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Comeback Markets

Most companies have taken a pass on an inner-city service market worth tens of billions of dollars. Some smart urban-based businesses are eagerly filling the void.
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The Inner City 100

Most companies have taken a pass on the huge inner-city service market. Some smart CEOs are eagerly filling the void

James, a second-grader at the George W. Tilton Elementary School, on Chicago's West Side, is having his first encounter with the Pony Express. It's not exactly a smooth ride.

"The last Pony Express rider leaves town today," reads Michael Bolsinga, whose years of teaching have given him a remarkable facility for deciphering students' workbooks upside down. "Now, who left on that day?" he asks. James, a small African American boy dressed in baggy gray cotton shorts and a sleeveless T-shirt, hunches over the story, which is reprinted, supposedly, from an 1861 edition of the Daily News. His tutor repeats: "'The last Pony Express rider leaves town today.' Who left on that day?" Finally, on the third try, James gets it. "The pony ride," he says, eyes downcast. Mike smiles and hands James three red tickets, redeemable at the end of the session for such booty as Harry Potter stickers and smiley-face pens.

James is one of nine children attending a tutorial run by SuccessLab Learning Centers (#16). Seventy-two of Tilton's 650 students spend time in this cheerful classroom, where desks are amply stocked with computers, tape recorders, and color-coded workbooks, and posters trumpet encouraging, up-with-academia messages ("Caution: Brains at Work"). A flight of stairs and a seeming world away, steel bars encase first-floor windows, and a sign reading "Warning: Narcotics Enforcement Area" fronts the nearby West End Apartments. "Did you notice how I gently put my elbow up to lock the car doors?" asks SuccessLab president and CEO Marjorie Schaffner as she drives past boarded-up buildings on nearby North Kostner Avenue. "I've been solicited to buy drugs there."

SuccessLab is one of several Inner City 100 companies for which depressed urban areas provide not only a home base but also a market. Where others see fields rendered barren by poverty, these companies' CEOs see a potentially fertile landscape parched for lack of services. In a 1998 study conducted by the Initiative for a Competitive Inner City (ICIC) and the Boston Consulting Group (BCG), Harvard Business School professor Michael Porter argued that retailers who shun inner cities are turning their backs on $85 billion in annual spending power. And although economic resurgence wears its most public face along such bustling commercial boulevards as West 125th Street in Harlem, it can also been seen in schools, clinics, and apartments, where entrepreneurs fill sometimes yawning needs.

"You've got a number of factors -- which I call a 'surprising convergence of positives' -- that are creating a different climate for personal services in inner cities," says Paul S. Grogan, a vice-president at Harvard University and coauthor of Comeback Cities: A Blueprint for Urban Neighborhood Revival. The first and most emphatic of those positives is new housing, which is bringing people back to once neglected areas. SuccessLab's home city of Chicago, for example, acquired more than 10,000 units of affordable housing from 1980 to 1998 -- a net gain of $750 million in new investments in the city's poorest neighborhoods.

Grogan's other "positives" are relatively open immigration policies, decreased crime, and bank loans for businesses made more available by the federal Community Reinvestment Act. "Even if there's a recession, I don't see the cities returning to their former state," says Grogan.


Political winds are wafting more money toward segments of the inner-city economy. Opportunities are rife for companies that know the market.


No one, so far, has slapped a dollar figure on the market for inner-city services, as the ICIC-BCG study did for retail. But market estimates for the individual segments represented by this year's Inner City 100 winners should pique entrepreneurial interest.

Health care. In inner cities, where government-sponsored programs pay for much of the health care, the greatest opportunity may be for managed-care companies. Last year $30 billion -- or a bit more than 15% of total Medicaid dollars -- went to managed care, says John Klemm, an actuary with the Health Care Financing Administration.

Real estate. Inner-city rentals are a nearly $9-billion market that's growing at the rate of $28 million a year, according to Mark Calabria, senior economist with the National Association of Realtors.

Education. Supplemental instruction in the inner city constitutes a roughly $6-billion market, based on the percentage of federal (Title I) and state funds earmarked for low-income, at-risk students in large urban districts.

Child care. Thanks in part to limitations on welfare that were imposed in 1996, child care in inner cities is a $1-billion market, estimates David Henry, CEO of Allegheny Child Care Academy (#48).

And political winds are wafting even more money toward those four segments, as bipartisan support grows for accountability and performance in education and as states invest in services that support the transition from welfare to work. Yet even as those markets swell, many established companies are taking a pass. In health care, for example, "the large insurers have left the Medicaid managed-care business," says Paul Ginsburg, president of the Center for Studying Health System Change. "That provides an opportunity for businesses that are focused on that market and understand the inner-city population that's covered by Medicaid."

One way to focus on the inner-city market is, of course, to locate there. The advantages are obvious. An inner-city location makes it easier to hire a workforce that mirrors a company's own inner-city customers. Rodger Zepka, president of $15-million money-remittance company Envios, R.D./Pronto Envios (#41), started his business in the Washington Heights section of New York City and still staffs it almost exclusively from the surrounding Hispanic neighborhoods. Meanwhile, JosÉ Reategui, CEO of Rego Realty (#9), says that working out of Hartford has made him an expert on neighborhood change. Reategui's ground-zero vantage point allows him to pounce on properties as soon as they become available.

The home-field advantage has proved pivotal in at least one direct match-up. Both SuccessLab and its chief competitor -- $317-million Sylvan Learning Systems, which is based in the upscale inner-harbor section of Baltimore -- entered the Chicago market in 1995, Sylvan with 15 centers, SuccessLab with one. Today Sylvan has 6 centers; SuccessLab has 18. "Very important to our success is that we're based in Chicago and the schools have a connection with the principals of the company," says Schaffner.

Still, an inner-city location alone isn't enough to capture the market; neighborhood intelligence is also critical. "To get inside these communities you may have to get beyond the normal data that's available," says Harvard's Grogan. "You've got to talk with people who know the communities, like the city government and the community-development corporations. What kinds of investments are being made?"

Of course, some inner-city markets have drawbacks. Companies with large government contracts, for example, often find the paperwork and regulatory requirements vexing. Yet public investments, like Title I and Medicaid, are what will catalyze sustainable markets. "People who get work experience in companies that benefit from government programs get access to training, and from there they can get better jobs," says Grogan. "Markets that start small will develop and create environments in which more wealth and income can be produced. Then you're not looking at interminable dependency. You're looking at more of a market model. I think that's already happening."

Thea Singer is an associate editor at Inc.


The Inner City 100

Comeback Markets
Most companies have taken a pass on the huge inner-city service market. Some smart CEOs are eagerly filling the void.
Curricular Extras
SuccessLab shores up the academic moorings of kids in poor school districts
Doctors Without Orders
Molina Healthcare gives physicians freedom to match the treatment with the culture.
These Old Houses
Rego Realty brings dilapidated buildings back to life -- and livelihood.
Mother's Giant Helper
Allegheny Child Care lifts a burden from welfare-to-work moms.

City Lights
There are a million stories in the inner cities. These are some of them.

Who Wants to be a Milliner?
The story of this year's #1 Inner City 100 company.

The Inner City 100 Almanac
Fast facts about the Inner City 100 CEOs and their businesses.

The List
The fastest-growing private inner-city companies.


Please e-mail your comments to editors@inc.com.

Last updated: May 1, 2001




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