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October 26, 2006

Big-Box Swindle


I 'm all worked up over the new book by Stacy Mitchell, senior researcher for the Institute for Local Self-Reliance, and you're about to get worked up over it, too. So pull up a chair and let's go over some of the more relevant points raised in Big-Box Swindle: The True Cost of Mega-Retailers and the Fight for America's Independent Businesses.

Not that this has anything to do with us. Oh, heavens, no. But these little debates over big boxes do flare up from time to time, and Mitchell covers just about every kind of behemoth retailer, from chain bookstores and record stores, to large electronics retailers, to the ever-present Wal-Mart. We could almost pick any kind of retailer to use as an example as we weave our way through her book. But what should it be? How about oh, I don't know hardware stores? Just for kicks.

Big Boxes, Bad Business . Mitchell begins making the case against big box retailers by citing research on their negative effects on other businesses. Here are just a few examples:

First of all, they're big. Just 10 mega-retailers capture 30 percent of American spending. Home Depot and Lowe's account for nearly half of all hardware store spending.

Because of their size, they put the squeeze on vendors. New "pay by scan" technology means that vendors do not get paid until an item is actually scanned and sold to a customer. Home Depot has led the way in the garden center industry by refusing to pay growers until a plant sells, thus shifting the risk away from Home Depot and onto the growers. Mitchell suggests that big boxes may wipe all inventory costs from their balance sheet this way.

They send American jobs overseas. In response to pressure from Home Depot and Lowe's to lower prices, Black & Decker laid off 4,000 American workers and moved factories overseas. If Black & Decker didn't do it, the chains would have simply found another supplier that would.

They really put the squeeze on small vendors. Mitchell reports that Home Depot's treatment of a small supplier, Santa Fe Custom Shutters and Doors, was ruled in court to be "malicious and fraudulent." The company took on debt and increased its capacity to meet the terms of a Home Depot contract, which the mega-retailer then canceled. The judge noted that Home Depot routinely abused small vendors, and awarded $12 million in damages.

They don't just knock out their direct competitors. Home Depot and Lowe's, for instance, perform over 26,000 installations of windows, roofing, flooring and other products every day. While contractors are often the first to cheer the arrival of a big-box hardware store, they are surprised to learn that these retailers are also after their clients.

Newspapers, banks and other business services are particularly hard-hit by the arrival of the box. They are less likely to advertise in local newspapers or do their banking locally, and as local businesses fold, those banks and newspapers lose customers they can't replace. (So if you were a real estate developer looking to bring a big box to town, and you also owned a newspaper and a bank, what impact would that have on your rivals? Well, never mind. This is all hypothetical.)

Low Prices? Not So Much . Mitchell is all over the Myth of the Low Price. "Corporate retailers commonly offer very low prices at newly opened stores, sometimes sustaining losses at those outlets for months or even years to gain market share," she writes. Consider the following:

A hardware store owner in Albany tracked prices at a rival Home Depot. While individual prices varied, over a couple of years Home Depot's prices gradually rose to match those at other stores.

Mega-retailers often choose arbitrary prices, like $11.67 for a denim shirt, to give the illusion that they have bargained the price down as low as possible. In fact, the shirt cited in this example was marked up by 250 percent.

Chains are well versed in how to influence shoppers' perception of value. Mitchell cites a study that shows that combining the color orange with bright lighting creates the perception of low prices.

Most big boxes offer very low prices on items called "signposts" that most consumers know the price of. (This represents about 5 percent of items in a store.) The rest of the items the "blinds" are priced higher because customers don't know the going price anyway. Home Depot's founder once described this strategy as "islands of losses amid seas of profits." How poetic.

Low price guarantees that offer to beat the competitor's price also offer the illusion of low prices, even though consumers rarely take advantage of the offer and the store usually doesn't drop the price for other customers.

Even customers who do take the time to comparison shop may not be able to. Large chains may require vendors to make an identical item with cheaper materials, and the customer would never know. It may be cheaper, but it also might not last.

Oh, and let's not forget that as customers are lured away from local businesses, they may find that niche products are impossible to find. Using our hypothetical hardware example, a chain store might not carry as many building materials that work for historic homes, products that are particularly weatherproof in a damp climate, or locally-made items.

Good for the economy? You do the math . Small communities, says Mitchell, are often tempted by the promise of increased tax revenue. However, she cites research that shows that those benefits may not materialize or are offset by losses. In one town, big box stores produced an annual net tax loss of $468 per 1000 square feet, while Main Street shops produced a net surplus of $326 per 1000 square feet. Why?

Many towns don't budget for the increased expense of a big box retailer. She cites the example of Royal Palm Beach, Florida, where the presence of Home Depot, Lowe's, and other chains led to 1500 additional police calls every year and the need for a new substation. Most chains have a policy to call the police every time a crime occurs and to prosecute to the full extent of the law, and those large parking lots and shopping carts heaped with goodies can attract crime.

The increased costs of maintaining roads and sewers are also a surprise to small communities. "Local downtown and neighborhood businesses ... are efficient users of public infrastructure and services," she writes. "Sprawling megastores are not."

But what about that tax revenue? Studies show that sales tax revenues may spike initially, but generally remain the same "because consumers only have so much to spend; sales gains in one location are mirrored by losses elsewhere." Also, property tax revenues can decline as downtown and neighborhood businesses are shut down.

And all those swell new jobs? Mitchell points out that a new chain store gives the illusion of job creation because all of those new sales associates in orange aprons are so visible. Job losses are not as obvious as stores close, or businesses downsize, gradually over a few years. In fact, many communities do experience a net job loss.

She also cites extensive data that documents the value of small, locally-owned businesses to a community. From charitable donations, to community involvement, to a willingness to do business with local vendors, to a reluctance to lay off a long-time employee or cheat a customer, local businesses contribute far more to the town than big boxes.

Well, isn't this all just supply and demand? Actually, no. "Retail development does not represent real growth," Mitchell writes. "It does not generate new economic activity." Opening a new store, she asserts, does not increase the amount of milk people drink, nor does it increase their disposable income.

In fact, corporate retailers do not open new stores because an area has unmet demand. They chose locations where they believe they can pull customers away from local businesses. They're also willing to cannibalize themselves, opening multiple stores in a region and ultimately draining tax revenue away from the first store. In general, megastores overbuild, providing far more retail than an area can support.

But can't a big box fit into the community if it's designed right? Mitchell is critical of what developers call "lifestyle centers" or "town centers" with words like "village" or "center" in the name, although "they're not really the center of anything." She describes these mixed developments, with their wide, tree-lined sidewalks, faux architectural elements and big boxes as anchors, as employing "carefully crafted hucksterism designed to lull patrons into a warm nostalgia that induces spending," although they may be located near "genuine Main Streets that are barely functioning."

And what happens when one of those lifestyle centers is built on a waterfront? "Big-box stores, strip shopping centers, and malls are by far the worst type of development from a water-quality standpoint," she writes, citing another expert who explains that vast parking lots produce more runoff and deliver it to a watershed faster than anything else.

So what's next? Big-Box Swindle ends with some inspiring stories of citizen groups that have mobilized against the box. I'll leave you with these examples not, of course, that this has anything to do with us. But, you know, they're nice stories.

Frisco, Colorado stopped a Home Depot from coming to town in part by reminding local businesses that the chain sold more than hardware. It sells pet food; it gives construction loans. Soon banks, pet shops, nurseries and other small businesses joined the fight.

Main Street programs get involved in recruiting new small business owners, much in the way that a manager of a mall might recruit new tenants and help them succeed.

Hardware stores advertise the fact that they participate in independent purchasing co-ops like Ace, Tru Value and Do It Best, reminding customers that they, too, can negotiate low prices through volume buying.

Local business band together to negotiate tax incentives just like the big boxes do. The Austin Independent Business Alliance regularly reminds the city council that its members collectively employ 6,000 people, making them one of the top five employers in the city.

Santa Fe created a "Santa Fe Shares" card that works at regular credit card scanners and offers reward points for shopping at local businesses.

"Shop Local" days include discounts and cool prizes like iPods loaded with local music.

I've barely scratched the surface of this fine, inspiring, rabble-rousing book. Pick up a copy at where else? your local independent bookseller, and keep the discussion going.

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