, the "disposable income is not such that people are taking their families to Disneyland, but they are willing to pay $39.99 for cable and do conference calls around Bulls games," says Lynn Reilly Whiteside, executive director of Social Compact.

Branch bank booms

In fact, when Ameritech recently launched its new cable service, it came first to Little Village. Banco Popular, a bank with Puerto Rican roots, also recently opened a branch along the crowded neighborhood's main street.

Residents walk from their tidy three-tiered apartment buildings, past rows of flower beds that line sidewalks, and deposit a total of more than $1 million per month in the new bank branch.

To be sure, some gang problems persist here. There is occasionally graffiti scrawled on the sides of buildings. But the neighborhood, which was founded by East Europeans and more-recently settled by Mexican immigrants, has come a long way since the days of white flight.

Nor are residents of Little Village the only urban dwellers willing to part with their money. African-Americans who live in inner cities, for instance, spend far more on clothes than most Americans, according to a recent study by Harvard Business School professor Michael Porter. Blacks who live in poor urban areas spend an average of $1,032 per year on children's clothes and $745 on men's clothes. The average American family spends $518 on kids' apparel and $447 for men.

Another difference between affluent and poor communities is the size of the underground economy. While this occasionally involves illicit drugs, the vast majority is cash traded for everything from in-home laundry services and auto repairs to baby-sitting and lawn mowing.

This parallel economy's size isn't known, but experts estimate it totals $1 trillion annually in the US. More of this activity goes on in the inner city, where friends and relatives often perform services. As for the track record of inner-city businesses, there is little national data.

Although there have been many failures, there are also success stories, including supermarkets. The New York-based Local Initiatives Support Corporation (LISC) has helped open six inner-city grocery stores since 1993. Twelve more are in the works. The group is helping open a Sterling Optical branch next week in New York's Harlem section.

"The key is to look at what residents spend money on," says Jeff Armistead, a senior vice president at LISC. "It's groceries, pharmaceuticals, clothes, and shoes." Those fields are where the early opportunities are, he says.

Easy credit

Another key to inner-city success, says Mr. Andalcio, the Little Village entrepreneur, is offering easy credit. "People here have money stored away under their mattresses or in their tortilla makers," he says, "not in bank accounts." His customers pay as they go - or put $200 down and start a credit line.

Another more-fundamental key, says Social Compact's Ms. Whiteside, is a stable housing base, which is usually developed through years of work by community-development organizations. Perhaps most important is a shift in perceptions by corporate America. "We're no longer accepting the deficiency-based statistics," says Mr. Goodyear, the chairman of Bank of America, Illinois. "And when you do that you can come to some pretty different conclusions."