Local Stores Create Triple the Economic Activity of Chains

Date: 1 Feb 2003 | posted in: Retail | 0 Facebooktwitterredditmail

When you spend $100 at the chain Borders Books & Music, your purchase creates only $13 worth of local economic activity. That same $100 spent at locally owned book or record store generates $45, or more than three times as much local economic activity.

That’s the conclusion of a new study conducted by Civic Economics and published by Livable City in Austin, Texas. The study, “Economic Impact Analysis: A Case Study,” examines the local economic impact of two of Austin’s venerable independent businesses—Waterloo Records, widely considered to be the best music store in the nation, and Book People, a beloved, 32-year-old bookstore. The study compares their contributions to the local economy with the economic return the community would receive from a typical Borders store.

The study was prompted by plans to develop a retail complex that will include a 25,000-square-foot Borders outlet and a Whole Foods store at the same intersection where Waterloo and Book People are located. The development is slated to receive $2.1 million in public subsidies.

“This analysis demonstrates a clear failure of public policy to steer desirable development at the site in question,” the study concludes. “As presently configured, new development at the corner will yield a net loss to the local economy. Moreover, previous decisions have placed the city in the position of subsidizing such an outcome.”

The two local stores opened their books to Civic Economics so the firm could track how much of their incoming revenue is re-spent in the local area. According to the study, every $100 in sales at Waterloo and Book People returns $30 directly to the local economy. Using a standard multiplier (an estimate of how many times dollars re-circulate locally) and accounting for induced effects (greater household spending due to greater economic activity), the study concludes that the direct return of $30 results in a total local economic impact of $45.

For the Borders comparison, Civic Economics relied on numerous sources—including interviews with former employees, the company’s public records, and studies of similar stores conducted by Bank of America—to develop an estimate of what happens to dollars spent at a typical Borders. The study concluded that every $100 spent at Borders results in a direct return of $9 and a total local economic impact of $13.

The gap in direct return ($9 vs. $30) can be attributed to three factors. First, Waterloo and Book People have larger payrolls. “When people wonder why there’s such a big difference, I tell them to go up to the fourth floor of Book People and look at all the professionals writing ad copy, buying inventory, and doing accounting,” says Dan Houston of Civic Economics. Borders houses all of these functions at its headquarters in Ann Arbor, Michigan.

Another factor is that, compared to chains, locally owned businesses purchase more goods and services locally. Waterloo, for example, generates $600,000 annually in consignment sales of CDs by local bands which are recorded and produced locally. “The plastic case on the CD is about the only component that comes from out-of-state,” notes Houston. Although Austin’s Borders stores do have sections featuring local bands, they only sell CDs from major labels, which return little of the sale price back to the Austin economy.

The last factor is that a much larger share of the profit at a locally owned store stays in the local economy compared to a chain.

The study concludes that a typical Borders store generates $820,000 in local economic activity, compared to $2.8 million generated by Book People, which is roughly the same physical size as Borders at 22,000 square feet. Waterloo, which is smaller but has higher sales per square foot, pumps $4.1 million into the Austin economy.

Finally, the study looks at the likely competitive impact of the proposed Borders store. The study estimates that half of Borders’ sales will be siphoned from Waterloo and Book People.

The study then considers three scenarios—one in which Borders experiences better than industry average sales growth, one in which growth is average, and one in which the store’s revenue declines over a period of five years. For each scenario, the study finds that local economic activity will decrease—despite the fact that a new Borders will boost the area’s overall retail sales. In the average scenario, the study predicts the city will experience a net loss of $2.4 million in economic activity over five years.

“Redeveloping this corner is important, but it must be done without hurting the economy and nearby local businesses,” declared Bill Spelman, chair of Livable City. The group hopes the study will persuade Austin to withdraw public subsidies for the project.

  • Civic Economics provides economic analysis and strategic planning, and is looking for opportunities to conduct similar studies in other communities.
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Stacy Mitchell

Stacy Mitchell is co-director of the Institute for Local Self-Reliance and directs its Independent Business Initiative, which produces research and designs policy to counter concentrated corporate power and strengthen local economies.