by Jeff Milchen

Recessions inevitably lead to increased business closures, so it’s tempting to shrug off the collapse of many major retail chains (and independents) in the past year and assume new businesses will occupy their vacant space when the economy regains momentum.

That would be a mistake. As with the collapse of housing prices, the root problem behind many of the retail closures goes far beyond the current downturn, which simply exposed a long-building bubble.

Over the past two decades, U.S. retail square footage has increased at triple the rate of population growth and consumer spending combined. Retail capacity more than doubled between 1990 and 2005 alone, driven overwhelmingly by chain-store proliferation.

Yet, even as Internet sales increased their market share, the retail building frenzy continued — about 140 million square feet of new development was completed last year. As a result, we’re awash in shopping space, with nearly double the area per capita of any other wealthy country (and almost 10 times that of many European nations).

Factor in the rapid decline in consumer spending on credit and the result was seemingly solid chains like Gap, Circuit City, Linens N Things and Foot Locker shuttering hundreds of stores last year. And the problem extends beyond retail; Starbucks, Blockbuster and Bennigan’s did the same.

The International Council on Shopping Centers reports that chain store closures have decreased only slightly since 2008 and predicted nearly 150,000 other, mainly small, independent retail establishments will close this year.

Nationwide, already-strapped municipal budgets are stung by decreasing sales tax revenue and commercial property taxes. Since the average sales tax in Colorado, at 6.4 percent, is well above the national average, its municipalities are hit especially hard.

The deflation of the real estate bubble already has created damage and is ongoing, but states and communities should act promptly to reverse some of the conditions that encouraged the bubble and build a more sustainable economy. While a diverse local economy can absorb the loss of several small businesses, communities dependent on a few large corporations fare much worse.

Economic misconceptions, as well as speculation, played a huge role in creating our retail bubble. For example, big-box chains inevitably promise to create hundreds of new jobs and bring millions of dollars in new sales tax revenue when lobbying to build a new store. The claims are not only false, but grossly misleading.

Per capita spending on typical big-box goods like hardware, basic clothing or housewares, is a relatively fixed pie. We don’t significantly increase our consumption of socks or toasters just because a new venue is selling them. “New” sales tax proceeds and jobs generally displace jobs and revenue at existing area businesses.

The host community may see a short-term spike in revenue, but once newly generated public costs like new traffic signals, sewer, water and fire protection are calculated, cities typically experience a net loss. Despite the new receipts accompanying retail sprawl, taxes often rise fastest in communities rapidly expanding their developed area.

A community loses big, however, when a chain displaces sales at an existing independent business. Why? A new chain store typically is a clone of many other units, eliminating the need for local planning and using a minimum of local goods and services. Profits are exported to corporate headquarters, and almost all local jobs are low-skill positions.

In contrast, independent business owners typically spend much of their profits locally, give back more to the community, and create jobs for local accountants, webmasters, ad agencies and many other higher-skilled positions. In addition to offering greater career potential, these jobs are a training ground for future generations of entrepreneurs.

Studies in multiple states have quantified the “local premium” cities derive from local ownership, showing about 45 percent of each dollar spent at a local independent business returns to the local economy, compared to less than 15 percent of each dollar spent at a chain. So if McGuckin Hardware and Home Depot had, theoretically, equal sales numbers for the year, McGuckin would deliver more than three times the overall economic benefit to the local economy (and create more than 50 percent more jobs).

The current recession has a plus side: it’s sharply increased awareness of hazards that accompany dependence on unsustainable levels of consumption and giant corporations. As a result, interest in “Buy Independent/Local” campaigns, green business initiatives
and other strategies to build wealth from within sustainable communities is exploding.

This should not be mistaken for mere backlash against corporate subsidies and exploitation. Citizens are becoming more sophisticated in their understanding of economics and recognizing that directing growth and protecting community character are not obstacles to economic vitality, but effective means to sustain it.

Jeff Milchen is a co-founder of the American Independent Business Alliance (AMIBA.net), a non-profit organization helping more than 60 community groups sustain locally owned independent business and vital local economies.

Share this!