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More companies tap location, location, location of inner cities

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  • James
    BALTIMORE — Think the inner city is riddled with crime and uneducated labor and is a ghost town for business? Consider 180s, a company that seems properly
    Message 1 of 1 , Aug 31, 2004
      BALTIMORE — Think the inner city is riddled with crime and uneducated
      labor and is a ghost town for business?
      Consider 180s, a company that seems properly named for going in the
      opposite direction to the herd. It set up headquarters in the inner
      harbor of Baltimore, which might be known as a touristy area but which
      also has a 20% poverty rate and a 50% high school dropout rate. 180s
      sells accessories, primarily for athletes, such as gloves with a valve
      that skiers blow into to keep their hands warm. 180s is enjoying heat
      of its own: Revenue is up 14,000% the past six years to $47 million.

      Then there's CookTek. Its pizza-oven factory is so close to Chicago's
      Cabrini-Green housing project that CEO Robert Wolters says he could
      hit a golf ball 350 yards from the rooftop into some of the nation's
      most infamous squalor. CookTek's revenue surged 2,400% the past six
      years to more than $10 million in 2003. "Look for the poorest section
      of town. That's where our factory is," says Wolters, 37. "Five years
      ago, it was awful: prostitutes, drug dealers, people living under
      bridges. Not a place you'd want to be after dark."

      The success of CookTek and 180s is not despite their location in the
      poorer sections of their cities — it's largely because of it. And they
      are no fluke. When the Initiative for a Competitive Inner City (ICIC)
      set out to persuade companies to consider the inner city, it was
      surprised to find at least 7,000 had already made the discovery and
      moved in to take advantage.

      By Anne Ryan, USA TODAY
      Robert Wolters, CEO of CookTek.

      The ICIC, a non-profit established by Harvard professor Michael
      Porter, identified 800 ZIP codes in the 100 largest cities where
      unemployment and poverty were at least 50% higher than in the
      surrounding area. In those distressed neighborhoods were 364 companies
      that grew an average 866% in the five years ending in 2002, to average
      $17 million in annual revenue.

      So much for the inner city's image as a business badlands.

      Porter is a leading business guru and author of Competitive Strategy,
      a textbook used in virtually every business school in the world. He
      has advised nations including India and Ecuador on gaining a
      competitive foothold against advanced economies. He is credited for
      helping make Spain's Basque region prosperous.

      After the 1992 Los Angeles riots, he concluded that cities face
      economic challenges similar to those of poor nations, with one
      important exception: "Inner cities are sitting in the center of the
      most prosperous parts of the world," he says.

      Bruce Katz, director of the Brookings Institution Center on Urban and
      Metropolitan Policy, agrees, calling Porter's inner-city work
      revolutionary: "The only issue is not whether but how much the inner
      city will compete."

      Many advantages

      Moving in from the suburbs can offer a company many advantages. Inner
      cities often are underserved by businesses and offer much more
      consumer buying power per square mile. They are closer to airports and
      major highways. They are a source of loyal and motivated workers who
      in many cases are not used to getting paid a fair wage.

      But that's not to say companies such as 180s go to the inner city in
      search of a cheap workforce. The 9-year-old company's success is built
      on selling high-margin products such as $19.99 lightweight ear warmers
      that compete against $4 earmuffs. But even with those margins, CEO
      Brian Le Gette says there is no way 180s could manufacture in the USA
      and compete, so he outsources production to China.
      What is an inner-city company?

      An independent, for-profit corporation or partnership.
      Headquartered in or have 51% or more of its physical operations in
      economically distressed urban areas (50% higher unemployment rate and
      50% higher poverty rate than surrounding area).
      Have 10 or more employees.
      Have a five-year operating sales history that includes sales of at
      least $200,000 in 1998 and at least $1 million in 2002.

      Still, Le Gette says 180s shows how inner-city firms can help their
      communities. The 93 jobs at headquarters are almost exclusively for
      the college educated. Le Gette says 180s attracts more creative
      workers than it could if based in the suburbs, and those workers are
      more likely to put their egos aside for the good of the company and
      the neighborhood.

      Some employees, including promotions manager Eliza Graham, say they
      would be working elsewhere if it weren't for the company's
      philanthropic efforts, including the mentoring of 30 at-risk Baltimore
      high school students. Graham tells how fulfilled she felt when a
      student told her of his plan to sell drugs and she was able to get him
      to consider the consequences. None of the 30 students that 180s has
      taken under its wing has dropped out.

      Inner-city companies also make urban areas more diverse as
      middle-class newcomers move in. Nearly half of workers at the 364
      fastest-growing companies live in low-income pockets, ICIC says.

      Thirty-nine of the 93 employees at 180s live inside Baltimore's city
      limits. That includes CEO Le Gette, who lives in a condo next door to
      his office, "68 seconds" from his desk, "30 seconds when it's raining,
      " and recently arrived to work in sandals. When posing for
      photographs, he says he smiles no more than the Mona Lisa.

      Possible leg up

      It's unknown how many jobs at inner-city companies go to the poor, but
      32% of their employees are minority vs. 11% nationwide, says the ICIC.
      Maria Garza, originally from Mexico, makes $10.75 an hour in her
      fourth year at CookTek, leading a team that manufactures
      state-of-the-art commercial ovens for Domino's and Pizza Hut
      franchisees and others. She never got past $8 an hour during 11 years
      of making mattresses at another factory. Before CookTek, Garza says,
      she would have had to commute an hour to the suburbs or O'Hare airport
      to earn more.

      Inner-city companies disproportionately offer health care, retirement
      benefits, life insurance, homeownership incentives and education and
      training. In other words, inner-city companies can offer the leg up
      that public schools have so far failed at, Porter says.

      "Education is the key long term," Porter says. "But it may be a
      chicken and egg thing." Establishing a job base might pave the way for
      better schools, he says.

      Inner-city employees with children often commute from the suburbs
      because inner-city schools are so poor. Vance Bishop has found a
      solution for his 5-year-old daughter, Cassidy, who starts kindergarten
      this fall. The Bishops live in downtown Salt Lake City, two blocks
      from his inner-city job as an account executive for Ikano, an Internet
      service provider that has grown 9,400% in six years. Ikano's
      headquarters are in a Census tract with 36% poverty.

      Bishop and his wife, Nicole, considered private school but then
      discovered Washington Elementary in the shadows of the Utah Capitol
      building and where principal Joanne Price says the majority of the
      students are from a nearby homeless shelter.

      Washington Elementary wanted to keep the campus diverse, which meant
      keeping middle-class students from fleeing. It offers some classrooms
      where parents are required to volunteer three hours a week. That means
      each teacher is always assisted by three or four adults, which
      satisfied Bishop's concerns. And he's happy that his daughter will
      play soccer with children from Africa, Latin America and French

      Competitive advantages

      Some inner-city companies are serious about improving their employees'
      educations, too. To get hired at On-Target Supplies and Logistics of
      Dallas, the 156 employees had to promise to pursue, at company
      expense, training or education that will lead to promotion or a better
      job elsewhere. Not following through means getting fired, which
      happens to at least one employee every quarter, says CEO Albert Black,
      who grew up in the public housing of Frazier Courts in south Dallas.
      He says he won't invest in employees who don't invest in themselves.

      Few companies flee the suburbs just to be altruistic. Inner-city
      competitive advantages include:

      •Underserved markets. This is something Magic Johnson discovered with
      his chain of movie theaters and other businesses. The inner-city
      spending power per square mile is $25 million vs. $3 million in the
      suburbs, ICIC says. Grocery stores in inner Boston and New York sell
      40% more per square foot than suburban stores in the region, Porter

      •Location and logistics. Inner cities are often near airports and the
      interstate highway system. Ikano CEO Henry Smith leased business park
      space in 1995 in the Salt Lake City suburb of Murray, but it was a
      90-minute drive to the airport. He bought out his lease to move
      downtown in 1997, slicing the airport trip to 10 minutes. "We have
      clients and investors going in and out all the time, and meetings can
      last until 30 minutes before the flight departs," Smith says.

      "The buzz of being in the city adds to the culture," says CookTek's
      Wolters, who adds that his only regret is not buying the Chicago land.
      He expects his rent will only climb.

      •Eager employees. "The inner-city workforce has been maligned, but it
      is loyal and motivated, with higher retention rates than in the
      suburbs," Porter says.

      The CookTek factory employs 25, mostly Hispanic women, many of whom
      have only a five-minute bus ride to work. A few days of training at a
      cost of about $1,000 per employee is needed for light assembly.

      Of course, there are some drawbacks to being downtown. Crime has been
      brought under control in most cities to the point that the problem is
      one only of perception, Katz says. Still, Wolters says, crime was a
      consideration when CookTek moved next to Cabrini-Green. The suburbs
      would be safer, he says, but women are encouraged to walk with
      partners, and the company has not had to hire additional security
      guards. "We had some cars broken into, but there has been no personal
      injury," he says.

      When CEOs were asked what the biggest disadvantage was to being in the
      inner cities, the answer was almost unanimous: limited parking.
      Wolters also worries that the supply of quality workers is finite and
      outsourcing may become an option if his factory grows to several

      "People who live in the city have more interests: the arts, sports,"
      Le Gette says. "I counted 42 restaurants within two blocks. In the
      suburbs, fast food dulls creativity."

      Wolters agrees. "A mundane facility in an industrial park surrounded
      by cornfields is rather boring."
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