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.

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