We’ve all heard the ubiquitous urban legend: “Large retailers ruin local economies.” Typically, big-box critics assert that mega-retailers cause lower wages, lower prices force mom-and-pops out of business, and profits aren’t reinvested locally.
Despite stories about Walmart employees on public assistance or holding bake sales to make ends meet, most big retail workers are better off. A recent study backed by the National Bureau of Economic Research and published by the School of Industrial and Labor Relations at Cornell University found that locally owned businesses actually pay significantly less than larger national chains. The findings show that in retail, employees with a high school diploma earned 15 percent more working for large companies than for mom-and-pops. And those with some college or a college degree earned 25 percent more with “big box” retailers than with local stores.
With roughly half of the adult population having at least some college education, that means an average pay increase of roughly 20 percent for workers displaced from mom-and-pops to big box stores. If a typical Walmart employs about 200 people that’s a bump to the local economy of over $40,000 per month, or about $500,000 per year. And that’s money in people’s paychecks that they mostly spend in the community.
If the economies of scale, lower inventory costs, and better management enjoyed by the Walmarts and Costcos of the world kill small businesses, why don’t all local businesses fail when a big box opens in their community? The answer lies in efficiency and specialization. Businesses that adopt technology often have operating efficiencies over national retailers. For example, the cost to a local merchant of executing a sale is the cost of a cell phone and a free card reader. For a national chain, the costs include a check stand with a $50,000 cash register, an optical scanner, and millions of dollars of software backing it up.
Specialization is another competitive advantage that local merchants have over big-box retailers. While a typical national retailer may only offer a few competing items in a product category, a local business is able to specialize and stock a significantly wider range of products. Compare a local clothing store with Target. Yes, if I want an inexpensive pair of jeans from one of two brands (a national brand and the house brand), I’ll go to Target. But if I want to consider a wider style selection, I’ll head to a local clothing store with a variety of different brands and styles.
In a recent working paper published by Harvard’s Kennedy School, economists found that big box retailers actually help local businesses. This positive “spillover” was found to increase the business of small, local retailers located within a quarter of mile of the national operator by roughly 10 percent on average.
Yes, some stores are put out of business by competition, but that is true whether the competitor is a national chain or another local merchant. Those who are efficient and specialize reap the rewards of increased sales and profits by having a big-box retailer nearby.
Another argument that’s often employed by antagonists of big-box retailers is that their profits don’t remain local. The criticism assumes that locally owned stores spend their profits locally, while the profits of national chain stores go back to a corporate headquarters in some other city. But it’s a bit more complicated than that.
Walmart, for example, donated $1.4 billion to local charities and causes in 2016. Based on their number of stores, this amounts to an average of about $340,000 of local giving per store. Applying this same level of charity as a percentage of gross sales means an average mom-and-pop would need to give about $4,000 a year to local causes.
There may be plenty of reasons to criticize national retailers, but hurting local economies is not one of them. Retail employees make higher wages, efficient local businesses benefit from increased sales, customers get better prices, and communities get billions in locally focused philanthropy. So shop local – especially if it’s at a big-box store.
Kevin Cochrane teaches business and economics at Colorado Mesa University, and is also a Permanent Visiting Professor of economics at the University of International Relations in Beijing.
