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Faulty Study Ignores Small Business Benefits

| Written by Stacy Mitchell | No Comments | Updated on Mar 5, 2014 The content that follows was originally published on the Institute for Local Self-Reliance website at https://ilsr.org/bogus-chain-store-study-ignores-small-business-benefits/
Photo: San Francisco Starbucks

Photo by Cale Bruckner.  This article originally appeared in the San Francisco Bay Guardian.

Last month, San Francisco’s Office of Economic Analysis waded into the debate over whether the city should beef up its policy restricting the spread of chain stores. In a new study, the OEA concludes that the city’s regulations are harming the local economy and that adding additional restrictions would only do more damage. But this sweeping conclusion, hailed by proponents of formula retail, rests on a deeply flawed analysis. The study is riddled with data problems so significant as to nullify its conclusions.

San Francisco is the only city of any significant size where “formula” businesses, defined as retail stores or restaurants that have 10 or more outlets, must obtain a special permit to locate in a neighborhood business district. The law’s impact, in one sense at least, is readily apparent: Independent businesses account for about two-thirds of the retail square footage and market share in San Francisco, compared to only about one-quarter nationally. Although chains have been gaining ground in San Francisco, the city far outstrips New York, Chicago, and other major cities in the sheer numbers of homegrown grocers, bookstores, hardware stores, and other unique businesses that line its streets.

San Francisco’s policy has gaps, however, which have prompted a slew of recent proposals to amend the law. Members of the Board of Supervisors have proposed a variety of changes, such as extending the policy to cover more commercial districts (it only applies in neighborhood business districts) and broadening the definition of what counts as a formula business.

The OEA presents its study as an injection of hard economic data into this policy debate. There are three pieces to its analysis. Let’s take each in turn.

First, the OEA reports that chains provide more jobs than independent retailers do. It presents U.S. Census data showing that retailers with fewer than 10 outlets employ 3.2 workers per $1 million in sales, while chains (10 or more outlets) employ 4.3 people.

One major problem with this statistic is that the OEA includes car dealerships. Retail studies generally exclude the auto sector, because car dealers differ in fundamental ways from other retailers and car sales account for such a large chunk of consumer spending that they can skew one’s results. The OEA’s analysis is a classic example of this. Because the vast majority of car dealerships are independently owned and employ relatively few people per $1 million in sales, by including them, the OEA drags down the employment figure for local retailers overall.

If you take out car dealers, which are not subject to San Francisco’s formula business policy anyway, and also remove “non-store” retailers, a category that includes enterprises like heating oil dealers and mail order houses, a different picture emerges. Retailers with fewer than 10 outlets employ 5.3 people per $1 million in sales, compared to only 4.5 for those with 10 or more locations.

The actual difference is even a bit more than this, because chains handle their own distribution, employing people to work in warehouses, while independents typically rely on other businesses for this. And, of course, a portion of the jobs chain stores create are not local jobs; they are housed back at corporate headquarters. The OEA fails to mention either of these fairly obvious caveats.

The superior ability of non-formula businesses to create jobs is notably evident across many of the categories that generate most of the city’s formula business applications, including clothing, grocery, and casual dining. The only exception is drugstores, a category in which chains appear to be supporting more jobs. But even this may not be a true exception, since most independent pharmacies focus almost exclusively on medicine, while chain drugstores are hybrid convenience stores, employing people to ring up sales of cigarettes and greeting cards.

Chart: Jobs Created per $1 Million in Sales, Indies vs. Chains

The second and third pieces of the OEA’s analysis are linked together. The study concedes that, compared to chains, independents circulate more of their revenue in the local area, creating additional economic activity and jobs. But, it contends, prices at chains are 17 percent lower; enough, according to the OEA’s math, to outweigh the economic benefits of this recirculation.

On the lighter side of this seesaw calculation sits the OEA’s estimate of how much money local retailers circulate in the city’s economy. This estimate is notably smaller than what other studies have found. When I asked Dan Houston, a principal with Civic Economics, why his firm’s studies show that independent businesses have a bigger impact, he pointed to two areas where his firm’s figures differ from the OEA’s. One is labor.

“We’re finding that local wages and operating income [at independent businesses] are much bigger, closer to 25 percent [of expenses] rather than the 15 percent the OEA finds,” said Houston.

The other is spending on inventory. Civic Economics has found that independent retailers and restaurants source some of their goods locally, whereas the OEA assumes that all of this spending leaves the area.

Sitting on the heavier side of the OEA’s seesaw is its conclusion that chains charge lower prices. As definitive as its 17 percent figure sounds and as pivotal as it is to the study’s math, it is a highly questionable number. It’s based on a limited sampling of prices in which large swaths of the retail sector, including apparel stores and restaurants, were excluded.

“I just hate to see a statistic like that being used when it is so limited in what was being measured,” said Matt Cunningham, another principal at Civic Economics.

It only takes a slight adjustment of these wobbly figures to produce the opposite conclusion: that formula businesses do more economic harm than good. All one has to do to tip the OEA’s seesaw in the other direction is to assume a slightly larger recirculation of revenue on the part of independents and a slightly lower price advantage on the part of chains. (Just dropping the price difference to 14 percent will do it.)

Perhaps the worst aspect of the OEA’s study is that it seems to float in space, untethered to what’s actually happening on the ground. Many of the chains that are clamoring to open in the city’s neighborhoods are high-end retailers whose products carry a price premium. Their arrival typically drives up commercial rents, making it harder for businesses that sell basic low-margin goods to survive.

Nor does the OEA attempt to situate its analysis in the context of several peer-reviewed studies that don’t just model the potential impacts of corporate consolidation, but actually track them. In a study published in Economic Development Quarterly, for example, economists Stephan Goetz and David Fleming report that counties that have a larger share of their economy in the hands of locally owned businesses have experienced higher median household income growth than places dominated by large corporations.

The OEA’s study will not be the city’s only analytical look at its formula business policy. The Planning Department has commissioned its own study, preliminary findings of which were released this week. Among other useful statistics, the draft notes that most formula business applications are approved and fully one-quarter of the retail space in the city’s neighborhoods is now occupied by chains, which suggests the permitting process is not as unfriendly to formula businesses as the law’s opponents contend.

Still, this figure is much smaller than in San Francisco’s more centralized commercial districts, which are not covered by the policy. Here, the chains’ share of the available square footage stands at 53 percent and growing.

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About Stacy Mitchell

Stacy Mitchell is co-director of the Institute for Local Self-Reliance, and directs its Community-Scaled Economy Initiative, which produces research and analysis, and partners with a range of allies to design and implement policies that curb economic consolidation and strengthen community-rooted enterprise.  She is the author of Big-Box Swindle and also produces a popular monthly newsletter, the Hometown Advantage Bulletin.  Connect with her on twitter and catch her TEDx Talk: Why We Can’t Shop Our Way to a Better Economy. More

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