Another central planning failure
The supposedly still-coming grocery store in Pittsburgh's Hill District will be a failure, at least as thinking people consider economics.
The Hill House Association will “build” the Shop 'n Save store on 2.4 acres at Centre Avenue and Heldman Street. “Build” is in quotation marks because lots of other people's money will foot the bill for this “full-service” facility that so many people insist is necessary to complement revitalization.
But this project has been in trouble from its inception.
“This could be a poster child for what happens when special interest groups with lip locks on the government teat drive a project,” says Jake Haulk, president of the Allegheny Institute for Public Policy. The facility is too expensive with too little private investment with little chance to succeed, he says. After all, the underwriters are a cluster-cluck of government-knows-besters and “public good” shakedowners.
There's a million bucks from the Pittsburgh Urban Redevelopment Authority; it also donated the land, which, valued at $500,000, surely is low-balled. There's another million from “the state” (i.e., taxpayers).
The Pittsburgh Penguins were shaken down for $1 million. Allegheny County money (again, taxpayer dollars) totals $750,000. And the usual suspect foundations have been snookered into giving, too.
The independent Shop 'n Save operator who's going to run this store, owned by Hill House but leased to him, has woefully little skin in the deal — another $1 million but just under 1⁄12 of the total cost.
That's a big honkin' red flag blowin' in gale-force winds indicating that the store cannot generate enough profit to survive without subsidies. More taxpayer subsidies, no doubt.
Planners originally estimated the store's cost at $8.5 million. But even at that price, private developers said it was excessive. Now the cost has ballooned to $11.6 million. Does anyone doubt the number will grow? Given that the project's “funding gap” grew from $2.2 million in March to nearly $4 million this summer, consider the question answered.
The sad fact is that costs could have been corralled and a grocery store could have been operating right now had developers accepted the offers of perfectly wonderful outlets (think ALDI, think Save A Lot) that would have built on the site far sooner and with far more private investment.
And then there's the basic operational economics, adds Mr. Haulk, a Ph.D. economist.
“At a respectable return on capital, the $11.6 million store would have to generate $600,000 in net profit (annually) after all expenses, including interest payments. Assuming normal (thin) grocery store margins, the store would need to generate $30 million in sales to earn a decent return on the $11.6 million,” he says.
“Of course, with all the grants, authority money, Penguins money, state dollars, etc., only (the sole private investor) will have to earn a profit and that on the $1 million.”
Thus, you can bet any failure will be masked by the newest intervention to cover up the lie of the last failed intervention (to end all interventions, of course).
Unsustainable visions, usually the product of the central planners, usually do beget unsustainable operations.
Colin McNickle is Trib Total Media's director of editorial pages (412-320-7836 or email@example.com).