The local interest
BLACK FRIDAY, the day after Thanksgiving, is typically America’s most intense shopping day of the year, due to a pronounced feedback loop. Consumers, many of whom have the day off, have traditionally treated it as the day to begin holiday shopping, and retailers, taking note, stoke consumer demand by offering deep discounts and sales to lure them in. According to the National Retail Federation, this year was no exception: sales over the weekend hit $52.4bn, up 16% from last year’s total. The resulting consumerist frenzy brings out some deplorable impulses. At this year’s sales, a number of South Carolina shoppers ignored a man who collapsed and died on the floor of a Target store; a woman at a Los Angeles Wal-Mart, apparently battling for a discounted XBox, attacked about 20 people with pepper spray. Still, insofar as consumer spending supports the broader economy, people are keen to encourage shoppers—particularly if they shop responsibly. One effort in that direction was “Small Business Saturday”, a campaign to get people to go shopping at locally owned businesses. Among this year’s participants was Barack Obama, who took his daughters to Kramerbooks, an independent bookstore in Washington, DC.
Despite the fact that this is a marketing campaign sponsored by American Express, I’m sympathetic: I like bookstores in general and Kramerbooks in particular, and I try to support independent operators too. While Mr Obama was bookshopping, I was at the Renegade Craft Fair, where I bought a small print by a local artist. But the premise that small businesses are somehow more virtuous than big ones is worth interrogating. It’s not as if national chains don’t employ people or create consumer surplus. They are often able to offer better prices, because they can leverage economies of scale to cut their own unit costs. Why should people care about supporting local retailers over the big players?
It may be instructive to look at Austin, a city where people do support local retailers, regardless of whether they “should”. As the paper explained in 2009, America’s “buy local” movement got a boost here about ten years ago when the owners of BookPeople and Waterloo Records, an independent bookstore and record store respectively, hired a local consultancy, Civic Economics, to analyse the impact of shopping at locally owned businesses rather than national chains. The city had been planning to extend $2m in incentives to Borders to build a store at the southeast corner of a downtown intersection, and BookPeople and Waterloo—being at the northeast and northwest corners of that intersection respectively—were, naturally, alarmed. The analysis found that for every $100 spent at an Austin-owned store, $45 stayed in the local economy, compared to $13 spent at a chain like Borders. The deal eventually fell through and the site went to the Whole Foods flagship, Whole Foods being a national chain that was founded and is headquartered in Austin. Borders went under, for unrelated reasons. Waterloo and BookPeople are still chipping along.
And Austin’s localist movement remains unusually robust. There is a widely shared view that local businesses are a good thing—for the businesses themselves, obviously, but also for consumers. The evidence for the latter point is that so many local businesses exist. The city makes some efforts to support small businesses, and residents occasionally coalesce in support of them. Small businesses in Texas also benefit from relatively low tax burdens; businesses with revenue under $150,000, for example, are exempted from the state’s franchise tax.
But none of that gets to the question of why residents qua consumers support locally owned businesses over national retailers. The answer must be that they derive some benefits from shopping at these stores. As for what those benefits are, a few can be discerned. An obvious one is the one that consumers themselves typically cite, that locally owned businesses are an antidote to the homogeneity of giant retailers. A less abstract iteration of this argument is that because retailers are different, and because chains are typically accessible online if they don’t have a physical storefront in a city, having a lot of local businesses in your city increases the variety of goods and services available. Indeed, local businesses may stock products that are tailored for the local markets but that would be squeezed out of the inventory at a bigger chain. So, for example, an Austinite can go to Walgreens to buy a generic antihistamine, or to the People’s RX to buy a bottle of Texas Tree Mix. It would also be plausible to argue that locally owned businesses often improve on the customer service of national chains. This isn’t necessarily the case, but it stands to reason that if the owner of a business is on the premises they would be available to offer informed advice about product line.
These benefits to consumers coexist with the benefits to the local or regional economy—that money spent at a locally owned shop has a greater multiplier effect and so on. What’s interesting is that it’s the latter set of benefits that attract more attention from policymakers. At the local level, there’s a trend in economic development to “economic gardening,” which emphasises creating jobs by nurturing new businesses rather than by poaching them from elsewhere. And in promoting Small Business Saturday, Mr Obama and New York City Mayor Michael Bloomberg took to Twitter, where they talked about how shopping at small businesses is a way to support the community and fuel the economy.
There’s nothing illogical about that pitch. It does, however, reflect a protectionist impulse that might be undesirable if extended to the economy writ large. Every community features some small businesses that cater to a specific local market. In Austin, for example, there are outfits that make custom cowboy boots; in Minneapolis, you’re more likely to buy a custom canoe. But the risk in supporting local businesses simply because they’re local is the impairment of other businesses that are otherwise unusually effective. A mercantilist economy misses out on the gains from specialisation and trade. The aforementioned Whole Foods, for example, has helped drive American consumer interest in organic produce, sustainable seafood, and so on—precisely because it’s a big chain with national distribution. Austin’s local businesses benefit from local patronage, but the city also enjoys the fruits of Whole Foods’ national success—which it would lose if cities elsewhere rejected chain businesses in favour of local stores. This isn’t to say that consumers should categorically support big businesses over small ones, either; the point is just that everything has trade-offs.
And if American policymakers, on balance, are inclined to support the small businesses, a more effective pitch would include some descriptor of how they benefit the consumer directly. A Brooklyn grocer, for example, pitched customers Saturday by promising to greet them with a free cookie rather than a shot of Mace. Self-interest can be the most effective lever.
Source: The Economist