Empty Streets: How building networks can put more black retailers in city neighborhoods

Retail trade is a well-traveled path to economic success for many Americans. It is the second largest industry group within the nation’s thriving small business sector, employing 14 percent of the sector’s entrepreneurs and 25 percent of its paid employees. Forty percent of Americans’ first jobs are in retailing. Because it is a business that requires relatively low capital investment per worker, retail trade offers not only jobs but entrepreneurial opportunities for people of modest means.

Retail trade also makes an essential contribution to community economic health. A strong retail sector keeps streets bustling and safe. It prevents the blight of vacant commercial space. And, not least, it makes life more convenient for community shoppers.

Although black Americans account for just over 12 percent of the U.S. population, they account for only 3.5 percent of the nation’s retail trade entrepreneurs. Black retail trade entrepreneurs are also less successful than U.S. retail trade entrepreneurs overall. Excluding large businesses, sales per black firm are roughly $80,000 compared with $292,000 for white firms. And less than 14 percent of black firms have paid employees, compared with 29.1 percent for white firms.

The absence of black retailers affects black communities as well as individuals. In 1994 Columbia University conducted a survey of northern Manhattan between 110th and 175th Sts., a community that is 72 percent black and 16 percent Hispanic. The survey showed that more than 70 percent of residents shopped elsewhere for clothes and shoes, electrical appliances, furniture, and gifts. While much of the absence of retail business from such communities surely reflects their unattractiveness for retailers, the dearth of local retail entrepreneurs is also a factor.

I recently spent 10 months in New York City learning first hand about the retail trade business, particularly stores specializing in apparel and accessories. On the basis of my field work I propose a plan to improve the health and possibly increase the number of black retail establishments. Because black-owned businesses are more likely than white businesses to hire black workers, my plan could help to increase black employment and rejuvenate faltering black communities, not just in New York, but nationwide.

Why So Few Black Retailers?

Many people attribute the paucity of black retail establishments to the difficulty blacks have in obtaining access to capital. It is true that redlining and other forms of discrimination by banks have been widely documented. But commercial banks are not the only source of financing available to black small businesses. Particularly since the 1960s numerous government programs have been providing capital to minority-owned business. Nevertheless, black Americans continue to be badly underrepresented in retail trade.

A more compelling explanation for the shortage of black retailers involves the nature of the retail trade market. In markets for homogenous products such as metals or grains, the “invisible hand” links buyers with sellers almost costlessly and automatically. But markets for the highly differentiated products typically involved in retail trade are more complicated. The producer of a particular variety of footwear is not automatically matched to the retailer whose customers might want those shoes. How is a shoe retailer to know about all available varieties and brand names of the footwear he might wish to sell to his particular clientele and how to find the best deals on those products? How are wholesalers to reach all the buyers that form their particular market niche? Retailers and wholesalers of differentiated brand-name products must connect with each other through a costly and imperfect search process, one that is so strongly conditioned by proximity and preexisting ties that it is more properly described as a trading network rather than as a pure “market.” The closer the retailers and wholesalers are to each other—the better informed each is about the other—the more successful the resulting trading networks. Retail entrepreneurs blessed with many ties to wholesalers who know them, their needs, and their clientele can avoid a costly search for the products they wish to sell.

White retail entrepreneurs usually go into business already enmeshed in a rich network of such ties. Most blacks do not. Because of discrimination, past and present, few blacks hold key posts with manufacturers and wholesalers, and black retailers do not necessarily have relationships with whites that could substitute for ethnic ties. In the absence of that network of relationships, they face an extremely demanding search for the right products to carry in their stores. A black retailer I interviewed said that one’s “head spins” when confronted with the range of wholesalers.

Sociologists have noted that some minorities, particularly immigrants from Asia, have been able to compensate, through ethnic collective action, for the lack of ties with wholesalers. As Ivan Light has noted, discrimination against some minorities may actually facilitate collective action by creating a small world in which business information is transmitted more effectively and trust is maintained more easily. Certainly, ethnic ties have created startlingly successful business patterns. According to a July 14, 1995, article by Chris Woodyard in the Los Angeles Times, Indian immigrants from the state of Gujarat—most with the surname Patel—own more than a third of all U.S. motels. And Jonathan Kaufman reported in a February 22, 1995, article in the Wall Street Journal that Cambodians run more than four out of five doughnut shops in Southern California.

As I discovered in New York, while formation of these compensating ethnic networks among immigrant groups of color is by no means limited to Asians, neither is it universal. It may be all the more difficult for nonimmigrant groups. Unfortunately, black retailers have not been able to develop such compensating ties. For them, then, the first step to increased competitiveness is to establish themselves in an effective trade network.

Building Ties in the Retail Business

Very large retailers such as major department stores buy in huge quantities and deal directly with manufacturers. To stay competitive, smaller, independent U.S. retailers have turned to various forms of buying groups. Though these groups do not now serve the needs of black retailers, they can be adapted to do so.

One such group, the independent buying office, represents its retail clients in wholesale markets. As described by Patrick Cash, John Wingate, and Joseph Friedlander in Management of Retail Buying, the independent buying office helps locate products, recommends preferred lines, and arranges visits to showrooms. It also helps with orders, handles problems, and tracks market trends and special offerings by vendors. It may also prepare displays and promotional material, train salespeople, and pool orders so that small retailers can qualify for quantity discounts.

Clients of the buying office make their own decisions on product mix and, if they wish, can conduct their own independent searches for products. Clients usually sign a year-long contract with the buying office at a cost, typically, of about 0.5 percent of annual sales. Because the central mission of an independent buying office is information exchange, its clients must be engaged in similar businesses.

A second kind of interstore cooperation involves centralized buying by voluntary chains sponsored by wholesalers. Here the ultimate decisions on product mix are made by the wholesalers (though retailers are free to buy other products). The wholesalers sell their products to clients at low markups and also provide services, including merchandising, recordkeeping, joint advertising, and supervision. Many also extend credit to their retail customers through delayed billing and even provide long-term financing for modernizing stores, erecting new buildings, or purchasing an existing business. Because voluntary chains provide a much higher service level than independent buying offices, they are also better at increasing participation in retail entrepreneurship by facilitating start-ups. Unless the sponsoring wholesalers are black-owned, however, they are typically less knowledgeable than independent black retailers about how to tailor their mix of merchandise to black communities. In my field work I did not discover any black-owned voluntary chains.

Franchising is not usually thought of as a buying group, but it is only a short step from voluntary chains. The main difference is that the franchiser tries to make the franchisees identical. A franchisee buys all his stock from the franchiser and receives substantial training in the ways of the franchise. In exchange for identifying his store completely with the franchise, the franchisee expects large benefits from the use of the franchise name.

Franchising has several drawbacks as a means of increasing black participation and success in retail entrepreneurship. Applying for a franchise is not unlike applying for a bank loan, and blacks may run into the same problems with franchisers that they have with banks. The charge for use of the franchise name and other benefits also raises capital requirements considerably. It can, for example, cost more than $1 million to open a McDonald’s. To a lesser extent these same problems may arise for black membership in voluntary chains.

Franchising will be most successful in stimulating black retail entrepreneurship if the franchisers are themselves black, especially if they have roots in black communities that help them identify niches that are not well served by existing franchises. Of course this approach runs up against precisely the problem of low representation of blacks in wholesaling and poor black ties to manufacturers.

In my work, outside of fast food I found only one black-owned retail franchise that was tailored to the black community—an athletic footwear franchise targeted at the inner-city black and Hispanic market. The entrepreneur began his franchise already well connected with many manufacturers. He had met their sales representatives through participation in promotional events for a National Basketball Association team. He also received help in identifying vendors from the Association of Black Sporting Goods Professionals.

The athletic footwear franchise works in partnership with local governments to raise capital from a variety of public and quasi-public sources such as community development corporations. Often new stores are in urban enterprise or empowerment zones. New franchisees must bring $250,000 to the table, of which 20-25 percent is their equity.

A Plan for Action

My plan would increase black participation and success in retail trade in apparel and accessories by building ties to vendors and across retailers. It would supplement, not supplant, other efforts to encourage black entrepreneurship in retail trade and other areas, particularly by eliminating bank discrimination.

Blacks form an important market niche in apparel and accessory retailing. According to a 1992 marketing study, 56 percent of blacks (as against 29 percent of whites) enjoy shopping for clothes. A 1993 Department of Labor survey found that blacks spend 7.9 percent of their income on apparel and services, compared with 5.3 percent for whites. Blacks also have distinctive taste in apparel and accessories, for example creating demands for Afrocentric garments and for what people in the clothing trade call “urban sportswear”—what the rest of us might call baggy jeans. Because blacks tend to be fashion leaders, especially in the youth market (as the now ubiquitous baggy jeans attest), the potential exists for successful black apparel and accessory retailers to branch out of the minority community.

Black retail trade entrepreneurs have been more successful in apparel and accessories than in any other retailing. But a need is still felt for apparel and accessory stores in the black community. In the survey of upper Manhattan cited earlier, clothing stores ranked number one as the type of store residents would like to see added to the neighborhood.

Although many large independent buying offices focus on apparel, they handle few black retailers. They do not know the product lines of special interest to the black market niche or have the expertise to serve the particular needs of black retailers. But the expertise could be developed if there were demand for it. And one way to create that demand would be to encourage large numbers of black retailers to join one or more selected independent buying offices by subsidizing some part of their annual cost of membership. Once enough black retailers join the buying office and build a large enough base to make it possible for the buying office to acquire the necessary expertise, the membership subsidy would no longer be necessary. After a start-up period of, say, five years, the independent buying office would be fully capable of serving the black niche market, and the affiliated black retailers should then find it worthwhile to pay the full costs of membership. The subsidy could be phased out.

How much would the plan cost? In 1992, according to the Survey of Minority-Owned Business Enterprises, there were 6,391 black-owned apparel and accessory stores in the United States (excluding large businesses), of which 796 had paid employees. Average annual receipts for the latter group of stores were $158,000, yielding an affiliation fee of $800 per store using the 0.5 percent of sales formula quoted above. Rounding this fee up to $1,000 and applying it to the total number of black-owned apparel and accessory stores in 1992 yields an upper-bound estimate of roughly $6.4 million annually for five years.

The entire cost of a store’s membership should probably not be subsidized. The retailers should have enough of a stake in the operation to ensure that they take seriously and use the services offered by the chosen independent buying office. A trade-off exists on the question of how large the subsidy should be. The greater it is, the greater the incentive for black apparel and accessory retailers to join. The more retailers who join, the more influence they will have with the chosen independent buying office. But, of course, the greater the subsidy is, the higher the cost of the project. In any case, less than full subsidy will reduce final costs both directly and indirectly by reducing retailer participation. If necessary, costs can also be reduced by limiting the project to one or more U.S. regions. I believe that the cost of the project can be brought within the range of feasible financing by black, corporate, and foundation philanthropy, thus avoiding the need for government involvement and spending.

The networking nurtured by the independent buying office should boost the success of existing black apparel and accessory retailers, thus enabling them to hire more employees. It may not, however, by itself lead to an upsurge in new retail businesses. The pull of the example of success is slow and relatively weak. Here is where the voluntary chains and franchising come in. The independent buying office chosen to be the beneficiary of vast new membership from black retailers should ensure that the market representatives assigned to work with its black clientele are themselves black. These market representatives can then develop relationships with a broad array of wholesalers and manufacturers that will enable them, in the long run, to turn the most successful black retail concepts into black-owned franchises that would create successful new black retail outlets.