‘Lazarus’ on the Hill?

By Glen Meakem
Pittsburgh Tribune Review
Sunday, August 31, 2008

In 1998, Pittsburgh celebrated as the “glitzy” new Lazarus department store opened on Fifth Avenue, Downtown. In the spring of 2004, after just five years, Pittsburghers mourned as the store closed its doors forever — another blow to a city struggling to succeed.

Now Pittsburgh politicians and community leaders face another economic decision — which grocery store to build in the Hill District. I am hoping, for the sake of Hill residents and city taxpayers of all neighborhoods, that our leaders will choose the best long-term economic answer instead of short-term glitz.

The Lazarus project was a costly mistake. In order to attract the store, the Urban Redevelopment Authority lent Lazarus $18 million and the city provided $5 million in additional cash. Despite the large government subsidies, once construction was completed and the doors opened, sales were well below expectations.

Lazarus was obligated to begin repaying the $18 million loan once in-store sales reached $41 million per year. But peak sales never exceeded $22 million. The taxpayer loan never was repaid. Even with more than $20 million of government subsidies, Lazarus sustained big losses and was forced to close.

The truth is Lazarus might have worked if marketproblems — high parking taxes and the lack of downtown residential living — had been addressed first. Instead, politicians chose a reality-ignoring strategy that cost taxpayers tens of millions of dollars and dealt Pittsburgh a tough blow.

The first proposal for the Hill District grocery store is being presented by St. Louis-based grocer Save-A-Lot. Its store is economically viable, based on a business model that works and experience with more than 1,200 stores around the country.

Save-A-Lot deliberately keeps its stores smaller than other grocers, eliminating amenities such as on-site bakeries, pharmacies and dry cleaners. It also limits inventory to approximately 1,200 frequently purchased items — what the corporation refers to as an “edited assortment.”

By keeping its stores small, forgoing amenities that increase the costs of doing business, and stocking only the most popular items in the most commonly purchased sizes, Save-A-Lot claims it saves customers 40 percent on food purchases.

The company is experienced in providing quality service to urban markets like the Hill District. According to Mayor John Thompson of Wilkinsburg, where a Save-A-Lot opened in 2007, the store has surpassed the community’s expectations, providing not only quality food at low prices but also many jobs to community residents and financial support to local charity efforts.

Save-A-Lot says it would not be economically viable to build a full-service grocery store on the Hill. But the small size of the proposed building project (16,500 square feet) would allow additional businesses to move into the Center Avenue location over time (such as a pharmacy), complementing the smaller grocer.

The new Save-A-Lot building is projected to cost $5 million to $6 million and can be up and running in less than a year.

The second proposal, presented by Kuhn’s, is not based on experience or a proven business model.

Similar to the “glitz” of Lazarus, this proposal calls for a $24 million revitalization project that includes a 50,000-square-foot Kuhn’s Market, among other stores. The plan surprised many, since Kuhn’s previously stated — along with Giant Eagle and Aldi — that it was not interested in building a grocery store on the Hill.

Unlike Save-A-Lot, Kuhn’s is a local, family-owned business with eight locations but no experience in urban markets. Yet some community leaders and activists see this more ambitious plan — including a pharmacy, bakery, deli, meat counter and fresh fish section — as a better fit for the neighborhood.

The proposed Kuhn’s project would require an as-yet-unspecified level of taxpayer support above the $2 million in subsidies already promised by the URA and the Pittsburgh Penguins.

Before making their decision, Pittsburgh leaders also should consider one more set of facts: Grocery shopping habits are changing all over the country.

According to a 2007 Gallup Poll, 46 percent of adults say higher food costs are creating financial hardships.

Prices climbed 5 percent in 2007 and 6 percent in 2008 (the largest single-year jump since 1990).

Americans are now buying fewer luxury food items and more store brands.

According to Willard Bishop, a Barrington, Ill., consulting firm, limited-assortment grocery stores such as Save-A-Lot enjoyed an increase in sales of more than 16 percent last year while sales at full-service grocery stores rose only 3 percent.

The Save-A-Lot proposal is in line with current trends while the Kuhn’s proposal runs against them.

The last few days of summer are upon us and community leaders are struggling to make the right decision between two very different grocery store proposals. Will this generation of leaders choose the proven business concept from the company with experience that is likely to serve the Hill community for many years to come?

Or, as their predecessors did with Lazarus, will they choose the expensive, unproven model from a company relying on big government subsidies with no experience in the market it is entering?

In the business world, we call this decision a “no-brainer.” Political and community leaders should choose the commonsense solution over government-subsidized “glitz” and go with Save-A-Lot.

Hill District residents and city taxpayers from all neighborhoods will thank them for it.

Glen Meakem, founder and original CEO of FreeMarkets Inc., a business-to-business Internet company Downtown, is co-founder and managing director of Meakem Becker Venture Capital.