Op-Ed: Innovative Low-Cost Solution to Grocery Store Dilemma?
Irvine is home to brilliant minds, kind hearts, and a positive, problem-solving spirit. Can these qualities be applied to solving a significant problem – the lack of everyday shopping in the new neighborhoods north of the Great Park? I put on a business school hat and have a proposal to spur discussion.
Problem: Developers hesitate to build everyday retail because land is scarce, construction costs are high, and grocery stores are struggling nationwide.
Proposed Solution: FivePoint and Irvine Company provide free delivery of groceries and everyday items to residents’ homes from existing Irvine stores. Developers would negotiate with delivery services and pay a subscription fee – a tiny fraction of the cost of building brick-and-mortar stores, with little financial risk. Residents wouldn’t need to drive to grocery/RiteAid type stores and wander the aisles – the stores do all the work. Overall vehicle miles traveled and emissions may decrease slightly, as delivery vehicles can make multiple deliveries in a single trip.
Stores Cost A Lot to Build and Maintain
Physical grocery stores are in decline across the country. While some shopping centers with grocery stores appear to prosper in Irvine, others such as Woodbridge Village Center have struggled. The Irvine Company was faced with a stark choice at Woodbridge: either close the mixed-use Center due to low occupancy rates (and, presumably, low gross income) or invest heavily to revitalize it. Listening to the desires of nearby residents, Irvine Company chose to keep the mixed-use Center open, investing $30 million to upgrade stores, enhance a playground for children, and create more community spaces outdoors.
But Woodbridge was an existing shopping center. The cost of building new shopping centers is quite high. FivePoint recently sold 41 acres of land zoned for housing in its Great Park Neighborhoods for $218 million, or by my calculation $5.3 million/acre. At this value, a 17-acre shopping center in the Great Park Neighborhoods area would require land valued at around $90 million.
Factoring in the cost of construction and ongoing maintenance, and considering declining sales at grocery stores (CVS/RiteAid-type stores are doing better), the return on investment (ROI) of a shopping center may be low or even negative. A developer may take on considerable financial risk in order to fulfill its promises to residents for easy access to grocery and everyday shopping. This is a possible explanation why FivePoint chose to build a more profitable luxury gym along Irvine Boulevard in hopes the City would absorb the cost and risk of building a grocery store on City land nearby.
Home Delivery of Groceries Could Be Available to Residents at Minimal Cost to Developers
So…Why build a grocery store if in 10 years it may be a bit obsolete and unprofitable? The global consulting company McKinsey explains: “To put it bluntly, much of the $5.7 trillion global grocery industry is in trouble. …both growth and profitability have been on a downward trajectory…[causing] a massive decline in publicly listed grocers’ economic value.”
A proposed solution to consider: FivePoint and/or Irvine Company can use their bargaining power to negotiate a low price for grocery/household item/pharmacy delivery. Then cover the cost for residents in their respective neighborhoods. Residents would order items on their choice of an app or website. Delivery could be same-day or, in some cases, within an hour or two after the resident places an order. A quick sampling of home delivery service costs in the 92603 Zip Code is as follows:
Instacart: Delivery service of items from stores such as Albertsons, Ralph’s, Vons, CVS, Costco, H Mart (Korean focus), Petco, BevMo, Sprouts and several others. Cost: $149/year or $3.99 per order.
Shipt (owned by Target): Similar to Instacart. 50,000 items are available. Fewer stores, but includes Target, CVS, Ralphs, and 99 Ranch Market (Chinese focus). Cost: $8.95/month with an annual contract or $14.95 on a monthly basis.
AmazonFresh: $119/year for Amazon Prime membership and $14.99/month for grocery/household item delivery.
Walmart: $98/year for unlimited, some non-grocery items. (See also this article)
As a hypothetical cost calculation, if a developer negotiates unlimited home delivery for $100/year per household, and 2,000 households sign up for the service, the cost to the developer would be $200,000/year. I expect this is a tiny fraction of the annual cost and financial risk associated with building and maintaining a shopping center.
Benefits: Helping a Nascent Industry to Grow in Irvine
A program such as this would provide a boost to the growing Irvine home delivery business. A high volume of business encourages stores and delivery services to accelerate investment, lower costs, and expand offerings. Typical Key Performance Indicators (KPIs) in this industry may include the number of new customers, customer acquisition costs, and the total volume of purchases. Adding thousands of new customers could improve scores on all of these metrics. The home delivery business would be more likely to succeed and expand, providing all Irvine residents with better service at lower prices. This can all be accomplished without any City funding.
Further, the cost of providing residents in the underserved neighborhoods near the northern part of the Great Park would, to the developers, be a business expense. A developer may gain tax advantages that individual subscribers could not get. In time, as the industry becomes more efficient, the cost of delivery services may drop and the need for subsidies from developers may be reduced or eliminated.
Possible Traffic and Emissions Reduction
Residents typically drive their cars to get groceries and the like. This adds to traffic along heavily traveled streets such as Irvine Boulevard. Having items delivered directly to residents’ doorsteps may reduce this type of traffic.
True, delivery services do put delivery vehicles on the street. But a delivery vehicle can make deliveries to multiple addresses in a single trip. This reduces the total number of trips on the roads, and developers may benefit when the City shifts to Vehicle Miles Travelled (VMT) as a measure of environmental impact.
By reducing the number of trips to the store, home delivery may also reduce emissions a bit. This adds to Irvine’s status as a leading “Green” city. (Developers could go a step further by insisting that delivery services use electric vehicles for at least a percentage of deliveries.)
A New National Model?
FivePoint and The Irvine Company have an opportunity to enhance their reputations for innovation and to gain further goodwill from residents. A developer-subsidized home delivery program could possibly become a national model for new neighborhoods in other cities facing a similar dilemma.
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