Does the Little Guy Stand a Chance?

Capitalism has been lauded as the market system necessary for providing better prices and quality for consumers. Fast-forward to modern day and capitalism implies large “big box” discount retail stores buying real estate, in stark contrast to small, family owned businesses. Are these stores a sign of U.S. economy growth or evidence that commercialism has overcome the American Dream of immigrants starting their own businesses?

The importance of small business to the US economy 

Big stores and name brands may have the greatest visibility in the US economy, but approximately 99.7 percent of all US employer firms are small businesses. Small businesses employ nearly half of the private workforce and since 1995 have created nearly 2 out of the 3 new net jobs in the United States. These small businesses include local mom and pop stores as well as private, local brand labels. They tend to have much smaller operational scale and hire fewer people than retail stores, but since these stores are so plentiful in the local economy, their quantities aggregate to the largest employing sector in the US.

Aside from their role on the workforce, smaller businesses also do a better job stimulating local economies than do retail stores. Small businesses, on average, return nearly half of their revenues to the economy, whereas large chains only inject 14 percent of their revenues into the local economy. Local businesses tend to buy products that are sourced geographically closer to their business whereas larger retailers are able to ship in products and supplies from more distant locales. To scale out – spending $1,000,000 dollars at local stores leads to $500,000 going back into the economy, which could also include at least 10 jobs, as compared to the $14,000 that a large-scale retailer would generate. Include the multiplier effect- and it seems that smaller businesses can generate greater positive economic gains than do retail stores.

The importance of retail stores to the US economy 

Large corporations open up new local businesses. For instance, Apple in Cupertino, while employing 12,000 people, also created 60,000 additional jobs thanks to the creation of local businesses relating to Apple. In addition, the accompanying wealth created by corporations in an area has a multiplier effect in the economy, where each additional dollar of wealth can generate even greater sums of economic impact when people start spending it at gyms, grocery stores, local coffee shops, etc.

In addition, retail stores are signs of population growth and expansion in a city. For instance, the opening of a Heinen’s grocery in downtown Cleveland signaled that the retailers see potential in the revamp of the city’s population, even though Cleveland has not quite met the population threshold for major retailers to open branches in the city.

How they impact and interact

Because larger businesses can incur cost savings through economies of scale and vertical integration of their supply chain, they are able to provide lower prices than small businesses. Furthermore, they can deliver a greater variety and breadth of products. With the opening of the Heinen’s in downtown Cleveland, local small restaurant owners in the 5th Street Arcade, a popular lunch destination during the work week, are worried that they will start seeing decreased clientele as their customers stop by Heinen’s for lunch instead, due to Heinen’s greater selection of foods and cheaper prices.

On a net balance, large retailers also tend to decrease the amount of employment in a region when they open. While a large store, such as Walmart, can easily create 320 jobs, this could also lead to losing 510 jobs through closed businesses. This means that on average, for every job that a retail store contributes to the economy, approximately 1.4 jobs are lost.

However, while these statistics may paint a grim picture of retail, there could be potential upside. As explained, there are synergies that evolve from the opening of new retail stores in any given region, leading to perhaps the destruction of some jobs, but also the potential for new ones in the area. While the media and certain statistics may paint the image of big box retail taking over smaller businesses, there are also ways for both to coexist.