BrainTrust Query: What should New Orleans’ grocers do roughly one year after Katrina?
By David Livingston, Principal, DJL Research
Even before Hurricane Katrina, New Orleans was never considered a normal retail environment for supermarkets.
Two of the country’s most troubled supermarket chains, Winn-Dixie and A&P, were in the rare position of being the market share leaders. In most other markets, these chains had long been displaced as market leaders, particularly in Dixie where Wal-Mart typically rules.
The Crescent City was also unique in the number and popularity of independent supermarkets that prospered there. Many, in fact, had an almost cult-like following.
Since Katrina, the definition of normal has changed. As citizens of New Orleans became displaced after the storm, suburban populations around the city began to swell.
In those areas, Winn-Dixie store sales were comping up in the range of 30 to 40 percent while others saw increases generally around 15 percent. This, I believe, was due in part to Winn-Dixie’s strong presence in New Orleans. Impressively, Winn-Dixie and others were able to achieve sales gains with fewer employees and shorter hours of operation.
In New Orleans, most of the supermarkets that reopened after the storm are clustered in the Uptown and Garden District areas near the Mississippi River.
A few other stores in Orleans Parish have opened as well but about half of the pre-Katrina supermarkets remain closed. Previously, these stores drew most of their business in from a one or two mile radius. Now, with many areas of the city void of supermarkets, it is not uncommon for customers to come from a five or six mile radius.
I don’t think any supermarkets have yet to reopen in St. Bernard Parish, to the east.
Sales volumes appear to be quite strong at the stores that are open. This is due to the reduction in competition, the influx of recovery workers and former residents returning on weekends to do home repairs. In a normal market situation, new supermarkets should be opening.
Many that would like to reopen stores have not yet been able to due to a number of factors. Here’s a short list of the many problems retailers are facing in New Orleans:
1. Many are still waiting for their insurance proceeds.
2. There are difficulties in determining how high off the ground new buildings will need to be in preparation for future storms.
3. Stores are developing new security measures to prevent a repeat of the severe looting that took place after Katrina.
4. Areas that suffered the most damage are being repopulated at a slow pace. Some reports have put into question if some areas, such as the heavily damaged Ninth Ward, will ever be fully repopulated.
5. There is a severe labor shortage and the new minimum wage is in reality about $10 to $15 per hour. This has occurred even though unemployment remains high. (I still haven’t figured out why unemployment is so high with such a heavy demand for labor.)
6. Insurance costs have significantly increased.
I find myself wondering – if I were a retailer that had operated successfully in New Orleans prior to the storm – would I be better off focusing on reopening in the city or building stores in suburban areas where the population has gone? Winn-Dixie certainly makes an argument for the latter with sales in its suburban locations comping up to 40 percent higher.
Discussion Questions: What is your prognosis for the health of grocery retailing in New Orleans? How will the retail environment and surrounding areas
change as a result of Katrina? What would you do if you operated a store or stores in areas hit by Katrina?
People = stores; no people = no stores (obviously). The issue (presumably) is whether or not N.O. itself will ever regain its former population base. It’s clearly a big IF: a big reward to (those who enter) if it does, and a big loss if it doesn’t.
Supermarkets need people to shop them so suburban grocers should prosper and, right now at least, the Ninth Ward is probably a little sketchy in terms of site selection. What should supermarket operators do over the long haul? Vote Democratic (just kidding, sort of) and hope a new administration makes it a priority to gut FEMA and the Corp of Engineers and replace them with somebody more competent (not kidding at all). Importing a few levee builders from the Netherlands might not hurt either. Otherwise, New Orleans will end up being what it has always been — a bowl surrounded by water, protected by an ineffective levee system administered by corrupt political hacks that’s just one big storm away from disaster.
New Orleans has been and always will be a different market. From the days of Schwegman, which offered everything to consumers including banking to exceptionally strong independents. Eating habits were never normal when Monday everyone eats red beans and Vienna sausages. But all that has changed. Supermarkets must first build stores one step ahead of the consumers. After the consumers are in, it becomes too costly to build. Second, they need to plan for the future. This means build stores that will withstand flooding. Schnuck’s has, so why not in New Orleans? Third, operators must understand that a large segment of the population will never come back so don’t over build. Last, all must understand the ineffective local and state government is still with them. Federal money was given to them to shore up the infrastructure, but local and state governments spent the money elsewhere. The old saying, “I am from the government and here to help you” will never be the answer for the Big Easy.
Ditto on Frank’s and Ben’s comments. With regards to the 9th Ward, I was there recently and Walgreens was the only thing close to a supermarket there. And it was packed to the rafters. But as I recall, even before the hurricane, the 9th Ward did not have a supermarket. Although there were about three on the fringe area.
One of the best recipes for success in supermarket retailing is to go after the very best stores of the weakest competitors. This means you want to open stores near Winn-Dixies and A&Ps that are performing well. From what I can tell, those two chains are up significantly in volume. Previously they were underperforming and now are back to industry norms in sales per square foot in this area. This presents many new opportunities throughout the Gulf region.
As for returning to New Orleans, independents need to take it slow. If they all come back at the same time, the market will be overstored. Right now the competition is over-performing. Just keep adding one store at a time until the overall sales per square foot has fallen to a balanced level.
Pay attention to the new consumer base. The demographic of New Orleans is changing and it may not wind up being “chocolate” to quote the Mayor. I read recently that up to 80% of the “recent” (no time definition given) returnees to the city are non-minority. The early influx of Hispanic laborers is already established. The successful supermarket operators will have much larger sections of pasta and plantains and a much smaller section of Zatarain’s.
A store lease is a long term commitment. Unless the retailer knows how much business is temporary, it would be hard to make a long-term commitment to run a supermarket in the New Orleans area. Local banks are flush with deposits due to insurance settlements, but how much of that money will actually be used for rebuilding locally? There’s no indication that the region will benefit from intelligent, comprehensive long term planning. No one needs the advice of RetailWire to see that areas unlikely to be flooded in future hurricanes will have a future, while the other areas are too risky for new supermarket locations. The region’s future seems to be based on (1) the gas and oil business (2) tourism and (3) the port volume. Given the supermarket industry’s short margins, speculating on New Orleans’ future probably isn’t a worthwhile way to invest.
Look at Mansour’s in Huntington, WV or grocery stores in the Pike Street Market. New does not have to be chain and/or it can be chain with personality and face-to-face service. A little imagination goes a long way.