Solving Urban Challenges Through Fast Food
In 2009, the Subway sandwich chain received 142 loan guarantees worth nearly $27.7 million from the federal government's Small Business Administration. Subway is just one fast food company (even if it is the fast food chain with the most franchises worldwide). Meanwhile, in that same year, all the combined grocery stores in the United States appear to have received a total of seven SBA loan guarantees worth $4.1 million. Such disparities in federal loan support can help shed light on the question of why there are so many fast food restaurants relative to grocery stores in America's inner cities.
There are, of course, other relevant considerations. Perhaps the most obvious explanation as to why fast food restaurants tend to outnumber grocery stores in America's inner cities is that fast food is generally more profitable than the grocery business. Recent media reports indicate that margins for individual fast food franchisees are in the neighborhood of 4 to 6 percent, while those for grocery stores are "razor thin," averaging just 1.3 percent after taxes. Grocery stores also often occupy more square feet than fast food outlets. In city centers where space is limited, prospective grocers may be stymied by fewer real estate options, zoning restrictions, lack of available parking for customers, and costly leases.
And then there are fears of crime in urban areas. Despite reduced levels of violent crime in a number of America's major cities in recent years, grocery entrepreneurs may still be reluctant to open stores in inner cities because of concerns about robberies and vandalism. Mitigating these concerns requires considerable outlays, including installing security equipment and taking out insurance premiums that are especially costly for entrepreneurs doing business in "risky" areas. Of course, such costs of doing business in urban areas also apply to the fast food industry. But perhaps higher fast food margins make up for these expenses, whereas thinner grocery margins are insufficient to offset these costs.
Fast food's profitability relative to grocery retailing may not entirely account for its prevalence on inner-city blocks, however. There are other structural contributing factors. Consider, for instance, that national fast food companies often rely on individual franchisees to distribute their products. This means that individual fast food outlets representing regional and national chains have been able to qualify for federal loan guarantee programs for "small businesses." This contrasts with leading national grocery retailers, many of which are owned and operated by corporations rather than individual franchisees. Such an ownership structure often precludes grocery retailers from receiving the same government small business loan guarantees that are available to the fast food industry.
More specifically, the SBA, which guarantees loans of up to $3.75 million that individual businesses can borrow from commercial banks, imposes eligibility criteria on qualifying businesses' participation in its 7(a) Loan Program. To participate in the 7(a) Loan Program, the agency's "primary program for helping start-up and existing small businesses," qualifying businesses have to fit the definition of "small." According to current SBA regulations, this means that the annual gross receipts of qualifying grocery stores and supermarkets may not exceed $30 million, and that fast food and "limited service" restaurants cannot gross more than $10 million. These regulations favor national fast food companies over supermarket chains because many individual fast food restaurants are owned by franchisees and gross less than $10 million, while the majority of individual supermarkets representing national chains are owned by companies, conglomerates, and private equity firms that gross in excess of $30 million.
The Subway sandwich chain exemplifies how the fast food franchising model has been ideal for participation in the SBA's 7(a) Loan Program. With over 44,000 outlets as of 2016, Subway has more restaurant locations than any other fast food company in the world. All of its restaurants are franchised, with its U.S. locations pulling in an average of $452,000 in sales as of 2010. Not coincidentally, Subway has been far and away the leading recipient of SBA loan guarantees in recent years.
Over at McDonald's, the company reports that "more than 80%" of its outlets are currently owned and operated by franchisees. According to the fast food industry trade publication QSR (quick service restaurants), the average U.S. McDonald's restaurant took in annual sales of $2.4 million in 2010. At Kentucky Fried Chicken (part of the Yum! Brands conglomerate), 13,489 of the company's 18,198 locations were individually owned and operated as of 2013, with the average U.S. outlet (both franchised and corporate-owned) raking in $933,000 in annual sales in 2010. Similarly, two of the other major fast food chains, Burger King (part of the global private equity firm 3G Capital as of 2010) and Wendy's, have announced plans to transfer 100 percent and 85 percent of restaurant ownership to franchisees, respectively. Like the other fast food chains, industry figures from 2010 showed that Burger King and Wendy's franchisees registered annual sales under the SBA eligibility threshold of $10 million ($1.2 million and $1.4 million, respectively).
Unlike the fast food industry, most of the country's leading grocery retailers are not franchised and, given their billion-dollar gross sales, ineligible for SBA 7(a) loan guarantees. Led by Walmart, which grossed $422 billion worldwide in 2010, these companies include Target, Costco, Publix, Aldis, Trader Joe's, Whole Foods, and a handful of other supermarket chains. While a few national and regional grocery chains, such as IGA, Piggly Wiggly, Giant Eagle, Save-A-Lot, and ShopRite, are franchised, these stores account for a relatively small segment of the grocery sector. (Queries to two of the nation's large supermarket chains, Kroger and Safeway, regarding whether they are franchised to individual owners, have gone unanswered.)
There was the curious case of one franchised supermarket chain in the 1960s, however. In 1967, a Baltimore-based, black-owned company called the Jet Food Corporation announced plans to open a chain of franchised supermarkets in inner-city African-American communities; the company eventually opened supermarkets to considerable fanfare in Baltimore and Cleveland. According to Jet Food Corporation president Herman T. Smith, the company was founded with three objectives in mind: to ensure that profits remained in black communities, to create jobs, and to provide inner-city African-American consumers with access to high-quality, affordable groceries. It is uncertain whether the supermarket chain received federal assistance. One article in the November 30, 1967, issue of the African-American magazine Jet reported that "the Jet Food Corp. boasts that it was opened without the assistance of federal or foundations [sic] funds." But that same article also noted that SBA head Robert C. Moot helped cut the ribbon for the grand opening of the Baltimore Jet Food supermarket in 1967, which implies some involvement between the agency and Jet Food. Similarly, historian Robert E. Weems, Jr., refers to "a cooperative effort by the Small Business Administration, the Commerce Department's Affirmative Action program, and the Jet Food Corporation"; what this "cooperative effort" entailed is unclear. One fact that can be ascertained about the Jet Food Corporation is that between the years 1970 and 2010, there is no record of the company having any SBA 7(a) loan to franchised businesses.
Jet Food Corporation's absence in SBA 7(a) loan records is not unusual among grocery operators. Today, only a fraction of franchised grocers participates in SBA loan assistance programs. A look at relatively recent SBA 7(a) loan guarantees illustrates just how few franchised grocery stores receive SBA assistance relative to fast food chains. Franchisees of only four grocery chains — Big M Supermarkets, IGA, Piggly Wiggly, and Save-A-Lot — received SBA loan guarantees in 2009. Big M obtained one loan guarantee, while the other chains each collected two. The seven SBA loan guarantees totaled roughly $4.1 million. Meanwhile, as pointed out at the beginning of this chapter, the Subway sandwich chain alone received 152 SBA loan guarantees amounting to $27.7 million in 2009. Subway was the single largest beneficiary of SBA loan guarantees to franchise businesses in 2009, and the fast food industry was better represented than any other franchise sector among loan guarantee recipients. That year, 668 fast food outlets representing 132 chains obtained SBA loan guarantees totaling $170 million. (See appendix, table 1.)
Over the past four decades, such SBA support has contributed to the proliferation of fast food and the expansion of individual chains like McDonald's in years past, and Subway in more recent years. Even though the agency's loan guarantees have ostensibly been made to individual fast food franchisees, ultimately that support has also helped subsidize the mammoth fast food corporations under which those franchisees have been operating. New franchisees, after all, generate additional franchising and leasing fees paid to corporate headquarters. Exposing how SBA 7(a) loan programs favor fast food franchises over supermarket chains demonstrates how federal policies can help shape the development of food landscapes throughout the country. So how did the U.S. federal government get involved in fast food, particularly fast food in urban African-American communities, in the first place?
* * *
The federal government has had a history of involvement in African-American economic development that predates the arrival of fast food in America's inner cities in the late 1960s. That involvement, however, had been relatively superficial and ephemeral. One can make the case that the federal government first intervened in African Americans' economic and business interests when the U.S. Bureau of Refugees, Freedmen and Abandoned Lands, or Freedmen's Bureau, was created under the aegis of the War Department near the end of the Civil War in 1865. The agency, which had been established to transition African Americans from slavery to freedom, included the facilitation of freed people's labor contracts with former masters or landowners. But the Freedmen's Bureau was hardly a successful and unequivocal advocate of African Americans, as the agency often negotiated labor contracts that were unfavorable and constricting to former slaves. Moreover, the bureau was effectively defunct by the early 1870s, and an official federal bureaucratic arm focusing exclusively on promoting black businesses would not materialize until 1927. That year, the Coolidge administration created a Division of Negro Affairs within the U.S. Department of Commerce.
The Division of Negro Affairs was established to serve as a resource for African-American entrepreneurs and those seeking information on how to market to African-American consumers, though not necessarily in that order. The division's information guide on The Negro in Business (1936) noted that the publication would be handy to a variety of people, including "persons interested in exploring the Negro market for increased sales." The division also collected information about existing black businesses and disseminated that information to government agencies, as well as "students, publicists, educational institutions and libraries, Negro banks and insurance companies, distributors and manufacturers, newspapers and advertising agencies and chambers of commerce and trade associations."
But while the Division of Negro Affairs was intended to promote African-American businesses, it did not provide entrepreneurs with direct financial assistance. Although the division sponsored "business clinics" to help African-American entrepreneurs develop business plans, it offered little in the way of practical support. As Weems points out, during World War II "most African American businesses were able to help themselves and the war effort only by obtaining subcontracts from larger white firms that had secured prime government contracts." By the Eisenhower administration, the federal government's commitment to the Division of Negro Affairs had become so tenuous that it eventually abolished the office, citing budget imperatives and a need to streamline the federal bureaucracy by eliminating "unessential" programs and offices. The Eisenhower administration's designation of the Division of Negro Affairs as "unessential," Weems speculates, was likely informed by "racial considerations."
It was not until the mid-1960s that the federal government began to consider more substantive support for black businesses. As part of its civil rights and antipoverty platforms, the Lyndon Johnson administration saw a need for the federal government to promote African-American entrepreneurship and job creation. Given the context of the Cold War, federal responses to African Americans' economic and social circumstances were, of course, also informed by geopolitical concerns. Both Johnson and his successor Richard Nixon believed that African Americans might be ripe for Communist recruitment as long as economic prosperity and racial equality eluded them. During his 1960 presidential bid, Nixon declared that "every act of [racial] discrimination was like handing a gun to the Communist." He and Johnson also recognized that the continued marginalization of African Americans only bolstered Soviet propaganda on the failure and farce of American democracy.
As part of its efforts to identify barriers to African-American economic development, the Johnson administration collected data on lending to minorities by federal agencies. Its findings led to the creation of programs designed to improve African-American entrepreneurs' access to credit so that they could be better positioned to launch small businesses. In 1964, Vice President Hubert Humphrey, a Minnesotan who had first gained national attention sixteen years earlier for having delivered a rousing speech supporting civil rights during the 1948 Democratic National Convention, ordered the SBA to investigate its history of loans to minority businesses. In accordance with Humphrey's request, the SBA's review found that only seventeen loans had been made to African Americans in the agency's ten-year-plus history. The newly established Equal Opportunity Loan program (EOL) sought to rectify that.
Born out of Title IV of the Economic Opportunity Act of 1964, the EOL was part of Johnson's War on Poverty. It provided loans of up to $25,000 for low-income would-be small business owners and for proprietors of existing small businesses located in communities with high unemployment. By requiring less collateral than what was typically necessary for conventional loans with commercial banks, the loans were intended to help borrowers who might otherwise have had difficulty obtaining access to credit. The EOL program was not explicitly a minority assistance initiative, and indeed, it ultimately counted more white beneficiaries than African Americans. But Johnson, Humphrey, and congressional backers like Jacob Javits, the liberal Republican senator from New York, had intended for African Americans to be the primary beneficiaries of the program.
Other initiatives to promote African-American enterprise during this period included a SBA loan program established in 1964 called "6-by-6." Applicants approved for participation in the program received managerial training and individual loans of up to $6,000, which would have to be repaid in six years. Eligibility for 6-by-6 loans was not restricted to African Americans, but Weems notes that "black entrepreneurs were given special consideration" — an observation consistent with the establishment of the program in cities with considerable African-American populations (Washington, D.C.; Camden, New Jersey; Philadelphia; New York City; Houston; and San Francisco).
At the Commerce Department, officials identified corporate franchisors as potential partners in facilitating African-American enterprise. The undersecretary, Franklin Delano Roosevelt Jr. (the namesake son of the former president), headed the department's Task Force for Equal Opportunity in Business. Roosevelt's task force began compiling information on corporate franchisors that "pledged to enter into franchise agreement on a nondiscriminatory basis and without regard to race, color, or national origins." The task force's compilation led to the publication of the Franchise Company Data Book beginning in 1965. In 1965, this Commerce Department tally of companies amenable to minority franchisees numbered only 18. Two years later, that figure had risen to 267. Between those two years, rioting in U.S. cities brought urban African Americans' economic doldrums to the fore, and African-American economic development had come to assume even greater urgency among policymakers.