The Not So Subtle Shift in Elk Grove From Jobs to Brick and Mortar Retail Development; Plugging Retail Leakage?

February 27, 2018 |

For those who even casually follow the governance of Elk Grove will have noticed a not so subtle change in the city's economic development focus, particularly in the last year.

Over the last several years, the economic development mantra of the Elk Grove City Council and the city's economic development director, Darrel Doan, has been about correcting the well-documented jobs to home imbalance. In this vein, the city has tried to leverage every angle, no matter how implausible.

When the city's population growth medical care facilities, like grocery stores, gas stations, and nail salons followed. Nonetheless, one council member seemed to take this as a sign that The Grove was on the verge of being a "medical mecca." 

Combine this with the city's for-profit medical and pharmacy schools, and a new development idea, be it an ever so short-lived one, was to attract medical and biotech firms to locate here. To date, unless one has slipped under the radar, that effort has seemingly been abandoned.

Another area the city was focused on was, with the help of Sacramento's supposed economic development guru Barry Broome, was the recruitment of a Silicon Valley high-tech companies. At first, it appeared the city scored two years ago next month.

In his 2016 annual State of the City address, former Elk Grove Mayor Gary Davis, with much hoopla, announced that yes, a Silicon Valley firm was moving to Elk Grove based on the city's job center oriented planning area, the so-call Southeast Policy Area, or SEPA. That firm, Fremont, California-based NRC Manufacturing would be bringing hundreds of high tech jobs, which were to be part of the 25,000 jobs promised for the area.

In reality, NRC Manufacturing is a low-skill, low-pay subcontractor, but hey, jobs are jobs right? Of course, NRC has not yet located one position in the SEPA, much less Elk Grove and by all accounts that supposed employer has disappeared.

Since that debacle, Doan and the city have apparently dropped the high-tech and bio-med focus and now have unabashedly reoriented their economic development efforts on retail. This effort is exclusive of the city's failed attempts to get the Howard Hughes Corporation to complete their unfinished "Ghost Mall," also known as the Outlet Collection at Elk Grove, which come this July will have sat unfinished for ten years. 

Of course, the city will point to the Wilton Rancheria's proposed $500 million resort casino to be located next to the Ghost Mall as a success and stimulus for job development. Those plans, however, are currently tied up in litigation in the U.S. District Court in Washington DC, and regardless of the outcome, the lawsuit will probably continue for a few more years.

If the casino does get built, it will reportedly employ about 2,000 people. The question then becomes will the tribe, and Boyd Gaming offer wages that will allow workers to buy nearby homes which are now running about $500,000.

Probably not, but the whole casino discussion is a separate matter.

Back to the retail, it was about one year that Doan and city manager Laura Gill approved a $50,000 the consulting firm Retail Strategies. The Birmingham, Alabama-based consultant apparently had some success in recruiting retailers like Dollar Tree to Fort Payne, Alabama, Planet Fitness to Tullahoma, Tennessee, and a Golden Corral to Cullman, Alabama. 

To date, there have been no reported retailers locating to Elk Grove based on the contract with Retail Strategies. This lack of quantifiable results has not deterred Doan from a supposed vigorous pursuit of retailers. 

As Doan outlined in a recent appearance before the City Council, Elk Grove is under-performing other nearby municipalities with regards to the generation of the all-important sales tax revenue. To solve this so-called "retail leakage" of sales and the taxes they generate, Doan and his expanded economic development staff are now focusing on recruitment of more upscale retailers.

What is curious about Doan and the city's new-found emphasis on retail is they seem are pushing against what is an irreversible change in consumer spending and buying habits. Even though Doan correctly stated 90-percent of retail purchases are still done in brick and mortar locations, he is masking the trends that are sweeping retailers out in a riptide to drown at sea.

Although there is an abundance of evidence Elk Grove is swimming against the tide, a recent story highlights some of these new realities. The story, written by Wolf Richter and posted on BusinessInsider.com points out some the challenges for brick and mortar retailers.

Richter notes "In Q4, the e-commerce share of retail was 9.1%, though up from 8.2% a year ago. But e-commerce sales in the fourth quarter soared nearly 17% from a year ago - the largest jump since Q1 2012 - to a new record of $119 billion. But this surge in e-commerce is leaving the biggest retail categories largely untouched for now, though this is likely to change. They include auto dealers, gasoline stations, and grocery stores. These three categories alone, at $620 billion in Q4, accounted for 51% of retail sales. These are among the sectors that are still "online resistant." 

Below is one of several graphs from Richter's story that demonstrates this vast change in consumer buying habits. 

So just why is Elk Grove pursuing this seemingly mid-20th-century solution to municipal finances and economic development? There is any number of possibilities.

Perhaps the city wants to recruit these high-end retailers to make Elk Grove a more attractive relocation area for Bay Area families who supposedly tastes are more sophisticated than our Winco and Walmart offerings. Add to this with Council Member Pat Hume and Darren Suen's focus on building a train station for the Altamont Commuter Express could play into this scenario.

With slightly better shopping choices, attracting people to commute from Elk Grove's ACE station to Silicon Valley jobs will make the community more attractive for the transplants. Developers and building trade unions, who fund Hume, Suen and the entire city council's campaign war chests, would undoubtedly love nothing more than to have subdivisions filled with McMansions where they can push higher priced housing for Bay Area equity refugees.    

Beyond the above equity refugee scenario, perhaps something more fundamental is happening. As Doan acknowledged, these sales tax revenues are the mother's milk of city finances. If you combine more retailers along with a possible boost in sales taxes, according to Doan the city has a formula for at least $9 million more in annual revenues.

So why the need for higher revenues? 

It could be a combination of the city council overpromising on services while revenue growth projections cannot keep up with demands. Former Mayor Gary Davis said so much on January 13, 2016.

Notwithstanding the increased revenues the city will receive from the statewide gasoline sales tax hike signed into law, the city still has unaddressed road maintenance needs. That maintenance has been deferred for at least five years now totaling a minimum $40 million, and that cost continues to grow by at least by $2 million annually.

When the City Council discusses the possibility of hiking sales taxes at their Wednesday, February 28 meeting, perhaps a clearer picture of why this not so subtle interest in pursuing retailers will reveal itself. Regardless, if the city is counting on generating higher sales tax revenues from brick and mortar retailers to make up for future revenue shortfalls, they are playing a fools game.