Shils Report – Impact of Mega-Retail Discount Chains on American Small Businesses
Chapter X: Conclusions and Recommendations – Feb/7/1997
“The writer has devoted almost three years to this study. He has sent out approximately 6,000 questionnaires to small retailers asking their views on strategies for survival in the face of the formidable gains of the mega-retail discount chains. The questionnaire returns have been analyzed statistically and data has presented a picture of fear, sadness and disillusionment about the chance for small retailers to survive the impact of the mass discounters.
Much of the resentment was focused on redevelopment agency plans in many states where tax funds have been made available to the mega-retailers to pay for capital outlay and debt service for these “Big Boxes” which have destroyed the viability of the “Main Street” merchant, while denying the small business merchant the use of development funds to end center city blight. This type of subsidy for the mega-retail discount chains has been described as “corporate welfare.” In many instances the retention of sales taxes for 10-15 years has deprived school and other local governments of needed revenues. It is clear that there is only so much demand in a given area, and where a supercenter opens, the result is often the closing of the smaller competitors. While the chain retains the sales taxes, the ultimate closure of the small retailers eliminates a traditional flow of revenue to the schools, counties and state governments.
How Could This Happen?
Suppose a Kmart or a Target was an anchor store opening in the mall 5-10 years before. The square footage of the store ranged from 30,000 to 60,000 feet. Suppose several years later a Supercenter, such as Wal-Mart, with perhaps 200,000 plus square feet were to be constructed one-half mile away, soon, the auto traffic in the older mall lessened. The Target or Kmart with only 45,000 sq. feet closed and surrendered. The anchor store then remained vacant and the decline of the mall accelerated. Throughout the United States, formerly prosperous malls or strip centers have given up. The areas have become desolate and look abandoned and the customers depart for the newest supercenters and their parking areas.
It is reasonable to assume that since Wal-Mart does present strong direct competition and a major challenge to many of the current mall tenants, that many of these tenants may not continue in business. The argument or assumption that Wal-Mart will increase traffic must be questioned. The reverse is more likely to be true. A consumer, who traditionally shops at the mall in some of the smaller businesses or chains may be now more inclined to visit Wal-Mart while in the mall. However, the traditional Wal-Mart shoppers will not leave the store to see what else is available. They are drawn to Wal-Mart in the first place because their needs are met from a selection and price standpoint. Therefore, those traditional mall stores offering the same or similar merchandise as Wal-Mart will lose traffic and eventually close. Their closing may have a ripple effect on other non-competing mall stores as the “traffic” flow weakens.
The new discount stores were in many cases funded by redevelopment funds that were denied to “Main Street” merchants struggling to survive the exodus from downtown. The economic vitality of the downtown oozed out as the highway interchanges were the place to go. As the downtown businesses closed, there was a desecration of civic and cultural life affecting families, education, crime and violence. The new mega-store required municipal and state investments in roads, water and sewer lines, police and fire protection and other governmental services. As one travels through the towns and cities of America, it is easy to note negative change with abandoned buildings, unsightly parks, declining majesty of public buildings and general malaise. Interviews with surviving owners of retail stores disclose a hopelessness. They say “the traffic is gone”; the “future is bleak” — “I may have to close.”
In the four states the author visited, he saw numerous instances of community groups fighting supercenter sprawl. Often they resented the financial packages (RDA) funds offered to developers and chains. They feared the increase in pollution and traffic congestion that would affect school crossings. They deplored a lack of downtown planning that permitted illogical zoning changes. They feared the new chain stores would not add to the size of the consumer market — but only cause commercial glut until the small retailer was eliminated. They were concerned about the negative impact upon the environment as well as the cultural, scenic, fiscal and economic impacts.
Development that exceeds a community’s ability to absorb it will ultimately result in abandonment of prior and public investments — and possibly the new supercenter will also close as the joblessness in the town increases. Lastly, the major discount chain may close because of losses in the town’s purchasing power. The chain then opens in the next county, leaving the town desolate and abandoned. This is more and more becoming true in the United States as new large chains open stores not realizing the demographics and other limits of the market.
Are Large Chains Doomed as Well as Small Stores in the Discount Race?
A 1994 study co-authored by David T. Kresge of Dun and Bradstreet Information Services and retail consultant Gary A. Wright of Denver stated: “Despite predictions that small retailers are doomed, specialty stores are thriving in some important niches, says a new study of retailing. In those retail sectors where personal service, location or expertise are valued such as the women’s fashion, accessories and gifts, smaller retailers are doing very well, said co-authors Kresge and Wright.”4
In the same Philadelphia Inquirer article the opposite position was taken by a Wall Street investment expert following the retail chain picture: “Senior retail analyst Walter Loeb of Loeb and Associates says the larger firms such as Wal-Mart are gaining increasing sway, with enormous control over pricing, the competitive environment and suppliers.” “When Wal-Mart is growing at 18-20 percent a year with the (economy) growing only about 3 percent, somebody is giving up business,” he added.” The study discussed in the article recommended personalized service as means by which small retailers could survive. On the other hand, the authors warned that powerful chains such as Home Depot were also offering personalized service.
The future of the small retailer is growing desperate, despite recommendations about personalized service, unique product differentiation, and a move from the destroyed “Main Street” of America to more appropriate locations. How can those small retailers, with less than a million in sales, finance a lease termination and the expense of a move to a more desirable location? The proof of the pudding that the major discounters will sooner or later eliminate most of the small retailers is the fact that even the medium size firms are in trouble.
Susan Dentzer in a May 1995 article in US News & World Report, entitled “Death of the Middleman?” points out the growing centralization of power between manufacturers, suppliers and discount retailers. As was stated many times in this study, small retailers have lost the wholesalers that sold to them. Many now buy from Sam’s Clubs and other club stores. Dintzer states:7 Yes, the middleman is an endangered species because of the EDI hookups between manufacturers and large discounters. But here again, the small retailers may become a thing of the past, lacking funds and information to survive.
Retailing in Transition
In a study several years ago, the following forecast was provided: “By the end of this decade, more than half of today’s retailers will be out of business.” They explained: “there is too much retail space for the market, too much “copy cat” sameness among retailers, and far too much leverage on the books. These conditions leave no room for marginal performers.” They further predicted: “that by the end of the century, some lines of trade will virtually be owned’ by only four or five major players.”10 It now appears that this prediction made in 1990, is being corroborated by the retailing change of power in the mid-nineties.
In retailing, analysts say, discount is no longer synonymous with success. “The days are gone when a discounter could be unique or alone in any market,” says Allan L. Pennington, a Chicago retail consultant with McMillan/Doolittle. “It’s become a difficult business to be in.” Analysts trace the trend to a redrawing of battle lines. Until recently, discounters of every stripe sought to steal customers from full-price independent, mass merchants such as J.C. Penney Co. and department stores such as R.H. Macy & Co. But the expansion into nearly every market of the so-called Big Three — Wal-Mart Stores, Inc., Kmart Corp. and Dayton Hudson Corp’s Target chain — has pitted discounter against discounter in a competition that favors size. Wal-Mart and Target, in, particular are thriving. “The smaller chains are getting caught in a battle between the Bigs.” says Linda Kristiansen, a New York retail analyst with Wertheim Schroder.16
The Role of the National Trust for Historic Preservation
The author has endeavored to assess the contributions of the mega-retail discount chains as well as the negative implications of their unprecedented growth.
It’s important at this time as the writer comes to the end of his study to once again review the role of the National Trust for Historic Preservation and the challenge it sets forth to governments, citizens, planners, developers and local and national economists and sociologists.
The Trust sees the mega-retail discount chains as inputting such negatives as:
1. Sapping the economic vitality of downtowns and “Main Street” by shifting the retail center of gravity out to highway interchanges on the edge of town.
2. Displacing existing businesses, especially independently owned small businesses that contribute significantly to local civic life, by building stores vastly out of scale with town’s ability to absorb them.
3. Setting the stage for higher property and state income taxes by creating developments that are costly to serve and require new roads, water and sewer lines, police protection and other public services.
4. Causing the waste or abandonment of previous public and private investments in existing buildings, streets, parks and other community assets.
5. Homogenizing America by building stores that have no relation to their surroundings.
The National Trust for Historic Preservation asks the mega-retail discount chains to answer the following challenge:
“Can the consumer benefits provided by the superstore be achieved only through the creation of more urban sprawl and all the sprawl brings: traffic congestion, automobile dependence, air pollution, dispirited or dead downtowns, despoiled country sides and weakened community ties? Or could some of the benefits be provided without so much damage to the environment and local communities? We think these are questions that should be asked.”19
The Trust also poses an equally important challenge to the many communities facing the invasion of the super “boxes:
“And communities have choices. They can encourage or discourage certain types of development. If a community doesn’t want superstore sprawl, it can take steps to prevent it. If a community wants a superstore, it faces a whole host of other questions relating to whether the store comes in on the communities terms. Where should the store be located? How big should it be? How much new retail space can the local economy absorb without suffering fiscal and economic impacts created by a commercial glut? Can the store be designed to help preserve the communities livability and attractiveness? How can the store minimize negative environmental, cultural, scenic, fiscal and economic effects? Above all, what is the long term impact of the decision?”19
Supercenters and Comparative Labor Costs
A major advantage for Wal-Mart’s Supercenter, generally, is its lower labor costs as compared to both the unionized and non-unionized supermarkets. Wal-Mart is presently non-union. Kroger, the dominant supermarket chain, is unionized; nevertheless, it, unlike many supermarkets, continues to be strongly managed, effective and highly profitable. Wal-Mart’s low labor costs, high productivity and control of its managerial and inventory processes have weakened not only Kmart, but many regional discount chains as well as supermarkets.
The American food industry is the finest in the world. Its distribution of goods, and quality of service are the shining example world wide. Its products, from produce to paper towels, are available night and day for everyone’s convenience. Primary locations make shopping easily accessible for all concerned customers. Different types of stores service all the needs of customers culturally, aesthetically, and most importantly, economically. And now, this industry is in jeopardy.
For example, in Southern California, 90% of the market share in the food industry is under a collective bargaining agreement. Labor contracts between the United Food and Commercial Workers and food employers such as Ralphs, Food-4-Less, Hughes, Vons, Albertsons and Luckys have been negotiated through collective bargaining over the past several decades. The end result of these deliberations, as one might expect, has been a livable wage plus important benefits. Here the community is truly the beneficiary with healthy, independent tax paying residents who contribute to the tax base rather than drain it. A full-time wage earner working at Ralphs, paid at top scale, will earn a more than livable salary with health costs and dental coverage paid additionally.
Wal-Mart and Other Mega-Retail Discount Chains Enter the Food Industry in a Most Powerful Way
In the near future Wal-Mart will probably enter the food business in California and several other states and what may be at stake will be the additional loss of many quality high paying jobs now found in supermarkets. Wal-Mart’s increasing assimilation into the food industry is apparently motivated by the drive to increase total retail sales. According to company statements, total retail sales should increase some 30% due to the synergies established at combination stores.
Furthermore, it has been suggested that Wal-Mart might use food as a loss leader in order to increase store traffic. There will be a positive transfer effect in the sale of general merchandise by having more visitors to the store, particularly if the sales of food are in the “loss leader” category. The impact that this will have on the food industry will parallel the effect it has had on the traditional retail industry. The problems created for employees within the traditional food industry could be nothing short of catastrophic. Supermarkets work on very thin margins, and their shrinking market share resulting from the combination of cheap labor and low prices will have murderous impact on the traditional food stores, large or small. The fallout could be compared to that of GM, Chrysler and Ford; not in overall job loss, but in weekly earnings, while company paid health benefits and retirement plans now prevalent in supermarkets might disappear. The shift in health benefits costs will go directly to the taxpayer while desperate worker who can’t get jobs and retirees without pension funds may be adversely impacted and may have to be taken care of by federal, local and state governments. With a Social Security system already in jeopardy, increased drains will only shorten its lifespan. The elderly will certainly become more dependent on government subsidies as the shrinking “middle” will be further demonstrated.
The Supercenter’s impact on the food industry will not be transparent to the causal observer. The entry of mega-retail discount chains like Wal-Mart, Kmart and Target into the food business is to increase their retail sales possibly by as much as an estimated 30% – in the case of Wal-Mart. However, there will be a further negative impact upon the local, state and federal economies as jobs go from full time to part-time and as wages drop and fringe benefits disappear.
Small retailers anxious to survive do not have the relative financial ability to compete with the mega-discount chains in advertising, promotion, public relations or radio and television. They rely on the small business techniques replete with flyers, leaflets, brochures, using the yellow pages of the telephone book and the local newspaper. This, despite the fact that many proponents for the mega-retail discount chain movement believe that small retailers can survive by employing specialization, improved marketing, utilization of information and computerized systems and other MBA driven techniques.
When one mixes the anger of not having adequate and free downtown parking with the tax abatements and other grants provided the large chains — yet generally denied to rehabilitate downtown businesses — the reason for the anger comes through loud and clear. The customer base of the retail respondents, described in Chapter III, depends greatly on highways and parking. Naturally the major chains locating outside of “Main Street” have the advantage of parking lots; ease of access; freedom from parking meters and downtown traffic congestion. Added to that, the fear of crime and violence in downtown evening shopping creates major disadvantages for the small “Main Street” retailer.
The State of Mind of the Small Retailer in America; His Fears and Concerns about Survival
One cannot argue with time honored principles taught at the nation’s illustrious business schools, i.e., Wharton, Harvard, Stanford – but these schools prescriptions are far away from the financial constraints of small businesses. Those principles being such as “satisfy your customers”; “study the success of others”; “gather and analyze management information regularly”; “sharpen your marketing skills”; “increase the customers perception of value”; “position your business uniquely”; “eliminate waste”; “find something to improve every day,” for example, the Kaizen, Japanese method of incremental improvement; “embrace change with a positive attitude”; and pull the trigger and start the battle.”
The writer has visited many strip centers, “Main Streets” and malls, in number of states and has interviewed a number of valiant survivors. In Part II of Chapter IV, the reader certainly has to recognize the discouragement and disillusionment of the respondent retailers about the end of their “American Dream.”
Taylor and Archer, while truly attempting to encourage small retailers to survive, nevertheless did recognize the present devastation going on in malls, strip centers and the former “Main Streets” of middle America. Furthermore, it is easy to see that observers are shocked by the decline and elimination of most small retail stores in the ethnic and minority enclaves of our very large cities in the East, Midwest and the West. The elimination of small retail stores in the neighborhoods results in job loss and contributes to the ultimate conversion of a formerly socially stable neighborhood into a ghetto, beset by violence, crimes, drugs and an underground economy.
An End to “Corporate Welfare” – Recommendations to Congress for Federal Legislation to Combat and Restrict “Big Box” Abuses
The following recommendations set forth in Chapter VIII, hopefully would restrict “Big Box” abuses by mega-retail discount chains, developers and redevelopment authorities operating under existing state redevelopment laws by taking away state and local tax giveaways and providing a vehicle for Congressional Hearings.
The idea is to attach strings to federal monies given states and localities: for example, such strings are often attached to highway monies. This would make sense here because these “Big Box” stores create additional burdens on federal highways as they are often built in areas accessible only by federal highway.
The legislation would say that highway money would be reduced to any state which allowed these stores to go up in any of the following circumstances:
(1) If the development received state or local tax incentives;
(2) If it was within x miles of a federal highway;
(3) If the developer/retailer did not pay the government for the full social costs of building such a store (not just for repairing highways more often, but also cleanup of air pollution) (a study to determine those costs should be required); or
(4) if a required “small business impact report” showed existing small businesses would be injured significantly.
Ideas for titles such as Small Business Survival Act; Retail Overdevelopment Act; Tax Financing Restraint Act (or any combination of these).
Further since the Internal Revenue Code is filled with provisions which aid, help or restrict the activities of certain industries, it is a natural place to consider curtailing the redevelopment agency, developers and “Big Box” abuses.
The idea might be to impose an excise or penalty tax on any state or local tax giveaways these “Big Boxes” wangle out of state and local government. The legislation possibly could apply only to retailers with an income over x billion dollars or a minimum of square foot. Our logic is this: The federal agencies and Congress are the only people who can stop the states and cities from cannibalizing each other as each gives away more and more in the form of tax breaks to win these mega-retail discount stores, only to rob their neighboring town or state of tax revenues (and jobs) from the existing retailers.
Only states or the federal government can step in to stop the current warfare; warfare which makes local governments more dependent on Washington D.C. No new jobs are created, and because the mega-retail chains pay their employees less and kill jobs at other retailers, they cause the federal government to receive less in income taxes. This should certainly interest Congress and the U.S. Treasury Department.
It is also obvious that there are incidental costs to the federal government for “Big Box” store development. They tend to expand near interstate highways, adding additional traffic which certainly costs the federal government more.
The mega-retail discount chains generally don’t provide health insurance to employees, adding these people to the governments’ burden. These chains are quite profitable, so an excise tax would not put them out of business.
Further, the environmentalists and preservationists should see the need to reduce the tax incentives for “Big Box” development. Finally, those in favor of reducing the federal deficit should be eager to embrace new sources of revenue.
Greg LeRoy, previously cited in Chapter VII, made it very clear that the state and federal governments have been wasting large sums on “corporate welfare” for enormously powerful and rich retail corporations. Whether it is a tax abatement or the right to retain sales tax revenues to pay for capital outlay or debt service; these are funds, which based upon earlier objectives, should have been applied in great part to rehabilitation of the “Main Streets” of the United States. Further, as Greg LeRoy pointed out, the grants help build structures which are often abandoned while the companies receiving the financial assistance move elsewhere.
The Need to Combat Urban Sprawl (The Work of the National Trust for Historic Preservation)
It is clear that the cities and towns of America, are gradually succumbing to urban sprawl. Moreover as described in many places in this study, the same type of sprawl is taking place in malls and strip centers away from the downtown areas. All of the abandonments of stores that were a delight to see ten years ago have taken place in great part due to the restless mobility of such competing giants as Kmart, Target, Wal-Mart and other mega-retail discount chains, as they feverishly move from area to area building larger and larger superboxes in a desire to kill off their competition. Soon the nation will appear to be scenes of desecrated malls looking like ravaged cemeteries, abandoned, looted, boarded up and loaded with graffiti.
The following long term strategy for combating sprawl may be found in the work of the National Trust for Historic Preservation released in 1994.33
“One of the best long term strategies for combating sprawl is to revitalize the downtown, the community’s traditional center of commercial, cultural, and social activity. Making downtown “the place to be” helps to attract businesses, shoppers, and appropriate development to Main Street’.” “Sometimes a downtown’s problems seem overwhelming to local citizens. By flooding the community with more commercial space than can reasonably be supported and by diluting the downtown’s economic vitality, sprawl can add to those problems. Yet downtown’s problems are not insurmountable. Rebuilding the historic commercial district’s economic strength simply requires persistence, collaboration, and a clear vision of what you hope to achieve.”
“By identifying the downtown’s major problems, then breaking large tasks down into smaller, achievable steps that gradually bring about positive, incremental change, a community can restore the downtown’s economic vitality and make downtown, an exciting place to shop, conduct business, dine, live, and visit.”
A Successful Downtown Revitalization Program Will Usually Have These Characteristics
1. A clear focus on a historic or traditional commercial district (either a downtown or a neighborhood commercial district).
2. Comprehensive and coordinated design, promotion, organization and economic development activities.
3. Strong support from both public and private sectors.
4. Broad-based community involvement and support.
5. A strong historic preservation ethic and a commitment to preserve the district’s historic commercial buildings.
6. Willingness to take risks and try new approaches.
7. Trained, professional staff, whose primary function is to coordinate the activities of committed volunteers.
8. An active and effective board of directors and committees.
9. An evolving track record of individual and overall successes in preservation-based commercial revitalization.
10. Ongoing contact, sharing information and affiliation with other local, state and national preservation-based commercial revitalization programs, through correspondence, memberships, volunteer service and conferences.34
The National Historic Preservation Trust Tells Communities, How Should You Get Started?
In their publication, the National Trust for Historic Preservation, pulls on successful strategies in combating Superstore sprawl and offers the following advice on methods communities can use:
“Publicize the issue. Talk with community leaders. Hold a community meeting. Put together a slide show illustrating the successes other communities have had in revitalizing their downtowns, and show this to civic groups, school classes, local businesses and others. Ask the local newspaper to write a series of articles about the downtown and its revitalizing efforts.”
“Recruit participants. The downtown program must involve groups and individuals throughout the community in order to be successful. Main Street revitalization requires the cooperation and commitment of a broad-based coalition of public and private sector groups: Business; civic groups; local government; financial institutions; the chamber of commerce; consumers; and many others. It also involves mobilizing a large number of volunteers to implement activities.”
“Form an organization. Sometimes an existing organization or institution can take on the downtown revitalization initiative. It is usually more effective, though, to create a new organization that focuses exclusively on the revitalization process and that is unhampered by an existing reputation or by the expectations and particular interest of existing members. The new organization should include broad-based community representation.”
“Identify barriers to downtown development. Ultimately, it should be as easy for a new business to locate downtown as it is to locate out on the strip. Examine your community’s planning and land-use policies, financial programs, building codes, and other tools to see if there are regulatory or financial incentives that encourage sprawl instead of downtown development. List other problems affecting the downtown as well.”
“Develop a realistic, incremental work plan. Articulate what the community wants the downtown to achieve. Develop a written mission statement and three or four major goals. Then identify some high-priority, but achievable activities the organization can do to meet these goals. In the early years try to include highly visible physical improvements and promotional events. Remember that you can’t tackle all the downtown’s problems in one year. Some of the problems may take years to overcome. Take one step at a time.”
“Measure your progress. Keep track of the amount of money invested in physical improvements and of the number of new jobs created and new businesses that open. Track the downtown’s vacancy rate. Count the number of people who take part in promotional activities. Ask downtown businesses to let you know if their sales are increasing. Publicize the progress the downtown revitalization is achieving.”
“Be persistent. Downtown revitalization doesn’t happen overnight. It’s a gradual, incremental process. As your organization succeeds in mobilizing resources to tackle small problems, it will strengthen its capacity to confront bigger challenges.”35