The prepared food section at Bell's Market in the Northeast.

The prepared food section at Bell's Market in the Northeast.

Facebook via Bell's Market

Philly’s independent grocery stores: The soda tax is killing us

In neighborhoods where chains won’t go, ‘even my lottery is down.’

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The nightmare scenario for Philly independent grocers is the story of a Baltimore neighborhood market called Santoni’s.

In 2010, our neighbor to the south started the bottle tax, basically its version of the soda tax. The measure at first taxed each bottle two cents and in 2013 ratcheted it up to five cents. That year, Santoni’s closed for good after 83 years in business in a mixed-income neighborhood. The owner blamed the new tax, saying his sales had dropped 18 percent since its passage, with what he estimated as many as 3,000 weekly customers fleeing to stores outside the city.

Other factors were certainly involved. Giant and Safeway had stepped up their game in Baltimore, demographics had been changing in the neighborhood and Santoni’s had invested in renovations just before the 2008 financial crisis. But industry experts mostly agreed the bottle tax had an effect.

So far — and it’s only been three months — local Philly grocery stores have said they’re struggling, describing losses in overall revenue of 10 to 15 percent compared to past years. While big chains like ACME, Family Dollar, Aldi and Walmart can absorb losses because of their national footprint, independent grocers are particularly vulnerable to shifts in revenue. These are places like ShopRite, Fresh Grocer, Shop-N-Bag, Bell’s, Chelten Market and others.

Many of them are located in lower-income areas where business is riskier in the first place and where the chains generally refuse to go. They are seen as anchors in their respective neighborhoods.

Nationally, these types of stores have been closing or getting bought out by chains, completely independent of any soda tax or bottle tax like in Baltimore. And now in Philadelphia, an unprecedented tax has been added to the mix.

“Most of these independent grocers are just on the borderline,” said John Stanton, professor of food marketing at St. Joseph’s University and a former marketing executive in the food industry. “They’re just making it. Small changes in revenue or cost are going to put them over the limit.”

‘My lottery is down’

The problem for independent grocery stores hasn’t just been sales of sugary drinks. Sales on sodas and similar products, notes Don Petzak, general manager of TheRichmondShops.com IGA in Port Richmond, have been declining for years. While typical corner stores depend on sugary drinks for some 30 percent of their revenues, it’s closer to 5 percent for supermarkets.

The bigger problem has been customer volume. In the last three months, independent grocers have seen overall sales drop, suspecting customers who don’t want to pay the tax have gone to the suburbs and bought all their groceries. Petzak estimates his business so far this year is down about 10 percent compared to last year.

“My lottery is down; let’s put it that way,” he said. “It affects the whole thing.”

At Bell’s Market in the Northeast, manager Maria Koutsouradis declined to give a percentage drop but noted her sales numbers and numbers of customers have dropped compared to previous years. She said people are buying more water and orange juice but not enough to offset the sales decline in soda and in revenue overall at Bell’s. Where she said her store was a routine weekly visit for customers, it has become a place where many only go out of necessity.

Jeff Brown, who operates six Philly ShopRites and two Fresh Grocers, has been particularly outspoken about the soda tax. His PR department did not respond to an interview request, but he told Bloomberg last month overall sales had dropped by about 15 percent across his Philly stores.

ShopRite grocery

The ShopRite off Aramingo Avenue.

Flickr via Generic Brand Productions

Brown, other independent grocers and even chain grocers have received millions in grants from the state — mostly through the Redevelopment Assistance Capital Program — for their efforts to operate in so-called “food deserts,” parts of the city that would otherwise lack access to healthy foods.

Anne Palmer, food communities and public health director at Johns Hopkins, said independent grocers aren’t altruistic, but “They see it as a bigger mission than ‘I’m here to make money’ and have it as an anchor business. They perceive it as giving back to the community.”

“Giving back,” of course, only goes so far.

“At some point in time business reality sets in,” said Phil Lempert, a food trend analyst known as The Supermarket Guru. “If in fact these communities want a really nice store, a nice ShopRite if you would, they’ve got to make money. If people are going to go to other areas to avoid a soda tax long term, that’s going to hurt.”

‘We don’t want you to leave your neighborhood’

Should the decline continue, solutions won’t be easy for independent stores. For any business, a decline in sales necessitates a plan for making up the loss with higher sales elsewhere or a reduction in operating costs. Grocery stores have a difficult time with the latter, given the high costs of food expenditures, capital, skilled employment and high turnover. It also doesn’t help from the mission standpoint of many local grocers that the products that make the most money are usually the least healthy.

At TheRichmondShops.com IGA, Petzak said he planned investments and renovations years ago that have recently come into his store, such as the wine and beer section. The experiment has been successful, but he expected the alcoholic beverages to be additional sales on top of the consistent overall revenue he’d been making until this year. Not as a replacement stream.

“This tax has changed the environment,” he said. “We were not trying to survive but trying to excel. ‘At least you’re not going out of business?’ Is that a good attitude? When you’re trying to improve yourself and your store, it’s disheartening.”

To encourage businesses to improve their offerings of other beverages, the city started the Healthy Stores Tax Credit. It essentially covers the first $2,000 stores spend increasing their supply of healthy beverages.

Lauren Hitt, spokesperson for Philly Mayor Jim Kenney, cited reductions in the wage tax and the Business Income and Receipts Tax as ways the city has attempted to buoy independent grocers. The wage tax started gradually going down under the Rendell administration, and the cuts to it and to the BIRT (exempting the first $100K in gross receipts from the gross receipts portion of the tax) impact all businesses, not just independent grocery stores.

“We are confident that this tax alone will not shutter supermarkets,” she said.

Some have suggested grocery stores might raise prices incrementally for hundreds of other products and not pass on the sugary drinks tax. Stanton said doing so would prove unwise, if not impossible. Grocery stores make significant amounts of money on deals made with companies to place products in ideal locations and to place them in the weekly circulars. If Kellogg’s or some major company discovered a store was hiking its product’s prices, Stanton said they would likely cut off those kinds of negotiations with the store.

He said the overall sales declines he’s been hearing for independent stores has been shocking. But he notes the data so far is anecdotal.

“I’ll feel a little more sure in six months,” Stanton said. “It’s not so much you need like an amount to reach a conclusion, but you need to get an amount of time to get more certain.”

Don Petzak recently opened a beer and wine section at TheRichmondShops.com IGA.

Don Petzak recently opened a beer and wine section at TheRichmondShops.com IGA.

Facebook via TheRichmondShops.com

Lempert expects sales to pick back up after consumers get over the sticker shock and realize how much they may be spending on gas or possibly higher prices at the new stores they’re frequenting.

“What retailers have to do is really promote getting away from soda,” he said. “Promote bottled water, maybe juices and other products that are alternatives and think much more holistically and really say to people, ‘We don’t want you to leave your neighborhood.’”

One bottler for Canada Dry told the AP he’s seen an increased in bottled water volume since the tax was enacted, but Nestle, the biggest bottler, has seen no such gain. Following Berkeley’s soda tax, the American Journal of Public Health found bottled water consumption increased 63 percent in lower-income areas.

Lempert would like to see the government get involved with promoting a switch to water and the other alternatives. That’s something the city is doing with the Healthy Stores Tax Credit. In other ways, grocers and the Mayor’s administration have been at odds.

We’re in uncharted waters here

Mayor Kenney, on multiple occasions, has directed criticism at Brown, accusing him and others of “putting money in their pockets” by charging for the tax at the point of sale. He also questioned why Brown would be opening a new grocery store if he were concerned about declining revenue and cutting employee hours. That store had been planned before any effects of the soda tax — or even the proposal for the soda tax — were known.

“The city has now created an environment that might make a lot of what I’ve done unsustainable,” Brown told the Philadelphia Citizen this month. “It’s very disappointing. I don’t think they purposely did it. But the unintentional consequences could affect whether Philadelphians have grocery stores or not. It literally could be that significant.”

Whatever happens going forward will be a first. Though Baltimore’s bottle tax and Berkeley’s soda tax are similar, there’s no blueprint for a sugary drinks tax an American city this big.

Palmer said a balance needs to be struck between improving health and revenue streams and keeping these smaller stores in business. It’s generally the independent stores, she notes, that respond best to consumer requests and needs and cater their selections to fit their neighborhoods, as Bell’s does for its Russian-influenced corner of the Northeast. And when independent stores go under, a comparable newcomer rarely swoops in.

Take Santoni’s, for instance. After the store shuttered in 2013, Baltimore didn’t get a new independent grocery store. The longtime neighborhood fixture was replaced by another chain.

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