Instead of spending government money to bring a grocery downtown, there’s another option that wouldn’t need any help: crowdfunding. And by “crowd,” I mean the residents of downtown and San Antonio.
Here’s how one motivated entrepreneur could get a downtown grocery going with zero startup capital and create a nice career for themselves in the process. (In case it’s not obvious, I’m not volunteering to do the job!).
It’s not a sure thing and there are lots of unknowns but we won’t know unless someone tries.
But, first some background.
What we know about an urban grocery in downtown San Antonio
- There’s not enough population to make it economically feasible as a conventional retail store model. Otherwise, someone would have built one by now without the City needing to gift $1mm. The grocery business is ridiculously low-margin. It’s more expensive to build an urban store compared to the suburbs and there’s limited incentive for a HEB, Wal-Mart, Whole Foods or La Fiesta to do something downtown when their customers will have shown they’ll drive the two miles to their nearest store.
- Many people dislike the current HEB proposal for different reasons: I’ve heard too upscale, too many road closures, too small at 8,000 square feet and too much government money needed to make it happen. Clearly, the proposed store design is optimized to help HEB rather than downtown.
- We all complain about HEB and/or Wal-Mart not providing a grocery like it’s their job to make downtown better. But those corporations have a primary purpose — and that’s to enrich people named Butt and Walton. Period. They are generally good corporate citizens but we shouldn’t be surprised when they act in a way consistent with their mission.
- Any store that is going to make it downtown must have prices very close to an HEB and choice needs to be enough to make sure people can use our store as a one-stop shop.
So, with all that in mind, we need something that (a) isn’t just deriving revenue from a classic grocery business, (b) is say 6-8,000 square feet and (c) offers prices and choice close to a modern grocery store. A grocery co-op can work but they’re slow and cumbersome. A for-profit entity will be superior for all the reasons that for-profit businesses are better at making customers happy.
So, how to get there?
A Downtown Grocery in 9 Steps
1) Identify a site. Meet with the landowner and frame out a lease. Ideally, some place between Southtown and downtown and on as busy of a street as possible. Negotiate and sign a lease with a 120-day feasibility period so it can be canceled if we can’t get steps 2-9 done. (My guess is about $12-15k/month rent is to be expected for a 7,500 sq ft store.)
2) Develop a concept that will appeal to downtown residents. Get one of the many Southtown architects to sketch out a concept store. With the right talking to, a sketch would likely be done free — with the hopes of getting the job of drawing up the plans later. Let’s stick with our concept of a 7,500 square foot store for now.
3) Get bids from* contractors.* Get a budget put together for the store build-out. (My guess: $300k if we are very frugal but I’ve never been in the grocery business.) If we’re lucky,our site from Step 1 might already have some build out left over from a previous tenant.
4) Meet with a grocery distributors. McLane is one of the largest. Compare the cost from them to the HEB costs. My guess is our costs will be about what HEB’s prices are to consumers. Let’s say you get a 5% markup on average after shrinkage, theft and waste (the industry average markup is about 12%). If we’re lucky, we can get to $3mm in annual sales in the second year. That’s a net from grocery sales in the $150-200k range.
5) Create an operations budget. Presuming we’re open 10 hours a day, we’re likely looking at labor of $75/hr (2 workers, 1 cashier, 1 manager, 1/4 of a bookkeeper). Add in insurance, utilities, legal, web design, etc. and I’m guessing we have about 750k per year in annual operating expenses.
6) Create a formal proposal. After fleshing out the numbers, put all the above into a package summarizing the startup and ongoing expenses. Let’s estimate the startup at about $900k (double our build out cost of $300k since entrepreneurs alway underestimate plus $300k of starting inventory). A similar store in Dallas lost $1.2mm in it’s first year. Let’s say we’re smarter than they were and would only lose $800k each year from normal grocery operations.
7) Sell memberships to the public, much like Costco. Now this the secret sauce to make this thing work. We know that our grocery store by itself will be a money losing proposition. So, we go to the public and ask them sign up for annual memberships at $500 / business, $200 / family or $100 per person for residents. These entitle you to 5% off at the store. We set a threshold of at least 2,000 memberships or a total gross of $800,000 per year — whichever is less. (We can also sell ‘super’ memberships at $1,000 / year for the truly committed. That would earn you a free t-shirt!). We can also work out memberships for people who only work downtown. So, we could offer them a 5% discount but for 5-6:30pm for example.
8) Launch a crowdfunding campaign on a site like indiegogo with the before mentioned startup costs and first membership dues. With our startup costs of $900k and $800k of first year memberships, we need to raise $1.7 million. While that number seems like a bunch and it is a lot of money, it’s an average of $100 from each of our 17,000 downtown residents or about $1 on average from each resident of San Antonio.
9) Close on the funding, incorporate — and get to work.
The nice thing about this crowdfunding approach is that we’ll know very quickly if downtown’s want of an urban grocery store is truly the will of the people. If we can’t find enough downtown residents willing to pony up money to build and shop at the store, perhaps our city should not pay $1mm for one either.
Ultimately, this depends upon getting the right entrepreneur to make it happen. Know anyone?
EDIT: I fixed some math. Thanks to Jay!