Local Ownership Pays Off for Communities

By Jeff Milchen
Published May 2003

Editor’s note: While this article remains relevant and popular many years after publication, we also recommend visiting the American Independent Business Alliance’s web page on the local multiplier effect for a thorough analysis and more recent references.

We’ve written frequently about the importance of independent and local ownership of businesses to enhance both community economic prosperity and democracy, but the studies available for economic evidence have been less specific and older than we’d like. So we were excited to see new studies in this realm that provide up-to-date information.

The Multiplier Effect Quantified

First is an economic impact study done by Civic Economics in Austin, Texas (population 657,000). It revealed that each dollar spent at two locally owned book and music stores, Book People and Waterloo Records, creates more than three times the local economic activity of dollars spent at a typical Borders Books & Music Corp. store.

The study was initiated to provide hard data with which to evaluate a potential 25,000 square foot Borders store as part of a new retail development on the same block as those independent businesses. The two local retailers opened their books for the study. Civic Economics utilized numerous sources to determine the Borders impact, including interviews with former employees, the company’s public records, and studies of similar stores conducted by Bank of America.

The factors accounting for the difference in community payback are familiar to our readers, but we ‘re glad to bolster the empirical evidence behind common sense:

  1. The local businesses have larger payrolls, employing their own ad writers, buyers, accountants, and other positions that chains centralize in a single headquarters.
  2. Locally owned businesses make more of their own purchases locally.
  3. More of the profits at locally owned businesses recirculate in the community.

The study also included the competitive impact of the proposed Borders store and projected that half of Borders’ sales would be siphoned from Waterloo and Book People. The development that includes Borders is slated to use $2.1 million in public subsidies–another hole blown in the myth of the “free market.”

Bigger Isn’t Better for Economic Return

The second study demonstrates that growth does not necessarily mean increased net revenue–in fact, many types of development actually drain local economies. Tischler & Associates studied various types of residential and commercial developments in Barnstable, Mass (population 48,000) and compared the tax revenue they generated with the cost of providing additional required services. The findings? Big box retail, shopping centers, and fast-food restaurants cost taxpayers more than they produce.

The biggest drain is fast-food restaurants with a net annual deficit of $5,168 per 1,000 square feet, with big box retail developments at a loss of $468 per 1,000 square feet, and shopping centers at $314 per 1,000 square feet.

Smaller specialty retail (not big box “category killers”) was found to generate positive returns, returning $326 per 1,000 square feet to the community. Other positive producers include business parks, offices, and hotels.

So why the higher costs from big box and fast food development? The biggest expenses generated came from higher road maintenance costs and greater demand for public safety services–especially police calls for commercial crime.

Hidden Costs

One commmunity that openly embraced chain superstores in the past decade was was Pineville, NC. But Pineville now has put the brakes on such development growth. It recently tightened its zoning rules and turned down two retail developments, including a Wal-Mart Inc. “supercenter.”

The decision came after city officials had to raise taxes to subsidize all the added public costs generated by big box stores and strip development. They projected that Wal-Mart would create the need to hire two new police officers at a cost of $120,000 per year, far exceeding the municipal revenue the store would generate. Commercial properties account for 96 percent of all police calls in Pineville. Even though a growing number of communities now charge impact fees for the initial costs generated by big box developments, the public pays for their ongoing drain on resources.

Stacy Mitchell, senior researcher at the New Rules Project explains why locally owned businesses typically create less demand for police services. “Criminals passing through seem to prefer the anonymity of a Wal-Mart store along the highway to the intimacy of Bob’s Hardware on Main Street. Local retailers don’t usually call the police for every bad check or shoplifting incident, while chain stores often have a policy of prosecuting every offense.”

Many more communities are coming to grips with the public law enforcement costs created by big box stores. In East Lampeter, Pennsylvania, District Justice Ronald Savage has added two days to the monthly court calendar just to deal with crimes at Wal-Mart, which account for about one-quarter of the town’s non-traffic citations, criminal misdemeanors, and felony complaints.

Updates– September 25, 2003:
  • Once the people of Austin learned the true costs of the proposed public subsidy for the Borders development, the subsidy was blocked. Left to try to compete in a free market against a successful local business, Borders decided it could not — the store was not built.
  • A survey published in September, 2003 produced results nearly identical to those in Austin regarding the multiplier effect for dollars spent at locally owned businesses. The analysis by the Institute for Local Self-Reliance and Friends of Midcoast Maine tracked the revenue and expenditures of eight locally owned businesses in the Maine towns of Rockland, Camden, and Belfast and compared their economic impact to that of two corporate chains; Target and Wal-Mart. The local businesses represented a range of goods and services, and collectively employed 62 people and had sales of $5.7 million in 2002.

The survey found that the businesses spent 44.6 percent of their revenue within the surrounding two counties. Another 8.7 percent was spent elsewhere in the state of Maine. The four largest components of this local spending were: wages and benefits paid to local employees; goods and services purchased from other local businesses; profits that accrued to local owners; and taxes paid to local and state government.

All eight of the surveyed businesses banked with locally owned banks. They purchased some inventory from local manufacturers, advertised in local newspapers, and hired local accountants, printers, internet service providers, and repair people.

The other 46.7 percent of their revenue left the state. This out-of-state spending included inventory purchased from out-of-state companies, mortgage interest, rent, credit card fees, supplies, insurance, and equipment leasing.

A similar expenditure profile was created for a big box retailer. Because national retailers do not reveal detailed financial information, the study estimated expenditures (payroll, supplies, services, utilities, taxes, etc.) based on national data, statements by company officials, and employment and property tax information on one of its Maine outlets.

The survey found that the chain returns 14.1 percent of its revenue to the local economy, mostly in the form of payroll. The analysis concludes that expanding local businesses would be a better economic development strategy for the region than bringing in large chains.

The survey also found that the local businesses contributed 0.4 percent of their gross revenue to charity. That’s four times as much, relative to overall sales, as Wal-Mart gave to charity in 2002, and twice as much as Target gave.

Editors’ note: The Maine study involves a sample too small to use for drawing broad conclusions, but in combination with related studies, it provides strong support.

The Austin study cited is available at: liveablecity.org. See the American Independent Business Alliance (an organization initiated by two ReclaimDemocracy.org staff to help communities support their independent businesses and resist corporate displacement of local businesses) or the New Rules Project for much more related information.

Related articles: Bigger Banks Mean Bigger Fees, Independent Drugstores Beat the Chains