Thinking Outside the Big Box

Urban centers need to come up with creative solutions to keep their local economies safe from the crushing force of big-box retailers.

In March 2013, after pouring millions of dollars into a two-year campaign of radio ads, direct mail, strategic donations to local charities, and lobbying, Wal-Mart finally gave up and walked away from its bid to open stores in New York City. Despite its full-court press, Wal-Mart had been unable to overcome opposition from dozens of community, small business, and labor groups. Opposition was especially fierce in East New York, which might seem surprising, given the area’s high unemployment, but many residents and community leaders concluded Wal-Mart would do more economic harm than good. “Wal-Mart stores devastate local businesses and destroy more jobs than they create,” insists Inez Barron, who fought the company’s plans and went on later in the year to win a city council seat representing District 42 in Brooklyn.

New York is not the only place having this discussion. Virtually every large U.S. city is wrestling with the prospect of Big Retail. Having run out of places to expand in small towns and suburbs, Wal-Mart, Target, and other big-box chains have set their sights on urban areas. Their aim is not merely to add another option to the retail mix, but to dominate urban markets with hundreds of stores. Just four years after getting the go-ahead in Chicago, Wal-Mart has 10 stores open and a dozen more in the pipeline. Nationally, the company captures one of every four dollars Americans spend on groceries. Taking over urban markets would bring Wal-Mart’s share of the food system close to 50 percent—a staggering and completely unprecedented degree of power.

Amazon, meanwhile, is also pushing into cities. The Internet giant, which accounts for one in three online orders and is growing so fast that it’s on track to topple Wal-Mart as the world’s largest retailer by decade’s end, is looking to build dozens of warehouses in or near big cities with the aim of offering same-day delivery to a large segment of the U.S. population.

While some cities have welcomed these retailers and even offered them tax breaks, others are saying no. In Massachusetts, Boston and neighboring Somerville have turned Wal-Mart away. Community opposition is also hindering the company’s expansion into Los Angeles and Seattle. Following the opening of two Target stores, city officials in San Francisco, which already restricts chain stores and chain restaurants in most neighborhood business districts, are weighing citywide limits on big-box retailers.
Big retailers can seem appealing at first to cities tired of losing jobs to the suburbs. But a growing body of research indicates that cities that resist letting big retailers take over their local economies will be better off. In a study published in Economic Development Quarterly, economist Stephan Goetz found that income growth has been significantly higher in cities where big chains have less of a presence and small, locally owned businesses retain a larger than average share of the market. In a separate study, Goetz found that counties that gain Wal-Mart stores end up with higher poverty rates than those that do not (after controlling for other factors), and poverty worsens with each additional big-box store that opens.

One reason for these negative outcomes is that big retailers cause more job losses than gains. Although supporters still cite job creation as the main justification for OKing these stores, the data tell a different story. Two years after Wal-Mart opened a supercenter in a low-income neighborhood on the West Side of Chicago, one-quarter of the businesses within a four-mile radius closed, eliminating as many jobs as the new store created, a study in Economic Development Quarterly reported. Another study, in the Journal of Urban Economics, analyzed data from nearly 3,000 counties and concluded that, for every 100 jobs created by a new Wal-Mart, an average of 140 people are laid off at competing small businesses, unionized grocery stores, and other outlets. The impact of Amazon is even worse, because the company is highly labor efficient, extracting an enormous amount of work from its warehouse “pickers.” For every 100 warehouse jobs created by Amazon’s expansion, about 360 jobs at brick-and-mortar stores are lost.

Not only are there fewer jobs, but the wages are lower and the working conditions worse at the new ones than at the jobs they replace. Average wages at Target and Wal-Mart are under $9 an hour and both chains have used aggressive and sometimes illegal tactics to thwart worker organizing. Amazon’s wages lag average pay in the warehouse sector by nearly 20 percent and its workplace abuses, including injury-inducing workloads, have been well documented by investigative journalists.

Another reason that cities that resist big retailers are more prosperous has to do with how money circulates (or doesn’t circulate) in the local economy. Locally owned stores not only keep profits in the area, but they rely on other local businesses for many goods and services, such as accounting, printing, web development, advertising, and so on. When big chains move in, they replace these local webs of exchange—and all the middle-income jobs they support—with an extractive business model that transfers wealth out of the area. For every $1,000 in sales, locally owned retailers create an average of $460 in additional economic activity in the community, according to studies conducted in New Orleans, Grand Rapids, Mich., and half a dozen other cities. Big-box retailers generate only $140 in local economic activity for every $1,000 they take in. Many neighborhoods already struggle to keep wealth from leaking out; the arrival of Wal-Mart or Target only increases the outflow.

Indeed, the fundamental problems plaguing the U.S. economy can be traced in large part to big retailers. As these companies have grown, they have undercut two key pillars of the middle class, driving out tens of thousands of family-supporting small businesses and millions of union manufacturing jobs. All they have provided in return are low-wage jobs in their stores. No wonder so many people are stuck at poverty wages with few avenues for moving into the middle class.

The Local Alternative

Unlike the small towns that welcomed Wal-Mart 30 years ago, cities have the advantage of hindsight. Urban areas retain the country’s largest concentrations of both small businesses and union jobs. Cities should aggressively protect these assets.

Although it’s often assumed that market forces alone are driving consolidation in the retail sector, the rise
of big retailers owes much to government policy. Billions of dollars in tax breaks have underwritten the construction of big-box stores and Amazon warehouses. State and federal tax loopholes have enabled national chains, but not local retailers, to escape paying all or part of their income taxes. Most states exempt Amazon and other large Internet retailers from collecting sales taxes. Banking deregulation has triggered the demise of thousands of community banks, dramatically shrinking a primary source of small business loans, while propping up the equity markets that keep large companies flush. And the list goes on.

Different policies would produce different outcomes. Rather than embracing big retail, cities should instead seize another economic opportunity: regenerating community-scaled enterprises. Growing public interest in local food, local products, and local businesses is already spurring a modest revival. Since 2006, the number of farmers’ markets has doubled and over 1,400 small neighborhood grocery stores have sprouted up. After years of decline, local pet supply stores, fabric shops, and other small retailers are once again growing in numbers. Since 2009, the number of independent bookstores in the United States has risen from 1,651 to 1,971. More newly graduating pharmacists are opening their own drugstores now than seeking work at a chain. Long-dormant factory buildings, meanwhile, are becoming home to a new generation of small-scale producers making apparel, housewares, and other items.

Local ownership yields more than economic benefits. Sociologists have found that neighborhoods where a large share of the economy is in the hands of locally owned businesses have higher levels of social capital and a higher degree of “collective efficacy”—meaning that residents are better able to act together to solve problems—compared to places dominated by outside companies.

How might cities lead the way in fashioning new policies that foster local business creation rather than corporate consolidation? The Institute for Local Self-Reliance (ISLR) has identified and developed a wide array of policy approaches. Here are six of the most important:

  1. Support Local First Initiatives
    In more than 100 cities, including Buffalo, N.Y.; Minneapolis; New Orleans; and Oakland, Calif., local businesses have joined forces to launch “Buy Local First” campaigns. These public education efforts are making a difference. ILSR’s annual Independent Business Survey has consistently found that local businesses in cities with active Buy Local First initiatives are outperforming those in places that lack such a campaign. While these campaigns need to be run by local business owners themselves, cities can provide crucial financial and logistical support to get them off the ground.
  1. Place Limits on Big Retailers
    Left on their own, Wal-Mart, Target, and other chains will multiply aggressively in cities, leaving little room for local businesses and healthy competition. Cities have a broad array of policy tools available for keeping these companies in check. They can require large retailers to pass an economic impact review to gain approval. They can use zoning tools, such as store size limits and formula business restrictions, to limit where these stores can locate, or even ban them altogether. Cities can also impose living wage and health insurance requirements on big retailers to mitigate some of their worst impacts.
  1. End Corporate Subsidies and Tax Loopholes
    City officials should lead a national campaign for a level playing field, calling on state and federal lawmakers to bar the use of incentive programs to subsidize big retailers. These giveaways not only hurt local businesses, but they pit municipalities against one another in battles that almost always leave the entire region worse off. Cities should also call for an end to tax loopholes, including the passage of the Marketplace Fairness Act, which would require large online retailers to collect state and local sales taxes.
  1. Expand Financing for Local Businesses
    Because local banks are the main source of credit for small businesses, cities should support these institutions by shifting public funds, when feasible, from big banks to local banks. Cities might also consider partnering with a local CDFI to establish a Local Business Financing Initiative, modeled on Pennsylvania’s Fresh Food Financing Initiative, which has financed nearly 100 successful locally owned grocery stores in low-income communities.
  1. Create Viable and Affordable Space for Start-Ups
    Drawing on models such as Austin’s IBIZ Districts (“Independent Business Investment Zones”) or the MoDiv retail incubator in Grand Rapids, cities should develop anchor destination spaces that can provide great habitat for new and growing entrepreneurs.
  1. Favor Local Businesses in
    Contracting and Procurement
    A growing number of city agencies, school districts, and anchor institutions like hospitals and universities are adopting procurement policies that favor local, independent businesses. Some cities, for example, have adopted preferences that give local bidders a 5 percent preference over non-local companies in competitive bidding.

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