New Chicago mall and Schumpeterian disruptive innovation

Today a new mall is opening in Rosemont, near O’Hare Airport and the Rosemont Convention Center. The Fashion Outlets of Chicago will have a range of familiar factory outlet stores and restaurants, conveniently located near the airport and public transportation (I could even take the el there from KP Chicago HQ!).

So what? According to its developer, Arthur Weiner, this mall breaks a bunch of retail factory outlet rules that were just begging to be broken:

“The rules that this center broke were rules that needed to be broken. They were begging to be broken,” said Arthur Weiner. So, just what’s bonkers about the place? “It’s fully enclosed, two levels — never been done before. It is next to the third largest airport in the world, never been done before anywhere in the world.”

“It’s wrapped around a seven-deck, structured parking garage, never been done before,” he continued. “It is never more than 75 feet from the entrance to a shop, never been done before. You go to an outlying outlet center, you’re walking 700 yards after you park your car.”

That does sound pretty neat, and novel. And there will be baggage concierge service for the airport, and an airport shuttle. Another novel aspect is the partnership with a group called The Arts Initiative, which will install large pieces of public art from Chicago artists in the mall. Thus the space will be part mall, part gallery.

Of course, this rang my Schumpeter bell. Rules broken, new configuration, new location, new set of customer services, new arts partnership. Perennial gale of creative destruction. Bring it, baby.

Green urban infrastructure can save green(backs)

Lynne Kiesling

Some of the best environmental projects also save money. This post at The Atlantic’s Cities blog highlights urban green infrastructure such as permeable pavement projects, including a recent study finding that they can also be economical:

Looking at 479 case studies of green infrastructure projects around the U.S., the report finds that the majority of projects turned out to be just as affordable or even more so than traditional “grey” infrastructure. About a quarter of projects raised costs, 31 percent, kept costs the same and more than 44 percent actually brought costs down.

Here’s the logic: suppose you are, as Chicago is doing, using permeable concrete now when repaving alleys. Permeable concrete is more expensive than traditional concrete, but because it allows rainwater to return to groundwater, it reduces the water flow into storm drains, the sewer system, and wastewater treatment facilities. So you have to evaluate the higher construction costs versus the lower wastewater treatment cost and other reduced costs of storm runoff, including lower operating and maintenance costs. As reported in the post:

The costs of traditional infrastructure are especially pronounced in cities and regions with combined sewer systems that collect both sewage and stormwater. During heavy rainfall, these systems are often overwhelmed, pouring sewage-laden water into drinking water sources and greatly increasing water treatment costs.

Technologies like permeable pavements and rain gardens can capture, naturally treat and filter stormwater back into the ground, preventing overflows and reducing reliance on treatment centers. Chicago’s existing green infrastructure, including its green alleys, diverted about 70 million gallons of stormwater from treatment facilities in 2009, according to the report.

I can attest to the existing strains on the sewer/storm runoff system in Chicago; we live just off of a main north-south surface street, and after a heavy rain like last night’s there are substantial pools of water backed up onto the street around several of the storm drains (my neighborhood hasn’t had our alleys repaved yet). Moreover, this runoff frequently overflows from the sewer system into Lake Michigan, leading to beach closures on the days following rainstorms. I could channel my inner John Whitehead to do a travel-cost estimate of the value of the lost recreation, which reinforces the value of permeable concrete. One thing we don’t know yet, though, is if it’s as durable as traditional concrete, or if it depreciates more quickly.

All of this reminds me that I have to get the KP Spouse moving on that rain barrel …

Walmart Express, market definition, and local politics

Lynne Kiesling

Recently Walmart announced that they would begin operating small-format stores called Walmart Express, the first two of which opened in June in Arkansas. If you look at the portfolio of earlier Walmart stores, they range in size from the 185,000 square foot Supercenter (the big kahuna) to the 42,000 square foot Market (with a smaller range of items, focusing on groceries and pharmacy). At 15,000 square feet, the Walmart Express store is a different beast:

Walmart Express has been created to offer low prices every day in a smaller format store that provides convenient access for fill-in and stock-up shopping trips. The stores give Walmart flexibility in serving customers, especially in rural and urban areas where shoppers may not have access to larger stores.

The Walmart Express test stores average 15,000-square-feet and offer groceries and general merchandise, including an assortment of fresh produce, dairy and meat, dry goods, consumables, health and beauty aids, over-the-counter medicines and more. Many have pharmacies as well.

From a shareholder value perspective, developing this smaller-scale store is a sensible market development strategy in light of the economic challenges retailers have experienced during the recession — maintaining positive comparable-store sales numbers during recessions is tricky, even for a low-cost leader. If Walmart can see positive profit margins at these stores, that will provide more evidence that their real competitive edge is not the economies of scale associated with big-box retail, but is rather the supply chain logistics and operations management for which they have become famous (or infamous, depending on your perspective). Essentially, I think they are “leveraging” (sorry for the jargon, but I think it’s correct here) all of the supply chain logistics efficiency and cost-cutting they have generated in their larger format stores to make the economics of the smaller store more attractive.

That’s the beginnings of a value story for the producer side’ now, what about the consumer side? Pay attention to how Walmart is framing the Walmart Express store: “The stores give Walmart flexibility in serving customers, especially in rural and urban areas where shoppers may not have access to larger stores.” In rural areas, they might site a Walmart Express store in a community that is too small to sustain a larger store. In urban areas, high population density means that the constraint is not market size, but is rather land scarcity and prices. So the constraint is on a different margin, but the smaller store format may serve the small rural and dense urban market (with local differences and customization in merchandise, to be sure). If Walmart can leverage their supply chain logistics to bring their low-price model to these markets, this could expand the market while increasing competition, all of which benefits consumers. And, in a city like Chicago with low-income neighborhoods that qualify as “food deserts”, a store like Walmart Express could provide retail access to fresh food in such areas.

Thus it shouldn’t surprise you that Chicago is one of the target markets for Walmart Express, at least three of which are scheduled for development during 2011. Two of them are in my southeast-extended Lakeview neighborhood, one at 2840 North Broadway (an area that, while not low income, is definitely not well served by retail grocery establishments) and a second one mile north at 3636 North Broadway. Both of these sites are 14,000-ish square feet and have been empty (in the more northern one, empty for four years!).

The siting of the second one is economically curious, because while five blocks from Wrigley Field and thus full of foot traffic (not to mention the high population density and economic and demographic diversity), this area is not bereft of grocery options: Jewel at 3531 North Broadway (a traditional grocery store, on the small side), Treasure Island at 3460 North Broadway (a Chicago institution, christened by Julia Child as the “most European grocery store in America”), and Whole Foods at 3640 North Halsted, about one block from the proposed Walmart Express. It’s also directly adjacent to a dingy and somewhat dilapidated Walgreens, which announced this week that it would revamp and build more produce-carrying stores in Chicago, targeting food desert neighborhoods.

What to make of this? I think it reflects the model I suggested a few years back about evolving grocery retail competition among Whole Foods, Trader Joe’s and Costco — this is a market characterized by simultaneous rivalry and product differentiation. The market in that neighborhood is big enough for all of those players, and if you made a Venn diagram of their target markets, you’d see some overlap, but not that much. Jewel has so-so produce and does the traditional coupon/loss leader competition, TI is smaller and gourmet focused, Whole Foods is healthy eating at a higher price point. I anticipate Walmart Express will use their existing supply chains for meats and produce, which are strongly imbued with environmental sustainability practices at their trademark low prices. My analysis of this particular market is that those who want better produce and meat but struggle to afford Whole Foods will be the target Walmart Express shopper — making them better off and generating profits for Walmart with little, if any, diminution of profit for Whole Foods. I’m not as sure about the outcome with respect to packaged grocery items and Jewel relative to Walmart Express; we’ll have to watch and see!

Of course, there’s also a local political story here, as described in this Crain’s Chicago Business story. Although the site does not require any zoning change, newly-elected alderman James Cappleman is miffed at having not been consulted directly by Walmart well in advance:

Alderman James Cappleman (46th), whose ward includes 3636 N. Broadway, says he heard about the deal from residents at a community meeting last week and was first contacted by Wal-Mart on Tuesday afternoon, after Crain’s initial inquiry.

“One of my concerns is I’m just now finding out about it,” says Mr. Cappleman, who was elected earlier this year and says he will seek input from the local chamber of commerce and neighborhood groups. “I’ve been very clear from the very beginning that I’m an alderman that works with the chambers and community organizations. We need to hear from any interested business very quickly so we can make decisions about what’s best for this community.”

I reject Cappleman’s top-down “I’ll be the judge of what’s good for the community” attitude. Just because he’s the elected alderman of the neighborhood does not make him the ultimate arbiter and gatekeeper for what is “good for the community”. Sadly, in Chicago (and I suspect other places too), aldermen have developed an entitlement attitude on this subject, and often act as gatekeepers for the protection of the political class in their ward, rather than the largely silent distributed community. I’ll be interested to see the consequences of this evolution.

A disgusting display of bureaucratic force from the Chicago Department of Public Health

Lynne Kiesling

This is so vile, so disgusting that I am literally nauseated at my desk as I write. One of the ways that independent chefs, caterers and confectioners economize on their substantial fixed costs is by sharing kitchens. In Chicago, the business license treatment of such kitchens from the Chicago Department of Public Health has been uncertain: does the kitchen owner have to be the one with the license, or does each user of the kitchen have to have a separate license?

Last night, due to a paperwork miscommunication and Kafkaesque bureaucratic process of trying to sort this out, the Chicago Department of Public Health destroyed organic fruit purées that Flora Lazar of Flora’s Confections prepared over the summer and preserved to use in her much-touted and anticipated Valentine’s Day confections. These officials tore open the bags and bleached the food so that it could not be put to any use. I’m going to quote Chicago Tribune reporter Monica Eng here at length, because she was there, and her post illustrates exactly how senseless and appalling this destructive CDPH behavior is, but there is more at her post, including a depressing video of the CDPH officials destroying the food, so please do go read more there.

In a sad struggle that unfolded in a West Town kitchen Thursday night, Department of Health inspectors seized, slashed open and poured bleach over thousands of dollars of local peaches, pears, raspberry and plum purees owned by pastry chef Flora Lazar. She’d purchased the fruit from Green City Market farmers last summer and had planned to use it to make local fruit gelees for her business, Flora Confections.

More than $1,000 of food owned by the Sunday Dinner Club caterers was also destroyed by health department inspectors.

Inspectors cited no health problems with any of the food. They even encouraged Lazar’s son to eat the confiscated granola bars from Sunday Dinner Club. They only said the food was prepared by chefs who didn’t have the proper business licenses to prepare and sell it. …

The destruction of organic artisanal granola bars and local fruit from Klug Farm and Hillside Orchards is heartbreaking to any local food advocate. But for Flora Lazar, this setback, the week before Valentine’s Day is devastating.

“This puts me out of business for six months,” a despondent Lazar said. “I have done everything by the rules. Instead of making the food at home, which I could easily do, I sought out and rented space in a licensed kitchen. When they finally said we could apply for a separate license, I did that. I paid my $600 and invited the inspectors here today.”

If Lazar had been less transparent and left her cooler in her car during the inspection, she would probably be cooking today. Inspectors were mostly destroying food that had been prepared before their arrival. But she estimates that her honesty and attempt play by the rules just cost her $6,000 in revenue. She says the fruit purees, harvested at the peak of Midwest ripeness, are “irreplaceable.” …

But until recently the city had no clear policy regarding shared use kitchens, says Kitchen Chicago owner Alexis Levering. When she secured her latest space she said she confirmed with the Department of Licensing that it was zoned for shared use. The department further assured her that as the licenseholder, she would be responsible for any food safety issues associated with her clients, she says.

Later, though, Licensing said her clients would all need to apply for their own licenses, and with each application they’d need to get a new health inspection, giving the little niche kitchen exponentially more inspections than the busiest restaurants in Chicago.

But when Kitchen Chicago users went to the department, they were told again that they couldn’t apply for the license because it was at the same address as Levering’s license. The confusion continued for months until recently, Levering said, a department representative told her that now he would make sure that renters could apply for the licenses. He further told her, however, that any violations committed by one chef would mean a ticket for every cook who rents space in the facility, meaning possibly thousands of dollars reaped by the city for a minor infraction by one cook the others might have never met.

“That’s like giving everyone in the car their own ticket when a driver is stopped by the police,” she said.

This week, it seemed as if the kitchen was finally making progress with the department and, indeed, two of the businesses, Sunday Dinner Club and Flora Confections, had their license applications accepted, paid their fees and were told the inspectors would come Thursday.

The inspectors arrived at 9:30 a.m. and didn’t leave until nearly 5 p.m., when their final act was to destroy hundreds of pounds of local, organic, often unopened cheese, cassoulets, granola bars, frozen fruit purees, baking ingredients and more with a gallon of bleach.

Officials never said that the food posed a health risk. At best it was a victim of paper work confusion among city bureaucrats who couldn’t agree on a policy. But since no one at the city will comment on the situation, part of the story remains unclear.

Francis Guichard who is the CDPH food protection director called this morning to say that her inspectors could not allow the food to move from the building because they could not ensure where it was going. Licensing has still not commented on the issue.

At one point, one of the cooks suggested that the unopened food at least go to the Greater Chicago Food Depository rather than being destroyed. That request was denied. Watching the destruction of all of this perfectly edible food, you’d never know we live in a state where one out of 10 households doesn’t have enough food to eat.

The Health Department inspectors are expected back at the kitchen today to destroy the rest of the food they deem unlicensed.

These so-called “protectors of public health” destroy the inputs into an entrepreneur’s business in her busiest season, despite acknowledging that the destroyed food poses no health risk. These so-called “protectors of public health” destroy perfectly healthy food instead of even giving to hungry, needy people. On what grounds can these so-called protectors of public health have any legitimate claim to be doing valuable work on behalf of the people of Chicago? And I pay how many thousands of dollars in taxes every year to support this kind of wasteful, counter-productive, aggressive, megalomaniacal activity?

If these City of Chicago employees are indicative (and I think they are) of the attitude of city government toward entrepreneurship and toward the value of meaningless bureaucratic gestures that keep income out of the pockets of entrepreneurs and food out of the mouths of people, then I am truly ashamed and embarrassed to call this my home. It adds insult to injury that I pay such high taxes for the privilege of living in such a despotic city. Yes, I mean despotic; we Chicagoans know that there are many dimensions in which such a word is not hyperbole.

I also sympathize with the first commenter on Monica’s post:

And the Government still doesn’t think the Revolution is coming?

Weekend jaunt from Chicago: New Glarus, Wisconsin

Lynne Kiesling

The area around New Glarus, Wisconsin, is one of our favorite places when we want to get out of town. Great roads for cycling, camping, beautiful scenery, and of course the newly-expanded New Glarus Brewery. Gone are the days when we could get Spotted Cow and Uff Da Bock around here; now we have to drive to Wisconsin to get some. If you are not familiar with the area, this Gaper’s Block post provides a good weekend getaway guide, including recommendations for bicycling on the several very good trails in the area — especially good for families!

NO Jazz & Heritage lineup

Lynne Kiesling

I’m gonna beat Mike to the punch on this one: Weekend 1 of the New Orleans Jazz & Heritage Festival will include Wynton Marsalis & the Lincoln Center Jazz Orchestra, as well as my local band Wilco! It’s 24-26 April … hmmm, right now the calendar looks open. Have to see if I can persuade the KP Spouse …

Massive thunderstorms!

Lynne Kiesling

Yowza … we had massive thunderstorms here last night, with the tornado sirens going for the first time I’ve ever heard them in Chicago. We actually grabbed the cat and the laptops and the firebox with the valuables and headed for the basement, where we poured pitchers of water and waited. Thankfully it all came to naught and was over quickly; within half an hour we were back upstairs watching the Weather Channel.