by Michael J. Berne and Joshua D. Kahr

   Much of the attention surrounding the return of chain retailer to the inner city has focused on supermarket chains that are returning after decades of investment in the suburbs. A few other national retailers, such as the Body Shop and Ben & Jerry’s Ice Cream, also have gained notice for a small number of new outlets in high-profile, low-income locations. However, the real workhorses of low-income urban communities have been and continue to be the major drugstore chains, which were locating in underprivileged communities long before the onset of the recent trend.

   The surge in inner-city development is being driven by a nationwide expansion among the major national and large regional drugstore chains. The four big national players–CVS, Rite Aid, Walgreens, and Eckerd–currently have in excess of 13,500 stores, and, through new development and aggressive purchasing of existing smaller chains, they continue to grow at an astounding rate. Rite Aid opened 578 stores in the 1999 fiscal year, which it proclaimed "the most aggressive real estate expansion program in the history of the drugstore industry." Walgreens has a stated goal of adding 450 stores in the year 2000. The business objectives of the Eckerd chain, owned by J.C. Penney, include the opening or relocation of up to 300 stores per year.

   Large regional players such as Duane Reade, the market-share leader in the New York City metropolitan area, also are participating in the growth. The chain has pushed beyond the central business district (CBD) into residential areas, growing from 59 stores in 1996 to 145 stores in 1999. Its current objective is to add at least 20 new stores in New York City in each of the next four years.

   This rapid growth is fueled by changes in demographics and the health care industry. People are living longer, and the population is aging. New prescription drugs are being developed at a dizzying rate, and drug manufacturers are becoming more aggressive in marketing their products directly to the public. The shift toward managed care also has had an impact. In their efforts to cut costs, health maintenance organizations (HMOs) have tried to limit hospital use, resulting in a higher percentage of prescriptions being filled outside medical facilities. HMOs also are developing long-term maintenance programs that require more patient/pharmacist interaction and therefore more pharmacies. Furthermore, HMOs have slashed profits on prescription drugs to such low levels that only the fast-growing chains, with their high sales volume and diversified merchandise mix, can survive.

   Chain drugstores’ growth also is driven by their new role as a one-stop shop for the harried modern American. At a Rite Aid or a Duane Reade, those lacking time or energy can quickly purchase many of the small consumable items–such as snacks, dry goods, and pet food–that they need to buy on a frequent basis. The modern chain drugstore is in this sense a reinvention of the general store, filling the vacuum created by the fall of variety store chains like Woolworth and Kresge’s and the absence of a smaller, more neighborhood-scaled format for the modern mass merchandiser (e.g., Wal-Mart, Kmart). In the same way that the modern supermarket now offers shoppers hundreds of nonfood items under one roof, the modern chain drugstore, by allowing a number of minor but necessary purchases to be made in one trip, has become a retail destination in itself, a new status that is largely responsible for the site location requirements of today’s drugstore chains.

   In the 1950s and 1960s, drugstores were not considered to be destinations in their own right. They occupied in-line locations in grocery-anchored neighborhood strip centers in order to take advantage of the heavy foot traffic generated by the supermarket. At that time, grocery and drugstore shopping was combined in one trip. Because the modern freestanding food-and-drug superstore was uncommon and drugstores drew the majority of their sales from prescription medications, supermarkets and drugstores peacefully coexisted. Drugstores also occupied space in regional malls, where they could benefit from the traffic created by department stores.

   Much has changed in the industry over the past decade. Chains now express a clear preference for corner sites on signalized, well-traveled intersections and are moving out of in-line locations in strip centers as soon as their lease expires. The majority of the 289 Eckerd stores closed in the spring of 2000 by J.C. Penney were small, low-volume outlets in strip centers; the company plans to re-launch these stores on "strategic corners."

   J.C. Penney was so intent on a particular corner location on U.S. Route 41 in Bradenton, Florida, that it was willing to build a new building for the bank already there in order to put a new Eckerd store on the lot. Corner locations are so profitable for the drugstore chains that they are willing to pay rents of $20 to $30 per square foot instead of the $10 per square foot they would pay in strip centers. Expecting such high rents, developers often are willing to pay remarkably high acquisition costs in order to beat the fast-food restaurants, gas stations, and banks that compete for corner locations.

   Prime corner locations often are found at prominent downtown intersections or high-visibility entrances to older commercial districts. Lot size is usually 60,000 to 70,000 square feet, or 1.5 acres. The store normally is housed in a low-slung, one-story standardized building with a wrap-around asphalt parking lot with 50 to 60 spaces and, usually, a drive-through window. Stores can range from 10,000 to 15,000 square feet and are considerably larger than most strip center stores. The larger store space allows for the display and sale of more front-end merchandise such as cosmetics, health and beauty items, greeting cards, vitamins, seasonal goods, candy, snack foods, and over-the-counter (OTC) medications and photo processing. The average trade area includes 18,000 to 20,000 people within one to two miles.

   The popularity of the new model can be explained by the fact that compared with old, in-line strip locations, the new freestanding locations report increases of 10 percent in customer traffic and increases of approximately 30 to 35 percent in sales. The high visibility afforded by the new format also is more in keeping with the drugstore’s new status as a "general store." The larger lot size makes a larger footprint possible and provides more opportunities to offer the high-margin, front-end merchandise and services that are so vital to today’s drugstores. The size of the lot allows for a drive-through window, while in-front curbside parking makes for a quicker and more pleasant shopping experience. And locating stores along heavily trafficked routes provides an added measure of convenience to time-constrained customers.

   Prominent locations have become more necessary also because of drugstores’ battles with their main competitors. When supermarkets started offering pharmacies, many of them insisted on clauses in their leases prohibiting strip center developers from allowing drugstores as in-line tenants. Because supermarkets generate the foot traffic that makes strip centers so desirable for other retailers, developers had no choice but to agree. Drugstores, for their part, had started to sell convenience food items as part of their front-end offerings and did not want to be too close to supermarkets anyway.

   The expansion campaigns of the national and regional chain drugstores have not ignored low-income neighborhoods in the inner cities. The Walgreen Company operates more than 200 stores in communities in which the median household income is less than $25,000; in fact, President Bill Clinton has commended the chain for its commitment to hard-pressed urban areas. Rite Aid, however, remains by far the leader in this regard. Of its 3,900 stores, more than 600 are located in economically distressed neighborhoods, and before the onset of its recent financial difficulties the chain had earmarked some $380 million (approximately 135 locations) for investment in the inner cities during the fiscal years 2000 and 2001. Walgreens, Rite Aid, Eckerd, and CVS all have stated that they intend to continue pursing expansion in urban neighborhoods with their new format.

   This trend can be at least partly explained by a broader movement among retail developers to rediscover urban markets after focusing almost exclusively on suburban growth for a number of decades. Developers and retail chains are finding a dwindling number of opportunities outside cities, and even when they do find a potential location, they often have to face intense antigrowth sentiment.

   A host of federal, state, and local incentives are now in place to make the numbers work for urban projects by providing tax benefits, land writedowns, utility discounts, and other subsidies, and banks increasingly are willing to finance these projects to meet their Community Reinvestment Act (CRA) quotas, which are set by the Federal Reserve Bank. Opportunities for banks to invest in housing are not as plentiful as those for retail, and the quotas probably soon will have to be revised to include retail investment. Community development corporations (CDCs) also are turning to retail as an important next step–after housing reinvestment–in rebuilding their communities.

   Much of the expansion of chain drugstores into low-income inner-city communities can be understood in the context of the national explosion of chain drugstores and the national trend toward urban retail development. However, the chain drugstore industry’s role in low-income urban areas also accounts for the rapid expansion of drugstores there.

   The main competitors for chain drugstores are supermarkets and mass merchandisers (e.g., Wal-Mart ranked fifth nationwide in pharmacy sales in 1999). However, supermarket chains followed the flight to the suburbs in the 1960s and only in the last decade have they started to rediscover urban areas, while discounters have never had a major presence in the inner cities. Even the urban-oriented Kmart has only 10 percent of its stores there. On the other hand, chain drugstores, with their need to sell high-margin front-end merchandise and services in order to compensate for lower reimbursements from HMOs, have been willing to fill the void. Drugstore chains also have used high-volume merchandising (resulting in lower prices) offering an extensive selection of products to rout their inner-city competition–the single-store "mom and pop" pharmacies and independent supermarkets, all of which generally suffer from limited selection and higher prices.

   Some have cited institutional discrimination to explain the absence of a normal range of retail options in the inner city. However, there is more to it than that. A modern full-service supermarket, discounter, or neighborhood shopping center requires a 10- to 15-acre site in order to support a large store and an even larger parking lot. A parcel of this size is difficult to find or to assemble in denser urban markets, where lots are small and separately owned. Declaring a site "in need of redevelopment" and thereby making it subject to the power of eminent domain will often lead to lawsuits or a strong political response, particularly if it is done on behalf of a private developer/retailer.

   Some have argued that ample parking and a large lot size are not necessary in denser urban settings, where many shoppers would arrive on foot or by public transportation. However, to allow for the larger purchases common at such retailers and to tap the larger trade area that these bigger formats require, automobiles must be accommodated.

   The chain drugstore, however, is comparatively simple to develop. The necessary lot size is much smaller, site acquisition is easier, and the overall impact is less. Also, because the development is freestanding, the developer needs to attract only one drugstore tenant, which is particularly important in marketing locations that are unproven in the eyes of retailers. A drugstore tenant also will be more willing to take on the risk of locating in a marginal neighborhood because each individual store is a small investment in comparison with the portfolio as a whole. In contrast, supermarkets, with their larger size, higher development costs, and need for a high average number of purchases per trip because of their razor-thin margins, must be more cautious. Finally, chain drugstores have been more willing in inner-city settings to consider unusual configurations and sizes and the reuse of existing buildings. Duane Reade, for example, has opened up in numerous bi-level and L-shaped spaces with below-average store sizes in New York City.

   There also are sociocultural explanations for the popularity of chain drugstores in low-income urban areas. Inner-city shoppers tend to prefer national name brands to private label or generic brands, equating national brands with a standard of quality that justifies the added cost. These inner-city shoppers rely on chain drugstores as the only retailers that furnish the desired brand names.

   Chain drugstores such as Rite Aid and Walgreens also empower local managers to work with local and minority product vendors to ensure that store merchandising is appropriate for an area’s demographics. Rite Aid provides bilingual service and employs Spanish-language advertising to appeal to the Spanish-speaking population. Rite Aid and CVS participate in welfare-to-work and assorted "hire local" efforts. All of the major chains set up booths at street festivals and other community events to provide services such as blood pressure screenings and mammograms free of charge.

   The explosion of chain drugstores in low-income urban areas is a positive development for a number of reasons. They generally improve the appearance of the area in which they locate and often rid the neighborhood of problem stores or blighted properties at a prominent intersection. The mere presence of a chain drugstore can have a legitimizing effect on an inner-city neighborhood and may trigger the interest of other chains, promoting the revitalization of an entire retail district.

   Chain drugstores almost always are a significant improvement on the retail options previously available to residents, providing better pricing and selection as well as the all-important brand names. In this sense, they offer the best possible alternative to a full-service supermarket or mass merchandiser. Because chain drugstores are so desperate for new locations, they often do not have to be lured with public subsidies. Astute inner-city not-for-profit developers should be able to reap even further benefits for the local community by playing one drugstore chain off another to get the best combination of products, services, and corporate contributions to the community.

   From the standpoint of local communities, however, the arrival of the chain drugstore is a mixed blessing. In many cases, local entrepreneurs find themselves unable to compete and close their business. Such an outcome is inevitable and, in fact, desirable in a market economy, but in severely underprivileged areas, the pharmacist who is put out of business often is a community leader whose role in community life is thereby altered. Furthermore, while a new chain drugstore will almost always provide more jobs than were in the neighborhood before its arrival, it often can place local residents only in low-end service positions because of their lack of necessary skills or readiness for employment.

   Chains also are unlikely to volunteer to modify their design prototype unless compelled to do so by zoning ordinances or political pressure. That businesses should prefer a standard design that maximizes profits is understandable, but such designs can have a harmful impact on the streetscape and the character of the neighborhood. For example, the new store might not fit in with local architecture, or its in-front parking lot can break the existing "street wall." Furthermore, a community should be concerned about the possibility that it has more chain drugstores than the market can support. The ultimate result could be a market shakeout, followed by shuttered 10,000-square-foot eyesores on highly visible corners–plus the waste of any subsidy money that might have been used to chase the now-defunct store. This may become even more of a worry as the modern food-and-drug supermarket expands further into inner-city neighborhoods.

   The combination of a dwindling number of sites and continued interest in growth could create the leverage that low-income urban areas need to safeguard their interests. Instead of replacing local entrepreneurs, the chains could be induced to take on existing pharmacists as store managers. In fact, occasionally CVS already does this: it will buy out local independent owners and hire them to run the new CVS branches. Chains could be compelled to hire qualified local residents for higher-level management positions and to provide additional job training for those employees who are not yet ready for such responsibility.

   In addition, strict design standards could be placed on new store development so that neighborhood character is not compromised. Finally, community-based developers can also work together to ensure that their neighborhoods do not get caught up in the industry trend toward cannibalization. They should independently determine the appropriate number of chain drugstores that their residents can support, and then, once that number is reached, they should jointly refuse to entertain further offers. In sum, low-income urban areas should remain conscious of, and take advantage of the fact that, for once, they are in the driver’s seat.

Michael J. Berne is a planner for a New York City–based planning and real estate consulting firm, and specializes in retail development and commercial revitalization. Joshua D. Kahr is an associate director at GVA Williams, a full-service real estate brokerage and management firm. Both are based in New York City.