Monday, August 20, 2018

Food Deserts, Restrictive Covenants, & Market Failures

Food Deserts, Restrictive Covenants, & Market Failures
My least favorite refrain from judgy frugality bloggers is telling people to stop eating fast food & junk food, and to just cook all their meals at home.

Which is weird, right? What could possibly be wrong with that advice? Thousands saved every year, and healthier living, too. And all this abundance for only $11.

But the high horse advice reeks of a privilege that most of us are totally blind to: the fact that most of us have a dozen grocery stores we can easily drive to, in the car we just happen to own.

Or, heck, maybe we can bike there, since we apparently have all this free time and, you know, it's important to keep it tight.

But not having a car is a thing. Cities without great public transportation are a thing. And for thirty nine million Americans, food deserts are a thing.

Let's tackle the last one a bit today.

Grocery stores sometimes close. And when they do, the fact that another doesn't take its place is often not just the free market in action: it's not just that all other grocers see this area as a poor investment.

Grocery stores like Safeway regularly insist on non-compete clauses to be inserted into leases and sales agreements or, amazingly, agreements with cities themselves, preventing any other super market using the same space they vacated, for up to fifteen or twenty years. This has led to organizations like the Food Empowerment Project to petition that Safeway end this practice.

So when the urban or rural Safeway closes down, a Kroger or Trader Joes or Aldi cannot use the space, even if they see an opportunity there, even if the landlord would jump at the chance. There is no opportunity for a different grocer, perhaps a smaller one more able to meet the demands of this particular market, to even try.

A different type of tenant, a sporting goods store or a Ross can move in, sure: but no company that sells groceries. It's not allowed.

The clause in rental agreements which prevents a future tenant in the same industry from renting the space is a type of restrictive covenant: put in place specifically to protect the competitive interests of an industry.

But why would a landlord agree to such a clause in the first place? The restrictive covenant is a result of a lopsided amount of leverage in negotiations between landlords who have a space which serves as an anchor in a shopping area, for which there are very few tenants who are in the market for that space, since grocery stores are pretty huge.

But if grocery stores in a neighborhood close, without sufficient ability to bring in new players, what often results is a food desert: areas where there are few or no options for fresh produce, meat, and other staples. Residents are then faced with a dilemma: travel at a significant cost of time and money to where grocery stores are, or get their food at the places left in their community...liquor stores, gas stations, and fast food restaurants. 

It's terribly unhealthy and, in an economic sense, terribly inefficient.

Once again, this is a type of market failure: when the market creates a system in which goods and services are distributed inefficiently. It's terribly inefficient for consumers to spend time taking multiple busses out to other grocery stores. It's terribly inefficient to force competing grocers to wait 15 years to enter the market again, simply because the prior grocer wants all the customers to go to their next closest market several miles away.

The cruel irony is that these are often the very areas with citizens who can least deal with all the hurdles of a food desert, as they are both cash poor and time poor.

These harsh realities make the ignorant claims shouted from laptops in the suburbs ("Just shop at Aldi's! Stop eating junk, get a Costco membership, and cook at home!") not all that helpful. 

Of course, this issue is larger than micro economics. Food deserts are political, since the issue disproportionately impacts low income and minority communities. It's an issue of personal finance, as individual households need to spend more money on daycare and transportation in order to get groceries every week, and likely may spend more on healthcare later on if nutritional options are lacking. It's obviously a public health issue, as well.

There are a lot of different ways to get angry at this situation.

But the procurement professional in me keeps coming back to the stupid clause in that rental contract: the restrictive covenant. This is a case where the free market has allowed a contractual term to eliminate competition, rather than encourage it.

Many of our citizens and politicians frame the free market as something that always fosters more and more competition. If governments and bureaucrats just left it alone, competition would naturally occur, prices would be driven down, and all consumers benefit.

But the reality is often more complicated. In this case, regulation is needed so that competition can occur: the free market is allowing a single, powerful actor to stifle and eliminate competition. The laissez faire approach has led to less competition, and a market failure.

We see the same thing occur fairly often in unregulated free markets. Without proper oversight, monopolies and oligopilies form, nearly eliminating competition. When employers have overwhelming power and are allowed to push whatever terms they like onto their employees, non-compete agreements are foisted on employees, who are prevented from working for other employers which, again, stifles competition in the marketplace.

We citizens, and our politicians, would do well to stop framing the free market as some sort of perfect system that always does the best overall thing for workers, companies, consumers and investors, alike. Often, it just does whatever is best for the strongest player on the field.

And we need to stop framing common sense regulation as something that always hurts the free market. In this case, with citizens who are finding it hard to meet the most basic of human needs, indeed, regulation is the thing that could actually help the market operate.

As always, thanks for reading.


  1. Replies
    1. Thanks, Solitary Diner. It took me three weeks to finally publish, but better late than never.

  2. In more run down places in LA, you see nothing but fast food restaurants. In the area that I currently live, they are fewer and far between, but have tons of Trader Joe's, Whole Foods, and a plethora of other places to get fresh produce. It's very lopsided indeed.

    1. When we venture into different parts of our cities, we can really see how different our neighbors have it.

      LA is unique in that it seems like everything is kind of a drive away, but it's weird because it really is densely packed.

  3. YES. It's something that I wasn't really aware of growing up because we were poor in a reasonably well off area. Not affluent, there was just one street about three blocks long that belonged to the affluent of the town, but definitely an ok median wealth kind of town. Being poor there wasn't grinding poverty, it just meant cramped space, smaller abodes, and never going out to eat. And we still had access to at least two grocery stores at any given time. We had to drive quite a ways to the Asian market but at least one large supermarket was always in town.

    I'm glad you dug up that non-compete clause because I never knew about it - we had two large retail spaces in our town that has been a revolving door of businesses, including multiple groceries at different times, but the last decade, there hasn't been any and the groceries have moved from the relatively central part of town toward the more affluent side of town. I couldn't figure out why but I wonder now if it's this non compete nonsense coming into play.

    1. It's hard to really know if it's a restrictive covenant at play, or just companies organically deciding an area isn't one they want to invest in. That's why I'm so happy to see the reporting by FT & Marketplace: I'd never have guessed this was an issue without their work.

      As one of the writers said though, these restrictive covenants are kind of low hanging fruit: getting rid of them at least allows the possibility of another grocer moving in to the same property if they want to. It's a no-brainer for competition & for providing access to food.

      I read a Washington Post piece when researching that found it was only after a well-off neighborhood started to get impacted by restrictive covenants that you'd start to hear about it. Majority black wards in DC would have 1 or 2 grocers in the district due to these covenants, and you didn't hear a peep. But stick the well-to-do residents with a vacant grocery store, and you can bet that the local politicians start to feel the pressure.

  4. Unless your target audience is poor people, the advice will be for the masses. Most people can cook more and eat less fast food. I don't think that's riding a high horse. That's a pretty low bar for most people.
    I agree that the non compete clause is insane. That'd sink a landlord. What if they sell the property? Can the new landlord sign with a new grocery store?

    1. I can appreciate that writers have a broad audience and you can't write for everyone. But the tone, and acknowledging an issue that impacts 39 million Americans, matter, too.

      To be fair, I'm sure I've written plenty that has been offensive/insensitive, and isn't as thoughtful re: communities who have it worse off than I do.

      So re: selling the property, my initial research was finding examples of these clauses primarily in sales agreements. That is, Safeway owned the property themselves, and put the restrictive covenant into the sales agreement: the next owner could not sell groceries or sell to a grocer for 15 years!

      So it can apply to either a sale or when renting.

  5. I knew food deserts were a thing, I didn't know about those non-compete clauses were a thing. I wonder how enforceable they are? Although I'm sure the landlords don't want to risk it.

    1. The courts have surprisingly enforced these clauses (according to one of the articles linked above, the FT article, I believe), since they're made by two willing parties as a condition of the contract.

      It seems the judicial branch is reading the letter of the law here. I think local governments will be the entity needing to change the practice, unfortunately.

  6. Great article and you can tell you've put a lot of time, thought and research into this. I've got a lot of links and read now which look really interesting!

    "Free market" is such a joke term and should be banned when stuff like this happens all the time. And can't agree more on the whole "no regulation" dogma.

    In the UK they have to arbitrarily scrap 3 regs for every 1 they introduce (they may have copied this off the US in fact@). Now I have no doubt that there was a lot of low hanging fruit to get rid of at the beginning of when they introduced this practice (on the sale of whale oil and the like) which are totally out of date or just unused today. But surely at some point we will have to start scrapping actually useful regs just to get something also useful in. That is just insane.

    I agree with scrapping out of date regs or ones that have been proven by data to be ineffective or more harmful than good but the two things should be totally unrelated!

    Cheers and hope the sleeping routine has improved recently :)

    1. Thanks for that kind comment, FIREstarter. I started this one weeks ago, but had more podcasts & articles to digest on the subject -- it's a complicated one.

      I get the feeling you folks in the UK have a better understanding of the market, and how government & private enterprise can work together to foster competition. Here, it's such a joke dichotomy with many citizens: it's private enterprise VERSUS government regulation.

      And yes, sleeping is going better...though a long, long way off from the ideal. I think I may retire early just to get some sleep!

  7. Excellent and thought provoking post. I see that mindset often and may be guilty have thought it as well, before I read an article from someone living in a food desert. With lack of access to transportation, sometimes you shop at the closest location which is often not the cheapest. And sure Costco is cheap because you're buying in bulk. If you're living hand to mouth, you're not buying 100 rolls of TP and a family sized 4 pack of pasta sauce. You just buy what you need and have the money for. Some like to talk about the free market and Adam Smith's invisible hand, but if they actually read Wealth of Nations, he actually says that some governmental regulation is needed to make things run properly. Don't ask me to cite where as it's been a long time!

    1. "If you're living hand to mouth, you're not buying 100 rolls of TP and a family sized 4 pack of pasta sauce."

      Andrew, you win this week's award for the comment which clearly should have been in the post, but wasn't.

      And I might need to go read Wealth of Nations now...haven't ever read it!

      I hope all's going well in NYC. We still dream of living there for a year or two. Maybe right before we pull the plug on RE!

  8. Wow! I had no idea. I guess that explains why the building vacated by the Safeway in my neighborhood became a gym despite the many pleas by the residents for another grocery store. I live right on the edge of a very economically depressed area - well... it used to be. With the housing market what it is, people are snatching up houses there and flipping them... but that's another story.

    Anyhow, there's one little non profit that's working to remedy the food desert part of the situation. They're really innovative and so far I think they've started 2 community farms in the area, helped over 500 families start backyard gardens, and they're opening a food co-op/neighborhood owned grocery store. I guess if you can't get what you need from the corrupt corporatocracy, you just have to go around them. Here's a link if anybody's curious:

    1. Yeah, since it's a Safeway I think there's a decent chance a restrictive covenant might be at play there. They keep coming up as the company using them, when I search on food deserts.

      I checked out that co-op and I love their Theory of Change page. Powerful stuff.

      I really should check out what equivalents there might be in AZ. Early google searches are coming up empty...

    2. Well... maybe that would be a good project for a certain someone who's planning on retiring early. It wouldn't exactly be restful, but certainly rewarding! :)

    3. I would be like the very worst person for that job. I have tried organizing/implementing large things before and it is always a small disaster. I can write, I can come up with ideas, and I can support...

      But as a project leader, I just guarantee that nothing will actually come of the project.

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