The Impact of Big Box Retail Chains on Small Businesses

In his paper, Impact of the Wal-Mart Phenomenon on Rural Communities, author Ken Stone states, "Studies in Iowa have shown that small towns lose up to 47 percent of their retail trade after 10 years of Wal-Mart towns nearby". Historically there have been other threats to small town merchants such as mail order catalogs, the automobile and shopping malls. The concept of the discount department stores began showing up in the 1960’s when stores such as Wal-Mart, Target and K-Mart began to open their doors.

Wal-Mart’s influence over the discount retail market is the most prolific. They developed from a small five-and-ten store into a growing company with $82 billion in sales in 1995 and over $105 billion in 1997. As of November 30^, 1999, the company had 1,803 Wal-Mart stores, 682 Super-centers and 457 Sam’s Clubs in the United States alone. Wal-Mart employs more than 815,000 people in the United States. Wal-Mart achieved much of its original success by offering products at a much cheaper price than its smaller competitors. From 1960 to 1985 annual sales from these retail chains went from $2 billion in sales to $68 billion.

In another article by Ken Stone, Competing with the Discount Mass Merchandisers (1995), data indicates that there are also advantages to the big discount retailers moving into town. In almost all cases the total sales for one of these towns increased after the introduction of the large retailer, was to a level higher than the state average. According to Stone, merchants selling goods different from Wal-Mart reap the most benefits, while merchants selling the same goods are hurt.

There are many economic factors that can be linked to the advent of large discount stores in small town America. One of these factors is described in Edward B. Shils article, Measuring the Economic and Sociological Impact of the Mega-Retail Discount Chains on Small Enterprise in Urban, Suburban and Rural Communities". In this article he states: "’Partnering’ developed between the mega-retail discount chains and the manufacturers allowing these chains to buy ‘direct’. In many cases they eliminated the regional wholesaler who had traditionally served the small downtown retailer as well. The new position of the powerful mega-retail chains, discounters or otherwise, was not to augment but to compete." Obviously, this puts the smaller retailers at a disadvantage, especially as these wholesalers lose more and more business.

(click on chart at right to view larger image)

In most cases the initial growth in sales for communities with new "mega-retail discount stores" was greatest in the first few years, averaging about fifty percent growth. After about five years the sales begin to decline, but after ten years they were twenty-five percent higher than before the large discount retailer moved to town. Total sales did increase in certain areas such as general merchandise, eating and drinking places, and home furnishings, but declined in almost all other areas. (See graph above)

The surrounding towns that did not have such a chain were immediately affected. In fact, their sales dropped by two percent the first year and continued to drop at a rate of thirty-four percent after ten years. This is because stores such as Wal-Mart strategically position themselves in areas that will draw consumers from surrounding rural communities, using lower prices, which is a great incentive for shoppers who are from poor, rural areas. According to Ken Stone, the greatest impact in Iowa has been in towns that do not have a Wal-Mart and have a population of less than 5,000. (See graph below).

(click on chart at right to view larger image)

When stores such as Wal-Mart or Target propose building in these areas the initial reaction of local authorities is positive citing an increased tax base and more options for the community. However, over the years the result is often a lower tax base as the smaller businesses close. Another fact is the quality of employment at these large stores – on average they pay less and have less benefits as compared to their smaller counterparts. Also, these retailers usually have a combined total retail employment rate of only forty percent in the category of fifty employees or greater. Employment also declined in the department stores in many areas as they began to downsize and cut personnel costs due to competition with K-Mart, Wal-Mart and Target. Thus, discount retail chains affect many aspects of employment in these communities.

Another issue that impacts small communities with the opening of these retail stores is traffic congestion. A report by the Billings, Montana traffic engineer quoted in the November 17^th Billings Gazette article, says that the proposed Wal-Mart super-center in the Billings Heights will add 5,118 new cars to main street per day, which now carries 25,000 vehicles each day and increase traffic congestion by one-fifth. According to the article, this street is already the busiest street in the State of Montana.

Another problem is the decline of "main street America". Ellen Dunham-Jones states, "Wal-Mart’s merchandise has not only homogenized consumption patterns throughout the country, it is homogenizing our experience of landscape." In other words, the introduction of these discount retail chains has altered the landscape of America. Edward B. Stiles states, "Traffic density in older malls began to die as shoppers go to the newer and larger mega-retail discount stores whether it be Target, Kmart or Wal-Mart. Within a year every second and third retail store is closed. These stores take on a ghettoized boarded-up appearance. Graffiti, iron grills, unsightly signs that appear and what five to ten years earlier was a handsome mall in harmony with the countryside, now resembles an urban ghetto. The National Trust for Historic Preservation in Washington, D.C. describes these developments as ‘Urban Sprawl.’ But, what was witnessed was not ‘urban sprawl’, but ‘suburban’ as well as ‘rural sprawl.’"

The advantage of the "big box" discount retailers is clear: lower prices, aggressive pricing practices, large advertising budgets, expanded lines of products to choose from, constant renovation and remodeling stores with the appeal of seeming "new" all the time, free parking, hours of operation (many are open twenty-four hours), one-stop shopping (including groceries, dining, apparel, filling prescriptions and much more) and lack of back ordering. However, there are also disadvantages such as poor service, large spaces that can take forever to get though, crowds and traffic congestion.

Another factor that contributes to the impact of these stores on small business and communities is their fast growing expansion and cooperate decisions to close certain stores. These losses greatly affect these areas. According to Edward B. Shils, hundreds of thousands of dollars are lost in infrastructure development, land development and foregone taxes. These losses sometimes reach into the millions.