I've often argued in this blog that private goods that need to be subsidized are bad investments. For years, politicians in Mankato argued that the city needed a new downtown hotel. But no- private investor was willing to take the necessary risk to build a downtown one until the local government handed out generous subsidies a few years ago. Meanwhile, many hoteliers built new hotels on the eastern edges of town, effectively telling us where the new hotels were wanted.
A similar thing can be said about North Mankato, a town of about 12,000 across the river from Mankato. The Mankato - North Mankato area is bisected by the Minnesota River. The part of North Mankato that lies in the river bottoms is called "lower North" and the part of Mankato that lies in the hills above the river bottoms is called, appropriately enough, "upper North." In the late 1990's, North Mankato politicians felt that their town needed a full-service grocery store of its own in upp North. From their perspective, this need became more pressing after a Jack and Jill store closed in lower North. This despite the fact that within 5-10" drive from anywhere in North Mankato, there were at least 5 full-service grocery stores. But they were all across the river in Mankato.
The politicians got their wish when Ray's Market, boosted by city subsidies, opened up first in the old Jack and Jill location and later in a new development in upper North. But over time Ray's couldn't make a go of it and is now closing. Since this link only gives an excerpt of the complete article, I have manually typed some of the important excerpts below that make my point.
...The (Haugum - PM) family said they were unable to sustain the business in the current economy considering the very thin margins and high volume of a grocery store.
The store in lower North closed a few years ago. A Dollar Store later opened in that location, but it also failed and closed its doors.
The economy certainly didn't help amtters, but it also didn't help that just across the river from North Mankato there are 5 major grocery stores (two Cubs foods, two HyVees, and a Super WalMart) with a huge selection of products at reasonable prices. Still, the North Mankato politicians saw fit to subsidize the Ray's locations.
Around the same time, the smaller Jack and Jill grocery store in lower North Mankato had gone out of business. The Haugum-Boerboom family got a low-interest loan from the city to buy and remodel that building and opened it as Ray's Market.
After Enggren went out of business, the Haugum-Boerboom family purchased the upper North Mankato building from the city for $1,000,000.
According to the article, North Mankato lost about $800,000 from that transaction while Enggren lost about $400,000. The Ray's Market in lower north closed several years ago, but the city of North Mankato is still owed about $62,000 on the building. These two public losses amount to $862,000, or almost $72.00 for every city resident.
Enggren gives a quote which really tells you why North Mankato really didn't "need" its own grocery store in the first place.
Which means that Cub and HyVee were already providing good value to the residents of North Mankato. Ad to that the competition from Wal Mart, the two local Walgreens (one of which opened just down the road from Ray's in upper North last winter), and the numerous convenience stores, all of which compete directly with Ray's in one way or another. Now we know why North Mankato didn't have its own full-service grocery store to begin with: the existing competition was already serving it efficiently.
So the lesson is this: if politicians say "we need a" what amounts to a private good "in our town," but no private investor is willing to take the risk to get things going, then the town doesn't really need that good and it should not be subsidized.
But we know how tempting it is to spend other people's money on other people.
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