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Agenda Report - January 19, 2005 I-01 Supplemental 2 PHFiled by S. Herum - 1119105 i W`' �s LAM I-IDIA A h o r n( y s A t L a w Steven A. Herum sherum@hexumcrabtree.com January 19, 2005 Lodi City Council City of Lodi City Hall 21 West Pirie Street P.Q. Box 3006 Lodi, California 95241 Re: Final Environmental Impact Report State Clearinghouse leo. 2003042113 Dear Honorable Members of the Lodi City Council: This office represents Lodi First, are unincorporated association of Lodi residents, voters, taxpayers and property owners. Lodi First is vitally concerned about the duality of life in Lodi and the proposed Shopping Center project. Lodi First asked this firm to evaluate the response to the Herum. Crabtree comments appearing in the final EIR. We reviewed and highlight several major deficiencies in the Final EIR. The failure to mention a particular response does not mean that Lodi First agrees with the legal sufficiency of the omitted response. Rather, in the interest of time, Lodi First is providing the City with comments concerning several of the responses. CONVERSION OF AGRICULTURAL LAND Lodi First disagrees with the response to comment I"-3 found at 17-18. Essentially the response states "it is not possible to provide direct mitigation for the loss of a specific parcel of agricultural land, either in whole or in part." Instead Lodi First embraces the analysis provided by the Third District Court of Appeals: "Obviously, when farmland is converted to urban use, a requirement that conservation easements be obtained on other land will not replace the converted land. However, conservation easements can diminish the development pressures created by the conversion of farmland and can provide important assistance to the public and private sectors in preserving other farmland against the danger of the domino effect created by the project. In this respect, conservation easements fall well within the concept of mitigation under CEQA. 2291 West j cwck LniAeB100 Cr --,A 95207 Tei 2.09.472.7700 ® 17nx 209.472.79861 J ode- foTel, 209-525,3441 A !tel^<] fission,.Al Cof- )Profion Lodi City Council January 19, 2005 Page 2 Of course, conservation easements are not always required whenever a proposed project would convert farmland to other uses. The Legislature has not so declared and thus leaves the matter for resolution on the facts and circumstances surrounding a particular project. However, we reject the assertion that a requirement that conservation easements be obtained cannot be a feasible mitigation measure when a project will convert farn-tland to other uses. Accordingly, we conclude that the issue of conservation fees as a mitigation measure should have been subject to EIR discussion. This would not be necessary if the City had an established program for the assessment and use of conservation. fees. However, neither the City nor the County have established such a program. Hence, EIR discussion and public response are necessary to determine the appropriate amount of the mitigation fees to be assessed. Such fees must be fair, that is, roughly proportional to the environmental impacts of the project and not extortionist or confiscatory. (Guidelines, § 15126.4, subd. (a)(4); see Dolan v. City o Tigard su ra 5_12 U.S. -374 [129 L.Ed.2d 3041; Nollan v. Cali&rFnia Coastal Co tL-N8J The determination of the fees solely through the procedure of offer and acceptance will not necessarily establish the appropriate amount of the fees. And EIR discussion and .public response are necessary to determine how and when the fees should be paid and spent. For example, should the fees be paidup-front upon project approval or should they be paid on a per -acre basis as the property is developed? Should the fees be spent immediately or should they be held and pooled with fees from other developers? What areas or properties should have priority for acquisition? It seems obvious that preservation of farmland relatively isolated from urban land uses would be cheaper but less efficacious than preservation of farmland that is pivotal in the effort to prevent urban sprawl. These are matters that can and should be addressed through an EIR with an opportunity for public response." (A copy of the Third District opinion was attached to our comment letter.) In light of this analysis, the discussion of potential mitigation measures for the loss of agricultural land is legally deficient as an infortnational document. More particularly, potential mitigation measures, such as agricultural conservation easements, should be discussed. We observe that these types of mitigation measures should be discussed in an EIR even if an agricultural mitigation fee program is not yet enacted. TRE ATMENT.0F AGRICULTURAL/UR-BAN CONFLICT Response p-4 (pages 19-20) fails to provide or cite to any evidence supporting the assertion in the EIR that geographic buffer areas and walls minimize the potential for conflict. There is no professional opinion or technical study demonstrating that the buffer of the dimensions proposed \\nt_oas\prolaw\dociLiment.s\2146-002\SAH\4.1447. doc Lodi City Council January 199 2005 Page 3 or walls of the height contemplated would reduce the potential for conflict. Nor does the EIR include information that prevailing winds are constant and therefore reduce potential conflict. A paucity of evidence eviscerates the sufficiency of the analysis. As the Third District Court of Appeals observes: "[An] assertion is not a statement of reasons, but a bare conclusion. As such, it does not satisfy CEQA requirements. [fl A statement of reasons is necessary to assure meaningful judicial review in the event, as here, the EIR is challenged in court. `Mere conclusions simply provide no vehicle for judicial review.'" Protect the Historic Amador Waterways v. Amador Water Agency (2004) 116 Cal.App.4`h 1099,1111. The EIR's evaluation of the urban/agricultural conflict suffers from the same infirmity, At Response F -S, the Final EIR reports, "The DEIR applies the Health & Safety Code definition because neither the CEQA statute nor the Guidelines define `physical deterioration' as such, and the `blight' definition is the closest approximation of state law. It is noted that the commentator does not offer an alternative definition, other than to repeat the CEQA language of `physical deterioration.'" The Appellate Court repudiated using the Health & Safety Code definition of urban decay: Some of the parties use the term "urban blight," assuming that it is interchangeable with "urban decay." This is incorrect. "Blight" is a terra with specialized meaning that has not been shown to be applicable. (See health. & Saf.Code3:3030 et. seq.) .SCI C v. City of Bakersfield 2004 WL 2849018 page 10 n.4. (The deputy City Attorney contacted my office and asked for a copy of the B( -,'LC opinion. The EIR consultant should use the BCLC opinion as binding guidance when curing the present deficiencies in the EIR.) The Court determined that ars EIR dismissing an urban decay impact because it did not equal the F-Fealth & Safety Code "urban blight" definition was legally defective. The same error exists here. EVIDENCE OF URBAN DECAY Besides misdefzning urban decay, the EIR. improperly disregards evidence submitted by Lodi First concerning the potential for urban decay. Response F-6 states in part that studies from other jurisdictions have: \\nt—oas\prolaw\documents\2146-002\SAH\41447.doc Lodi City Council January 19, 2005 Page 4 "no direct relevance to the proposed project or the subject EIR analysis. This is because all markets are uniquely local, each having its own mix of commercial uses, as well as distinct locational factors and dynamics of competition. [] The Oklahoma study and commentator's non -expert argument and opinions do not meet the CEQA standard for substantial evidence." Once again, this response conflicts with the Appellate Court opinion: "Studies discussing the experiences of Bather communities constitute important anecdotal evidence about the way the proposed shopping centers could serve as a catalyst for urban deterioration and decay in the City. The Vencill report is extremely significant and it strongly supports BCLC's position that CEQA requires analysis of urban decay. F,N6] J3 11 Moreover, numerous individuals commented about urban decay during the administrative process. For example, at the planning commission's public hearing on the adequacy of the draft EIR's, Cindy Fabricius stated, "[T]here are 45 empty Wal -Marts in the state of Texas. There are 34 empty standing Wal -Marts in the state of Georgia. There are 27 in Utah. Find thee. Go look at them. They are empty. When Wal-Mart moves on they leave their boxes. Those boxes are not bought up by other [businesses]; who can afford that huge of a store; that huge of a rent?" Herman Lee commented that there are parts of East Bakersfield that need revitalization. Yet, the proposed shopping centers are out in the southwest part of town.. He queried, "What about the people on the east side of town?" Some comments made at the February 2003 City Council meeting are also relevant. A representative of Save Mart Supermarkets spoke in opposition to the project and submitted the data concerning Oklahoma City. He stated that the addition of the two shopping centers will adversely affect existing shopping centers and asserted that the "[t]he potential for urban blight and decay is a matter which must be considered" in the EIR's. Another commercial property owner wrote that he had been unable to re -lease a building that formerly housed a grocery store and he ended up demolishing the building. When a grocery store closes, the remainder of the stores in the shopping center are likely to close. The center "could end up with many bearded up storefronts," Another citizen wrote a letter that included six examples of buildings in the City that formerly housed large retail stores and now are "vacant, rundown box buildings and shopping centers." He was concerned that the proposed projects would result in more "empty warehouse type, rundown buildings" littering the City. While these individuals are not experts in any sense of the word, their firsthand observations should not casually be dismissed as immaterial because "relevant personal observations are evidence."' Lodz City Council January 19, 2005 Page 5 SCLC v. City of Bakersfield at 15 (emphasis added). Thus, besides studying the wrong effect (blight instead of decay) the Final EIR improperly dismissed relevant anecdotal evidence from other cities and comments from the public as being irrelevant. This does not amount to a good faith response to comments. Given the Fifth District's guidance concerning anecdotal studies concerning urban decay amounting to substantial evidence, Lodi First attaches the following studies: 1) DSR Marketing Systems, Inc.'s Report. "Wal-Mart Supercenter's Impact on Grocery Shopping Patterns in Carson City, Nevada", 2) Bay Area Economic Forum Report on Supercenters: "Supercenters and the Transformation of the Bay Area Grocery Industry: Issues, Trends, and Impacts", 3) Beaumont and Tucker: "Big -Box Sprawl (And How to Control It)", 4) Rea & Parker Report: "Smart Growth's Response to Big -Box. Retailers: City of Villages ---- A Renewed Orientation Toward Communities and Neighborhoods", 5) ®range County Business Council Report: "The Impact of Big Box Grocers on Southern California: Jobs, Wages, and Municipal Finances and 6) The Shils Report: "Measuring the Economic and Sociological Impacts of the Mega -Retail Discount Chains on Small Enterprises in Urban, Suburban, and Rural Communities". AIR QLALITY Response F-10 responds to Lodi First's comment that the air quality analysis does not correlate increased tonnages of various types of air pollution to the likelihood of increased incidents of various air pollution causing ailments, such as heart and lung disease and childhood asthma. The generalized response was not responsive: it merely states that it is indeed true that incidents of air pollution caused ailments increase when the amount of air pollution increases. According to the Appellate Court, this is not enough: BCLC contends that both EIR's omitted relevant information when they failed to correlate the identified adverse air quality impacts to resultant adverse health effects. We agree. Guidelines section 15126.2, subdivision (a) requires an EIR to discuss, inter alia, "health and safety problems caused by the physical changes" that the proposed project will precipitate. Both of the EIR's concluded that the projects would have significant and unavoidable adverse impacts on air quality. It is well known that air pollution adversely affects human respiratory health. (See, e.g ., Bustillo, Smog 11arms Children's Lungs,for Life, Study Finds, L A. 'Times (Sept. 9, 2004).) Emergency rooms crowded with wheezing sufferers are sad but common sights in the San Joaquin Valley and elsewhere. Air quality indexes are published daily in local newspapers, schools monitor air quality and restrict outdoor play when it is especially poor and the public is warned to limit their activities on days when air quality is particularly bad. Yet, neither EIR acknowledges the health consequences that necessarily result from the identified adverse air quality impacts. Buried in the description of some of the various substances that make LIP \\ut_oas\prolaw\documents\2146-oo2\SAH\41447. doc Lodi City Council January 19, 2005 Page 6 the soup known as "air pollution" are brief references to respiratory illnesses. However, there is no acknowledgement or analysis of the well-known connection between reduction in air quality and increases in specific respiratory conditions and illnesses. After reading the EIR's, the public would have no idea of the health consequences that result when more pollutants are added to a nonattain ent basin. On remand, the health impacts resulting from the adverse air quality impacts must be identified and analyzed in the new EIR's. BCLC v. City of Bakersfield at 21 (emphasis added). This truncated analysis fails to provide sufficient information as required by CEQA. There is no evidence in the response that it is scientifically impossible to correlate increased tonnages of air pollution to the increased likelihood that members of the general population may suffer from various respiratory ailments. Nor does the EIR demonstrate an attempt to correlate this relationship. CUMULATIVE IMPACTS Response F-12 underscores the EIR's failure to produce an adequate cumulative impact evaluation as identified by BCLC v. City of Bakersfield. Moreover, the response did not explain why the various proximately located Wal-Mart Supercenters should not properly be included in a cumulative impact analysis of urban decay. Thus, Response F-12 fully fails to address the comment. The ultimate problem with the EIR's approach is illustrated by the response to comments. At page 32 the response tells us "the County Community Development Department staff was contacted for information on possible cumulative developments." This is the precise problem. The County Community Development Department gathers data on county land use proposals but does not collect information concerning City development proposals. TRA "FIC IMPACTS Response F-9 is unresponsive. Dodi First comments that the EIR was legally deficient for failing to conduct an energy impact of the proposed project. The response generally claims that such an analysis is not necessary. Appendix F of the CEQA Guidelines suggests the response is not true. The Appendix reads in relevant part: "In order to assure that energy implications are considered in project decisions, the California Environmental Quality Act requires that EIRs include a discussion of the potential energy impacts of proposed projects, with particular emphasis on avoiding or reducing inefficient, wasteful and unnecessary consumption of energy." \\nt_oas\pro1aw\documents\2146-642\SAH\41447. doe Lodi City Council January 19, 2005 Page i The term "shall" is defined in. CEQA as follows: "identifies a mandatory element which all public agencies are required to follow." 14 Calif. Code. Reg. §15005(a). Thus CEQA Guidelines compel a public agency to "include a discussion of potential energy impacts of the proposed projects". Appendix F goes on to provide: "Potential significant energy implications of a project should be considered in an EIR. The following list of energy impacts possibilities and potential conservation measures is designed to assist in the preparation of an EIR." (emphasis added.) The term. "should" is defined in CEQA as follows: "identifies guidance provided by the Secretary of Resources based on policy considerations contained in CEQA...Public agencies are advised to follow this guidance in the absence of compelling, counter ailing considerations." 14 Calif.C.Reg. §15005(b). This record of proceedings is devoid of any evidence or arguments that compelling and countervailing considerations authorize Lodi to dispense with the requirements of Appendix F. The Final EIR argues Appendix F was removed from the CEQA Guidelines in October 1998 ["any requirements that environmental documents address energy consumption and impacts were removed from the CEQA Guidelines"]. This statement is false. The Office of Planning and Research website continues to list appendix F (energy conservation) as part of the CEQA Guidelines. CEQA appendix F is located at: http://ceres.ca. gov/topic/env_law/cega/guidelines/appendices.html EFFECT TO PUBLIC SERVICES Response F-11, concerning effect to public services, is not a good faith response to comments and does not disclose the impact's significance. The statistics cited by the response do not disclose the nature and scope of the actual potential effect to the public health care system nor does the response disclose the significant amount of time that elapses before some full-time employees will be covered, the number of part time employees who are ineligible or the high co - pay that excludes significant numbers of full-time employees. Therefore, the response failed to evaluate the waiting period imposed by Wal-Mart before health coverage is available, the fact that part-time workers do not qualify for health care coverage and the unusually high out of pocket costs of the coverage preventing many workers from enjoying the coverage bendit. This means the FIR did not disclosing meaningful information concerning a recognized physical effect: the effect to public services and the secondary effect of needing additional facilities. The University of California Public Law Research :institute explained the deficiency in the EIR as follows: "Wal-Mart increasingly made it difficult for employees to become eligible for health care coverage. The Miller report found that Wal-Mart increased the waiting period for new full time employees to be covered by health insurance \\nt__oas\prolaw\documents\2146-002\SAH\41447.doc Lodi City Council January 19, 2005 Page 8 from 90 days to 6 months. The waiting period is even longer for part-time employees who cannot get health insurance coverage for their family and must wait 2 years before they are eligible for individual coverage. In addition to these requirements, Wal-Mart has changed the definition of part-time workers from employees working less than 28 hours a week to all employees working les than 34 hours a week. The Miller report pmts Wal -Mart's practices into perspective by noting that the average waiting period for health coverage for employees at ether large retail establishments is 1.3 mouths. Furthermore, Wal -Mart's health plan shifts much of the health care costs onto employees; a single worker could end up spending around. $6,400 out-of-pocket before seeing any health plan benefits." Public Law Research Institute, University of California, Hasting College of the Law, "California Response to Supereenter Development A Survey of Ordinances, Cases and Elections." Prepared for the Governor's Office of Planning and Research (Spring 2004) at 20-21 (all statistics contained in the quotation are from the Miller Report. The Miller Report is a study prepared by the United States House of Representatives, House Committee on Education and the Workforce dated February 16, 2004). Thus the response to comments did not disclose when health benefits would be available to the Wal-Mart employees. According to the House of Representative study, the time is lengthy, part- time employees do not qualify for the health insurance benefit, and even those employees who qualify for the health care benefit may not be able to afford the large co -pay. (The average grocery worker in the Bay Area receives $23.64 an hour in wages and benefits; the average Wal- Mart employee just $9.60 an hour. Id. at 17. As a result, potential effects to the County hospital, a potential impact underscored by the San Diego County Taxpayers Association study, remain fully unevaluated. The fact that some full- time employees may qualify for the high co -pay health insurance does not disclose the nature and magnitude of the potential impact. Very truly yours, STEVEN A. HERUM Attorney -at -Law SAH:Iac Attachments \\i tmoas\prolaw\docu eiits\2146-002\SAH\41447.doc il Prepared by Dr. David Rogers President DSR Marketing Systems, Inc. 108 Wilmot Road, Suite 245 Deerfield, Illinois 60015 TEL: 8471940-8200 FAX: 847 / 940-8237 email: dsrms@sbcgiobaI.net August 25, 2004 Page SUMMARY ....... ......... ............ 1 THE SURVEY AND ITS FINDINGS .... ................. ................... 4 Objective ........ ....... ............ 4 Methodology...................................................... 4 CarsonCity ......................................... 4 Grocery Spending ........ ............. ........ 6 Grocery Retailers ................................................... 6 Grocery Market Shares .......................... ......... ... 6 How Far is the Store Shopped From Their Homes? ......................... 8 How Often Do They Shop? ........................................... 8 The Monthly Travel Burden .......... ....... _ ........... ....... 9 The Supercenter's Impacts ........ _ ............................. _ 10 Do Supercenter Customers By -Pass Closer Supermarkets? , . ... ........... 12 Percent of Family Grocery Budget Spent at Each Store .... ........ ...... 12 Grocery Stores Shopped Per Month .............. __ ................. 13 Where Wal-Mart Supercenter Customers Also Shop For Groceries ........... 14 Demographic Profiles ........ ...................... .............. 15 Appendix 1: THE SURVEY QUESTIONNAIRE Appendix 2: THE CARSON CITY / GARDNERVILLE / MINDEN MARKET AREA Appendix 3. ABOUT DSR MARKETING SYSTEMS INC, FurDOse and Research Method In April - May, 2004, 496 interviews were completed with a crass -section of households living within the city limits of Carson City, Nevada. The purpose of the telephone survey was two -fold. First, to identify the grocery shopping patterns of these households and compare the shopping characteristics of Wal-Mart Supercenter customers with those of its traditional supermarket competitors. Secondly, to estimate the impact the Supercenter has had on the supermarkets in Carson City. The detailed results of the research are contained in the Survey Findings section presented below. Where Carson Citv Shea s For Groceries • 36% of the grocery shoppers interviewed now buy at least some of their groceries at the Wal-Mart Supercenter .... and 19% make it their primary stare for food shopping. • The Supercenter ranks as Carson City's leading grocery store, with a 19% market share. • It is estimated that more than half of the stare's business comes from beyond Carson City Itself. Based on field observations, it is estimated that the Supercenter is achieving weekly sales volumes of $1.1 million in supermarket -type -merchandise more than twice the volume of the leading traditional grocery competitor in Carson City (Raley's, $475,000). unerceater, hot ging Characteristics • Supercenter shoppers drive substantially further to buy groceries than do shoppers of the major traditional supermarkets in Carson City. The average Wal-Mart shopper - in Carson City only - lives 5.5 miles from the Supercenter versus only a 2.0 mile average for customers of the traditional supermarkets. And this is an under -estimate because the Supercenter draws more sales from areas beyond Carson City. I SUMMARY (Continued) 41 The average shopper visits the Supercenter 5.5 times per month, less than the 6.9 times per month that shoppers visit the traditional supermarkets. 0 Therefore, on a monthly basis, customers of the Wal-Mart Supercenter travel more than twice as far for their grocery shopping than do those of the traditional supermarkets (60 miles per month versus 28 miles). A 92% proportion of the Supercenter shoppers reported that a competing supermarket is closer to their home than is the Supercenter. On average, these customers report traveling 8.6 miles (round trip) further to shop the Supercenter than they would travel if they shopped at the closest competing supermarket. • Supercenter shoppers visit an average of 2.4 different grocery stores per month, which is only marginally less than the 2.6 different grocery stores visited by all those interviewed. Therefore, Supercenter shoppers visit an average of 1.4 other grocery stores on a regular basis, indicating that they are not using the Supercenter as a total one stop grocery store. Supercenter shoppers spend an average of 52% of their total food budget at the Supercenter with the remainder (48%) being spent at other Carson City supermarkets. The competing supermarkets in Carson City have a similar 'loyalty" reading which ranges between 46% and 53% of all their shoppers' spending. This finding indicates that customers of the Supercenter are no more loyal than those of the traditional grocery stores. Supercenter Shopper Demographics Supercenter shoppers tend to be drawn from households with somewhat lower incomes ($40,000/year) and younger heads of households. As would be expected, the Supercenter also draws more heavily from larger households (i.e. 3 persons or more). 2 SUMMARY (Continued) The SuDercenter's Com etitive Imoact • Reflecting its wide geographical draw, the Wal-Mart Supercenter's impact on pre- existing supermarkets has been fairly evenly dispersed. As expected, there appears to have been a slightly higher impact on stores located closer to the Supercenter and those featuring low prices as their primary drawing card (such as the former Super Kmart and Smith's). • On average, the sales declines at the pre-existing supermarkets ranged between 10% to 20% per store, but were presumably even higher at stores that were drawing customers from beyond Carson City, such as the Albertson's in south Carson City. • The heaviest "contributors" to Walmart's sales were the three (3) Albertson's stores (a combined 26%), Raley's (19%), Smith's (13%), and Scolarl's (13%). • We estimate that several of the existing supermarkets now have average weekly sales below $300,000, which is the current (approximate) threshold for maintaining store profitability. With Wal -Mart's plans to open a second Supercenter in north Carson City in mid -2005, we estimate that at least three or four supermarkets will close before the market returns to equilibrium. This will reduce consumer choice from the current eight (8) competing supermarkets (excluding Costco) to four (4) or five (5). We are planning a follow-up gravity model analysis to refine this estimate. 8 0hective The purpose of the telephone survey was to interview a representative cross-section of Carson City grocery shoppers to determine where they currently shop for groceries, their frequency of shopping these stores, the approximate distance of these stores from their homes, and their demographic characteristics such as household size and income. We also asked those individuals who currently shop for groceries at the Wal -mart Supercenter where they shopped before the Supercenter opened. A copy of the survey questionnaire is presented as Appendix 1. The survey was intended to quantify any differences between supermarket shoppers in Carson City and those of the Wal-Mart Supercenter on such factors as travel distance, shopping frequency and demographic characteristics. In addition, the survey provides a benchmark analysis of the market shares held by the competing supermarkets as of May 2004, and of the sales Impacts resulting from the opening of the Wal-Mart Supercenter in September 2001. Methodoloc Between April 13 and May 5, 2004, a total of 498 telephone interviews were conducted in the Carson City area. Interviewers were instructed to contact only those households with telephone prefixes which indicated that they lived within the city limits of Carson City (only 12 interviews were completed with households on the perimeter of Carson City). The interviewers were instructed to make one call back in the event the respondent was not at home and then to proceed to the next listed number. No interviewing was to commence before 4:00 pm (except on weekends) in order that a sufficient number of households with working heads of households could be obtained. Interviewers were requested to talk with the person most responsible for the household's grocery shopping. Surveys were validated using standard verification techniques. Carson Cit Carson City is the capitol of the State of Nevada, and with a 2003 population of 55,300, Carson City ranks as the fourth largest city in the State after Las Vegas, Reno, and Sparks. Employment is centered around government, the casinos, tourism, and agriculture. Additionally, many retirees from California and elsewhere have settled in Carson City because of the lower cost of living and lower tax rates. By the standard of other Nevada cities, 4 the Carson City population growth rate has been moderate, having increased by 37% between 1990 and 2003. Carson City households are presently served by eight (8) traditional supermarkets, a Costco Warehouse Club, and a Wal-Mart Supercenter. Please refer to the accompanying Map 1. Carson City draws a significant proportion of grocery shoppers from areas outside the city limits - primarily to the south and east. This "outside" draw is particularly true of the Costco Warehouse Club and the Wal-Mart Supercenter which are both located near the Carson Valley Power Center just to the south of Carson City in Douglas County. The most significant secondary trade area for Carson City is the Minden/Gardnerville area about 15 miles south of Carson City. This area has a population of about 30,000 and is served by three (3) major grocery stores (Raley's, Smith's, and Scolarl Wal-Mart is rumored to be considering building another Supercenter in this market. Based upon discussions with local supermarket operators, we estimate that the eight (8) supermarkets in Carson City and the three (3) stores in the Gard nervil le/Minden area serve an expanded trade area population of about 96,000 (please refer to the map and data presented in Appendix 2). On a rule of thumb guideline of one store per 10,000 people, this suggests that the trade area population and store count are currently in approximate equilibrium. However, it is estimated the Wal-Mart Supercenter is achieving weekly sales of over $1.1 million in supermarket -type -merchandise - which is more than twice the volume of a typical supermarket. As a result, we estimate the market is presently over -stored by one (1) store. The competitive climate will obviously intensify when a second Wal-Mart Supercenter opens in north Carson City in 2005. When this store opens, it will draw sales from most of the existing Carson City supermarkets and produce further store closures - besides that of the Super Kmart. The following Table 1 summarizes the demographic characteristics of Carson City versus those of the State of Nevada and the United States as a whole in 2003. - 0 AA 6ARSON CITY, NEVADA SCALE Major Grocery Store Locations * Current Stores * Proposed Store * Closed Store MAP 1 a� t -Glow, xr;03 06dw W %per t 5"Pep"nt -4"h 'h9 01 S. 9 -� ..... ..... ..... Al I . . . . . . . . . . . . . . 7. June 2004 56 Cost J, a T E VARY &TF 74mw THE SURVEY ANIS ITS FINDINGS (Continued) Table CARSON w +- parson Ci y Nevada U.S. Median Household Income $45,078 $46,326 $45,859 Average Household Size 2.46 2.64 2.58 Median Age (years) 39.9 36.2 36.1 % of Papulation Over 50 Yrs 32.2 26 9 27.3 Groce S endin Based on the demographic characteristics of the population living in Carson City, they are estimated to spend an average of $43.50 per person per week on supermarket -type - merchandise (S -T -M). This estimate translates to natal spending of $2.26 million per week .... given a total non -institutional papulation of 51,909 in 2003. Groceryers The accompany Map 1 identifies the locations of the major existing, proposed, and recently chased supermarkets serving the Carson City market. Of the ten (10) existing stares, nine (9) are located within the city limits and consist of three (3) Albertson's, a Raley s, Smith's, Safeway, Scolari's, Costco, and Grocery Outlet, Most are about 50,000 square feat (gross area) in size (or larger), except for the Safeway (45,000 square feet), Scolari's (40,000 square feet) and the Grocery Cutlet (25,000 square feet). The Wal-Mart Supercenter has an estimated supermarket area of 60,000 sq. ft. (grass) and opened in September 2001 just south of the Carson City limits. The Super Kmart in north Carson City closed shortly thereafter. Grocery Market Shores The respondents interviewed were asked where they shop for groceries and how much they spend at each stare. 6 THE SURVEY AND ITS FINDINGS (Continued) With three stores in the market, Albertson's captures almost 23% of the available food and grocery spending in Carson City, However, on an individual store basis, Wal-Mart and Raley's rank #1 and #2 respectively, with each achieving a market share of 19% each. The remaining supermarkets average between 10% and 13% each. Please refer to the following Table 2. Since the Costco, Wal-Mart, and two of the Albertson's are located on the perimeter of Carson City, we estimate these stores actually achieve much higher store sales than is suggested from their share of food and grocery spending within Carson City itself. + Grocery area only. * Not available. Approximate Carson City Est. Weekly Store. Size [Market Share Grocery Safes (gross area sq, ft.) M ($) Albertson's - E (Henry 50 & Airport) 55,000 13.7 375,000 Albertson's - S (Hwy 395 & Roventini) 45,000 7.1 250,000 Albertson's - N (Henry 395 & College) 60,000 1.8 275,000 Sub -Total 22,6 Wal-Mart Supercenter 60,000+ 18.7 1,100,000 Raley's 55,000 18,5 475,000 Smith's 60,000 13.0 325,000 Safeway 50,000 10.7 275,000 Scolari's 40,000 10.0 200,000 Costco 110,000 3.8 N/A* Grocery Outlet 25,000 1.2 70,000 All Others 1,5 N/A* Total 100.0 3,275,000 Since the Costco, Wal-Mart, and two of the Albertson's are located on the perimeter of Carson City, we estimate these stores actually achieve much higher store sales than is suggested from their share of food and grocery spending within Carson City itself. + Grocery area only. * Not available. THE SURVEY AND ITS FINDINGS (Continued) How Far is the Mare Shopped _FromTheir H_0me? Respondents were asked how many miles the stores they shop are from their homes. The responses in Table 3 below indicate Wal-Mart grocery shoppers travel an average of 5.5 miles to the Supercenter, whereas customers of the major supermarkets average 2.0 miles. Even the Haley's and Albertson's in south Carson City, both located near the Wal-Mart, draw from a radius less than half the size of that of the Supercenter. - Table 3 DISTANCE TRAVELED Average Distance From Home (miles) Wal-Mart Supercenter 5.5 Albertson's - E (Hwy 50 & Airport) 2.0 Albertson's - S (Hwy 395 & Roventini) 1,6 Albertson's - N (Hwy 395 & College) 2.1 Average (Albertson's) 1.8 Raley's 2.4 Smith's 1.8 Safeway 2,2 Scolari's 2.0 Costco 4.2 Grocery Outlet 2.0 All Others* 25.1 AVERAGE 3.1 How Often Do [bgy ShoR? The respondents were also asked how many Limes per month they visit the stores where they buy their groceries, The Wal-Mart Supercenter is not shopped quite as frequently as the average traditional supermarket, 5,5 versus 6.9 trips per month, respectively. Nevertheless, as identified in Table 4, the Wal-Mart visitation rate is still well over once a week (1.4 times) versus 1.7 for the traditional supermarkets. - Including WinCo in Reno. THE SURVEY AND ITS FINDINGS (Continued) Table 4 MONTHLY VISITATION RATE Average Times Shoppeii. Per Mqnth I Wal-Mart Supercenter 5.5 Albertson's - E (Hwy 50 & Airport) 7,0 Albertson's - S (Hwy 395 & Roventini) 7.2 Albertson's - N (Hwy 395 & College) 7.6 Average (Albertson's) 7.1 Raley's 6.6 Smith's 7.3 Safeway 6.5 Scolari's 6.6 costco 4.9 Grocery Outlet 5.5 All Others 2A AVERAGE 6.4 The MonthlyTravel Burden _ From the previous tables, it can be determined how far the typical customer of each store travels per month. The following Table 5 indicates that the average Wal-Mart grocery shopper travels more than twice as far each month than a traditional supermarket shopper, 60 miles round-trip versus 28 miles: - W11 THE SURVEY AND ITS FINDINGS (Continued) Table 5 MONTHLY TRAVEL Average Travel Distance Average Distance Monthly Per Month ilea} Traveled Trips One Way Round T02 (Mlles) Wal-Mart Supercenter 5.5 5.5 30 60 Albertson's - E (Hwy 50 & Airport) 2.0 7.0 14 28 Albertson's - S (Hwy 395 & Roventini) 1.6 7.7 12 24 Albertson's - N (Hwy 395 & College) 2.1 7,6 16 32 Average (Albetfson's) 13 26 Raley's 2.4 6.6 16 32 Smith's 1.8 7,3 21 42 Safeway 2,2 6.5 14 28 Sco)ari's 2,0 6,6 13 26 Costco 4.2 4.9 21 42 Grocery Outlet 2.0 5.5 11 22 All Others+ 25.1 2.4 60 120 The SupeEcqgDnjteqr'sq�1cts Table 6 below identifies where respondents shopped before and after the Wal-Mart Supercenter opened in Carson City. A 36% proportion of those interviewed (177 shoppers) now do at least some of their grocery shopping at the Supercenter. The data indicates that about 10% - 20% of the customers of the pre-existing supermarkets switched to the Supercenter for at least some of their grocery shopping - and that the Super Kmart appears to have been a casualty of the Wal-Mart Supercenter opening: - + Many of these responses were for Winco, in Reno. 10 THE SURVEY AND ITS FINDINGS (Continued) Table 6 IMPACTS OF THE WAl.MART SUPERCENTER Mores Sha ed For Groceries % of Store Before After Customers Who Supercenter Supercenter Switched to Supercenter N Vidal; -kart Supercenter 10+ 177 N/A Albertson's - E (Hwy 50 & Airport) 157 120 18 Albertson's - S (Hwy 395 & Roventini) 84 73 13 Albertson's - N (Hwy 395 & College) 21 19 10 Sub -Total /Average 262 220 16 Raley's 210 173 18 Smith's 144 123 15 Safeway 125 109 13 Scolari's 121 108 11 costGo 50 46 8 Super Kmart 35 0 100 Grocery Outlet 15 12 20 All Others 18 17 6 In dollar teras, the Supercenter's sales have been drawn as indicated in Table 7: - + These responses relate to the former Walmart discount department sure in Carson City. 11 THE SURVEY AND ITS FINDINGS (Continued) Table 7 SUPERCENTER SALES SOURCES % of Supercenter's Sale Raley's 18.6% Albertson's, Hwy 50/Airport 16.6 Smith's 13,4 Scolari's 12,8 Safeway 10.2 Super Kmart 8.5 Albertson's, CarsonlRoventini 7,4 COStGO 5.3 Albertson's, Carson/Hwy 395 1.6 Grocery Outlet 1.6 Walmart Discount Store 1.4 All Others M When combined, the three (3) Albertson's "contributed" 26% of the Supercenter's grocery sales. markets? Those respondents who shop the Wal-Mart Supercenter were asked if they travel further to Wal-Mart than to a nearby supermarket grocery store. Nine out of ten (92%) responded that they _do by-pass closer grocery stores in order to shop at the Wal-Mart. On average, these respondents travel 8,6 "extra" miles round-trip to purchase their groceries at the Supercenter. Percent oS e�n f Grocery Bud et t at Each Store Respondents were then asked how much of their total grocery budget they spend at the stores they shop on a regular basis, The following Table 8 breaks out their expenditures at these stores in 25% increments: - 12 THE SURVEY AND ITS FINDINGS (Continued) .e: GtOCE12Y BUDGET , i % Of Grocery Combined Wal-Mart Albertson's Grocery All Su„ diet Stam Totals Supercenter (Ail 3 S.tc res) Ra{ems Smith's Safes Scolari's Costco Outlet Othe s 0-25% 29% 25% 25% 26% 33% 35% 35% 33% 33% 29% 26%-50% 34 30 41 35 24 28 37 41 33 29 51%-75% 15 21 13 13 15 14 9 17 33 29 76%-100% 22 23 22 26 28 23 19 9 0 12 Totals, 100 100 100 100 900 100 100 100 100 100 Average % 50 52 51 53 52 49 46 41 48 44 Customers of the Wal-Mart Supercenter reported spending 52% of their total grocery budget at the Supercenter, with the remainder being spent at other grocery stores. This is only slightly higher than the 50% average for all the grocery retailers in Carson City and suggests that Wal- Mart customers e while marginally more loyal than the customers of other stores - nevertheless do a considerable amount of their grocery shopping at other supermarkets. The most important of these are Ra�s (8% of all grocery spending by shoppers of the Wal -mart Supercenter), Scolarl's (8%), Albertson's East* (7%), and Smith's (7%). Grogga Stares Shia ed Per Month The following Table g indicates the number of different grocery stores shopped each month by shoppers of the various grocery retailers, including Costco and Wal-Mart. On average, Wal- Mart Supercenter shoppers visit 2.4 different grocery stores each month... consisting of their trips to the Supercenter plus those to 1.4 other stores. This reading is only slightly below the "All Store Average" of 2.6 stare visits per month and suggest that Supercenter shoppers are just as prone to crass -shop other grocery stores as are shoppers of the traditional supermarkets: - x On Highway 50 at Airport. 13 THE SURVEY AND ITS FINDINGS (Continued) Table 9 CROSS -SHOPPING PROPENSITIES Wal-Mart Supercenter Albertson's - N (Hwy 395 & College) Albertson's - E (Hwy 50 & Airport) Albertson's - S (Hwy 395 & Roventini) Costco Grocery Outlet Raley's Safeway Scolad's Smith's All Others Al! STOREWTOTAL Total # Of Avg # Of Where Wal -mart t1 ercenter Customers Also Sho For Groceries Table 10 below lists the other stores that the 177 Supercenter shoppers also cross -shop for at least some of their food and grocery needs.. In our opinion, the extensiveness of this cross - shopping activity reflects weak -points at the Supercenter that prevent it from functioning as a true one-stop shopping destination. For example, inadequacies in product quality and variety, the distance from home, and in-store and parking lot congestion. 14 Other Different Different # Stores Stores Stores Shgppers Shopped Sho ___W ed Sho ed ___pp_ 177 242 419 2.4 19 26 45 2.4 128 179 307 2.4 73 117 190 2.6 46 92 138 3.0 12 21 33 2.8 176 256 432 2.5 109 193 302 2.8 108 198 306 2,8 123 193 316 2.6 17 33 50 2.9 all 1,308 2,119 2.6 Where Wal -mart t1 ercenter Customers Also Sho For Groceries Table 10 below lists the other stores that the 177 Supercenter shoppers also cross -shop for at least some of their food and grocery needs.. In our opinion, the extensiveness of this cross - shopping activity reflects weak -points at the Supercenter that prevent it from functioning as a true one-stop shopping destination. For example, inadequacies in product quality and variety, the distance from home, and in-store and parking lot congestion. 14 THE SURVEY AND ITS FINDINGS (Continued) Table 10 OTHER STORES CROSS -SHOPPED # of Walmart GrocerySho ers Albertson's - N (Hwy 395 & College) 6 Albertson's - E (Hwy 50 & Airport) 34 Albertson's - S (Hwy 395 & Roventini) 24 Sub -Total 64 Costco 20 Grocery Outlet 4 Raley's 40 Safeway 30 Scolari's 41 Smith's 34 All Others 9 TOTAL 242 Finally, Table 11 below identifies the demographic profiles of all the shoppers of the various grocery retailers in Carson City, including Costco and the Wal-Mart Supercenter. The Wal-Mart Supercenter has a stronger appeal than the other stores to lower income households and to younger and larger families. At the other end of the spectrum, Costco, and Raley's draw more heavily from upper income and older shoppers. Scolad's appears to appeal to older households; Smith's to lower income households; while Safeway and the three Albertson's stores have a relatively uniform appeal across most segments of the community. 15 THE SURVEY AND ITS FINDINGS (Continued) 1 All Wal -Mari 18% 20% 21% 14% 21%u 13% Grocery A!1 PBCl1C3C f��?t1iG Q SFS tigG'TG'C11E:r AIE3ertSOrl`5 is rTtlth'S �el �Wr3 Gp{c ri`$ 03tG4 Outlet Others WCOM 14% 16% 16% 17% 8% 15% 9% 13% 8% 18% Under $40,000 46% 50% 42% 43% 53% 43% 53% 32% 70% 31% $40,000- 36% 36% 39% 38% 34% 37% 31% 39% 10% 31% $60,1300 210 3% 2% 1 % 3©10 1% 1% 0% 0% 0% $60 - $75,000 13% 13% 14% 12% 9% 15% 11% 25% 0% 38% $75,000- 3% 2% 4% 3% 4% 4% 4% 0% 10% 0% $100,000 Over $100,000 2% 0% 2% 4% 0% 1 % 1 % 4% 10% 0% TOTAL $-, 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% Median ($} 43,977 40,000 44,103 43,684 40,000 43,784 40,000 49,231 40,000 52,258 AGE Under 35 10% 15% 10% 9% 9% 5% 12% 9% 6% 12% 35-49 20% 21% 24% 18% 20% 22% 13% 14% 33% 29% 50-65 48% 50% 48% 48% 43% 48% 44% 64%n 33% 47% Over 65 22%® 14% 18% 25% 27% 24% 32% 14% 25% 12% TOTALS: 100% 100% 100%0 100% 100% 100% 100% 100% 100% 100% Mediae (years) 55.6 54.2 55.0 57.2 57.3 57.2 58.5 56.3 54.1 52.9 1 19%Q 18% 18% 20% 21% 14% 21%u 13% 25% 24% 2 51% 45% 48%9 55% 53% 56% 56% 57% 42% 35% 3 14% 16% 16% 17% 8% 15% 9% 13% 8% 18% 4 9% 12% 9% 4% 11% 10% 10% 7% 17% 24% 5 5% 6% 7% 3% 4% 5% 2% 11% 8% 0% 6 or More 210 3% 2% 1 % 3©10 1% 1% 0% 0% 0% TOTALS: 100% 100% 100% 100% 100% 100% 100% 10010 100% 100% AVERAGE 2.37 2.55 2.45 2.20 2.33 2.40 2.18 2.46 2.42 2.41 16 Appendix 1 - S {!{(I zzlR;ffJ,lZ={;k so NOW R � L:,A, Fal xv Column 1. Poiygon (see appendix), Total Description Column l Fet. Population 2009 Projection 105,236 2004 Estimate, 96,250 2000 Census 88,881 1990 Census 62,572 Growth 1990-2000 42.05% 2000 Population by Single Pace ClassifWation 88,881 White Alone: 78,269 88.06 Black or African American Alone 1,050 1.18 American Indian and Alaska Native Alone 1,920 2.16 Asian Alone 1,279 1,44 Native Hawaiian and Other Pa&ific Islander Alone 114 0.13 Some Other Race Alone 4,315 4.85 Two or More Races 1,133 2.17 2000 Population Hispanic or Latina by 009ha 88,881 Not Hispanic or Latina 78,639 88.48 Hispanic or Latino: 10,241 11.52 Mexican 7,464 72.88 Puerto Rican 178 1,74 Cuban SOU 0.98 All Other Hispanic or Latino 2,499 24,40 2000 Hispanic or Latisao by Single Race Class. 10,241 WhlteAl one 5,049 49,30 Black or African American Alone 49 0.48 American Indian and Alaska Native Alone 204 1.99 Asian Alone 54 0.53 Native Hawaiian and Other Pacific islander Alone 23 0,22 Some Ocher t2aae Atone: 4,227 41,28 Two or More'12ac-s 634 6.19 2000 Population by Sex 88,881 Mate 45,258 50.92 Cemalc 43,622 49.08 Male/Female Ratio 1.04 Prcpurcxi on: Jcinc 23, 2i}Q4 Page ! of 9 �� O P i n D € r A C .0 20€)4 CLARITAS INC. All Ighes r=rvcd. I SGO S66 6511 Appendix 3: ABOUT DSR MARKETING SYSTEMS INC. V DSR Marketing �Systems, Inc. is a market research and consulting firm which specializes in retail research, including store location analysis and consumer research. 1-1 On it] 00 WOH Dr. Rogers is co-editor of Store.Locati n and Store Assessment P a text -book published by John Wiley and Sons Ltd., the international publishers, and is a regular columnist for a variety of retail trade magazines in Australia, the USA and UK, including Retail Me_Mhandiser and Pro ressive Grocer in New York, the European RetaaiL1Pjq@9 and Retail Week in Britain, and ahgpg�� in Australia. Dr. Rogers has consulted with an extensive number of retail, restaurant, and shopping center clients in Australia, Canada, France, Iceland, Puerto Rico, Saudi Arabia, Sweden, the United Kingdom, and the U.S.A. His experience includes expert witness testimony at planning and traffic impact inquiries and in cases concerning Retail Competition and Eminent Domain. Dr. Rogers received his undergraduate degree from the University of Bristol (England), his M.S. from the University of Wisconsin (Madison), USA, and his doctorate from the University of Reading (England). All three degrees were in the field of Urban Studies. ,h 0 SUPERCENTERS ;r OF THE BAY AREA GROCERY INDUSTRY: Trends, and Impacts ,Bay Area Economic Forum January 2004 A.PartswshiP of this Assadatron' of Bay Area Govemmen.ts and the Dy Area Council a Supercenters and the Transformation of the Bay Area Grocery Industry: Issues, Trends, and Impacts Bay Area Economic Forum a partnership of the Bay Area Council and the Association of Bay Area Govermnents January 2004 Project Supervisor R. Sean Randolph Research and Analysis Dr. Marlon Boarnet and Dr, Randall Crane, Principals Daniel Chatman and Michael Manville, Associates Public Economics Group The nation's retail grocery sector is undergoing amajor transformation, led by supercenters — big -box retail stores with full-scale grocery service. These superceriters are the latest development in the nationwide restructuring of the retail grocery industry. Based on efficient distribution systems, low prices, and shoppers increasingly seeking value, supercenters are intensifying competition within the sector. While they are a national phenomenon, supercenters also have important local impacts, Their imminent appearance in California and the Bay Area raises a complex range of issues concerning their costs and benefits, fiscal implications for local governments, and land use policy. This report is designed to provide decisionmakers with the information and analytical tools needed to make sound decisions regarding the possible development of supercenters in their communities. It refrains from judging whether these facilities are desirable or not, but instead presents the key issues that local decisioninakers will geed to consider. The report was prepared by Dr. Marlon Boarnet, associate professor of Planning, Policy, Design and Economics at the University of California at Irvine, where he chairs the Department of Planning, Policy and Design, and by Dr. Randall Crane, professor of Urban Planning and associate director of the Institute of Transportation Studies at UCLA. They were assisted by Daniel Chatnian and Michael Manville, who are currently doctoral candidates at UCLA. A Bay Area Economic Forum review panel composed of Lenny Mendonca (Director, McKinsey * Company, San Francisco), Diana Farrell (Director, McKinsey Global Institute), John McCaffrey (Managing Partner, PricewaterhouseCoopers LLP, San Francisco), lied Furlong (Regional Vice President, Federal Reserve Bank of San Francisco), Sunne McPeak (President, Bay Area Council), Eugene Leong (Executive Director, Association of Bay Area Governments), Paul Fassinger (Research Director, Association of Bay Area Governments), Gerald. Raycraft (Planning Director, Association of Bay Area Governments), Sean Randolph (President, Bay Area Economic Forum) and Gary Finger (Smart Growth Director, Urban Land Institute) provided extensive advice and guidance. On-line collies of this report can be accessed on the Bay Area Economic F'orurn's website at www.bayecon:for.or,, The Bay Area Economic Forum is a civic partnership of business, government, Hibor, university and community leaders that addresses issues impacting the vitality and competitiveness of the Bay Area's economy and the quality of life of its residents. A non- profit public-private partnership, it is jointly sponsored by the Bay Area Council and the Association of Bay Area Governments Bay Area Grocery Industry Report Page 1 of 104 Executive Summary Transformations in the discount retail industry are rapidly altering the grocery business nationwide, as California will soon learn firsthand. The engine of this change is the retail format known as the supercenters ----a big -box retail store that also contains the equivalent of a full-size grocery store, with total floor space often three to four times as lame as that of a conventional supermarket, As recently as the raid -1990s, supercenters occupied niche markets and were confined largely to regional chains. In just a few short years, Wal-Mart, the dominant force in American discount merchandising, has used the new forinat to make itself the dominant national grocer as well. Wal-Mart is now the largest grocer by sales volume and the fifth largest by number of stores. Other discount chains that have experimented with the supercenter format include Kz-zart (the nation's 22nd largest grocer, ranked by sales) and Target (the 27th largest). California has no supercenters today but several are proposed to open. soon. Wal-Mart alone plans to open 40 in California over the next few years. Why is the restructuring of the grocery industry important to the Bay Area economy? Based on trends elsewhere, the region can expect substantial impacts of three kinds: w Lower prices charged for grocery goads, 0 Lower wages and benefits paid to grocery workers, and a An array of local development issues, such as traffic and fiscal effects. While some changes will be beneficial, others suggest local costs. Due to their magnitude, the distribution and timing of these benefits and costs are critical policy issues. This report thus has two primary purposes: To profile this trend, by estimating these impacts for the region, and to clarify their relevance and complexity at the municipal level. It also outlines a. checklist of costs and benefits for communities considering supercenters. For most consumers, the clearest advantage of supercenters is the mix of goods offered at lower than average prices. As supercenters achieve sizeable market share, these savings will be significant. Assuming that supercenters capture between 6 and 18 percent of the region's grocery sales by 2010, total consumer savings on groceries are estimated to range from $382 million to $1.13 billion per year in the Bay Area. an important issue given the Bay Area's high cost of living. Through multiplier effects, these savings will generate additional stimulative effects on overall regional spending. While multiplier effects from lower prices are difficult to quantify, the overall regional impact could be up to two tunes the amount of direct expenditure savings. Consumers also benefit from one-stop shopping, precluding the need for separate trips to buy groceries and other products. These benefits will be diminished, however, to the extent supercenter shopping requires longer trips, in turn increasing the time and money costs to consumers of shopping travel. Bay Area Grocery .Industry Report 12 - . , ..... Page 2 of 104 The grocery industry is an important, if often overlooked, source of high -wage entry-level jobs in the Bay Area. The entrance of a low-wage competitor into the grocery industry will likely produce downward wage and benefit pressure on grocery jobs throughout the region. The average grocery job in the large Bay Area supermarket chains currently pays wages and benefits worth about $42,552 per year, of which about a third is the value of the benefit package (including health care coverage, vacation, holiday and sick leave). Conversely, supercenters will offer total compensation (wages and benefits) estimated at $11.6$ per hour less than this, or about $21,000 less yearly per average grocery employee. As a whole, grocery workers in the Bay Area now earn roughly $1.5 billion in wages plus benefits. However, if lower wage, big box grocery stores obtain an 18 percent market share over the next several years, as indicated in other urban areas, this wage/benefit payroll is estimated to fall by as much as $677 million. These direct losses have indirect consequences. Lower regional incomes mean less spending on other goods and services. Through multiplier effects, the net economic impact of this reduction of wages and benefits to the regional economy could be more than double the direct loss, though again. such multipliers are difficult to quantify. Local3. development R_..... In many municipalities, land use decisions are linked to fiscal policy, because local governments receive a share of sales tax revenues generated within their borders. California cities thus omen seek to so-called sales tax "cash cows," such as auto dealerships and big -box chains, with promises of zoning variances, infrastructure enhancements, or tax rebates. However, the bottom -litre calculation of supercenter tax revenues is more nuanced than often appreciated. First, an expansion into non-taxable grocery sales will not generate the sales tax revenue per square foot of a conventional discount store. Second, net sales tax revenue will be reduced to the extent that supercenter sales simply displace sales at other stores in the same municipality. At a regional scale, supercenters bring the potential for shifting sales tax revenues across municipalities, creating a regional pattern of winners and losers, Third, any revenue impact must also be weighed against local public sector costs, such as the traffic, possible vacancies at other retail sites, and the public services required by a supercenter, Local government must consider both the positive and negative externalities of the supercenter format to arrive at the true impact of on public revenues. For example, supermarkets often anchor neighborhood shopping districts. A loss of a supermarket to big box competition could threaten the economic health of other stores that rely on foot traffic generated by the grocery store. In some cases, supercenters ----much as the big -box retail format more generally—could threaten the economic vitality of existing downtowns or neighborhood shopping centers. .Ray area Grocery Industry Report Page 3 of 104 Changes in retail patterns can also be associated with changes in traffic patterns. In some cases, the low-density, land -intensive nature of a supercenter might be at odds with municipal goals of building at higher densities. On average nationwide, supercenters generate over 3,3€ 0 car trips per day. Furthermore, because supercenters are generally located on the urban fringe, they often result in substantially more total vehicle miles traveled (VMT) for grocery shopping in comparison with conventional grocery stores. It is difficult to predict whether these changes will be viewed as alarming or benign in any particular municipality, but two paints are important. First, supercenters have the potential to bring land use changes, and local officials should evaluate these. Second, some of those issues, including growth patterns and the character of traffic flow, are regional. in nature, meaning the decisions of one municipality can impose undesired consequences on other municipalities. This report is intended in part as a tool to assist local governments. Its goal is thus two -fold: To illuminate these broader consumer, eniployment, wage, land use, and fiscal issues associated with the rise of supercenters, and to articulate their regional implications. The bulk of the report is an industry analysis of both big -box retail and grocery sales. It focuses on Wal-Mart because that firm is by far the national leader in supercenters, and because it is, to large extent, driving the rapid transformation of the grocery industry. In 1994, Wal-Mart had 147 supercenters; in 2002 it had 1,258. During that time, no other national chain came close to achieving a similar growth in supercenters, In the near tern, Wal-Mart is the most likely developer of supercenters in the Bay Area, In the end, the report is cautionary. Supercenters are part of a national and even international change in the retailing and grocery sectors, and those changes, like many other economic restructurings, bring both costs and benefits. Lower consumer prices and efficiency gains should be weighed against the direct and indirect effects of lower wages and benefits in the retail grocer sector, and fiscal and land use impacts that are substantially nnore. complex than. conventional "fiscal boon" scenarios assume, The entry of the world's largest grocer into California is anything but simple. At the same time, the basic facts are straightforward. Bay Area Grocery Industry Report M Page 4 of 104 ExecutiveSummary .................. . ............................................................................................ ........ I. Conswner benefits. - - . ............ .................... .............. --- ... .... ........... — ... .... — ..... .... 1 2. Lower wages and their impact on the local economy .............................................................2 3. Local development and fiscal impacts ............ .............. .............. -- ........ ...... --- ................ 2 Listof Figures ...... ................................................................................................................. 6 Listof Tables... ................................................................................................................................. 6 Overview ............... ........... ............... ..................................... .......... ........................................... 7 ChapterI-, Supercenters and the Grocery Industry . ................................................................. 11 The rise of discount retail ........................ ...... .... --- ...... ........................... ......... — ..... - ....... I I The advent of the supercenter ..................... --- ....................... ..... ---- ................ ..... 12 Grocery Industry Overview ................ ............ ........... ........ ........... ..................... ......... 13 Supereenters............... ....... — .............. -- ................................. ........................... ...........16 Topchains ..... - ........... ....... ---- .............. — ..... ................. - ... .... ............. ........... ....... 17 Current conditions and projected growth ... . ... ....... - ... --- ........ ................... ................ ... 19 Implications for the grocery industry..... .......... ......................... ...... ...................... 21 Wholesale clubs and "Neighborhood Markets"... ..... - ........................ ...... ---22 Chapter 2. Supercenters in the Bay Area, Market Share Scenarios........................................24 The study area and existing big box retail locations ................. ........................................... ... 24 Projected ected Bay Area supercenter market share. .......... -- ......................... -- ............. ................ 26 Chapter3. Consumer Benefits. ......................................................... .............. ........................... 30 Benefits of supercenter discount prices ......... .... - ......... .......... ........................ ....... 30 Average prices of grocery iterns ....... — ... ........................... — ........... ........... ........ ............... 30 Effect on prices in other stores -.. ............ ................................. ---- ......................... - ....... 31. Marketcapture . - - . . . . ................ ---- ......... ............... — ......................................... 31 Calculation of reduced expenditures — ...... ........ - ............................................. ................... 31 Discount retail and productivity increases ....................... ...... ..................... ....... 32 Chapter 4: Impacts on Regional and Local Grocery Industry Wages and Employment ......34 The importance of the grocery industry in the Bay Area ................. ...................... --- .......... 34 Bay Area coniparison of superinarket and supercenter wages and benefits .............................37 Unionized supermarket wages in the Bay Area ................. .......................... ....................... 37 Supercenterwages ............. .................... ................................ — ......... 39 Benefitscomparison...... ... ............................... ................. .......................... ...... 43 Comparison of wages and monetized benefits... .... - ........ ...... -- ................................ ........ 46 Wage and benefits impact analysis, ..... ................................. - ...... ........ -- ......................... 48 Bay Area Grocery Industry Report Page 5 of 104 Chapter 5: Land Use and Traffic Impacts..................................................................................51 Sizeand footprint...................................................................................................................... 52 Locationquestions.......,<............................................................................................................54 Traffic...................................................................................................... .57 Triplength............................................................................................................................. 58 Tripfrequency....................................................................59 Estimates of travel -related supercenter costs ........................................................................ 60 Chapter 6: Other Potential Community & Economic Development Impacts .........................62 Wal-Mart in rural communities.................................................................................................64 Economicdevelopment.............................................................................................................65 Wal-Mart impacts in urbanized markets...................................................................................66 Intangible Effects: Aesthetics, Tourism and Activism.............................................................67 Greyfields and ghostboxes: The problem of vacant retail space...............................................67 Recapture Clauses... .... ...... ......... .................... .............. ........................ .... 71 Remedies and Local Circumstances..........................................................................................72 Sun-unary.................................................................................................................................... 73 Chapter7. Potential Fiscal Impacts............................................................................................74 Overview.................................................................................................................................. 74 The fiscal landscape in California..... ................................ ............ .......................... __ 75 Impacts on municipal tax revenue......- ..... .... ___ .......... ...... .......................... .... 76 How much taxable revenue will a supercenter generate?......................................................... 78 Revenue stability of the supercenter forznat..............................................................................79 Thesubsidy process...................................................................................................................79 Summary.................................................. .................................................................................. 80 Chapter- 8: Policy and Practice.....................................................................................................82 Issues....................................................................................................... A checklist for local ofitcials....................................................................................................83 References.......................................................................................................................................85 Appendix A. Estimates of Grocery Market Share, 2010............................................................91 Current market shares................................................................................................................91 Supercenter per -store revenue... ............... __ ... - ....... ........... ............. ............ ..... 95 Supercenter market share estimates for study area, 2010..........................................................97 Appendix B. Employment and Payroll Comparisons with Similar Industries .......................99 Buy Area Grocery Industry Report Wage 6 of 104 Figure 1: Average supermarket size, US, 1990 to 2002..................................................................17 Figure2: Study area counties..........................................................................................................26 Figure3. Big.box retail stores in study area, 2003..........................................................................26 Figure 4: Location of Wal -Marts in the Bay Area..........................................................................57 Figure S: General merchandise and food stores as a percent of retail taxable sales, California .....80 Figure 6: General merchandise and food stores, taxable sales per permit ($ thousands)................81 y Table1: Supermarket facts, 2002....................................................................................................14 Table 2: Grocery store sales by size and ownership, 2002..............................................................15 Table 3: Sales per store, 2001 to 2002 ($million)...........................................................................17 Table 4: Selected top grocers nationwide, 2003..............................................................................18 Table : Top grocers, 2003 - ratio calculations...............................................................................19 Table6: Supercenter industry growth trends by company..............................................................20 Table 7: Wal-Mart store counts in selected markets, 2003.............................................................20 Table 8: Market share scenarios, Wal-Mart supercenters, 2010 .....................................................28 Table 9: Estimated Consurner Grocery Expenditure Savings, by Market Share .............................31 Table 10: Total employment, Bay Area, 2001................................................................................35 Table 11: Employment in the grocery industry, Bay Area, 1998 to 2001 .......................................36 Table 12: Yearly payroll per employee in the grocery industry, Bay Area, 1998-2001 .................37 Table. 13: Wage schedule for food workers and non-food workers, 2001 to 2003 .........................38 Table 14: Average wages for unionized supermarket employees, 12 -county study area, 2003......39 'fable 15, Wal -Dart full-time employment as percent of total, 1999-2001 ....................................41 Table 16: Wal-Mart average wage if employed at least one year & active at year-end, 2001,.......42 Table1.7: Benefits comparison, ............. .............. .................................... . . . ............. . ............ 44 Table 18: Wal-Mart health and welfare benefits estimate, 2000 .....................................................45 Table 19: Wal-Mart average per hour contribution to retirement savings plan, 2000 ....................46 Table 20: Comparison of estimated wages and benefits for unionized supennarkets ....................47 Table 21: Wage and benefits impact estimate, 2010......................................................................49 Table 22, Average Distance to Grocery Stores from Selected Zip Code Centroids .......................59 Table 23: Estimates of Additional Driving Costs Due to Supercenter Entry into Bay Area ..........61 Table Al: Population & effective buying income for submarkets (except Sonoma County) ......... 92 Table A2: Market share by distributor, study area (except Sonoma County).................................93 Table A3: Market share by chain, study area (except Sonoma County).........................................94 Table A4. Market share and revenue per store, San Francisco MSA, 2003 ....................................95 Table A5: Wal-Mart supercenters for selected metropolitan. areas, 1997 to 2003 ..........................96 'fable A6. Size of future market, supermarket sales........................................................a...............97 Table A7: Market Share Scenarios, Wal-Mart Supercenters, 2010 ................................................98 Table A8: Employment in the food and drinking place industry, study area, 1998 to 2001...........99 Table A9: Payroll per employee in the food and drinking place industry, 1998 to 2001 ..............100 'fable A10: Employment in department stores, 1998 to 2001.......................................................100 Table A11: Payroll per employee for department stores, 1998 to 2001 ........................................101 Table Al2: Employment in the accommodation industry, 1998 to 2001 ......................................101 Table A13: Payroll per employee in the accommodation industry, 1998 to 2001 ........................102 Table A14: Employment in the construction industry, study area, 1998 to 2001 .........................102 Table A15: Payroll per employee in the construction industry, study area, 1998 to 2001............103 Bray Area Grocery Industry Report Page 7 of I04 In the last decade, the supermarket industry in the United States has undergone a substantial transformation. Driven by a number- of factors, including the consolidation. of large grocery companies, one of its primary engines has been; the rise of the supercenter—a hybrid fonnat that puts an entire supermarket within a big box retail discount store. The impact of supercenters has been quickly felt: Wal-Mart, which as recently as the rnid-1990s was a marginal player in the American grocery sector, is today the number one grocer in the nation by sales, and the fifth largest by number of stores. Other discount merchants that have entered the grocery industry include Kmart, which is now the nation's 22nd largest grocer ranked by sales, and Target, which is the 27th. The meaning of these changes is loudly debated. As this report was being completed, Southern California was in the midst of a lengthy grocery employee strike in part motivated by the possible entry of supercenters into the region. In the Bay Area, proposals to regulate supercenters have been debated in Contra Costa County. In this sometimes charged environment, local officials are typically the first line of policy activity. Municipal governments throughout the Bay Area might find themselves being asked to consider the implications of supercenters in their communities. Yet the matter is complex, This report is intended as an educational aid to assist local governments as they consider the question of supercenters in their communities. Although the supercenter is a fairly straightforward fonnat---in one sense, it is just a larger box with a still larger parking lot --bound up within the supercenter model is a complicated array of potential impacts on local labor markets, land use, traffic, the fiscal condition of cities and the economic character of neighborhoods. Many of these issues are familiar, but perhaps do not get the attention they deserve; others are too often not considered at all. It is all too easy to think. of shifts in the grocery industry as purely private phenomena, and beyond the concern of those who make public policy. The purpose of this report is to impress upon municipal leaders that what happens to the.grocery sector can impact the community and the local economy, and that proposals for supercenters should be considered with care. This document should be a useful first step in developing more useful evaluations of large-scale retail projects. Based on experience elsewhere in the country, several impacts of supercenters are clear - 4 Supercenters will bring a substantial drop in grocery prices compared to traditional supermarket chains. s Supercenters will bring substantial downward pressure on wages and benefits in the grocery sector. r Supercenters will bring a host of complex land use, traffic, and fiscal impacts. Many decisions will fall to municipal and county governments, even if the impacts will be regional as well as local. Bay 14rea Grocery Industry Report Page 8 of 104 This report deals with each of the above impacts in tarn, in some cases simulating possible scenarios to illuminate their magnitude. In other cases, quantifying the impact is not possible, so instead the issue is discussed in more qualitative terms. This report is divided into four major sections. Section I provides background, first on the grocery industry and then on the possible development of supercenters in the Bay Area. This section provides context for local officials who will soon have to understand this transformation in the retail sector. Section 11 begins the examination of supercenter impacts by looking at, in turn, the effect of supercenters on consumer prices and on grocery sector wages and benefits. Section III examines local development. impacts associated with supercenters. Section IV discusses policy options from the perspective of local governments. Each of these sections is composed of one or more chapters, and as overview those chapters are briefly discussed below. The supercenter is a hybrid of both the grocery and retail sectors, and to be comprehended it roust be viewed in the context of both, and not as a typical big box store. This requires a perspective larger than the purely local. Chapter 1 provides that context by providing background on discount retail, the grocery industry, and the national trend toward supercenters. Supercenters are arguably another step in retail's transformation from an urban -based, service-oriented industry to a more suburban or exurban, value -driven sector. The first chapter provides an overview of these changes at the national level, and identifies the major players in both the grocery and retail fields. This chapter also discusses the logic behind supercenters, their implications for the grocery industry, and how large supennarkets across the country are reacting to the prospect of supercenter competition. Having established the national tread toward supercenters and the forces that are driving it, Chapter 2 looks at the potential for supercenter growth in the San Francisco Bay Area. Grocery market share estimates are constructed under various scenarios. The estimates are based on analysis and the experiences of other metropolitan areas. Starting Section II, Chapter 3 begins the discussion of likely supercenter impacts by noting that Wal-Mart supercenters, in particular, offer consumers significant price advantages over traditional supermarkets. These lower prices can benefit consumers (particularly consumers with lower incomes). The potential consumer benefits of Bay Area supercenters are estimated. This is also discussed, as it is important context in understanding the benefits that supercenters bring to local and regional economies. The source of Wal -Mart's consumer price advantage is multi -faceted, and includes pioneering efficiencies in distribution, the use of technology, and the application of new management techniques, The net result of these and other efficiency gains are discussed in Chapter 3, Yet another source of Wal -Mart's price advantage is less innocuous — Wal-Mart typically offers lower wages and benefits than do major Bay Area supermarket chains. This is examined in Chapter 4. Chapter 4 calculates the labor market impacts of supercenter growth. Supermarket employment is an often overlooked but important source of entry- level employment. Using the best available data on both Bay Area grocery industry wages and benefits and total compensation typically offered at Wal-Mart, supercenter jobs will pay $11.68 per hour less than typical super-narket jobs in major Bay Area grocery chains. Should discount retail companies gain a significant portion of the grocery market in any part of the Bay Area, a clear potential impact would be a falling Bay Area Grocery Industry Deport Page 9 of 104 average wage in the grocery sector, as well as a falling average value of the benefits offered to grocery workers. Discount prices also necessitate more space and more consumers, the success of discount retail is dependent to a large extent on selling . mmore goods to more people. As more and more consumers converge on a single location, an inevitable concern is worsening vehicle traffic, and the distortions of urban form. Haat can be caused by autocentric retail development. Supercenters are huge buildings designed to be shopped by people in cars, which means they have extremely large parking lots. Aside from the accommodation of automobiles, the amount of land necessary for a supercenter also generally requires them to be located on the fringe of urban areas, raising the question of whether supercenters contribute to residential dispersal and urban decentralization. Alterations to urban form that encourage sprawl are costs, albeit hard ones to quantify. These issues are discussed in Chapter 5. A topic often mentioned along with traffic and land use patterns is the impact discount retail has on smaller, more pedestrian -oriented shopping districts, and in particular on downtowns. Although much of the evidence Haat .has been gathered on this topic addresses conventional discount stores, rather than supercenters, what is available should be of interest to policy makers, and is in many ways still relevant to discussions of the new food/retail formats. More importantly, a discussion of downtowns' diminished vitality also reinforces the crucial lesson that while consumers may enjoy the newer format of one-stop shopping, towns and cities can pay a price in the form of vacant buildings and empty lots that once generated revenues. Chapter 6 reviews the current research on the economic impacts of new big boxes, including this question: When does retail development represent true economic growth, and when does it simply cannibalize existing markets? While analyzing the sales tax revenue generated, policy makers must consider the generated sales tax revenue displaced to supercenters from preexisting businesses, or completely lost dine to the failure of businesses competing with retail giants. The chapter also surveys the evidence on retail blight—its causes, consequences and possible solutions. There is also the question of fiscal impacts. For towns and cities, one of the most alluring aspects of discount retail stores is their potential to yield sales tax revenue, For municipalities in California, whose ability to collect property taxes has been greatly restricted, this is no small matter, and has in a number of instances led to "locational tournaments," in which communities compete with each other, at times through hefty subsidies, to have a big box locate within their borders. This is not a new story, but the advent of supercenters does throw an unfamiliar twist into it. Most grocery items are not subject to sales tax, so the expansion of a discount store into a supercenter may not be accompanied by a corresponding expansion in saps tax revenue. The true fiscal impact of big box discount retail is more complicated than a simple calculation of sales tax revenue, and the perceived fiscal benefit of a conversion to the supercenter format is much more ambiguous. This is taken up in Chapter 7. Finally, Chapter S summarizes time report's discussion of the costs and benefits of supercenters with respect to policy issues. The chapter also surveys the various initiatives that communities across time country have taken in response to supercenters, ranging from accommodation, to grassroots opposition, to efforts to prohibit time format by law. The report does not endorse any of these measures, offering instead a cautionary message. It would be an oversimplification for localities to assume Haat supercenters bring no issues of public concern, and it would be likewise Bay Area Grocery Industry Report Page 10 of 104 ill advisedfor municipal officials to focus exclusively on tax revenue without weighing the less obvious but equally real impacts supercenters can have on labor markets. The evaluation of a supercenter should ideally include not just an analysis of its costs and benefits, but also hour oasts and benefits are distributed, If costs and benefits are borne by the same groups, then a simple assessment of whether benefits exceed costs is sufficient. But if costs are concentrated in one segment of the community while the benefits are more widely distributed, there may be additional policy considerations. Ray Area Grocery Industry Report Page 11 of 104 The U.S. grocery industry has been dramatically transformed in the last ten years by the advent of supercenters—large stares selling a full line of groceries and drugstore items along with a full assortment of retail goods. The story of this restructuring is complex, including consolidation in the traditional grocery industry, and a shift in consumer preferences from a service orientation to a greater emphasis on low prices. In many ways, supercenters are the merging of the discount retail and the grocery industry—two sectors that, until just a few years ago, were distinct industries in the United States. Because a discussion of the impact of supercenters on the Bay Area requires an understanding of the changes in the discount retail and grocery sectors, the section begins with some background on the discount retail industry, followed by a profile of the grocery industry. Until the tura of the last century, most goods were sold through individual specialty stores. Between 1900 and 1920, merchants in and. around Boston began combining the operations of several specialty shops under one roof, and gave birth to the modern department store. A leader in the transition was Filene's, a company that originally sold only women's wear and accessories. At the turn of the century, Filene's began to acquire more space, sell new products, and remove the partitions that had once separated different wings of its stores. Shortly after it opened it developed a segment called the "bargain basement," where brand-name merchandise (mostly but not exclusively apparel) was offered at a drastically reduced price. At first, the bargain basement was viewed with skepticism and scorn by industry observers, who widely expected it to fail. Department stores at that time were often lavish affairs, well -decorated and situated in expensive downtown locations (Fogelson 2002; Cohen 2003). They were also full-service establishments with large sales staffs that worked mostly on commission. The bargain basement lacked all of these amenities, which explained its broadly anticipated failure. But the format allowed Filene's to broaden its customer base, to attract consumers who otherwise could not afford brand-name clothing, and to build customer loyalty among the working classes, luring the Great Depression, the bargain basement kept Filene's alive, reaping profits while the full-service establislunent operated at a loss. Spurred by the success of Filene's, other department stores began to open their own bargain basements, and soon freestanding discount stores, unattached to any large department store chains, began to pop up as well. By 1977 discount retail, with $39.2 billion in sales, was the largest sector of general merchandising, and the handful of discount outlets that had existed in the 1950s had expanded to almost 7,100. The undisputed champion of discounting at this point was the Detroit -based Kmart, which in 1975 had over 1,200 stores and in 1976 added more than ' Unless otherwise nand, the histories[ materia[ in this section is drawn from Bluestone, et al. (1481), Bay Area Grocery Indu q Report .gage 12 of 104 one new store every working day.2 Ktnart's expansion bankrupted many of the regional discount chains, and also seriously harmed the profitability of full-service department stores such as Sears, 3C Fenny, and Montgomery Ward, forcing them to reposition themselves as more specialized enterprises. Kmart remained in this position for roughly a decade, until it was itself underpriced by Wal-Mart. Like Kmart, Wal-Mart stores first opened in 1962. Unlike Kmart, however, and indeed unlike many other discount pioneers, the company began in the South. After Sam Walton opened a discount five-and-dime in Bentonville, Arkansas, the first Wal-Mart was opened in the nearby town of Rogers. Until relatively recently its growth has been contained within the southern and rural heartland states, where it was able to build power and customer loyalty without competing directly with Kmart. This enabled Wal -Mart's rapid growth, and let the southern company avoid directly competing with what were then Kmart's larger economies of scale (Hornbeck 1994). It also, and perhaps more importantly, forced the company early on to embrace technological advances in supply and distribution systems. The decision to remain in rural areas largely prevented Wal-Mart frons rising existing retail distribution networks. It was expensive to deliver goods to Wal -Mart's stores, and vendors often wanted to charge high premiums for slipping goods so far away from metropolitan centers (Standard and Poor's Retailing Supplement 2003). The company began to experiment with ways to rawer its supply and distribution costs. It opened the nation's first distribution center in 1970, marking the first time a firm had asked vendors to deliver goods to a central warehouse location rather than individual stores (Wal-Mart Corporation Official Timeline). These distribution centers carne to define how Wal-Mart grew. A distribution center was set up; stones were arrayed around it, generally not more than 20 miles away; over time, the capacity of the center was taxed as product turnover increased; and another distribution center was built in another location (Chaff 1998). Wal -Mart's use of technology, and its influence on productivity in both the retail sector and the American economy as a whole, is discussed in more detail in Chapter 3. The appeal of combining retail and grocery operations is not new. As early as the 1960s, industry specialists recognized the potential in merging discount stores and supermarkets. In contrast to today, in the 1960s it was the grocery chains that began buying their way into the discount arena, rather than the other way around. In 1961 the Stop & Shop chain of Boston, Massachusetts purchased the Bradlees regional discount chain, out of a desire to locate its supermarkets adjacent to discount retailers (Bluestone 1981). These stores did not prat grocery under the same roof as retail, although they did put it under the same ownership. They were also regional, rather than national, chains. These early experiments were not the model on which the contemporary retail/grocery supercenter is based. Rather the supercenter of today is a slightly smaller version of tho European hypermart, a massive big box combination whose average size is about 250,000 square feet. In the 1980s, both Kmart and Wal-Mart attempted to re-create hypes -arts in the United States. Wal-Mart. opened a division called Hypennart IDSA, and Kmart created one called American z Krnart was formerly the S. S. Kresge Corporation; it changed its name in 1977. Bay Area Grocery Industry Report Page 13 of 104 Fare. The extra -large format proved unpopular, and both companies soon scaled back to supercenters, which are about 170,000 square feet, with about 70,000 square feet of that being grocery space. Wal -Mart's first supercenter was unveiled in 1988, and Kmart rolled out its inaugural Super Kmart in 1991 (Graff 1998; Wal-Mart Corporate Timeline 2003).3 Kmart and Wal-Mart pursued different strategies in choosing where to locate their supercenters. Graff (1998) documented that almost half of Wal -Mart's 332 supercenters were in counties of less than 50,000 people; the average population of a supercenter county was 105,000. Super Kmarts tended to be in larger markets. Wal-Mart Supercenters and Super Kmarts competed directly in only 19 counties nationwide, and in a number of these areas the Wal-Mart Supercenters were actually converted Hyperzxaarts—the Hypermart, unlike other Wal-Mart holdings, had been introduced in more densely populated regions, When the company did bring out supercenters, it did so in low-risk areas. Almost all of the original supercenters were replacements of existing discount stores, and many of the stores replaced were in its oldest and most profitable locations. To date some two-thirds of Wal -Mart's Supercenters have came from discount store conversions (Barry 2003). Opening supercenters as replacement discount stores meant Wal-Mart could enter the grocery sector in areas where it already had strong identification and loyalty from customers. Just as it had done with discount stores, the company would build its strength in places where circumstances were aligned in its favor (Graff 1998). Grocery: d Overview Food stores are a major U.S. industry, with over 3.4 million employees and $535 billion in sales in 2002 (Table 1). The average customer visits more than twice a weep, spending about $25 per trip. They are also an increasingly diverse lot. The largest industry category is "Supermarkets," representing; only 20 percent of grocery stores but over 75 percent of revenues. However, in addition to conventional grocery stores, this group officially includes supercenters, combination grocery and drugstores, and warehouse -style grocers in which customers bag their own groceries (Table 2). The remaining $123.6 billion in official supermarket sales is mainly in smaller grocery stores and convenience stores, ai3d some sales in wholesale clubs and military commissaries, ' Note that, because these estimates of supercenter floor area and grocery floor space come From different sources than what was cited earlier in the report, the foot' space estimates are not exactly consistent. Graff (1998), for example, estimates supercenter grocery area at 70,000, whereas the market data cited earlier suggest that supercenters ofe • 60,000 square feet of grocery floor area, Bay Area Grocery Industry Report Table 1; SuDermarket facts. 2002 Supermarket employment (mil.) Number of grocery stares Number of supermarkets ($2 mil, or more in annual sales) Averages Supermarket size (sci t.) Average number of Items (SKUs) Number of trips per week by consumers Sales Total grocery stores sales (bit. $) Total supermarket sales (bil, $) Weekly sales per supermarket ($) Weekly sales per sq. foot of selling area ($} Sales'per customer transaction ($) Sales per Tabor hour ($) Page 14 of 104 3.5 166,135 32,951 44,000 35,000 2.2 $535.4 $411.8 $361,564 $11.13 $24.63 $137.68 Compiled by Food Marketing Institute at www.fmi.org/facts_figslsuper€act,htm, From US Departments of Labor and Agriculture, Bureau of the Census, Progressive Grocer, and Food Marketing Institute. Though not considered supermarkets by official industry definitions, "Wholesale clubs," such as Costco and Sam's Club, accounted for $27.4 billion in sales last year. Though only 5 percent of total food ,sales, this is an average of $28.2 million per store, the highest per store number in food sales. The remaining part of the industry consists of"Small grocers," defined as stores with less than $2 million in annual sales, as well as convenience stores. Nationwide, about 23 percent of grocery revenue is attributed to these smaller stores. in the Bay Area, like most urbanized areas, the figure is less, about 15 percent. Within the supermarket category, about two-thirds of sales are accounted for by stores izt super -market chains. So-called independent supermarkets, or those with ten or fewer stores, account for the remaining third. Significantly, chain supermarkets continue to slowly increase their share of the total, growing 4.4 percent between 2001 and 2002, while the volume of sales by the independents dropped a percentage point. The most striking charge from 2001 to 2002 was an increase in the total sales accounted for by the largest chain supermarket stores—those with $30 million or more in revenues. These: firms increased revenues 54.2 percent from 2001, though not quite as fast as the 5S.2 percent increase in the number of stores, Fart of this growth can be accounted for by "supercenters," described further below, whose revenues increased about 17 percent, largely via an increase in the number of stores. But supercenters are only a part of the story, The remainder is likely attributable to an increase of revenues among stores in the $20 to $29.9 million range, which moved them up to the higher 4 In the San Francisco -Oakland IRI lnfoScan market (San Francisco, San Mateo, Marin, Santa Clara, Oakland and Contra Costacounties), it is 14.2 percent; in the Monterey -Salinas IFMA market (Monterey, San Benito and Santa Cruz counties), it is 19.4 percent; in the Vallejo -Fairfield -Napa MSA (Napa and Selano counties), it is 10.5 percent. Bay Area Grocery Industry Report Page 15 of 104 category, as well as by the replace ratmt of small stores with larger ones among the conventional grocery store chains. Table 2: Qrogq-ryfsjtore-sales bysiAl and ownersh[D,2N2 Pct, Pct, Change, Change, No. of Pct, of 2001- Sales Pct. of 2001 - Stores Total 2002 ($billion) Total 2002 All supermarkets, by format, total 32,981 100.0 2.2 411.8 100,0 3.4 Conventional 16,807 61.0 (23) 145.1 35,2 1,9 Limited assortment (under 1,500 items) 2,500 7.6 25,0 13.0 3,2 42.9 Warehouse (low price/service) 535 1.6 (33.1) 2.9 0.7 (69.5) Supercenter* (75,000 sq.ft. min.) 1,789 5.4 15.0 45.8 11.1 16.8 S 6A 205.0 49,8 3.5 All supermarkets (over $2.0 million) 32,981 100.0 2.2 411.8 100n0 3.4 Chain supermarkets ($ millions) 21,660 65.4 2A 340.5 82.7 4.4 --- ------ -- $2.0 - $19 1,490 4.5 6,7 4.3 1.0 7.5 $4.0-$7.9 3,640 11.0 2.1 21.7 5.3 1.9 $8.0-$11.9 3,545 10,7 (13) 34.4 8.4 (1.4) $12.0 - $19.9 5,911 17,9 2.8 88,8 21.6 2,2 $20.0 - $29.9 3,939 11.9 (18.8) 89.3 21.7 (21.0) $30+ 3,035 92 55.2 101.9 24.7 54.2 tt_j_q�ppnde t S.:pp Hions) 11,421 34.6 2.4 --------------- - --- 71.3 17.3 (1.0) - ------ $2,0-$3.9 4,789 14.5 10.6 13.9 3.4 10.3 $4,0-$7.9 4,333 13.1 (2.9) 24.4 5.9 (3.2) $8.0-$11.9 1,161 15 (1.8) 11,3 2.7 (1,7) $12.0 - $19.9 760 23 (1.0) 10.9 2.6 (118) $20.0 - $29.9 226 0,7 (12A) 5.2 U (11.9) ---$30+ 152 0.5 5.6- 1.4 _(1,8 Other food formats, total" 133,154 NA 5.6 123.6 NA 3,6 Grocery/convenienceigas 132,000 NA 5.6 92.5 NA 2.8 Wholesale club stores 972 NA U 27.4 NA 6.6 y' commissary Military 1� 182 NA (7.1) 3.7 NA 2.8 Total Grocery Stores 166,135 4,9 535.4 3.4 NA - Not available, Supermarket items only, + Defined as 10 or fewer stores under one management Source: Progressive Grocer, Annual Reports of the Grocery Industry, as reported in Agnee (2002, 2003), Bay Area Grocery Industry Report Page 16 of 104 The physical size of supermarkets varies greatly (Figure 1), and is growing on average. Some chains, like Whole Foods, prefer a relatively small footprint of about 25,000 square feet of sales space, while the major traditional supermarket chains like Safeway and Ralph's (now owned by Kroger) have averages closer to 40,000 square feet. Newer stores are closer to 60,000 square feet in size, which is roughly equivalent to the amount of grocery floor selling space in many supercenters. Both Safeway and Albertson's have stores in the 60,000 square foot range, many of which sell loth drugstore and grocery items. Since 1990 the average stone size has increased from 31,000 to 44,000 square feet, a 42 percent increase. Floure 1. Avera a su ermarket size,US 1990 to 2002 47,000 45,000 43,(Cht0 (i }W}+� 4.4.1000 - ...,...-,T..T __.... .........,_____.__ Q) 39,000 - . Cu >37,000 C " 35,000 M2 33,000 v 31,000 29,000 _.---- _.---- _.__ __ .27,000..._ _.__...-.___-- __..----- -- _.._. _____m____ __----- -.---- 25,000 --r—T -- — F -— - Year Source, Food Marketing Industry Speaks (Iittp://www,f i,org/Facts_figsl/kcyfactslstoresize.ht ) Supercenters The newest format in this family is the supercenter, defined as a full sized discount retail store with a full sized grocery store under tie wane roof Supercenters averaged about $25.6 million in grocery revenu s per store in 2003. That is substantially more than the average of $8.63 million in sales for conventional stores (which includes the smaller independents), or the average $15.79 million for stores in large chains (Table 3). Bay Area Grocery Industry Report Page 17 of 104 Table3:.§glen eer stare, 200I to 2002 f;m111lOD Percent 2001 2002 Chan e form t, All supearkAe total _______12.334._._...._ 12.49 1.2%r_ Conventi€nal 8.27 8.63 4.3% Limited assortment (under 1,500 items 4.55 5.20 14.3% Warehouse (low pricelservice) 11,88 5.42 -54.4% Supercenter (75,000 sq.ft. min.) 25.21 25.60 1.6% Superstore cq_Tpg (30,®00 sq.ft min.) M50 _ 18,06 -2.4% All suerrnarkets over $2 0 million _-- 12.34 12,49 1.1% Chain �qerrrtarkets rnlllion 15.4615.79--11-2.2% indspendent Superm. arkets .milllons __....___6.45 .._._... 6.24 -3.3% Other food formats, total 0.950.93 -1.9% Grocerylconveniencelgas0.72_,__..._. 0.70 -2.7% Wholesale club stores 28.24 28.19 -0.2% hiEilit ry camrrtis5ar __ _-., _--_____.___18.37 20.33 T^^ 1_0.7_% Total Grocery Stores 3.27 3.22 -1.4% Source: Calculations based on data from Agnee (2002, 2003). The tog grocery chains in the country in 2003 are shown below. Some primarily operate supercenters: Wal-Mart (1), Meijer (12), Kinart (22) and Target (27) are the biggest of these. The figures for supercenters are all corrected to correspond to the grocery portion of the stares, but the formulas used by the companies and by the main source for industry statistics, Progressive Grocer, are imperfect. Bay area Grocery Industry Report Table 4:. Se.l t d to grocers tai o uvlde03 Page 18 of 104 investigating these data in more detail shows groat deal of variation among these grocers in the per -store and per -employee ratios (Table 5). The supercenter chains bring in more revenue than the stores with smaller square footage per store, and they employ substantially more employees per square foot. The latter phenomenon may be a result of using employees for fewer hours per month. Part-time workers are reported as half time, but: the average :may be less. Meanwhile, the definition of "full-time" workers varies from company to company. Until recently, working 28 hours per week at Wal-Mart was sufficient for full -tile stags; that has since changed to 34 hours per We e.5 The per -square foot revenue in the supercenters is also higher than the average for Wal-Mart and Meijer, but laver than average for Kmart and Target. In all cases, the revenue per employee tends to be quite a bit lower than the other major chains. 5 Both Johnson (2002) and Drogin (2003) state that Wal-Mart defines full-time status as at least 28 hours per week., but more recent'Wal-Mart employee benefit information states that full-time work is 34 hours per week or more, Estimated Number of Annual Square Feet Super Sales Selling Area Rank Chain markets (Millions) (Thousands) FTEs 1 Wal-Mart 1,336 48,742 82,196 428,108 2 Kroger 2,462 4.4,782 98,616 196,195 3 Safeway 1,581 29,355 67,781 107,492 4 Albertsons 1,589 28,461 73,859 127,295 5 Ahold 1,270 25,010 49,206 98,223 6 Delhaize 1,445 14,733 43,740 58,432 7 Publix 749 14,528 31,649 81,829 8 Winn-Dixie 1,058 12,646 43,612 72,729 9 Supervalu 582 8,198 20,187 30,603 10 Great A&P Tea 488 7,832 16,968 30,280 11 H.E. Butt 284 7,744 11,323 34,180 12 Meijer 156 6,053 9,453 65,929 19 Raley's 134 2,675 6,258 8,897 20 Wegmans 64 2,491 4,979 12,647 21 Whole Foods 143 2,454 2,371 15,362 22 Kmart 115 2,443 5,658 41,607 24 Stater Bros 156 2,206 4,464 6,005 27 Target 102 2,018 6,144 25,001 35 Smart & Final 228 1,693 3,659 2,889 41 Winco 38 1,127 2,176 3,597 Source: Progressive Grocer, America's 50 Largest Supermarket Chains (Weir 2003). investigating these data in more detail shows groat deal of variation among these grocers in the per -store and per -employee ratios (Table 5). The supercenter chains bring in more revenue than the stores with smaller square footage per store, and they employ substantially more employees per square foot. The latter phenomenon may be a result of using employees for fewer hours per month. Part-time workers are reported as half time, but: the average :may be less. Meanwhile, the definition of "full-time" workers varies from company to company. Until recently, working 28 hours per week at Wal-Mart was sufficient for full -tile stags; that has since changed to 34 hours per We e.5 The per -square foot revenue in the supercenters is also higher than the average for Wal-Mart and Meijer, but laver than average for Kmart and Target. In all cases, the revenue per employee tends to be quite a bit lower than the other major chains. 5 Both Johnson (2002) and Drogin (2003) state that Wal-Mart defines full-time status as at least 28 hours per week., but more recent'Wal-Mart employee benefit information states that full-time work is 34 hours per week or more, Bay Area Grocery Indusoy Report Table 5a To r .r 20 3 - roti® ioaigti tis Rank Boiling Chain 1 Wal -Mort 2 Kroger 3 Safeway 4 Albertsons 5 Ahold 6 ®elhaize 7 Publix 8 Winn-Dixie 9 Supervalu 10 Tea 11 H.E. Butt 12 Meijer 19 Raley's 20 Wegmans 21 Whole Foods 22 Kmart 24 Stater Bras 27 Target 35 Smart & Final 41 W into Page 19 of 104 Source: Calculations based on Weir (.2003). Current conditionsand projected growth Of the five major players in the supercenter industry, Wal -.Mart, Meijer, Fred Meyer (Kroger), Target, and Kmart, Wal-Mart has set the industry standard for supercenter growth. Target is a relative newcomer to the supercenter format, while mart's recent troubles, including its bankruptcy, have forced it to scale back its plans for future supercenters. Both Meijer and Fred Meyer have a significant number of supercenters-raore, in fact, than Target or Kmart -but for the purposes of ibis report they are relatively less important, as neither chain is seen as likely to expand into California in the near future. This report focuses on the firms with an active presence in California -Wal-Mart, Target and Kinart. Table 6 shows the time trend of supereenters operated by each company in the United States since 1991, Boiling Revenue per Revenue Square per Rev per FTEs 1,000 per Store Feet per Square FTE per Square (Billions) Store Foot (1,000x) Store Feet 36.48 61,457 $594 $114 320 5.21 18.04 39,732 $454 $228 79 1.99 18.57 36,547 $508 $273 68 1.86 17.91 46,481 $385 $224 80 1.72 19.69 38,745 $508 $255 77 2.00 10,20 30,270 $337 $252 40 1.34 19.40 42,255 $459 $178 109 2.59 11.95 41,221 $290 $174 69 1.67 14.09 34,686 $406 $268 53 1.52 16.05 34,770 $452 $259 62 1.78 27.27 39,870 $684 $227 12.0 3.02 38.80 60,596 $640 $92 423 6.97 19.96 46,701 $427 $301 66 1.42 38.92 77,797 $500 $197 198 2.54 17.16 16,580 $1,035 $160 107 6.48 21.24 49,200 $432 $ a9 362 7.35 14.14 28,744 $492 $367 38 1.34 19.78 60,235 $3.28 $81 245 4.07 7.43 16,048 $463 $586 13 0.79 29,66 57,263 $518 $313 95 1.65 Source: Calculations based on Weir (.2003). Current conditionsand projected growth Of the five major players in the supercenter industry, Wal -.Mart, Meijer, Fred Meyer (Kroger), Target, and Kmart, Wal-Mart has set the industry standard for supercenter growth. Target is a relative newcomer to the supercenter format, while mart's recent troubles, including its bankruptcy, have forced it to scale back its plans for future supercenters. Both Meijer and Fred Meyer have a significant number of supercenters-raore, in fact, than Target or Kmart -but for the purposes of ibis report they are relatively less important, as neither chain is seen as likely to expand into California in the near future. This report focuses on the firms with an active presence in California -Wal-Mart, Target and Kinart. Table 6 shows the time trend of supereenters operated by each company in the United States since 1991, Flay Area Grocery Industry Report iabl 6: fat ercen r irtd �t r ►nth r ds b c �n Page 20 of 104 Of the companies in Table 6, Wal-Mart is far and away the largest operator of supercenters.6 In 2002 it opened 192 new supercenters, giving it a total of 1,258 nationwide ----fully 70 percent of the country's supercenters ('Wal-Mart Annual report 2003; Barry 20013). These stores accounted For about 78 percent of the total supercenter industry sales in 2002, up from 72 percent in 2001 (Agnee 2003; Barry 2003). Target has 94 supercenters, but a fast growth rate: between 1999 and 2002 Target more than tripled its number of supercenters, and is expected to continue building them at a steady, if not as rapid, pace. mart has tumbled from the position it held in 2001: once operating 123 supercenters, it has since closed eight of them, and is projected to close over 50 more (Barry 2003), essentially removing it from future competition in the supercenter arena. One inference from Table 6 is that the national retail trend toward supercenters has not yet reached California. Table 7, which shows Wal -Mart's presence across discount store, supercenter, Sam's Club, and Neighborhood Market formats in Texas, California, and the United States, illustrates that Wal -Mart's current presence in the California market is not consistent with the company's strategy of growing through supercenters. While Supercenters are still outside of the experience of most Californians and most Bay Area shoppers, national trends suggest that will change soon. Table 7; Wal-Mart store counts io selected markets (iO3 Discount Stare Supercenter SAM`s Club Neighborhood Market California 133 Toxas 117 United States 1568 Source: Wfti-Mart Annual Report 2003 0 3 0 155 68 24 1258 525 49 6 The second and third, largest supercenter firms, Meijer and Fred Meyer, have 160 and 133 supercenters, respectively. Those firms are not shoran in Table 6, as Meijer and Fred Meyer are regional firms that are net expected to expand into the Day Area in the near future. 1991 1992 1993 1994 1995 1996 Wal-Mart 10 34 72 147 239 344 Target 0 0 0 0 2 8 Kmart 1 5 19 67 87 96 1997 1998 1999 2000 2001 2002 Wal-Mart 441 564 721 888 1,066 1,258 Target 13 14 16 30 62 94 Kmart 99 102 105 104 123 114 Sources; Merrill Lynch (2003); Wal -dart, Target and Kmart Annual Reports. Of the companies in Table 6, Wal-Mart is far and away the largest operator of supercenters.6 In 2002 it opened 192 new supercenters, giving it a total of 1,258 nationwide ----fully 70 percent of the country's supercenters ('Wal-Mart Annual report 2003; Barry 20013). These stores accounted For about 78 percent of the total supercenter industry sales in 2002, up from 72 percent in 2001 (Agnee 2003; Barry 2003). Target has 94 supercenters, but a fast growth rate: between 1999 and 2002 Target more than tripled its number of supercenters, and is expected to continue building them at a steady, if not as rapid, pace. mart has tumbled from the position it held in 2001: once operating 123 supercenters, it has since closed eight of them, and is projected to close over 50 more (Barry 2003), essentially removing it from future competition in the supercenter arena. One inference from Table 6 is that the national retail trend toward supercenters has not yet reached California. Table 7, which shows Wal -Mart's presence across discount store, supercenter, Sam's Club, and Neighborhood Market formats in Texas, California, and the United States, illustrates that Wal -Mart's current presence in the California market is not consistent with the company's strategy of growing through supercenters. While Supercenters are still outside of the experience of most Californians and most Bay Area shoppers, national trends suggest that will change soon. Table 7; Wal-Mart store counts io selected markets (iO3 Discount Stare Supercenter SAM`s Club Neighborhood Market California 133 Toxas 117 United States 1568 Source: Wfti-Mart Annual Report 2003 0 3 0 155 68 24 1258 525 49 6 The second and third, largest supercenter firms, Meijer and Fred Meyer, have 160 and 133 supercenters, respectively. Those firms are not shoran in Table 6, as Meijer and Fred Meyer are regional firms that are net expected to expand into the Day Area in the near future. Bay Area Grocery Industry Report Page 21 of 104 Nationally, Wal-Mart is expected to open 210 new supercenters in 2003, with about 130 of these slated to be conversions of existing retail discount stores (Barry 2003; Wal-Mart Annual Report 20113). At the end of January 2003, Wal-Mart had supercenters in all but seven states. It currently operates 1.33 discount stores in California, any number of which might be candidates for supercenter conversion (Wal-Mart Annual Report 2003). The cost of each such conversion is estimated at $5.9 million: a conventional discount store is an $8.8 million capital investment, while a supercenter costs approximately $14.7 million (Barry 2003). The upgrade seems to be well worth its cast. The return on investment (ROI) for a Wal-Mart Supercenter is approximately 33 percent; by way of comparison, the ROI for a discount store is roughly 29 percent, and for the average American supermarket it is in the low 20 percent range (Barry 2003). Over the last five years, supercenters in general have been. the fastest-growing sector of retail, with sales growing at 29 percent; Wal -Mart's have been growing at a compound annual. growth rate of 45 percent since 1993 (Karry 2003). According to Merrill Lynch, supercenters have accounted for 80 percent ($5 billion.) of Wal -Mart's $6.4 billion in operating profit over the last five years (Barry 2003). Implications for t�e groclWondustry ---A The supercenter sector of the grocery industry is expected to keep growing at a steady pace, as there is considerable room in the domestic market for expansion. Wal-Mart may be able to more than double the number of supercenters to 2,700 stores and still remain. profitable (Barry 2003). Supercenters are expected to propel Wal-Mart to double-digit growth through 2009. Currently Wal-Mart Supercenters own about seven: percent of the total US grocery market, but by 2009 that share is projected to be 16 percent. In the same period, the share of traditional super-narkets in the grocery sector is expected to decline, from 86 percent today to 74 percent in 2009. The Merrill Lynch report anticipates that most of this decline will be borne by smaller, independent grocers (Agnee 2002). That last point is important, because Wal-Mart, for all its market power, is still very much a southern and rural company. As of .lune 2003, over 70 percent of its supercenters were located outside the lamest 100 metropolitan statistical areas, where almost 70 percent of the nation's grocery dollars are spent. By one estimate, in the top 26 markets with populations over 2 million, Wal -Mart's combined average market share is less than 4 percent (Tatge 2003). however, the development of the supercenter is following the same successful pattern of growth as Wal -Mart's discount retail stores. Superceriters already dominate the smaller markets of loyal Wal-Mart shoppers in southern and rural communities. if the historical pattern of Wal -Mart's expansion continues, Wal-Mart will build from this foundation by rapidly expanding its supercenter operations into markets outside of its traditional strongholds, penetrating metropolitan areas such as the Bay Area. Many grocery industry analysts view Wal -Mat as a formidable contender in the grocery market (Hays 2003= Business and Industry MMR 2003; Callahan and Zimmerman 2003). Supermarkets are reacting to the new pressures of competition in a number of ways, Some chains are focusing on maintaining market share, rather than expanding. Albertson's, for example, has closed a number of stores, including all of its stores in Houston, and has announced plans to leave four other major markets (Albertsons' Annual Report 2002, Standard and Poor's 2002). Some supermarkets are using preferred -shopper programs more (for instance, the Vons Club), as Bay Area Grocery IndusPry Report Frage 22 of 104 they build customer loyalty and can help prevent flight to other stores. Private label merchandise offer customers. savings of 20 to 40 percent when compared to national brands, and also give retailers a 35-40 percent margin, in contrast to the 27 percent average margin they receive on national brands (Agnee 2002). These are likely to be emphasized more in the future. A number of large supermarket chains have chosen to offer more high-end goods and services, and to stress their connections to local communities. In metropolitan areas like Dallas, where Wal-Mart has established a strong presence, one Krroger's now serves stir -fry meals to go, while another has put together a 2,500 bottle wine collection and hired a full -tune steward (Hays 2003), 7 Conventional supermarkets may also have an advantage in neatness, A recent Wall Street Journal article states that 100,000 people visit an average supercenter each weep, and the shelves and displays rapidly get messy and disorganized as a result (Callahan and Zimmerman 2003).8 Supercenters can be difficult to navigate, and merchandise can be hard to find. In this arena the smaller traditional supermarkets may maintain an advantage. Wholesale clubs and .. .o Even as the supercenter moves to the center of the picture in the grocery sector, two other competitors deserve a mention.. The first are warehouse clubs, of which the largest are Costco and the Wal -Mart -owned Sam's Club. Warehouse clubs are oriented primarily to business customers and other organizations that need to buy in bulk, but they are also popular with individual consumers. They currently account for about five percent of supermarket item sales in the United States, and are expected to increase that share, with some projections putting them at eight percent by 2009 (Barry 2003). A wild card in the future of the grocery sector is Wal -Mart's "Neighborhood Market" fon-nat, which is currently in an experimental phase. Generally 42,000 to 55,000 square feet, neighborhood markets are comparable to existing combination grocery stores and drugstores. They are generally located in the same area as supercenters, so as to take advantage of the company's existing distribution network. A neighborhood market employs the same low wage labor and enjoys the same economies of scale as a supercenter Wal-Mart, but does so absent the daunting physical size. The first Neighborhood Market opened in 1998, and at the end of fiscal year 2003 there were 49 in existence. Almost half of these are in Texas (Wal-Mart Annual Deport 2003)• 'The strategies adopted by the grocery stores in response to Wal -Mart's entry into the food sector contrast with those adopted by Circuit City and Best Buy in response to Wal -Mart's similarly forceful entry into electronics. Like groceries, electronics have small margins that vanish quickly, because the product cycle is so fast that inventory rapidly becomes obsolete. Last year Wal-Mart moved past Circuit City to become the second-largest electronics retailer in America, just behind Best Buy, and the reactions of the two electronics stores are instructive. Best Buy has decided to go even further upscale, by emphasizing high service levels, promoting its cutting-edge products more aggressively, and collaborating with homebuilders to wire extensive entertainment systems in new homes, Circuit City, by contrast, has fired its commission -based sales staff and replaced it with hourly employees (Hansel( 2003), 8 In chapter 5, this report uses available data to develop a more conservative estimate of 23,205 persons per supercenter per week to derive traffic impacts, Note that if, in fact, supercenter customer visits are closer to the Wall Street Journal figure of 100,000 (Callahan and Zimmerman, 21103), which cannot be confirmed, then Chapter 5 substantially underestimates those traffic impacts, Bay Area Grocery Industry Report .Page 23 of 104 In combination with supercenter saturation, Wal -Mart's Neighborhood Market format could substantially increase the threat to traditional supermarkets and small independent grocers. A Neighborhood Market can be expected to compete in a much smaller geographic area, and thus influence one or two local supermarkets more directly than a supercenter. Chuck Gilmer, editor of the trade jourrnal Shelby Report, has said that Neighborhood Markets are where "Wal-Mart is really going to apply the pain"(Hassell 2001). It is premature to say what the impact of Neighborhood Markets will be. Some Wal-Mart Supercenters lacy head -to -bead competition with stores of a similar format, but Neighborhood Markets trust compete with existing and experienced local grocery chains. In May 2003, Wal- Mart announced that during the remainder of the fiscal year it would open fewer stores (15-20) than planned (20-25) in this format, perhaps because it has been less successful than anticipated.' , Wal-Mart to slow neighborhood market growth. Supermarket News, May 14, 2003. Bay Area Grocery Industry Report Chapter Supercenters in the BayShare Scenarios Wage 24 of 104 The purpose of this chapter is twofold.. First, it discusses existing big -box retail locations in the Bay Area, and how that informs likely locations of future supercenters. This is followed by estimates of future supercenter market share its the Bay Area study region. The market share projections provide the basis for consistently comparing lower consumer prices, wage and benefit reductions, and traffic impacts in later sections of this report. i • w e r r a r ii 71 The report focuses on a twelve -county area consisting of the eleven counties included in the San Jose -San Francisco -Oakland Consolidated Statistical Area, as defined by the US Office of Management and Budget in June 2003, with the addition of Monterey County to the south (see Figure 410 Statewide, Target had 175 stores while Wal-Mart had 133 discount stares and 30 wholesale clubs at the end of 2002 (Wal-Mart 2003, Target 2002). None were supercenters, although most do sell some food and other items typical of grocery stores.' 1 In the Bay Area, there were 32 Target stores, 27 Kmart stores and 19 Wal -Mari stores. 12 As described in Chapter 1, most supercenters are redevelopments of existing big box discount retail stores. Whether existing sites can be used for expansion will depend on the particular characteristics of those sites, particularly the size of the parcel and whether contiguous parcels are available for purchase. This report did not inventory sites to check which could easily be expanded, and which would have to be closed in favor of other sites. However, the constraints on development are likely to be lowest where existing outlets are concentrated. Figure 3 in turn shows the number of so-called "big box" establishments by zip code for the study area.. Locations of five big box store chains are aggregated: Costco, Sam's Club, Wal-Mart, Target, and Kmart. 10 The San Jose -San Francisco -Oakland, CA Combined Statistical Arca (June, 2003 definition) consists of the Napa, CA Metropolitan Statistical Area (Napa County), the San Francisco -Oakland -Fremont, CA Metropolitan Statistical Area (San Francisco, Marin, San Mateo, Alameda, and Contra Costa Counties), the San lose -Sunnyvale -Santa Clara, CA Metropolitan Statistical Area (Santa Clara and San Benito Counties), the Santa Cruz -Watsonville, CA Metropolitan Statistical Area (Santa Cruz County), the Santa Rosa -Petaluma, CA Metropolitan Statistical Area (Sonoma County), and the Vallejo -Fairfield, CA Metropolitan Statistical Area (Solaro County). 1' One industry source suggested that as much as 10 percent of revenue in a conventional Wal-Mart discount store could be from fond sales, 12 Information on store locations was obtained from telephone directories and company websites. Bay Area Grocery Industry Report Page 25 of 104 EM ro a�Caunly Soundary mg isex Retail Wres in Noft em. Caft. mia Regtj 23p -coda a 4vrBig, .Box RoanI Stores w + E Bay Area Grocery Industry Report Page 26 of 104 Despite the relatively large number of Target stores in the Bay Area, Wal-Mart Supercenters appear to be the likely entrants in the short term. It has been reported that Wal-Mart has plans to open 40 supercenters in California by as early as 2006 (Adamy 2002; Grant 2002). Wal-Mart may also roll out neighborhood markets in California (Green 2003). Target stated recently that it had no immediate plans to open supercenters in California (Green 2003). Given Kmart's financial condition., it is unlikely to open new supercenters (Weir 2003). The planning commission in Redding, California recently approved a Wal-Mart supercenter. The proposed development would add 93,000 square feet to an existing Wal-Mart discount store, expanding it to 220,000 square feet, including 60,000 square feet of grocery space (Mobley 2003). The Greenbelt Alliance (2003) reports that a Wal-Mart supercenter has been proposed in Gilroy. Sites in Salinas, Oakland, Brentwood, and other Bay Area locales have also been pursued by Wal-Mart for potential supercenter development. Other sources suggest that Wal-Mart Supercenters will likely open first in La Quinta, followed by the Redding store mid stores in Hanford, Chico, and Bakersfield (Associated Press 2003). It is difficult to predict a particular number or geographical pattern of supercenters. Based on the experience in other markets, as well as Wal -Mart's efforts to identify supereenter sites in outlying portions of urban areas, the company's initial foray into supercenters in California would likely concentrate on existing discount store locations and greeniields on the outskirts of the metropolitan areas. Although Wal-Mart typically develops its stores in areas outside core urban areas, there are occasional exceptions. In January 2003 the company developed a large discount store in Los Angeles. The store, which does not sell groceries, is multistoried, uses an existing building rather than a new box, and has escalators that can accommodate shopping carts ----a significant departure from Wal -Mart's typical format (Useem 2003). Projected ,, , supercenter market share Data from several sources is used to estimate possible future market shares for Wal-Mart supercenters in the Bay Area study region. The analysis focuses on Wal -Mast because the firm is the most likely initial entrant into the Bay Area market. Estimating the future market share for supercenters is important in understanding the magnitude of the consumer price benefits, wage impacts, and Pied use and traffic effects discussed later in this report. A rough Outline of the market share calculation is given below. For a more complete discussion of the supporting data and the methods, see Appendix A. Estimating supercenter market share is complicated by the fact that the format is quite new. It is possible that no market in the United States has yet been saturated with supercenters, even though Wal-Mart supercenters have rapidly gained market share in most cities. In 1997, Wal-Mart operated eight supercenters in Dallas, with a 4.85% share; by 2003, Wal-Mart had 28 supercenters and an 1$.3% share. In Houston.., Wal-Mart had two supercenters and 1.04% market share in 1997, and by 2003 had increased its presence to 25 supercenters with a 16.69% share (Shelby Report). .bay area Grocery Industry Report Page 27 of 104 This report discusses superecrnter market share for the Hay Area for the year 2010, since that corresponds to the roughly seven-year span of data available for existing metropolitan markets. It does not project changes in market share for later years. Market share is estimated in the following steps: 1. Local population growth projections are combined with existing grocery market data to estimate the Bay Area grocery market in 2010, 2. Data on Wal-Mart supercenter market share in large metropolitan areas (Dallas, Houston, Kansas City, Denver, and Phoenix) are used to calculate the revenue per supercenter and the Wal-Mart supercenter market share in those markets. These markets are chosen because they have a large number of supercenters, are similar in size to the San Francisco CMSA, and data are readily available. 3. Information on existing discount stores is used to infer the likely number of supercenters that could be opened in the Bay Area, based on the fact that conversions of existing discount stares is a the most common method of opening a supercenter. 4. Estimates of the likely number of Hay Area supercenters in the year 2010 are combined with data on the revenue per supercenter and the size of the overall market give estimates of supercenter market share. 5. Supercenter market share is also compared to existing market share in other metropolitan areas. This approach yields several market share scenarios for the year 2010, summarized in Table 8 (below). Bay Area Grocery Industry Report Table 8: Market share .scenarios. Wal-Mart su erre t rs X410 Assumptions: Market revenue, 2003, $ billions $9.7 Market revenue, 2010, $ billions 10.4 Stare Development Scenarios (Existing Cities) Rev/Store Revenue Market Stores ($ millions, ($ millions; Share Phoenix 2003 11 $48 $525 5.1% Houston 2003 25 $41 $1,018 9.8% Dallas 2003 28 $38 $1,061 10.2% Market Shard Scenarios (Existing Cities) Market Revenue Rev/Stare Share ($ millions' ($ millions; Steges Denver 2003 6.75 $702 $37 19 Dallas 2003 16.3 $1,903 $38 SO Further 2010 Scenarios, Stare Basis, Author's Estimates Rev/Store Revenue Market Stores ($ millions; ($ millions; Share Scenario 1 10 $37 $370 4% Scenario 2 16 $40 $640 6% Scenario 3 26 $40 $1,040 10% Scenario 4 41 $48 $1,968 18% Page 28 of 104 Source. Market Share estimates from Shelby Report and Trade Dimensions, and authors' calculations, For more details, see Appendix A. The scenarios are grouped in three categories. The first category—"Store Development Scenarios (Existing Cities)"—shows projected supercenter market share in. the Bay Area using assumptions about the number of stores and revenues per store based on phoenix, Houston, and Dallas in 2003. The second category—"Market Share Scenarios" --is the number of stores that would have to be developed to capture market share equivalent to the Denver or Dallas supereenter market share in 2003. In both categories, the column on the right-hand side is calculated based on the data to the left. The third category in Table 8 ("Further 2010 Scenarios") consists of four scenarios illustrating the range of passible future market shares in the Bay Area under assumptions specific to the Bay Area. if Wal-Mart were to replace all of its 16 discount stores with supercenters, at per - supercenter food revenue of $40 million, the supercenter market share in the Bay Area in 2010 would be about 6 percent of the retail food market (Scenario 2). The upper mound is harder to estimate, Since supercenter saturation has yet to occur in most US cities, the case studies are of limited predictive value. The current distribution of big box retailers of all kinds in the Bay Area is used as a guide (see Figure 3, above). Including Costco, Sam's Club, Target, Wal-Mart, and Bay Area Grocery Industry Report Page 29 of 104 Kmart, there are about one hundred such locations in the 12 -county study area. If Wal-Mart were to replace or upgrade all of its discount stores and also acquire Kmart's locations and replace or upgrade those into supercenters with per -store grocery revenue of $48 million, this would yield a market share closer to 18 percent (41 stores). Market snares of 6 percent and 18 percent are within the range in other metropolitan areas, as shown in the first two categories of Table 8. For details on the market share calculation and supporting data, see Appendix A.13 Supercenters will capture market share unevenly by county, because they are likely to be developed first in areas with less expensive land and fewer controls on the development process. San Benito and Monterey, southern Santa Clara, northern Contra Costa, Solano and Napa, and eastern Alameda are the most likely areas for supercenter development. The next section of the report, which includes Chapters 3 and 4, uses these market share projections to estimate a range of constimer price and employee wage impacts of supercenter entry into the Bay Area by 2010. 13 The data in the top half of Table 8 show that supercenter revenue per store drops in markets where Wal-Mart has more supercenters. The scenarios at the bottom of Table 8, because they are intended to illustrate ranges, combine low numbers of stores .and low revenue per store (Scenario 1) and high numbers of stores and high revenue per store (Scenario 4), all based on observed experiences in other markets, Note that, in the 18% market share scenario, experience in other markets suggests that revenue per store will be lower than $48 million, so that scenario might be associated with more than. 41 supercenters in the Bay Area in the year 2010. Based on experiences in other markets, the authors judge the likely range of supercenter market share in the Bay Area, in the year 2010, to be from 6% to 18%, and those market shares are used in calculations in the rest of this report. day Area Grocery Industry Report Page 30 of 104 Chapter 3: Consumer Benefits For consumers, the most obvious advantage of supercenters is the broad variety of goods available at lower pnces on average. Consumers also benefit .from supercenters by being able to carry out one-stop shopping, reducing the need for separate trips to buy groceries and other products. This lection is restricted to a discussion of the benefits supercenters offer, how they are able to offer them, and the particular implications for Bay Area consumers, This report estifnates the net reduction in consumer expenditures on groceries will range between $382 million and $1.13 billion peryear in the study area. (There may also be additional consumer costs due to supercenter shopping. For example, consumers will normally have to drive farther. These are discussed in Chapter 5.) Benefits .. supercenteri -prices flow much money will Bay Area Consumers save if supercenters open there in significant numbers? For purposes of illustration, this analysis assumes that Bay Area grocery stores, supermarkets, and supercenters will sell $10.4 billion worth of grocery items in 2010, based on a straight-line relationship between population and revenues (see Chapter 2). Consumer benefits of the lower prices offered at supercenters depend on three interrelated factors: the average prices of grocery items at supercenters; their effect on prices at other supermarkets and grocery stores; and the share of the market that supercenters capture. A 2002 study by UBS Warburg found that the price of a market basket of grocery items at Wal- Mart supercenters was between 17 and 29 percent lower than prices at major supermarket chains in the same urban area (Turcotte 2003). On average, the UBS Warburg study found that Wal- Mart grocery prices were 20 percent lower than major chains (Koretz 2002). Callahan and Zimmerman (2003) assert that average Wal-Mart prices were 10 or 15 percent lower when entering new markets, and cite unspecified "studies" showing differences in individual items ranging between 8 and 27 percent. A report by McKinsey & Company, apparently using proprietary survey data, states that conventional grocery stares have prices "over 8 percent [higher] across the board in some markets" in comparison to "value formats" such as supercenters (prank et at 2003). Bay Area Grocery Industry Report Page 31 of 104 The range implied by these sources is from 8 to 20 percent for the price of the average market basket, an assumption reflected in the calculations below. 14 The UFS Warburg study is cited as finding an average reduction of 12 percent (Turcotte 2003) or 13 percent (K:oretz 2002; Lofton 2003) in prices at other stores in the market after entry by Wal-Mart supercenters. Therefore 13 percent is used as an upper bound estimate of price reductions at other stores, corresponding to the 20 percent initial difference in price. Since the lower bound for the initial price difference is 8 percent, the corresponding decrease in prices among other stores for the lower -bound price difference scenario is set at 5 percent. Market capture Consistent with the previous analysis, the market capture of supercenters in 2010 is assumed to range between 6 and 18 percent (see Chapter 2). Calculation of reduced expenditures Using the range of assumptions above, the net reduction. in consumer expenditures on groceries could range between $382 million and $1.13 billion per year in the study area, again omitting Sonoma County (Table 9). Table 9: Estimated Consumer Grocd f Ex enditure Savin as. bv Market Share Supercenter Sector Union Grocer Sector Reduced Reduced Initial Price Expenditures Price Expenditures Market Share Difference (millions) Market Share Reduction (millions) Total 6% (8%) ($49.9) 64% (5%) ($332.1) ($382.1) 6% (20%) ($124.8) 64% (13%) ($863.6) ($988.4) 10% (8%) ($83.2) 61% (5%) ($318.0) ($401.2) 10% (20%) ($208.0) 61% (13%) ($826.8) ($1,034.8) 18% (8%) ($149.6) 56% (5%) ($289.1) ($439.5) 18% (20%) ($374.4) 56% (13%) ($753.3) ($1,127.7) Of the two sets of price differentials used to calculate consumer savings in the simulations above, the 20 percent price differential is based on data that reflect the initial difference between supercenters and grocery stores in markets where Wal-Mart supercenters had recently entered. The 8 percent price differential was based on studies that averaged across a range of markets, including markets where supercenters are more established. For that reason, the 8 percent price differential reflects some long -run response as grocery chains in some of the areas studied by McKinsey & Company had likely lowered their price in response to supercenter competition. Therefore, the 20 percent differential likely better reflects the price gap that would exist when 14 The upper and lower bounds are averages across market areas and across baskets of goods. Price differentials vary across items and across market areas. Bay Area Grocery Industry Report Page 32 of 104 supercenters initially enter a market, as would be the case in the early period of supercenter development in the Bay Area. Note also that the 20 percent price differential is an average of experiences across different markets studied by UBS 'Marburg (as cited in lforetz 2002 and Turcotte 2003), and so the calculations associated with that differential are not necessarily an upper bound. These estimates assume no change in grocery prices in the non -unionized sector, for two reasons. First, supercenters are unlikely to saturate the Bay Area market, so price reductions are likely to be limited to stores in areas where supercenters are competing. Other parts of the region would not necessarily experience significant price reductions solely due to the arrival of the competition in the region. (However, regardless of saturation level, wage and benefit reductions will occur across the board in the union sector, because union bargaining agreements apply region -wide; this is discussed in Chapter 4.) The second reason is a simple exigency of data: independent grocers and small chains are typically in niche markets (for example, health foods or ethnic specialty foods), and reliable data about how prices in those smaller markets would respond to supercenters was not available. These grocery savings have additional, indirect impacts on total regional consumption. Savings raise not incomes, which are then partly spent on more regional goods and services — which are in turn partly paid out as wages. Those are also partly spent on local goods, and so on, in a rippling effect. The total spending impact, or direct savings plus its indirect effect, is roughly estimated using a measure known as an income multiplier. While multiplier effects from lower prices are difficult to quantify, and estimates of local and regional income multipliers vary, the overall regional impact could be as much as two times the amount of direct expenditure savings (BASF 2000). Note, however, that to the extent that lower priced goods at supercenters require longer drives to access the stores there may be an increase in the time and money costs of travel associated with shopping there. This tradeoff is not captured in a calculation based solely on cost savings of goods. A calculation of the costs of extra driving is included in Chapter 5, which considers land use and transportation. impacts. Discount r ,,d Measures of productivity provide another way to assess the economic benefits of discount retail's expansion. Most economists conclude that productivity is the single most important factor in sustainable, long-term growth in standards of living (Krugman 1994). Recent research suggests that the discount retail sector, and Wal-Mart in particular, is an important source of the late 1990s increase in productivity growth in the United States. The McKinsey Global Institute (MGI) studied productivity growth in the U,S, economy during two time periods, 1987 to 1995 and 1995 to 1999, to understand why growth rates were substantially faster between 1995 and 1999 (McKinsey Global Institute 2001). American labor productivity grew at an annual rate of 2.32 percent from 1995-1999, compared to 0.99 percent from 1987- 1995, x}87-1995, a jump of 1.33 percentage points, The MGI study attributed about a quarter of this increase in the rate of productivity growth to improvements in the retail sector. Further decomposing this result, MGI attributed 16 percent of Bay Area Grocery Industry Report Page 33 of 104 the retail productivity increase to improvements in "general merchandise retailing" -- the sub- sector composed largely of discount retailers. Within general merchandise retailing, MGI argued that the bulk of the productivity increase was attributable to Wal-Mart. In other words, MGI found that general merchandise retailing was responsible for 3.7 percent of the increase in U.S. productivity growth rates in the late 1990'x, and that Wal-Mart was essentially driving productivity increases in the general merchandise sector. This is a large impact for any one firm. Articles in the popular press have noted that Wal -Mart's productivity advantage is due to several factors: Efficient distribution systems, large scale economies that give it leverage in buying from suppliers, managerial innovations, and the big -box format which leads to within -store scale economies (McKinsey Global Institute 2001; postrel 2002).15 Labor productivity levels in Wal- Mart stores were 44 percent higher than in other general merchandise retail stores in 1987. By 1999, it maintained a labor productivity level 41 percent higher than competitors (McKinsey Global Institute 2001). Some economists have theorized that the lower prices available to consumers in the 1990s as a result of discount merchandising helped slow the rate of inflation. Some analysts have called this the "Wal-Mart effect," noting the fzrrra's role in reducing prices throughout the discount retail sector (Baker, 1996). The MGI study estimated that labor productivity in Wal -Mast supercenters is 10 percent higher than labor productivity in the average discount retail outlet, suggesting that Wal-Mart supercenters are the most recent of various practices that have allowed that company to increase productivity and hence lower consumer prices. The productivity advantages and consumer price benefits that flow from Wal -Mart's efficiency innovations in the discount retail sector are important both for the U.S. and for regions. For the Bay Area, the entry of supercenters will bring lower grocery prices, providing increases in real living standards to consumers in the region. On the other hand, it will also lead to downward pressure on wages and benefits in the major Bay Area grocery chains, thus lowering living standards for grocery employees. This in turn will have a downward ripple effect on the regional economy. That point is the main subject of Chapter 4. 15 Also see "The Singlo Most important Coanpany," Newsweek, April 29, 2002. Bay Area Grocery Industry .deport pter i. l Impacts Grocery y+ i :' • { 1 and 1. WagEmployment es Page 34 of 104 Bay Area grocery business is an important source of high -paying, entry-level employment. The grocery industry offers wage and benefits that generally exceed those in the retail, accommodation, and food and beverage industries, Among major categories of occupationally similar jobs examined in this research, only construction offers Higher average pay and benefits than the grocery industry in the Bay Area, and the stability of construction work is likely lower. Given the market share scenarios discussed in Chapter 2, what is the range of likely impacts of the entrance of supercenters into the grocery industry on employment and wages in the Bay Area? As shown below, the gap between wages and benefits paid by unionized grocers and those likely to be offered by the major supercenter player, Nal -Mart, is currently on the order of $11.68 per Hour, or about $21,€300 for an employee working 1,750 hours per year. As lower -paid jobs replace current and future higher -paid jobs in the major grocery chains, how much will aggregate worker pay be reduced? The calculation depends on two key factors. the supercenter market share, which was discussed in Chapter 3, and the extent to which staffing levels per market share vary between the supercenter format and the conventional grocery format. Ander a set of realistic assumptions discussed in more detail below, aggregate direct wages and benefits to workers in the region would decline by $353 to $677 million per- year. In addition, these direct losses have indirect consequences. Lower regional incomes mean less spending on other goods and services, and so on. That calculation relies on what is known as a wage multiplier, which is estimated by the regional planning agency, the Association of Bay Area Governments (ABAG). While estimates of wage multipliers vary, using the ABAG multiplier for retail wages in the Bay Area, the net economic reduction of wages and benefits would be more than twice the direct losses (ABAG 2003). 16 In 2001, the most recent year for which Census data are available, there were 3.5 million full- time and pari -time jobs in. all non -proprietor establishments in the San Jose -Sail Francisco - Oakland Consolidated Metropolitan Statistical Area (Table 10). Adding Monterey and San Benito counties, the total was 3.6 million, The average pay and benefits per job in 2001 was about MAO, one of the highest for US metropolitan areas. 16ABAG's multipliers obtained from: interview with Paul Fassinger, ABAG research director, 2003. Bay Area Grocery Industry Report Table 10, Total emolovment. Bav Area. 2001 Page 35 of 104 Source: U.S. Census Bureau Tables l l and 1.2 show employment and average payroll in grocery stores and supermarkets, excluding convenience stores, 17 The grocery industry accounted for about 63,000 jobs in the study area and 58,000 jobs in the CMSA in 2001. This represents about two percent of employment for the study area, a substantial share for one industry. While the average wage for grocery jobs is significantly lower than the average for the study area, grocery employees are well paid compared to other occupationally similar sectors, as shown in Appendix B. The employment and payroll figures in these tables are for all groceries and supermarkets. Small groceries and non -unionized supermarkets have lower wages and benefits than the unionized sector, so this average is lower than unionized supermarket jobs. Nigher -paying and better - benefit union jobs account for about 60 percent of the employment in the industry. The average payroll for grocery and supeir arket employees was stable from 1998 to 2001, at about $24,000 per employee. Meanwhile, the 236,000 workers in the food and drinking place industry brought in an average of $13,400 per year in 2001, the 46,000 department store workers earned about $ 14,00.0, and the accommodations (hotel and motel) industry paid its 57,000 employees close to $19,000 per year. (See Appendix B for supporting data tables.) Among the industries in Appendix B, chosen because they provide employment opportunities that are similar to grocery jobs in terins of education mid training requirements, only the 225,000 Bay Area construction workers received an average annual wage ($43,000) higher than grocery workers. 17 "Payroll" includes wages., benefits, overtime pay, and bonuses. "Employees" includes all part-time and full-time individuals on the payroll at a given establishment on March 12, The NAILS system is site-specific, not firm specific, Therefore grocery industry ornployees working in distribution centers, administrative offices, and entirely retail stores are not includod, Payroll Annual Payroll per Establish - County Employees ($1,000) Employee ments Alameda 670,376 $29,759,600 $44,392 36,468 Centra Costa 329,686 14,402,442 43,685 22,285 Maria 109,012 4,540, 570 41,652 10,256 Monterey 106,740 3,392,702 31,785 8,719 Napa 52,052 1,770,943 34,023 3,848 San Benito 11,263 306,023 27,171 1,025 San Francisco 557,049 31,409,218 56,385 30,643 San Mateo 382,377 22,404,842 58,594 20,378 Santa Clara 1,042,995 68,288,321 66,473 45,265 Santa Cruz 81,466 2,604,964 31,976 7,001 Solano 100,819 3,109,203 30,839 6,584 Sonoma 172,665 6,004,813 34,777 13,526 CMSA 3,498,499 $184,294,616 $52,678 196,254 12 -county area 3,616,502 $187,993,541 $61,982 205,998 Source: U.S. Census Bureau Tables l l and 1.2 show employment and average payroll in grocery stores and supermarkets, excluding convenience stores, 17 The grocery industry accounted for about 63,000 jobs in the study area and 58,000 jobs in the CMSA in 2001. This represents about two percent of employment for the study area, a substantial share for one industry. While the average wage for grocery jobs is significantly lower than the average for the study area, grocery employees are well paid compared to other occupationally similar sectors, as shown in Appendix B. The employment and payroll figures in these tables are for all groceries and supermarkets. Small groceries and non -unionized supermarkets have lower wages and benefits than the unionized sector, so this average is lower than unionized supermarket jobs. Nigher -paying and better - benefit union jobs account for about 60 percent of the employment in the industry. The average payroll for grocery and supeir arket employees was stable from 1998 to 2001, at about $24,000 per employee. Meanwhile, the 236,000 workers in the food and drinking place industry brought in an average of $13,400 per year in 2001, the 46,000 department store workers earned about $ 14,00.0, and the accommodations (hotel and motel) industry paid its 57,000 employees close to $19,000 per year. (See Appendix B for supporting data tables.) Among the industries in Appendix B, chosen because they provide employment opportunities that are similar to grocery jobs in terins of education mid training requirements, only the 225,000 Bay Area construction workers received an average annual wage ($43,000) higher than grocery workers. 17 "Payroll" includes wages., benefits, overtime pay, and bonuses. "Employees" includes all part-time and full-time individuals on the payroll at a given establishment on March 12, The NAILS system is site-specific, not firm specific, Therefore grocery industry ornployees working in distribution centers, administrative offices, and entirely retail stores are not includod, Bay Area Grocery Industry Report Page 36 of 104 % of 12- % of Gounty ABAG 1998 1999 2000 2001 Region Region Alameda 9,789 9,942 9,822 10,619 16.7% 18.4% Contra Costa 7,469 7,591 7,777 8,467 13.3% 14.7% Marin 2,862 2,888 2,979 3,282 5.2% 5.7% Monterey 2,362 2,748 2,787 2,716 4.3% NA Napa 1,221 1,251 1,254 1,439 2.3% NA San Benito 453 447 545 566 0.9% 1.0% San Francisco 5,350 5,359 5,395 5,660 8.9% 9,8% San Mateo 5,574 5,845 5,544 6,159 9.7% 10.7% Santa Clara 12,974 13,126 12,597 13,405 21.1% 23.2% Santa Cruz 2,207 2,339 2,247 2,422 3.8% NA Solano 2,908 2,843 2,814 3,299 5.2% 5.7% Sonoma 4,751 5,107 4,775 5,458 8.6% 9.4% 12 -county area 57,920 59,486 58,528 63,492 DMSA 52,898 $3,952 52,949 57,788 State 232,910 250,811 239,654 250,300 nate: NAILS cads 445110 - Supermarkets and Other Grocery (except Convenience) Stares (NAICS 1997 and 2002) Source: County Business Patterns, US Department of Labor, Bureau of the Census Ray area Grocery Industry Report Page 3 7 of 104 ani 1�° ea � tall er ern I� a in the ro ire � t �� e4 �� 1s •2ati4 County 1993 1999 20100 2001 Alameda $24,231 $ 22,996 $ 26,333 $ 24,590 Contra Costa 24,471 23,123 26,294 24,553 Marla 26,670 26,286 27,947 25,179 Monterey 26,414 24,714 24,095 24,916 Napa 24,334 24,197 25,496 23,523 San Benito 25,247 25,561 26,240 24,406 San Francisca 23,946 24,016 24,693 23,335 San Mateo 25,643 27,341 28,522 2.6,096 Santa Clara 24,897 25,655 26,686 24,925 Santa Cruz 24,504 23,302 24,070 22,497 Solana 26,030 25,648 24,964 24,449 Sonoma .23,868 22,039 24,358 22,374 Mange 2,802 5,302 4,452 3,722 12 -County Region $ 24,820 $ 24,459 $ 26,106 $ 24,441 Statewide 24,399 24,230 24,807 23,785 Note: Inflated to 2001 dollars using the Consumer Price Index - Urban Wage Farmers and Clerical Workers for the San Francisco - Oakland -San Jose Metropolitan Area (CPI series IG CW URA422SA0).. Note: NAILS code 4.45110 - Supermarkets and Other Grocery (except Convenience) stores (NAICS 1997 and 2002). Sources: County Business Patterns, US Department of Labor, Bureau of the Census; Consumer Price Index, CJS Department of Labor, Bureau of Labor Statistics. Bay Area �1�mparison S�f supfIrmarket and supercenter wages and benefits ----I Table 13 compares the wages and benefits offered by unionized grocery stores in the Bay Area to those likely to be offered at Wal-Mart supercenters. The analysis focuses on unionized grocery stores because the unionized wage and benefit structure is largely consistent within the study area; about 60 percent of employment in the industry is unionized, and goad data are available for this sector, This makes it is passible to estimate wages and benefits with some accuracy. As noted previously, Wal-Mart supercenters are the basis for comparison because Wal-Mart is the most likely ear*rm supercenter entrant into the Bay Area market, Unionized supermarket wages in the Bay Area The unionized grocers have a largely consistent wage and benefit structure. Wages for the major categories of food workers and non-food workers are ,shown below for the past three years. Starting hourly wages for courtesy clerks are fairly low, at about $8.40 per hour. However, rapid increases accrue with experience in all other wage categories (see Table 13, next page). The average wage calculations are based on weighted averages within seven employment classes for about 36,000 unionized supermarket employees in the 12 -county study area, excluding Sonoma County (see "fable 14). The average hourly wage based on these figures is $1530. Bay Area Grocery Industry Report Page 38 of 104 Title 13. Wage schedule for food w ricer - rain -food worker� July 2001 July 2002 July 2003 FOOD ELATES Managing clerks $19.188 $19.688 $20.188 Senior head clerks and produce clerks $18.627 $19.127 $19.627 Head clerks $18.513 $19.013 $19.513 Experienced clerks $18.084 $18.584 $19.084 Apprentice clerks: 4th 520 hours $13.841 $14.224 $14.607 3rd 520 hours $12.213 $12.551 $12.888 2nd 524 hours $10.585 $10.877 $11.170 1st 52.0 hours $8.957 $9.204 $9,452 Courtesy Clerks (Hired before 513/83) $8.812 $9.112 $9.412 Courtesy Clerks (Hired after 512/83) $7.795 $8.095 $8.395 Demonstrators $10.450 $10,950 $11.450 NON-FOOD DATES Combo Bakery/Dell Manager $13.605 $14.105 $14.605 Head Clerks $12.600 $13.100 $13.600 Experienced Clerks $12.205 $12.705 $13.205 Apprentice Clerks 7th 620 hours $19.491 $10.921 $11.350 6th 5203 hours $19,081 $10.494 $10.907 5th 520 hours $9.670 $10.066 $10.463 4th 520 hours $9,269 $9,6401 $10.019 3rd 520 hours $8.759 $9.118 $9,477 2nd 520 hours Bay Area Grocery Industry Report Page 39 of 104 Table 14: Average wages for.Unignized supermarket a io a 2 -count stud area 2 03 Weighted average wage $15.30 Sources: Employees by wage categorization reported by Union Automation, based on union records of the United Food and Commercial Workers (tJFCW), Locals 428 (Santa Clara, Santa Cruz, Monterey, and San Benito Counties and Menlo Park), 3738 (Napa and Solano Counties), 1179 (Contra Costa),101 and 648 (Son Francisco, Marin, San Mateo), 839 (Monterey, Santa Cruzand San Benito Counties), and 120 and 870 (Alameda County). Wage steps from the.Master Food Agreement between the UFCW locals and major unionized supermarkets including Safeway, Albertson's, Ralph's, Nob Hill, and Raleys. Detailed data on supercenter wages are generally unavailable, Anecdotal and journalistic evidence exists, but is of limited. value; this evidence is reviewed below. Since Wal -haft is the likely initial developer of supercenters in the Bay Area, this analysis relies on the best information passible on the wages and benefits Wal-Mart would likely offer to its supercenter employees, based upon a report using payroll records for 2001 that Wal-Mart turned over to plaintiffs in a sex discrimination class action lawsuit (Drogin 2003). Supercenters accounted for 52 percent of total Wal-Mart employment in 2001, for over 460,000 employees (Drogin 2003). The percentage has likely increased since then, as most of Wal -Mart's double-digit revenue growth is attributable to the supercenter fozat. This analysis assumes that the national data. available on Wal -Mart's wage structure and benefit packages are directly applicable to the supercenter format. Current evidence suggests that the wage structure within discount retail firms between stores with and without groceries is consistent (e.g., Bielby 2003). A hallmark of Wal -Mart's labor strategy is its worker flexibility, wherein any employee can be moved to any section of a given store at any time Ortega 1998; Ehrenreich 2000; Wal-Mart Associate Handbook 2001; Cerankosky and Rodgers 2003). Segregating grocery and retail employees, and assigning therm separate pay tracks, would be a significant departure from this strategy. News reports and anecdotal sources suggest that whatever Wal-Mart pays in other parts of the US, it is less than $10 per hour. Bob Ortega, a Wall Street Journal reporter who wrote a book about Wal -Mata in 1998, estimated the company's starting wages at between $6 and $i per Dour Percent of Avg. Group Count Total HrslYr Wgt Av Courtesy clerk 4,364 12.1% 961 $8,40 Food clerk 17,394 483% 1,655 18.40 General merchandise clerk 9,963 27.7% 1,490 11.30 Meat cutter 2,076 5.8% 1,736 18.30 Meat clerk 645 1.8% 1,611 13.50 Meat wrapper 30 0.1% 1,718 13.90 Miscellaneous positions 1,521 4.2% 1,474 13.00 Total 35,993 100.0% 1,530 Weighted average wage $15.30 Sources: Employees by wage categorization reported by Union Automation, based on union records of the United Food and Commercial Workers (tJFCW), Locals 428 (Santa Clara, Santa Cruz, Monterey, and San Benito Counties and Menlo Park), 3738 (Napa and Solano Counties), 1179 (Contra Costa),101 and 648 (Son Francisco, Marin, San Mateo), 839 (Monterey, Santa Cruzand San Benito Counties), and 120 and 870 (Alameda County). Wage steps from the.Master Food Agreement between the UFCW locals and major unionized supermarkets including Safeway, Albertson's, Ralph's, Nob Hill, and Raleys. Detailed data on supercenter wages are generally unavailable, Anecdotal and journalistic evidence exists, but is of limited. value; this evidence is reviewed below. Since Wal -haft is the likely initial developer of supercenters in the Bay Area, this analysis relies on the best information passible on the wages and benefits Wal-Mart would likely offer to its supercenter employees, based upon a report using payroll records for 2001 that Wal-Mart turned over to plaintiffs in a sex discrimination class action lawsuit (Drogin 2003). Supercenters accounted for 52 percent of total Wal-Mart employment in 2001, for over 460,000 employees (Drogin 2003). The percentage has likely increased since then, as most of Wal -Mart's double-digit revenue growth is attributable to the supercenter fozat. This analysis assumes that the national data. available on Wal -Mart's wage structure and benefit packages are directly applicable to the supercenter format. Current evidence suggests that the wage structure within discount retail firms between stores with and without groceries is consistent (e.g., Bielby 2003). A hallmark of Wal -Mart's labor strategy is its worker flexibility, wherein any employee can be moved to any section of a given store at any time Ortega 1998; Ehrenreich 2000; Wal-Mart Associate Handbook 2001; Cerankosky and Rodgers 2003). Segregating grocery and retail employees, and assigning therm separate pay tracks, would be a significant departure from this strategy. News reports and anecdotal sources suggest that whatever Wal-Mart pays in other parts of the US, it is less than $10 per hour. Bob Ortega, a Wall Street Journal reporter who wrote a book about Wal -Mata in 1998, estimated the company's starting wages at between $6 and $i per Dour Bay Area Grocery Industry Report Page 40 of 104 (Ortega 1.998; Ortega 1999). The journalist and social commentator Barbara Ehrenreich worked in a Wal-Mart for a month in 1999, and reported that starting wages in a Portland., Maine Wal- Mart were $5.50 an hour, while the hourly wage in the Minneapolis -area Wal-Mart where she worked was $7 (Ehrenreich 2000). The inhouse publication of Ralph's supermarkets recently stated. that Wal-Mart employees averaged $7.62 while Ralph's employees average $13.51.°8 In ,Tune 2003, National Public Radio aired a multi -part series on Wal-Mart, and devoted one segment to the company's labor practices. In this segment NPR reported Wal-Mart wages as hovering between $5.00 and $7.00. A recent journalistic report stated that the average wage at Wal-Mart annually is less than $10 an hour before bonuses (Saporito 2003), and an article in Forbes placed the average Wal-Mart wage at $7.50 per hour, with the average annual salary of a full-time Wal-Mart employee being about $18,000 a year (1Jessell 2003). Using data on retail wages from the Bureau of Labor Statistics, the United Food and Commercial Workers (UFCW) union has estimated an average hourly wage of about $7.50 based on the estimated percentage of overall retail employment accounted for by Wal-Mart. These reported estimates are generally lower than the one used here. Drogin (2003) reports the average wage, at the end of 2001, of all "full time status" Wal-Mart employees—that is, employees who had worked at least 45 weeks during that year, Wal -Mart's definition of full time work is reported to be 28 hours a week or more (Johnson 2002; Drogin 2003).19 Table 15 shows that the percentage of employees falling in this category was 55 percent in 2000 and 2001. About 57 percent of Wal-Mart employees had "Hl -time" status at the end of 2001 (Drogin 2003: 11). This implies that about 43 percent worked fewer than 45 weeks. (This high percentage is not due to the creation of new jobs, because it accounts for positions created in the previous year.) The implied high turnover rate is corroborated by the reported average tenure of four years for year-end, full-time employees (Drogin 2003: 19), which in turn is a very substantial overestimate of average tenure for all employees, because employee turnover during the year is not taken into account, and part-time workers are excluded. The real figure is probably less than three years. In comparison, the average tenure of unionized supermarket employees in the study area—including part-time workers --is more than nine years. se Ralph's Supermarkets, 2003. The Wal -hurt Strategy: Low Prices, Low Wages, Low Benefits, Express Lanes. 1(2). May. 191t has since increased to 34 hours per week, according to tidal -Mart benefits materials given to employees. 20 Based on data from the UFCW Employers Benefits Plans. The average number of pension vesting years (roughly equivalent to tenure in the current job) is 9.77. Sonne known employees provided by Union Automation are not part of the Trust Fuad database and their pension vesting years are assumed to be lower. Bay Area Grocery Industry Report Page 41 of 104 Table 15. Wal-Mart full-time emolovment as vercent of total, 1999-2001 As 45+ Weeks, As Percent of Wage All 28+ Percent of Prev, Year Category Employees HrslWeek All Year End 2001 Total 930,770 5018,724 55% 57% Hourly 895,809 476,813 53% 55% Salary 34,9651 31,911 91% 98% 2000 Total 892,405 458,190 51% 57% Hourly 859,866 428,820 50% 55% Salary 32,539 29,370 90% 101% 1999 Total 810,722 414,989 51% - Hourly 781,702 388,802 50% - Salary 29,0120 26,187 90% - Source. Drogin 2003, Appendix 4A (p. 1) and 6A (p.1). The nationwide average wage for Wal-Mart in 2001 was about $18,000 for hourly employees with full time status and at least 45 weeks sof work during the previous year. Salaried employees with full-time status and at least 45 weeks of work (e.g., management) earned about $51,000 on average (Drog n 2003, Table 4). Hourly employees made up 96 percent of total employees in 2001, and 94 percent of employees with fall time status and at least 45 weeks of work. On an hourly basis, the wage averaged $9.21 an hour in 2001 (Table 16), ff wages at Wal-Mart have increased at the rate of inflation in the San. Francisco urban area since thea, the average wage for full-time workers with at least 45 weeks of work during the year would be about $9.670 now. But this average calculated wage might be substantially less if the 341,797 employees without at least 45 weeks of work during the year (38 percent of the total worker pool) were accounted for, Unfortunately, data are not available on this group. Bay Area Grocery Industry Report Page 42 of 104 Table 'f6: Wal-Mart: vera 0 hourl. w� e,if �rri 1 A ed at least one vear & active at vear-end. 2001 Year -End Actives Not Accounted Full Time Part Time For Men's average wage' $9.55 $8.50 NIA Women's average wage' $9.26 $7.88 NIA Women as share of workers O. 706 0.658 NIA Average hourly wage, 2001 $9.35 $8.47 Total workers 463,526 90,486 341,797 Percent of year-end actives 52% 10% 38% Percent of universe 84% 16% Weighted average, 2001 $9.21 Inflated to April 20032 $9.60 'Average wage is calculated for active workers at years end who had worked at Wal -dart for at least one year (Drogin 2003). 2ttsing. the Consumer.Price Index -Urban Wage Earners and Clerical Workers for San Francisco -Oakland -Sacs Jose. Source;; I3rogin 2003, p. 11 and Appendix 8b; authors' calculations. The estimated average hourly wage of $9.60 is likely ars overstatement of the national average wage, for three reasons. First, it does not count those who were hired daring the year, even though such workers account for 38 percent of year-end active workers, as shown in Table 16, above. Thus, longer -tenured employees, who tend to have higher wages, are significantly over- represented. Second, Wal-Mart reported that it had 1,239,409 employees in 2000, which includes all those who worked for a short while and left before the year was over.zr This implies about 300,000 employees turned over per year during this recent period. These employees are not included in the payroll records upon which the estimate is based, and such employees would be expected to have lower wages than those who were active at year-end. Third, it is unlikely that the average wage has Dept up with increases in the CPI for the Sart Francisco Bay Area during the last year and a half. 21 Frorn IRS Form 5500 for Wal-Mart 401K Retirement Savings Pian, Schedule T (Qualified Pension Plan Coverage Information), 4c(l), Bay Area Grocery Industry Report Page 43 of 104 Respite the fact that $9.60 is likely an overestimate of the current average wage for all hourly wormers at Wal-Mart stores in the United Mates, it is used here because that estimated hourly wage is based on the best available evidence.22 Benefits provided by the unionized grocery companies and Wal-Mart .are summarized in Table 17 (below). Both the UFCW locals and Wal-Mart offer paid holidays, paid vacation, health benefits, sick Dave, and a pension plan. In every category, the benefits offered to wormers at the UFCW locals are more valuable than those offered by Wal-Mart. Information about ,some of the Wal-Mart benefits in Table 17 is from. Boarnet and Crane (1999), and those Wal-Mart benefits, preceded by "[ 1999]" in the table, may have changed in the intervening four years. Job tenure is crucial in understanding the value of these benefits in practice. The rapid expansion of Wal -Mart's workforce means that on a nationwide basis there are many recently hired employees. Even if growth continues for Wal-Mart into the foreseeable future, the percentage of new positions added on a yearly basis will decline, which could lead to an increase in the average wage when longer -tenured employees receive premised increases in wages and benefits. However, as discussed in the text accompanying 'fable 15, Wal -Mart's turnover rate is quite high. This largely explains why even with a non. -trivial benefits package, the average value of benefits can be low on a per -employee basis, The dollar value of the benefits packages is estimated in order to compare them more explicitly. UFCW monetized benefit estimates are based on reporting of disaggregate employee data by the union pension funds. This infornration is reported on a summary basis in Table 20, later in this chapter. The net benefits package is worth about $7.57 per hour, excluding premiums (overtime, holiday, and Sunday pay). 22 The estimated national average Wal-Mart wage is used for the Bay Area. Note that, while the data in Drogin (2003) give sore e information on. Wal-Mart wages in different rogions, those data suggest that the national average Wal-Mart wage is a good estimate of.Bay Area Wal-Mart wages, The region including northern California, Oregon, and rural Washingtonhas an average wage equivalent to the national average, but that region includes both the urbanized Bay Area and rural areas to .the north, The southern California administrative region is likely more dominated by urban areas, and in southern California Wal -Dart wages are 97 percent of the nationwide average. Among the Wal-Mart administrative regions analyzed in Drogin (2003, appendix 4c), the regions with the highest pay rates offered wages averaging 20 percent higher than the national average. Because none of those regions were in California, the estimated national average wage is used as an estimate of Bay Area supercenter wages in this study. Pay Area Grocery Industry .Report Paid Holidays: Vacations: Premium pay: Sick Leave: Health & Welfare Eligibility Medical Insurance Page 44 of 104 Fable 17: Bengt•[ cce �aris�n UFCW Locals, Say Area Nine per year. Two weeks after one year. Three weeks after five years. Four weeks after fifteen years. Five weeks after twenty years. 150% for overtime and Sundays, 200% for holidays. Accrues at six hours per month, maximum 360 hours of unused sick leave. Annual cash buyout for untried hours up to $400 less $10 for each sick leave hour used Those working a minimum of 64 or 72 hours per month, after the first two months (60 days) of service. Three plans offered. Dependents covered under all plans. No premium. $200 deductible per person per disability. Most common plan (66 percent of workers), 100 percent of outpatient, birthing, extended care, inpatient. 10 copay for office visits, 100% coverage of remainder for PPO. Dental insurance: 80% of standard services covered. Retirement Flan: Pension and 401K moth made available to employees after probationary period of 375 hours of service. No employee premium required Other: Dearth benefit insurance averaging $33,877 (source - UFCW EBF). Vision coverage with $5 or $10 copay for exam, lenses and frames covered Wal-Mart, Us [19931 six per year. [19991: One week after one year. Two weeks after two years. Three weeks after seven years Unknown [1999]: Accrues at .023077 hours for each hour worked (approx. 4 hours per month) or 6 days per year, to a maximum of 192 hours (24 days). 50% of accrued sick leave may be used as personal time off from work. No cash buyout For those hired after 9130101, up to 180 days, 34 hours a week minimum. Employer paid with employee sharing premium. Two deductible options, $350 or $1,000. Employee premium ranges from $338 to $3,081 yearly depending on plan, deductible, and number of dependents. MITR"1:1111 401 K Plan: Any employee who worked one year for 1,000 hours. Money in trust until employee leaves or reaches age 69- 1/2. Mock Ownership: Company contributes 15% towards up to $1,800 of Wal-Mart stock each year. Profit -Sharing Plan: same eligibility as for 401K Sources: The Segal Company, UFCW Employers Benefit Plans database; Wal-Mart Associate Handbook and miscellaneous benefits materials; Boarnet and Crane (1999). On a monetized basis, the benefits received by Wal-Mart employees are substantially less than those of the unionized grocery stares in the Bay Area. In 1995, 38 percent of Wal-Mart employees Bay Area Grocery Industry Report Page 45 of 104 took advantage of the benefits packages offered to them by Wal-Mart (Boamet and Crane 1999). That number increased to 46 percent in 2000.23 The low participation rate is likely due to the high employee contributions required. The average hourly employer's contribution to health and welfare plans for participating Wal-Mart employees in 2000 was, at most, $0.86 per hour (based on the most recent publicly available tax return information). When averaged across all employees, the net benefit falls to at most $0.81 (Table 18).24 This assumes, conservatively, that the 1.2 million Wal-Mart employees active at year- end 2001 averaged 750 hours that year. No data on average hours are available. Table 18. Wal-Mart health and welfare benefits estimate. 2000 Number of employees and dependents covered in 2000$ 980,249 [A] Number of employees in 2000 (year-end)b 1,239,409 [I3] Percent of employees covered in 2003° 46% [C] Total contributions to Associates Health & Welfare Plan, 2000d $9,338,300,320 Contributions from employers (Wal-Mart)' $748,321,573 [D] Contributions from participants (Wal-Mart employees)f $589,978,747 [E] Estimates: Covered employees (l3 XC) 570,128 [F] Covered dependents (A - F) 410,113 Employer contribution per covered employee (D f F) $9,313 [G] Employee contribution per covered employee (E I F) $9,035 Avg, hours worked, covered employees (45 wks, 34 hrslwk) 1,530 [H] Employer contribution per hour fbr covered employees (G I H) $0.86 Employer contribution per employee (D / B) $604 [I] Employee can per employee (E I B) $476 Avg. hours worked, all employees (equiv. to 30 wks, 25 hrs/wk) 750 [,J] Employer contribution per hour averaged over all employees (I 1 J) $0.81 'IRS Form 5500 for Wal-Mart Associate Health and Welfare Pians, Part It (Basic Plan Information), Line 7d bIRS Form 5500 for Wel-Mart401K Retirement Savings Man, Schedule T (Qualified Pension Plan Coverage Inform ation), 4c(1) OVFCW estimate dIRS Farm 55€10,. Schedule H, Part It (income and Expense Statement), Line 3 "IRS Form 5500, Schedule H, Part 11 (income and Expense Statement), tine 1A rIRS Form 5500, Schedule H, Part it (Income and Expense Statement), Line 18 23 Source: Interview with staff at the United Food and Commercial Workers. Figure reported to be based on IRS 5500 Schedule F information obtained through a Wal-Mart employee. 24 Note that the calculated average hourly benefit does not rely on estimates of the percentage of employees participating in various plans, or on the details of those plans, instead, the average hourly benefit is calculated by dividing employer contributions by estimated hours worked, Bay Area Grocery Industry Report Page 46 of 104 Sim lar calculations arae carried out for Wal -Mart's pension plan. The plan is worth $0.22 per hour averaged across all employees (Table 19). T �l� 79: l�lari ger � ar h� r c�niricstia� t re irerraan avin s ion 2AOQ Number of employees and dependents covered in 2000' 613,995 Total emplcyeesb 1,239,409 [A] !Number of excludable employees' 581,964 Number ofnonexcludabfe employeesd 658,355 Number of benefitting nonexcludable employees' 556,522 [B] Total Wal-Mart contributions to 401K retirement savings plant $209,122,000 [C] Total employee contributions to 401K retirement swings plan9 $181,923,000 Estimates: Avg, fours worked, covered employees (45 wks, 34 hrslwk) 1,530 Employer contribution per covered employee ([C] 1 [E3]) $376 Employee contribution per total employees ([C] ! [A]) $169 [D] Avg, hours worked, all employees (30 wks, 25 hrslwk) 750 [E] Employer contribution per hour averaged over all employees ([D] ( [E]) $0.22 'IRS Form 5500 for Wal-Mart 401 K Retirement Savings Flan, Part it (Basic Plan information), 2000, Line 7d "Schedule T (Qualified Pension Plan Coverage Information), 4c(1) 'Schedule T, 4c(2) "Schedule T, 4c(5) rSchedule H, Pert It (Income and Expense Statement). 2a(1)(A) gSchedule.H, Part It (income: and Expense Statement), 2a(1)(B) Employees of'the major unionized chains, making up about 60 percent of the labor force in the study area, have wages and benefits valued at $23.64 per hour. The gap in the value of hourly wage and benefits between grocery workers at Nal -Mart and those at unionized supermarkets is estimated at $ l 1.68 per hour. This is 98 percent of the Wal-Mart base wage and benefits package, valued at $11.95 per hour. See Table 20, below, for a side-by-side comparison of wages and benefits on an hourly basis. Bay Area Grocery Industry Report Table:20.-..Comt) arise n.ol��festi eltagwille —.and bene—fits—Iorun—lo-mized imPki . talltiftiaho 0.81 " Pennon benefits per hour 2nters in the US 0.22f Premium pay, per -hour basis 0,779 Oo48 h Union grocers Wal-Mart, study area U.S. Average hourly wage, all workers $15,30 $9.6(x' Health & welfare benefits per hour 4.570 0.81 " Pennon benefits per hour 1.35e 0.22f Premium pay, per -hour basis 0,779 Oo48 h Vacation, per -hour basis 0.921 0.38) Sick leave, per -hour basis 0,73' 0.46' Benefits package (excl. premium pay) 7.57 1.87 Total wages and benefits, per hour $23.64 $11.95 Benefits/premiums, percent of base wage 35% 20% Difference $11.68 As percent of Wal-Mart hourly 98% 'From Table 14. bFrom Table 16, Wean employer contribution to health & welfare calculated by authors us UFCW Employers Benefit Plans database. OlFrom Table 18 ellen employer contribution to pension fund and 401 K calculated by autl using UFCW Employers Benefit Plans database. `From Table 19. 9Assumes premium pay (overtime pay and additional pay for Sundays and holidays) constitutes an increment of 5 percent on the base wage, pendir information from Food Employers Council. h Assumed to be paid in same proportion to base wage as UFCW workers. 'Based on 6 percent of hourly wage, treating a full-time employee with m( than five years of tenure as the average. Sources: UFCW Employer's Trusi Funds for tenure estimate of 9.77 years; Master Food Agreement for the unionized supermarkets for vacation entitlement of three weeks. 'Based on 4 percent of hourly wage, treating a full-time employee with thi four years of tenure as the average (Drogin 2003, Table 12) (entitled to weeks of vacation, according to Wal-Mart Associate Benefits Handbook, 1 kl3sed on six hours times 12 months times base wage divided by average hours per year of 1,500. 'Assumed workers. Page 47 of 104 Bay Area Grocery Industry Report Wage and benofits impact analysis Page 48 of 104 The supercenter is still a relatively new format, and supercenters in urban, unionized areas are still more so. There may be no documented example of a large city where Wal -Mart's presence has had a significant impact on the wage and salary negotiations between supermarkets and labor unions. (That said, the ongoing 2003 negotiations between the UFCW and major grocery chains in southern California might provide one.) However, a previous review of literature on the influences of non-union entrants on unionized supermarkets in Canada suggests that this will happen eventually. Unionized workers in Canada, who enjoyed wages and benefits 40 to 60 percent higher than workers in non-union competitors, were forced to accept a reduction in their wage and benefits as the non-union competitor gained market share (Boarnet and Crane 1999: 45-47). That experience suggests that grocery companies in the Bay Area will demand wage and benefit adjustments to close the gap with supercenters if they believe they will lose market share. There are some indications that supercenter -driven negotiation pressure may already be beginning. According to the president of the Dallas union of meat, seafood and dela workers, the UFCW unions there have long set the wage levels in the industry despite their low share, but this will be under threat in the new negotiation in June 2004.25 Similar information was obtained in interviews with local presidents and executive assistants from major unions in Las Vegas, Arizona, and Houston.2b The well publicized grocery employee strike in southern California, still in progress at the time this report was written, occurred against a backdrop of concern that supercenters would soon enter that market. The experience of other urban areas provided the following guidelines for the calculation of the impact of supercenters on grocery wages and benefits in the Bay Area: In the short term after entry of the supercenters (about five years), assuming a moderate expansion of the market, any loss of market share to Wal-Mart will affect the average wage industry wide, but will not reduce the wage and benefit package of remaining union members by very much. This assumption accords with the experiences of unionized supermarkets in other cities. In the longer terra (8 to 15 years), if Wal-Mart gains significant inarket share there will be a reduction of wages and benefits similar to that which has taken place in Canadian markets; 40 to 50 percent of the difference between wages offered by Wal-Mart and those offered by the unionized supermarkets will be erased. If the current gap is $11.68 per hour, for instance, grocery wage reductions could trim the difference to between $4.67 and $7 per hour. If Wal-Mart attains the upper range of the estimated range of market shares calculated in Chapter 2, the pressure on major grocery chains could be sufficient to lead to an 80 percent closure of the compensation gap between supercenters and unionized supermarkets. This is based on evidence, reported in Boarnet and Crane (1999), that in some of the Canadian markets major grocery chains believed that wage and benefit parity with ricin -union competitors was necessary in the long -run. 25 Interview with: Johnny Rodriguez, president or UFCW Local 540 in Dallas. 26 Interviews with Roberta West and Michael. Gittings, president and secretary -treasurer of UFCW Local 711 in Las Vegas; Jim McLaughlin, president of UFCW Local 99 in Phoenix; and Miles Anderson, executive assistant to the president, UFCW Local 455 in Houston. Bay area Grocery Industry Report Page 49 of 104 The greater the market share that supercenters achieve, the more pressure will be put on supermarkets and independent grocers to limit `cage and benefit increases and in instituting other rales to save labor costs in order to compete. Table 21, below, gives varying assumptions about supercenter market share and the amount of the gage and benefit gap that is closed. Corresponding to the experience elsewhere, Table 21 shows long -run scenarios, estimated for the year 2010. Table 21; Wane and benefits imn act estimate 2o1 The calculations in the table above reflect the following logic and assumptions, which correspond to the columns at the bottom of the table, moving from left to right. Supercenters capture market share, based on the range of year 2010 market share estimates developed in Chapter 2. This. results in downward pressure on wages and benefits in the unionized grocery sector. A fraction of the gap between grocery pay and benefits and supercenter pay and benefits is closed. That, fraction is either 40 percent or 60 percent, based on the Canadian experience reported in Boomet and Cane (199 9) or, for the case of 18 percent supercenter market share, the table also shows the effect of closing 80 percent of the gap between grocery and supercenter compensation. Supercenters are assumed to displace employment in the union and lion -anion sectors of the grocery industry in proportion to the existing split of union and nonunion employment in the industry in the Bay Area, and the resulting union and non-union grocery 2010 Assumptions Current estimate Market size ($bit)' $9.7 $10.4 Increase 7% Union members, 2003 35,993 Union as percent 62% Groc gimps, 2001 (no Sonoma) 53,034 62,096 Union market share 63% Average hours per year 1,300 Wage gap $11.63 Supercenter Wage Employment Reduced wages & benefits ($millions) market gap Union Union share, 2010 closure Union Non-union workers shrinkage Total 0.06 40% 36,190 25,906 $304 $49 $353 0.06 60% 36,190 25,906 $457 $49 $506 0.10 40% 34,650 27,446 $292 $81 $373 0.10 60% 34,650 27,446 $437 $81 $518 0.13 40% 31,570 30,526 $266 $146 $412 0.18 60% 31,570 30,526 $1393 $146 $544 0.13 30% 31,570 30,526 $531 $146 $677 The calculations in the table above reflect the following logic and assumptions, which correspond to the columns at the bottom of the table, moving from left to right. Supercenters capture market share, based on the range of year 2010 market share estimates developed in Chapter 2. This. results in downward pressure on wages and benefits in the unionized grocery sector. A fraction of the gap between grocery pay and benefits and supercenter pay and benefits is closed. That, fraction is either 40 percent or 60 percent, based on the Canadian experience reported in Boomet and Cane (199 9) or, for the case of 18 percent supercenter market share, the table also shows the effect of closing 80 percent of the gap between grocery and supercenter compensation. Supercenters are assumed to displace employment in the union and lion -anion sectors of the grocery industry in proportion to the existing split of union and nonunion employment in the industry in the Bay Area, and the resulting union and non-union grocery Bay Area Grocery Industry Report Page 50 of 104 industry employment is shown in the third and fourth columns from the left for each supercenter market share scenario, 27 Calculating reduced wages and benefits then involves two steps: (1) Some jobs that would have been union jobs are in the supercenter sector, where employees are compensated less (the column labeled "reduced wages and benefits, anion shrinkage") and and (2) The remaining grocery upon jobs also pay less, due to the wage gap closures (the column labeled "reduced wages and benefits, union workers")29. The sum of those two impacts is the estimate of the reduced wages and benefits in the grocery sector due to the entry of supercenters into the Bay .Area, shown on the far right column of Table 21. Any wages and benefits lost due to reductions in the non-union sector of the market are not estimated due to lack of specific data for that sector. Under the assumptions in Table 21, the value of reduced wages and benefits can be expected to range between $353 and $677 million per year. As noted at the beginning of this chapter, using the ABACI multiplier fear retail wages in the Bay Area of 2.18, the net economic reduction of wages and benefits would be in the range of $770 million to $1.48 billion per year. 27 One reviewer suggested. that supercenters, while paying lower wages, might employ more persons. The data in Table 5 (Chapter.l) give some insights. Tal -Mart employs approximately four times as marry full-time equivalent (FTE) employees per store as the major national grocery chains, and Wal-Mart supercenters average approximately twice the revenue per store as a major supermarket. These ratios are similar for other supercenter chains (shown in bold in Table 5), This suggests that the FTE per revenue in supercenters is approximately double the FTE per revenue in major supermarkets, lending some support to the hypothesis that supercenters pay employees less, but hire more workers. Yet making strong inferences from the data in Table 5, which is from trade publications, is difficult. Note, for example, that low revenue will also increase FTI; per revenue, and that ratio is especially high for K -Mart, but that could reflect K -Mart's recent financial difficulties. More specifically, employment impacts of supercenters should be based on careful analysis of specific labor markets, which cannot be inferred from Table 5. Lacking more credible data on employment effects of supercenters, the wage and benefit impacts calculated here are derived by apportioning projected grocery sector employment according to projected supercenter market share. 28 The number of supercenter jobs is multiplied by the wage gap to yield the estimates shown in "reduced wages and benefits, union shrinkage". 29 The number of union members is multiplied by the average hours worked per year (assumed to be 1,800 hours), by the wage gap; and by the percentage reduction in the wage gap due to downward pressure on wages from the supercenters, to yield the estimates shown in the column "reduced wages and benefits, union workers," Ray Area Grocery Industry Report Rage 51 of 104 Chapter Land and Traffic Impacts One of the more common criticisms of big box discount retail is that it contributes to the decentralization of population, and thus either causes or accelerates the process of urban sprawl, leading to increased traffic, wasted consumption of land, alienation of pedestrians, higher infrastructure costs, and other problems associated with the dispersal of residences and increased distances between homes and stores (e.g. Kunstler 1996; Holtz -Kay 1997; Duany, plater-7yberk and Speck 2000). Those who criticize the development patterns associated with discount retail often advocate more compact, mixed—use development. Although some arguments for more compact urban form seem intuitive, the evidence is mixed. For example, although it is argued that "leapfrog" development (development that jrzzxzps from place to place rather than progressing steadily outward) is wasteful and haves large pockets of land underused, later infill development in these areas may take place at unuch Higher densities (Feiser 1989). There is likewise significant ambiguity surrounding the question of whether density and urban form have much impact on travel behavior (Lave 1994; Guiliano 1995; Crane 2000; Boarnet and Crane 2001), and the question of whether sprawl leads to higher infrastructure costs is unsettled (Altshuler and Gomez-lbanez 1993; Calthorpe and Fulton 2001). Nevertheless, many Say Area cities and counties have adopted general plan policies and goals that call for promoting higher density, infill, and/or transit -oriented development, as well as revitalizing pedestrian -friendly downtown and neighborhood shopping districts. Within this larger set of issues, the question considered here is more narrow: What kinds of impacts will grocery/retail supercenters will have on land use, urban decentralization and traffic? This is different from asking whether discount retail in general helps disperse population and decentralize metropolitan areas. A number of urban historians (Jackson 1985; Fogelson 2002; Cohen 2003) agree that retail originally followed population out of the cities, and that it was residential, not commercial, development that led America's first waves of suburbanization. Today, however, the picture is somewhat foggier. Retail development ran. be seen as both a source and a symptom of residential dispersal. Sig box stores do their best to follow population growth—supply rarely creates its own demand ----but the tendency of these stores to locate on fz-inges does push the development envelope. particularly in instances where agricultural lard is rezoned to permit retail uses, residential development is likely to follow. Because the concern in this report lies specifically with supercenters, and because supercenters tend to be replacements of existing discount stores, the land use issues addressed here will be comparisons between supercenters and discount stores, and also between supercenters and traditional supermarkets, since the supercenters are expected to take some market share away from regular grocery stores. Does a supercenter generate more traffic than a grocery store? Does it use proportionally more land? is it more likely to locate in peripheral areas? Bay Area Grocery Industry Report To better orient this discussion, the chapter has three parts, addressing: o The size and footprint of the supercenter, * Questions of location and decentralization, and & Traffic impacts. Wage 52 of 104 In each part, a supercenter is compared to existing big -box discount retail stores or grocery stores, to focus on whether and how the supercenter format might change land use or traffic patterns in the Bay Area. The analysis concludes that the impact of supercenters is likely to be due to their larger catchment areas, which could be associated with longer shopping trips and hence more vehicle miles of travel. In terms of land use footprint or issues of location or decentralization, it is less likely that supercenters will differ significantly from existing development patterns. Size and footprint One major reason big box stores tend to locate on the peripheries of urban areas is that they require a lot of land,and land is cheaper on the fringe than it is in the center. Wal -Dart supercenters range in size from 150,000 to 210,000 square feet, and are often surrounded by parking lots UP to three times the size of the stores themselves, It is both expensive and logistically difficult to assemble a sufficiently sized parcel of land in the more developed parts of an urban area. Nationwide, the average size of a Wal-Mart supercenter is 160,000 square feet, although the supercenters currently proposed or approved in California range from 180,000 to 220,000 square feet. The average supercenter's grocery area. is 60,000 square feet, larger than the national average of 40,000 square feet for a conventional supermarket. However, grocery stores of 50,000 to 60,000 square feet are not unheard of So how is a supercenter significantly different from having a large grocery store and a regular discount store adjacent to one another? The evidence suggests that cities and towns regulate supercenters and supermarkets in the same way, particularly with regard to parking requirements, which tend to account for most of the land consumption in both kinds of development. A survey of off-street parking requirements in California and some out -of --state locations shows remarkable consistency: for grocery stores, discount retail stores, and supercenters, almost every city requires one parking space for every 200 square feet of floor area. A few cities require one space per 250 square feet, and almost none require more. Until 2000, the city of Seneca required one space per 100 square feet Seneca changed its rules after being advised that they were "twice as stringent" as every other community in the state. This point is further underscored by a survey of California cities with Wal-Mart discount stores, which found that Wal-Mart adhered to these parking requirements when it constructed its discount stores. The company neither requested a variance to build fewer parking spaces nor Bay -area Grocery Industry .Deport Page 53 of 104 decided of its own accord to build rnore.30 A notable exception. was Union. City, California, where the Bay Area's first Wal-Mart discount store was built. Union City requires one parking space per 250 square feet of retail space. However, when 'Wal-Mart built its discount store there, the company diose to provide seven parking spaces for every 1,000 square feet. According to Union City planners, Wal-Mart officials said this was a standard company parking guideline, and that it was applied to all of the company's properties. As other examples of this parking ratio were not found, and because the Union City Wal-Mart was built I I years ago, Wal-Mart may have since revised downward its estimates of needed parking. Most information available suggests Wal-Mart now provides only enough parking to meet municipal codes. This information can be used to estimate the land area required for supercenter development, along with assumptions about landscaping and parking space size, The average size of an off- street parking space, including room for automobile circulation, is 337 square feet. Landscaping adds an additional 10 percent (applied to parking and building footprint combined). Given these baseline assumptions, the scenarios below (see next page) illustrate a range of possible sizes for Bay Area supercenters. Scenarios I and 2 represent the one space per 250 square feet and one space per 200 square feet parking requirements, respectively, while scenario 3 represents the high-end, older Wal-Mart ratio of one space per 143 square feet of Boor area. The purpose of these scenarios is not to offer precise predictions of how big a discount store or supercenter might be. Such an exercise is futile for a number of reasons. Parcel size does not dictate how big a supercenter will be, but is a function of what parcels are available. "Variances, conditional use permits, and other locality -specific circumstances may modify development plans during the process of approving such large projects, There are also some common factors that may increase the required parcel size, such as company specifications for loading docks and truck parking areas, or more stringent landscaping, setback, or other municipal requirements. A proposed Wal-Mart supercenter in Gilroy would be 203,622 square feet, with 1,018 parking spaces and a total site footprint of 17.44 acres ---five acres more than the "scenario 2" to which it corresponds. The scenarios are intended to illustrate the important role played by parking requirements in determining the land requirements for nonresidential development of all kinds, including large retail stores. Although intended to mitigate traffic, parking requirements have an impact on urban form. Under the miniinum requirements above (scenario 1), a 200,000 square foot building— between 4 and 5 acres in size ----ends yap requiring almost 12 acres of land, with most of that extra space used for required parking. 3° The survey of parking requirements and Wal-Mart host towns was completed both through interviews with planners and perusals of zoning co,desAt included the.Calif6mia localities of Union City, Seneca, Long Beach, Napa, Pleasanton, Los Angeles, Redwood City, and Mountain City, Also surveyed were Duluth, Minnesota; Irving, Texas; and Dover, Delaware. Ira addition, the tnstittate of Transportation Engineers' parking generation rates were consulted, as was a survey of parkiatg requirezraents carried out by the American Planning Association, Almost all the codes recommended between 4 and. 5 parking spaces per 1,000 square feet, and most made no distinction between grocery and retail. Bray Area Grocery Industry Report Page 54 of 104 cettari® 1. ane ��° s see er 2�0 s tare feet of floor area Total Parking Parking Landscaping Total Total Square Footage Spaces (Sq. Ft.) Requirements Sq. Footage Acreage 150,000 600 198,000 34,800 382,800 8.80 160,000 640 211,200 37,120 408,320 9139 170,000 680 224,400 39,440 433,840 9.97 180,000 720 237,600 41,760 459,360 10.56 190,000 760 250,800 44,080 484,880 11.15 200,000 800 264,000 46,400 510,400 11.73 210,000 840 277,200 48,72Q 535,920 12.32 215,000 860 283,800 49,880 545,680 12.61 220,000 880 290,400 51,040 561,440 12.91 cenarlca 2 oa�e arlcltt s ase er 200 s oars feel of floor area ; Total Parking Parking landscaping Total Total Square Footage Spaces (Sq. t.) Requirements Seg. Footage Acreage 150,000 750 247,500 39,750 437,250 9.65 160,000 80€3 264,000 42,400 466,400 10,30 170,000 850 280,500 45,050 495,550 10.94 180,000 900 297,000 47,700 524,700 11.58 190,000 950 313,500 50,350 553,850 12.23 200,000 1,000 330,000 53,000 583,000 12.87 210,000 1,050 346,500 55,650 612,150 13.51 215,000 1,075 354,750 56,975 626,725 13.83 220,400 1,100 363,000 68,300 641,300 14.16 Seertarla 3 ot�e aria s ase er 1.43 s oars feet of floor area Total Parking Parking landscaping Total Total Square Footage Spaces (Sq. Ft.) Requirements Sq. Footage Acreage 150,000 1,050 346,500 49,650 546,150 12.56 160,000 1,120 369,600 52,960 582,560 13.39 170,000 1,190 392,700 56,270 618,970 14,23 180,000 1,260 415,800 59,580 655,380 15.07 190,000 1,330 438,900 62,890 691,790 15.90 200,000 1,400 462,000 66,200 728,200 16.74 210,000 1,470 485,100 69,510 764,610 17.58 215,000 1,505 496,650 71,165 782,815 18.00 220,000 1,540 508,200 72,820 801,020 18.41 As noted earlier, supercenters are generally located on the fringes of urban areas. Land is more plentiful and less expensive on the outskirts of metropolitan areas. Available land closer to urban Fray area Grocery Industry deport Page SS of 104 cores is more likely have buildings that need to be demolished before a big box can be constructed, increasing the cost of construction. In the case of Wal-Mart, supercenters are also located on urban fringes because that is where the company's conventional discount stores are, and.many supercenters are the result of discount store conversions. A map of the 19 existing Wal -Marks in the Bay Area shows that they are no exception: Wal-Mart discount stores are overwhelmingly located outside metropolitan centers (see Figure 4, below). Assuming that most supercenters will be built in fringe areas, the question at hand is whether this can be considered new fringe development. if Wal-Mart closes an existing smaller store and opens a supercenter nearby, in one sense this is new, because a larger building has replaced a smaller one, In this case, the amount of new development on the periphery could be said to be the difference between the size of the discount store and the size of the supercenter. But the grocery component may be taking the place of a conventional supermarket that would have been built in its absence. In that case, the amount of new construction is smaller: the 10,000 or 20,000 square feet in difference between the foregone supermarket and the supercenter's grocery component, It is also possible that an. outlying supercenter will attract enough customers away from a more centrally located supermarket to cause it to shut down. In this case, in addition to the vacancy problems described in the previous chapter, there will be a shift of economic activity to the periphery, which may be a catalyst for hastened development of the outlying area. Bay Area Grocery Industry Report Page 56 of 104 0 Wal-Mart locations, 200 County boundaries PIJRO� Urbanized area, Census 2000 Water features a ara AIN .day Area Grocery Indus" Report Page 57 of 104 Does a supercenter generate more or less traffic than a large supermarket plus a conventional discount store? In at least one sense, these are all the same: the overwhelming majority of trips to discount stores,, supercenters and supermarkets are made by auto. The main differences are not in travel mode, but in trip length and possibly trip frequency. Shoppers will likely drive farther to access a supercenter grocery store than they would to a conventional super-narket. There are two main pikes of evidence for this. The revenue per square moot in Wal -Dart supercenters nationwide is higher than that in Safeway, Albertsons, and other supermarket chains, despite Wal -Mart's having lower prices. Also, the grocery store component of a Wal-Mart supercenter can be expected to average 60,000 square feet, which is larger than the average store size for supermarkets. Both of these facts imply that supercenters draw substantially more customers than the average supermarket, if household consumption of grocery items is relatively fixed given modest differences in price. This implies there must be both more traveling for the equivalent amount of grocery purchases at supercenters. Molding development density constant, attracting more households means a supercenter draws from a geographically larger catchment area. From a regional perspective, this means there will be an increase in vehicle miles traveled (VMT). 4f course, attracting more households to a single location rather than dispersing those trips to more than one location means that, frorn a local perspective, there will be a higher concentration of trips where supercenters are built. These conclusions have little to do with the supercenter being a combination of' -retail and grocery formats. Rather it is the size of the grocery store component alone -----which exceeds the size of most standalone supermarkets in the Bay Area—and the volume of sales in. that component that has implications for the amount of travel. A transportation issue that does relate to the retail/grocery combination is the question of cross - shopping, commonly observed at shopping malls and community shopping centers such as those anchored by conventional supermarkets. Do people patronizing supercenters substitute in-store walking trips (e.g., from the grocery part of the store to the retail part) for some driving trips (e.g., driving to a retail store separately from buying groceries)? if so, this would imply that supercenters reduce auto trip frequency—with an unknown effect on total vehicle miles traveled, depending on the length of the trip to the supercenter and the length of the driving trips that would have been otherwise taken. Using proprietary consumer panel survey data, AC Nielsen recently reported that the average number of household trips to supercenters has increased along with their expansion into new markets, even as trips to traditional grocery stores have declined. The data also show that the average number of combined trips to supercenters and traditional supermarkets has fallen, This can be interpreted in two ways. First, it may be evidence that cross -shopping is leading to fewer vehicle trips. Second, it could mean that as all stores get larger and farther away ----including both supercenters and larger format supermarkets -----people choose to travel less frequently and buy in larger amounts, The discussion of cross -slopping has focused on the number of trips. A more general measure of traffic impacts is total vehicle utiles traveled (VMT). The net impact of cross -shopping on VMT is ambiguous. VMT is the product of trip frequencies and trip distances. If the average distance Ray area Grocery industry Report .Page 58 of 104 traveled to a supercenter is longer than to alternative stores, even if auto trip frequency declines somewhat due to increased cross -shopping, VM1T could still increase. The potential costs associated with increased vehicle travel associated with supercenters can be roughly quantified. Illustrative estimates are presented below. The calculations assume the primary difference is in trip length. Given the uncertainties, quantifying tate impacts of cross - shopping or greater trip length on trip frequency is not possible. According to the 2001 Nationwide Household Transportation Survey (NHTS), the mean reported orae -way length of a trip to buy goods at a grocery store, clothing store, or hardware store was 6.15 miles nationwide. 31 The length of grocery trips in the Bay Area is likely substantially lower than this, for several reasons. First, the Bay Area is on average more densely developed than the rest of the United States. Second, supercenters are available in the rest of the US, which increases the average reported distance of a grocery shopping trip. Third, people are likely to drive farther to access clothing or hardware stores than to buy groceries. Retail analysts consider groceries to be "convenience" goods, in which consumers value proximity highly. Clothing is considered a comparison-shopping item, and there tend to be fewer clothing stores within a given radius of a household. While items at hardware stores may fall in the convenience -stropping category more frequently than the comparison-shopping category, hardware stores are less densely distributed still. To illustrate trip lengths using data that are specific to the Bay Area, Table 22 (below) lists the number of stores in various categories within a five -mile radius of five randomly chosen zip code centroids.32 The number of grocery and convenience stores exceeds the number of other store categories, usually by a targe margin, The last row of the table shows the average maximum distance to a grocery store within the five - mile circles drawn around each of the zip code centers, 33 This is a maximum distance if the stores are spaced evenly apart to cover the five -mile radius circles. The distances range from 0.38 miles to 1.58 miles, substantially less than the reported national average of 6.15 miles. The analysis below splits the difference and uses three miles for the typical one-way grocery store trip distance in the Bay Area. 31 Data table provided online at nhts.ornl,gov, 3z A centroid is a point representing the center of the zip code area, Lists of stores within five miles of the zip code center were accessed at yp.yahoo.aom, September 15, 2003, 33 A five -mile radius circle is 78.5 square miles its area, For each zip code. centroid, 78.5 is divided by the number of grocery stores within a five -mile radius to get average land area per grocery store. This calculation assumes that the stores within a given market area are evenly spaced. Pay Area Grocery Industry Report Page 59 of 109 Zip Code Centroid: 95120 94603 94028 94589 94951 City: San Oakland Portola Vallejo Penngrove .Pose Valley Stares wzthin five miles Hardware Women's clouting Grocery and convenience Men's clothing Department stores and Frig box discount stores Maximum distance to grocery store' (miles) See footnote for calculation details 13 23 3 14 15 22 68 10 21 19 56 172 10 53 31 10 27 2 10 2 13 25 0 10 10 0.67 mi 0.38 mi 1.58 mi 0.69 mi 0.90 mi Supercenters will be less common than grocery stores in general, so the average supercenter grocery trip will be longer. To estimate how much longer, the report uses the fact that supercenter grocery revenue is about three times that of supermarket revenue, on average (see Chapter 2). As an upper bound, the analysis thus assumes that supercenter trip lengths are triple our estimate of the average grocery trip, or nine miles each way. The lower bound estimate assumes that supercenters only involve two miles of travel further than the average grocery trip, or five miles each way, based on a comparison of the average number of daily trips to grocery stores and supercenters.34 These assumptions are based in large part on national averages. Locating supercenters in dense areas near the urbanized heart of the Bay Area region would likely result in shorter trips, although traditional grocery trips are likely shorter in dense urbanized areas. The assumptions used Dere are based on the best available data. Trip frequency Wal -Mart's 4,688 stores worldwide draw over 100 million customers each week (Wal-Mart Corporation 2003),15 with a per -store average of 3,047 customer visits per day. For the U.S. only, Wall -Mart's annual revenue of $244,524 million, divided by an estimated per -customer revenue per supercenter visit of $55 for Wal -Mart's 3,400 U.S. stores (Harry 2003; Wal -Mast 2003), 34 Chapter 2, Table 1, reports weekly average sales per supermarket and revenue per transaction, Those imply an average of 2,012' supermarket visits per day, assuming one transaction per visit. Wal-Mart discount centers average 3,315 customers per day (see below). This implies that supercenters draw 65 percent more visitors per day, Assuming the catchment area scales with the nuibber of customers, this implies that supercenters draw on average from a five -mile radius (1.65 * 3 miles). 35 " Wal-Mart Stores, Inc. at a Glance," fact skeet at www.walmart.com. The number of stores is drawn from: the Wal-Mart 2003 annual report. Bay Area Grocery Industry Report Page 60 of 104 gives an estimate of 3,582 daily visits per store, 36 Both estimates are similar and reasonable, so the average is used: 3,315 customers per day. Estimating the number of visits associated with. the grocery store component of the supercenter relies on the assumption that the share of visits is equivalent to the typical percentage of revenues associated with grocery sales at the supercenter, that is, 40 percent. This yields a per -store grocery customer count of 1,326. Two trips, one to the store and one back home, are assumed for each visit, 37 An estimate of per -mile motor vehicle costs from the Victoria Transport policy Institute (VTPI) is used to convert the estimated annual additional vehicle miles of travel (VMT) from those stores into a dollar cost.$ VTPI estimates the personal cost of motor vehicle travel in urban areas at $0.71 per mile for time, fuel, parking, and the accident risk imposed on the driver. External costs, including traffic delays and air quality impacts imposed by drivers on others, are estimated at $0.59 per mile during peals travel periods and $0.33 per wile during off-peak periods in urban areas (VTPI 2003). The estimates here assume that 85 percent of supercenter travel will occur during off-peak hours, which is likely aro overestimate. This gives an external cost of 37 cents per mile, and a total cost of $1.08 per mile. 39 Pour scenarios are presented, based on the maximum and minimum projected market share from Chapter 2, and the range of additional (round-trip) VMT per trip discussed above (a high of 12 miles and low of 4 miles), The resulting estimates of additional travel costs are shown in Table 23, below. 36 Karry also reports expenditures per visit for retail stores—$24 per visit—but that value would have implied a larger number of daily customer visits per stare, so to be conservative the analysis uses the method that gives fewer customer visits per stare in this instance. �7 Another way to estimate trip frequency would be based on the Institute of Traffic Engineers reference, the ITE's Trip Generation, 6th Edition. Those suggest substantially higher trip numbers than reported here. However, transportation scholars increasingly question the reliability of the ITE figures on several grounds, including sample size and sample design issues (e.g., Shoup, 2003). 3' The VTPI is a transportation policy firm that has been lead consultant or subcontractor on projects for agencies including the Environmental Protection Agency, the US Transportation Research Board, and Environment Canada. 34 To account for the full cost of additional driving, the analysis includes both internal costs and external costs in the monetized per -anile figure, Bay Area Grocery Industry Deport Page 61 of 104 TabBe 23. �#irt��tzrs of �ciditionai rirrira ��sfi due t � er��rz r �ra4 in�� area Projected Est, Grocery Additional Additional Personal + Total Cost Market Number Customers Miles Per VMT Per External Cost of Additional Share of Mores Per Day Trip Year (Oa0s) Per Mile VMT (0005) 6% 16 1,326 4 30,975 $1.08 $33,422.41 6% 16 1,326 12 92,926 $1.08 $160,267.24 18% 41 1,326 4 79,374 $1.08 $85,644.93 18% 41 1,326 12 238,123 $1.138 $1256,934.80 The range is between 31 and 238 million additional VMT per year, at cost of between $33 and $256 million. Although these are only estimates, they nonetheless illustrate that the cost of additional traffic from a supercenter may be considerable. The next chapter considers other potential community costs associated with a shift from conventional supermarkets to the supercenter format in the Bay Area, with a focus on local economic development issues. Bay Area Grocery Industry Report Page 62 of 104 Clhapter 6: Other Potential Community & Economic Development Impacts Almost since Wal-Mart first began its explosive growth in the 1980s, that expansion has been accompanied by fears that it will erode the character and drain the vitality of cities and towns. Its critics have contended that big -box retail is a force not only for consolidation but also for homogenization. Opponents of discount retail contend that by collecting a host of shopping categories under one roof, big boxes empty Main Streets of the individual enterprises --which are smaller, more intimate and more evocative in character of their communities—that traditionally provided those same goods and services. Economic life might grow as the result of a big box's arrival, especially in rural townships with little in the way of sales tax revenue, but it will also shift away from downtowns and toward the peripheries, where opera space and lower land costs enable discounters to locate, For many communities, this seemed a fair trade. "In the face of the abundance Wal-Mart produced, in the form of more jobs, consumer savings and expanded trade," one observer commented, "the loss of Main Street seemed an incidental price to pay." 40 In the late 1980s academics began to take an interest in the impact Wal -Marts had on small towns and their surrounding regions. Studies have shown that the entry of a big box into a community generally does result in the closure of many small businesses, This conclusion should be considered neither new nor surprising: retail has always evolved and reinvented itself, and along the way it has always spun prior fora ats and ideas into obsolescence. The business cycle was not invented by Wal-Mart, which perhaps explains why the company has rarely tried to deny or apologize for it. Founder Sam Walton, for instance, in a 1992 interview unabashedly acknowledged his company's impact on smaller enterprises: Quite a few smaller stores have gone out of business during the time of Wal -Mart's growth. Some people have tried to turn it into this big controversy, sort of a "Save the Small Town Merchants" deal, like they were whales or whooping cranes or something that has the right to be protected, Of all the notions I've heard about Wal-Mart, vane has ever baffled me more than this idea that we are somehow the enemy of small-town America. Nothing could be further from the truth: Wal-Mart has actually kept quite a number of small towns from becoming extinct by saving literally billions of dollars for the people who live in thee, as well as by creating hundreds of thousands of jobs in our stores... I don't want to be too critical of small-town merchants, but the truth is that a lot of these folks just weren't doing a very good job of taking care of their customers. Whenever we put a Wal-Mart store into a town, customers would just flock to us from the variety stores. With our low prices, we ended an era of 45 percent markups and limited selection. We shut the door on variety -store thinking.41 Conceding Walton's point does not mean, however, that there is no reason for debate over his company's impacts on communities. For Walton, in that quote, speaks of two separate issues as a° Quoted in Hornbeck, 1994. 41 "Sam Walton Recounts the Life of a Salesman." Time. June 15, 1992. Bay Area Grocery Industry Report Page 63 of 104 though they were one—whether Wal-Mart results in the closure of small businesses and whether it is beneficial for the towns in which it locates. There is, realistically, no debate about Wal - Mart's impact on smaller stores that compete with it. But there is some room for discussion as to whether the gains brought by Wal-Mart (e.g., lower prices) are worth the trade-off in lost small firms and diminished downtown or neighborhood conunercial vitality. Clearly a Wal-Mart (or other big box retailer) is not of benefit to the shopkeeper who loses business as a result of its entry; the question is whether it is of benefit to the community as whole. It is also a question that has no easy answer, for it inevitably becomes freighted with an awkward cargo of intangible ideas. Many people have emotional investments in their communities that are difficult if not impossible to quantify, and it is hard to construct a cost -benefit analysis that factors in such nebulous concepts as "charm" and "sense of place." The discussion is also complicated by the fact that downtowns and Main Streets—while receiving the lion's share of publicity -----are not alone in being victims of retail decline. The proliferation of big boxes has had a profound effect on retail at every level, from strip malls to enclosed shopping centers, And as retail fortraats continue to evolve, problems can also develop around the physical structures that get left behind: empty shopping centers, failed strip malls, and big boxes that have closed or moved. The arrival of supercenters snakes this a point of particular urgency, since supercenters can create vacancies in two ways. First, they may accelerate the demise of grocery stores. Second, in creating a supercenter Wal-Mart usually closes one or more conventional discount stores, and these, too, normally sit empty while the supercenter thrives down the road. (Few retailers, after all., want to move into an old Wal-Mart if it means competing with a nearby supercenter. )42 This section will review the existing research on Wal -Mart's impact on local communities. It should be stated at the outset that the discussion here is more speculative than the analysis in earlier sections of this report. This is so for a number of reasons. The first, as mentioned above, is that in many ways the value of discount retail lies-----literally---in the eye of the beholder. Big boxes have been assaulted on aesthetic grounds a number of tunes, and much of the ire it arouses in some opponents sterns from its influence (real or alleged) on places' "quality of life." The second reason is that research in the field is not plentiful. For all the interest in big box retail by activists and journalists, relatively few studies have been done on it. Finally it should be emphasized that all of this research has been conducted on regular discount stores, rather than on supercenters. This is an important distinction discussed further at the close of this chapter. In the event that an entirely new supercenter is built in a town or city, much of the evidence discussed here should be applicable. If, however, a town or city is confronted instead with a discount store being converted into a supercenter, then -much ofwlrat the research in this chapter describes --particularly about small business closures ----tray already have happened. The impacts of a big box will always vary according to the specific conditions in the locale where it opens. There are few universal truths in economic development, and what is a boon for one town may be an intolerable burden for another. The question of aesthetics, for instance, will likely carry more weight in affluent towns, where the savings provided by a Wal-Mart or other discounter will constitute a smaller portion of household income. Lower prices in these places as "Empty Big Boxes Piling Up in County." St. Petersburg Prones. May 12, 2003. Bay Area Grocery Industry Report Page 64 o f 104 may not seem worth the loss of independent merchants, In a less affluent town, the reasoning may be the opposite. The chapter is divided into two parts. The first addresses the issue of Wal-Mart as a catalyst of small-business closures, and discusses, among other things, the different impacts the firrn seems to have in rural and urbanized areas. The second pari discusses the emerging problem of vacant retail property, the possible impacts supercenters may have on that problem, and some potential remedies to it that communities around the country are exploring. mam The evidence that has been assembled about Wal -Mart's impact in rural areas has been fairly consistent: communities that had a Wal-Mart or other discount retailer saw a considerable rise in both their retail sales activity and their sales tax revenues, and on some occasions also saw an increase in overall employment. Shops and flans that directly competed with the discount retailer (for instance, lower -end apparel shops or merchants that sold general housewares) tended to lose a significant amount of business and sometimes were forced to close. Merchants that offered noncompeting goods and services, however -----such as higher end restaurants and shops, specialty stores and furniture--wsaw their fortunes rise considerably, as they benefited from the increased flow of consumers that Wal-Mart attracted. The first comprehensive loom at Wal -Mart's impact was done in 1988, by University of Iowa researcher Kenneth Stene. Stone analyzed the retail tax returns often small towns with Wal - Marts curd there compared them to 85 non -Wal -Mast towns. After that, he controlled his findings for other conditions—such as the overall economic growth in Iowa over the years he examined— and drew his conclusions from there. Stone's findings were essentially the same as those described above, but he also noted that a new Wal-Mart, while providing some new growth for its host region, could draw as much as three-quarters of its sales from the market share of existing stores (Stone 1989; Stone 1997; Ortega 1998). These findings did not generate a tremendous amount of attention in the academic world (as they were not very surprising), but they were seized on by activists and Wal -]Mart opponents, and recited at various small-town rallies and planning commission. meetings (Ortega 1998). Wal- Mart, concerned by this development, hired a team of researchers at the University of Missouri's business school to conduct a second study of Wal -Mart's impacts. The team was paid $10,000 for their work, and the study was conducted on ten counties that Wal-Mart chose (Ortega 1998). The results of the Missouri study were not terribly different frorm. Stone's. It was again shown that the number of businesses fell in all counties that had a Wal-Mart arrive, and that retail taxes rose. The Missouri researchers also pointed out, however, that the businesses remaining after Wal-Mart arrived were larger and employed more people, and they concluded that all the counties had seen "growth or revitalization" after Wal-Mart opened. The study failed to control, however, for external economic conditions—Missouri farm towns were growing in general in the years the researchers chose to examine (Leon, Robb and Franz 1989). A third examination of Wal -Mart's effects, this one looking at 15 skull towns in Western Illinois, was published in 1992. Again the results showed that total retail sales grew considerably (in this case by 15 percent) and that stores competing with Wal-Mart suffered. This study also Bay Area Grocery Industry Report Page 65 of 104 demonstrated, however, that the impacts in Western Illinois were significantly less than these in Iowa. The reason, the researchers decided, was that the Illinois towns had more mature retail environments prior to Wal -Mart's arrival. Because the market was already competitive, many of the relatively inefficient businesses had already been eliminated or forced to adjust, and this made 'mal -Mart's effects less dramatic, In Iowa, by contrast, where retail markets were immature, many of the small businesses had existed without any competition. This sort of local monopoly often breeds inefficiency (the "45 percent variety store markup" Walton referred to), and the inefficiency leaves the business vulnerable to underpricing when a company like Wal- Mart arrives (Gruidl and Kline 1992). In 1994, J.R. Hornbeck, an economist with the Congressional Research Service, wrote his oven report on the impact of discount retailers on rural communities, part of which involved reviewing and comparing the earlier studies. He came to many of the same conclusions (Hornbeck 1994). Finally, in 1995, Stone published an update of his original work, which found that Wal-Mart stores in Iowa he had originally examined had attracted customers from a much larger radius than any stores before. But he also found that this "pull" factor reached a pear relatively soon: town -wide sales reached a zenith within 2-3 years, and then began to decline, sometimes to pre - Wal -Mart levels. The merchants who sold Don -competing goods in these towns continued to benefit from spillover business, while competing businesses continued to suffer (Stone 1395). Economic development The question of how to define local economic development has always been a vexing one for economists, First, it is no easy task to determine when new retail development actually creates wealth, and when it simply crowds out existing economic activity. Second, local economies rarely confine themselves to city limits, On the simplest level, income and jobs in any given locality will grow if one of four things happens; local businesses invest more; government agencies begin procuring more local goods; households begin spending more and saving less; or people outside the area begin to bray more goods and services that are produced locally. The first three all have obvious limits. As Pittman and Culp (1995) argue, employment would certainly rise if all households in a city chose to save nothing and spend everything they earned, but no responsible economic development official would advocate such an action. The real potential for growth in a local economy comes instead from the fourth circumstance—the outside demand for goads sold inside the city limits, In some instances, then, discount retail stores can qualify as economic development, and lead to a net gain for the communities that host them, If a big box brings people into a city or town because it is selling goods that previously were not available, and for which they would have otherwise had to go elsewhere, this would uali%, as economic development. Similarly, if the opening of a big box discount store induces local residents to buy locally goods that they would othenvise have left town to get, then this too qualifies as economic development (Pittman and Gulp 1995). This latter phenomenon, called travel substitution, is what seems to happen its the early stages of many Wal -Maas (Hicks and Wilburn: 1999). Because they opened in rural areas that had relatively little retail activity, the Wal -Marts created growth for their towns by becoming magnets for consumers ten., twenty and sometimes fifty miles away, and also by preventing local residents from driving to other towns for merchandise. The researchers who looked at these young Wal -Marts concluded that they were meeting unmet Bay Area grocery Industry Report Page 66 of 104 demand, and that the gains in retail trade they brought in were real, even when the closure of other businesses was accounted for. (One could extrapolate from this and argue that a Wal-Mart placed in the impoverished inner city might have similar economic development effects, since disinvested inner cities also suffer from isolation, high prices, and a lack of consumer choice.) The problem is that the conditions described above often do not last, and they are particularly unlikely to last in. the non -urbanized areas where Wal-Mart likes to open. stores. In regions where the population is slow-growing or static, retail markets can quickly become saturated, and at that point retail stops being a vehicle for economic development and instead becomes a zero-sum game: new entrants do not create new wealth., but profit only at the expense of others, by grabbing a larger slice of a finite pie (Bluestone 1981; Hornbeck 1994). When every town has a mature retail market, the effects of travel substitution taper off, as does the incentive to drive to another community for goods. And saturation has historically been an explicit component of Wal -Mart's business strategy—Sam Walton himself said the company's goal was to "saturate a market area by spreading out and thea filling in" (Hornbeck 1994; Ortega 1998). Wal-Mart eventually built, for example, 40 stores within 100 miles of St. Louis, Missouri (Ortega 1998). The saturation strategy, like much of Wal -Mart's business model, grew out of the emphasis it placed on efficient distribution systems. But it snakes excellent sense from a competitiveness standpoint as well, because in saturated markets the advantage goes overwhelmingly to larger firms (Hornbeck 1994). By putting new stores in relatively close proximity to old ones (or by converting existing stores into supercenters) Wal-Mart erects large barriers for any new competitor that wants to enter the market (Chaff 1998). For the towns that host a Wal-Mart, however, saturation often means that a temporary burst of growth might quickly fade, and be replaced by a more ordinary zero-sum price war. Wal-Mart impacts in urbanized markets A slightly different scenario, which may be more relevant in some areas of Northern California, is what happens when Wal-Mart eaters more urbanized markets, as it is now starting to do. The evidence here is more sparse, because it is only in recent years that the company has begun moving away from its rural strongholds, but the inforination assembled to date suggests that the impact of a conventional Wal-Mart in these areas tends to be diluted: fewer businesses close as a result of its arrival, and communities tend to be less altered by its presence. The reasons for this are essentially the same as those identified by the researchers in Western Illinois, although a few additional factors are at work as well. Urbanized areas tend to have populations that are not only larger but also more dynamic than rural ones, The presence of more people, coupled with the regular influx of newcomers, makes it harder for a retail market to each saturation. But more importantly, a dense population usually means that a retail market is already mature, and that competition has already purged it of inefficient businesses and business practices, In these circumstances, a Wal-Mart offers smaller savings to consumers on its arrival, and so it is unlikely to siphon away business on the scale that it could in an underdeveloped retail market. Certainly some businesses may still be forced to close or reposition themselves, but the impact will on the whole be considerably less. Bay Area Grocery Industry Report Effects:Intangible Tourism Page 67 of I04 Although the authors of the Northeast study attribute most of the diluted impact there to the region's mature markets and increased population density, they also point out that intense consumer opposition to Wal -Dart likely played a large role as well, and that this opposition was rooted in part in concerns about tourism. By the time Wal-Mart expanded to the Northeast, its reputation as a "Main Street killer" had preceded it. The Northeast's tourism industry is based largely on the area's history, and small towns there are in many ways commodities unto themselves. Thus the notion of a quaint downtown being replaced by an unsightly box in this instance had larger implications that the simple arithmetic of taxes gained and lost. Concern arose over the problem. of "aesthetic Mismatch"—the presence of big stores in small towns ---and the harm it could cause (Hornbeck 1990, Although aesthetic mismatch may seem a superficial concern, it is not entirely without foundation. To the extent that tourist -dependent towns trade on their physical appearance and the various images associated with it (i.e. "small town charm"), the interruption of that appearance can have a detrimental economic impact (Bosselman, Peterson and McCarthy 1999). The impact is less tangible and longer-term than the immediate boom or bust of a big box discounter, but it is no less real. Of course, here again income plays a role. The urbanized .Northeast tends to be more affluent than the rural South and Midwest, and residents there may be more willing, as a result, to sacrifice some lower prices for the sake of aesthetics. Areas in the Northeast have mounted considerable community and sometimes governmental opposition to the arrival of discount retailers, and in particular to the arrival of Wal-Mart. Sprawlbusters, the grassroots group whose purpose is to defeat big box retail, is headquartered in Massachusetts, and the state of Vermont used legislative, activist, and litigious methods to fight the entry of Wal-Mart for ten years, before finally losing a court case in 1995. It is not unreasonable to think that in areas where the discounter is fought this ferociously its market power may not be as great—at least not at the outset. A second potential .factor in Wal -Mart's impact on urb4n areas has to do with labor relations. Urban areas, and particularly cities in coastal regions, tend to be much more sympathetic to unions than rural and heartland areas. Thus in the cities organized labor's concerted campaigns against Wal-Mart may be more of a factor. It is not likely that labor concerns would trump aesthetic and sprawl -related concerns, but they may supplement them.. Greyfields ... problem Retail is an inherently turbulent industrial sector, and what rides in as a new format today may well be an outdated relic tomorrow. The big box is no exception, Just as regional malls and the first generation of big boxes sapped vitality from some downtowns, so too is the new generation of big box construction rendering some malls and older discount retailers unnecessary. In some ways this is more problematic than the dilemma of declining downtowns. Downtowns, with their smaller and more varied building types, may have a better chance at being adapted and re -used (assuming that zoning bylaws permit such reuse)43 simply because they can host a greater number of potential uses, A failed hardware store can become a specialty olothing shop, a 43 Among other laws, parking ordinances often freeze otherwise useable buildings in tlwir existing uses. Bay Area Grocery Industry Report Page 68 of 104 restaurant, or a bicycle repair shop. There are, by contrast, relatively few re -uses for a failed big box ----generally another big box merchant is required. Failed outlying retail space is generally divided into two categories: greyfields and ghostboxes. Agreyfleld is a declining regional mall, one whose sales are Fading and whose anchor tenants may have left or gone out of business. (A mall is considered a greyfield when its sales fall below $150 per square foot; a Class A mall, by contrast, averages sales of $400 per square foot (price Waterhouse Coopers 2001). It was estimated in 1998 that 7 percent of the country's regional malls were greyfelds, while another 12 percent were declining badly enough to become greyfrelds by 2005 (Price Waterhouse Coopers 2001; lures 2003). A ghostbox is a freestanding big box retail building that has been. abandoned. Both pose the same problem for communities: the potential for blight, and the impression—created by any sort of vacant structure—that something has gone wrong in the community (Armstrong 2001). Retail structures can go dark for a number of reasons, although one of the most common is a shift in population. Retail follows its customers, and a cursory look at the past fifty years of industrial change in America shows clearly that retail outlets, like Americans overall, have spread out from the center cities. Inner ring malls, which once drew business away from downtown central business districts, are now themselves losing business to exurban discount centers. Retail's evolution is also spurred by demographic changes: the enclosed mall, which was retail's chosen format in the 1970s and 1980s, was designed around families who had more time for leisure. shopping. As parents now work more and juggle an increasing number of tasks, shopping formats have altered to meet their needs. Only a handful of enclosed malls are now under construction, and so-called "lifestyle" and "power" centers are the retail style du jour (Amstrong 2001; Kures 2003),441n the 1980s, 55 percent of all retail stores were built in shopping centers: today that number is 20 percent, as freestanding retail has come more into vogue.45 Shopping centers, according to the Urban Land Institute, should reinvent themselves every 5 to 10 years in order to stay competitive (Beyard and O'Mara 1999). Many do not, and many decline as a result. Retail outlets also go dark as a result of the plain fact of competition. A given area can only support so many stores, and a saturated market will eventually correct itself, expelling the least competitive stores from the field. The US retail sector has been undergoing a corrective shakeup since the 1990s, leading a number of observers to assert that the country has a whole was "over - retailed" (Jossi 1998; Beyard, Braun et. al. 2001). The oversupply of space is due in part to retail's rapid evolution (Calthorpe and Fulton 2000) but the restructuring it has triggered has led to a number of mass store closures. Woolworth's closed 400 stores in 1997 as it headed into bankruptcy, and Knart, a troubled company in the past few years, filed for Chapter 11 protection in 2001, and has closed over 600 stores between 2002-2003 (Kures 2003), Montgomery Ward closed 90 stores in 1998 after announcing its own insolvency, and has plans to close another 254 by 2004. JC Penny, Bradlees, Sears and Ames have also announced closures and cutbacks (Amstron.g 2001). And Wal -Mart's entry into the grocery sector has in some instances shown similar results. Albertsons, for instance, left the Dallas area entirely when Wal-Mart entered, and 44 Lifestyle centers are shopping areas organized around a particular demographic such as affluent baby boomer or young professionals. A typical lifestyle center might feature a "category -biller" bookstore (such as Barnes & Noble), an upscale coffee house, and a large home famishing store (such as Bed, Bath & Beyond), A power center is a collection of big box discount stores, A Target, a Lowe's and a Maples would be a typical combination. 45 Trends in Retail and Shopping Centers, 2002. Bay area Grocery Industry Report Page 69 of 104 left behind a host of empty buildings when it departed. According to Detail Forward, Inc., thirty conventional supermarkets closed between 1997 and 2002 in Oklahoma City after Wal-Mart added seven supercenters to its existing three. The same study asserts that for every Wal-Mart supercenter that will open in the next five years, two supermarkets will close their doors (Retail Forward 2003). Wal -Mart's phenomenal success has also resulted in the closure of its own stores. The opening of a supercenter usually means the closing of at least one discount store, and because supercenters can be almost twice the size of conventional Wal -Marts, the company is rarely able to re -use the existing building's site. As of July 2003, there were 390 vacant or soon -to -be -vacated Wal -Marts in the United States, amounting to over 30.3 million square feet of unused retail space 46, plus thousands of acres of unused parking. On a larger scale, there is an estimated 500 million square feet of vacant retail space nationwide, out of six billion square feet total -47 Vacant retail stores are not a problem so long as they can be quickly re-leased, and many retail companies—Wal-Mart included -----have in-house realty divisions whose job it is to sell off or re- lease unused buildings. But prompt re-leasing is rarely easy. Retail leases are complicated documents to draft; and execute, and the municipal permitting process is also often time- consuming. Re-leasing can also be hampered by slow communications between a local real estate dispensation agent and the company's corporate headquarters: sometimes corporate real estate committees meet only infrequently to approve sales and dispositions, other times they may disagree with plans to subdivide properties. 48 Even in the best of circumstances (if, for example, a new tenant is secured almost immediately after a building closes) a building may sit empty for between six months and a year. This in turn can generate additional costs in the forth of police, fire, and other city services, particularly if a structure becomes blighted, with no compensating sales tax receipts. Under less than optimal circumstances, the delays can be even longer. One common difficulty is that companies are often particular about the shape and dimensions of their big boxes; although to the untrained eye most big box stores look the same, many have configurations specific to thein owners, especially on the interior (Annstrong 2001),49 Ira outlying areas where land is plentiful, it may be less expensive to build an entirely now box, rather than refurbish or demolish a box on an already -existing site (Armstrong 2001), because the cost of the new box would be the price of the land plus the price of construction, while the old site would be the price of the land, the price of demolition, and then the price of construction. Evert in places where infill development is the only option, an existing box is unlikely to be recycled. When Wal-Mart moved into a former Kmart in Napa, California, it demolished the Kmart building and built its own box in the exact same footprints° 46 The count was obtained from the, listings of Wal-Mart Realty, Val -Mart's its -house property disposition company, www.walmtirea)ty.com. 47 These figures come from the National Trust for Historic Preservation. 48 Interview with Jim Fletcher, San Francisco commercial real estate broker, September 10, 2003, 49 Also see "Empty Big Boxes Piling Up in County." St. Petersburg Times. May 12, 2003, 56 Interview with Donald Barella, planner, City of Napa, September 10, 2003. Pay Area Grocery Industry Deport Page 70 of 104 Even when companies are willing to move into old big boxes, their former owners are sometimes reluctant to turn leases over to their direct competitors," Although Wal-Mart Realty looks for tenants to fall its old stores, for example, it will not turn a lease over to 'Target or Kmart. While this makes sense from the standpoint of profit -protection, it also eliminates the most likely candidates to fill what are, in the end, large and not -very -useful buildings. (A Wal-Mart is more likely, however, to lease to a Home Depot, Lowe's, or other "category killer" that is not considered a direct competitor.) The consequences of big box abandonment tend to be self -compounding. At the very least, a vacant big box or shopping center anchor can have a drag effect on the sales of businesses around it, For shopping centers, and particularly for older ones that have grocery anchors, the loss of an anchor store can be devastating, as the traffic to its satellites often rapidly evaporates (University of Wisconsin Center for Community Economic Development 2002). Moreover, if a landlord is collecting rent on a vacant property and does not believe it can be re-leased, he or she also loses the incentive to spend money on upkeep of the property, The decline of an area can in this way become a self-fulfilling prophecy: a landlord decides a retail area is no longer vital and so stops putting money into the major building in it. Absent investment, the area does in fact decline, which reinforces the idea that the area is unhealthy, and reinforces the disincentive to invest. Such benign neglect can easily lead to blight. This is not mere supposition. A considerable amount of research has tied abandoned and decaying buildings to the phenomena of blight and neighborhood decline (Greenberg and Popper 1994; Annstron,g 2001; Thabit 2003). The causality is not always clear—that is, in some instances it seems that abandoned buildings are a symptom of neighborhood disinvestment, while in others they seem to be the source --but there is little doubt about the association. Cities with declining populations and rising unemployment levels have consistently been found to have more vacant and abandoned buildings {Armstrong 2001). Vacant buildings, along with their large parking lots, can attract litter, graffiti, and vandalism, as well as loiterers and homeless populations. A decaying building both worsens its own prospects for refurbishment and weakens the vitality of the buildings around it. And big box stores, which are built quickly and cheaply, often have lower -duality construction than other buildings, meaning they tend to deteriorate faster (Greenberg and Popper 1994). There is no reliable estimate for how long an abandoned big box or mall will sit empty, but plentiful anecdotal evidence exists to suggest that once an area is seen as obsolete, it is hard for it to recover. In St. Petersburg, Florida, four dead big boxes stand within half a mile of each other on Highway 19, but the county is considering rezoning agricultural land, because developers are reluctant to build on the used sites.52 An empty Wal-Mart in Bardstown, Kentucky, was vacant for over ten years (Mitchell 2001), The pathology of abandoned buildings is a fairly -heavily studied subject, and a number of theories have grown up around the causes and consequences of blight. The best known of these is probably the "Broken. Windows" theory, which was developed in the 1980s by the criminologists George Kelling and ,Tarries Q. Wilson (Wilson and Kelling 1982; Kelling and Coles 1996). Broken Windows asserts that blight and dilapidation are precursors not just to disinvestment but also to social disorder and crime. "Untended property," authors claire, 51 Interview with Ronald Barella, planner, City of Napa, September 10, 2003. sa Empty big Box stores Tile up in County. S1. Petersburg Times, May 12, 2003. Bay Area Grocery Industry Report Page it of 104 "becomes fair game for people out for plunder and even for people who ordinarily would not dream of doing such things and who probably consider themselves law-abiding" (Wilson and Kelling 1982: 31). The process by which decay can lead to cringe is described: A stable neighborhood can change... in a few years or even a few months, to an inhospitable and frightening jungle. A piece of property is abandoned, weeds grow up, a window is smashed. Adults stop scolding rowdy children; the children, emboldened, become more rowdy. Families move out, unattached adults move in ... Fights occur. Litter accumulates. People start drinking in front of the grocers; in time, an inebriate slumps to the pavement and is allowed to steep it off, Pedestrians are approached by panhandlers. 53 The Broken. Windows idea, though dramatic, is highly theoretical, and has never lacked for detractors. But every many of its critics do not dispute the broader literature it springs from, about the effect of physical deterioration on neighborhood and community health. A more accepted and arguably more sophisticated approach to blight is the neighborhood life cycle theory, which contends that without proper upkeep, almost any area can fall into a spiral of disinvestm.ents, as more affluent people move away and poorer in -migrants arrive (Jacobs 1961; Downs 19 81 ; Goldsmith 1995; Metzger 2000). In life -cycle theory as in. Broken Windows, the abandonment of buildings is a crucial contributing factor to the downturn of a neighborhood. Abandonment is considered a "signal" of decline, and triggers behavioral changes in neighborhood players ---by telling families to leave; telling businessmen not to invest; and telling poorer people to move in ---that can start a downward spiral. ure Clauses Theoretically, the problem of a retail company sitting on its lease should be a solvable one. Almost all lease agreements have what are known as "recapture clauses" built into them. Recapture clauses allow a property owner to take back the lease of any tenant that is underperform ng, and re -lease it to a new tenant. In reality, however, these clauses are rarely invoked. Its the case of Wal-Mart, this is because the company is often able to negotiate terms that are extremely favorable to it, and which make recapturing very difficult. The case of discount store in El Paso illustrates this point: Wal-Mart signed a lease agreement for the store that required it to pay a very low fuse rent, and on then to pay on top of that base rent a proportion of its gross sales. This made the rents quite high, until the company closed the store to open a supercenter two miles away. At that point gross sales, obviously, fell to zero, and Wal- Mart was able to bold onto its lease for a negligible sub -market rate. The property owner took Wal-Mart to court in an effort to get the property back, but lost.54 A broader problem with recapture clauses, which applies to almost all large retail properties, is that there is rarely a strong incentive to use them. The loss of a big box or anchor tenant usually means (or at least is interpreted to mean) that the site on which it is located is no longer a viable place for retail business. New big box construction, after all, does not usually harm large, healthy shopping areas, although it can. Generally it accelerates the demise of areas that were already s� Empty big Box States Pile up in County, St. Petersburg Times. May 12, 2003., See also Kelling, George and Catherine Coles. 1996, Fixing Broken Tf�indows. New York: Touchstone. " Scot Properties vs. Wal-Mart Stores. US Court of Appeals for the Fifth Circuit. 138 f 3D 571 1998 Lexis 6631. April 3, 1992, Decided, Bay area Grocery Industry Report Page 7.2 of 104 failing, In these situations, the owner is better off collecting rent on the empty building, rather than taking the building back and risking the prospect of°having no tenant—arid no income—at all .53 The extent to which such spirals can be avoided or reversed depends to a certain extent on the availability of open land, and on the stringency of local land use regulations. Abandoned buildings are most common in areas where land is plentiful and cheap; in urban areas retailers who want to locate in the market may be more willing to recycle an existing site, particularly if no open space is left. The San Francisco Bay Area, in other words, which is already heavily built and which has a perennially tight real estate market, is far less likely to suffer from large-scale retail vacancy than. is Texas. In Minneapolis, which has a thriving retail market and an average retail vacancy rate of only three percent, giant retailers have demonstrated a willingness to locate in old stores, rather than be deprived access to a vibrant and high -spending clientele (Frank 1998). Evers in areas with no shortage of open space, zoning and other ordinances can create incentives to recycle old boxes. In Vermont, which battled Nal -Mart's entry for years in court, the retail company was finally allowed into the state when it agreed to build in the site of an old Kmart— the result of a state law forcing new big box retailers to convincingly rule out existing store shells before they are allowed to build new ones. The second Wal-Mart in Vermont also went up in a recycled site (Frank 1998). Cobb County, Georgia, has introduced tax incentives to try and fill its empty retail centers, coupling them with impact fees on undeveloped land to make the existing buildings more attractive (McNaughton 2003). In some places, of course, incentives simply won't work. If an area is recovering from a retail glut, there there will logically be more buildings than there are retail clients to fill them. In these instances alternative uses must be found. Old grocery and retail stores have been converted into churches, hospitals, and office buildings. New Urbanist planners have seized on old big bones and malls as potential sites for transit -oriented mixed-use development, the logic here being that dead malls—which on average occupy 45 acres of land. -----are some of the few single -owned plots of land large enough to accommodate smart growth initiatives. The Cinderella Mall, in Englewood, Colorado, went dark in 1997. The city took it over and turned it into a mixed-use residential, retail and office development, all on alight -rail line (Bucher 2002). Other New Urbanist designers have taken old boxes and split thein up, partitioning the inside and interrupting the fagade, in the hopes of making it look like a series of smaller stores. But as intriguing as the New Urbanist and "smart growth" redesigns of big boxes are, they are also quite rare. Research and discussions with a prominent broker of retail and grocery properties in the Bay Area suggest that dark boxes and grocery stores in the Bay Area can usually be filled relatively soon, but that the replacement use will often alter the economic character of the property. 56 It is unrealistic to have a chain grocery store like an Albertson's go dark and expect a ss For this reason recapture clauses are more often invoked on underperforming smaller stores—.a video store, for instance ---that are the satellites of healthy anchors or boxes. 56 Fletcher interview, September 10, 2001 Bay area Grocery Industry Report Page 73 of 104 Safeway to replace it, it is more likely that such stores might become ethnic markets or malls, or might be subdivided, with half the space becoming a 24 -Hour Fitness or similar gym, and the other half perhaps becoming a discount grocer life Grocery Outlet. 57 RE From one perspective, Wal -Mart's ability to increase retail tax revenues (and often employment) suggests it is a net benefit for the communities in which it chooses to open stores. The loss of small businesses, while perhaps unfortunate, is neither new nor entirely without its advantages. But the reality is more complex, A supercenter replacing a conventional discount store is likely to have fewer impacts on small stores and downtowns, because one would suspect that discount store has already purged much of the surrounding retail market of its inefficiencies. Where the supercenters are more likely to have an effect is on the grocery stores, which thus far have been relatively shielded from discount competition. In that respect, it seems that the continued growth of supercenters may hasten the closure of underperforming supermarkets, which could present cities and towns with a problem of retail vacancy. Many of these supermarkets are likely to be older and smaller, which makes them more difficult to re -lease. The next chapter calculates supercenter benefits and casts to local governments public finances, on both the revenue and service sides of local budgets. While often considered "cash caws" in this sense, the details reveal many nuances and caveats. 57 Grocery Outlets stock overruns and discontinued products, i.e„ Coca-Cola in cans that still bear a Santa Claus or the Olympic logo, or liquid soap in the prior year's color. Such a strategy allows inventory to be produced at cost or below, but also makes its vertical and horizontal depth wildly unpredictable. E Bay Area Grocery Industry Report Page 74 of 104 Local governments in California have little direct control over their revenues, and every less control over how they canspend what they receive. Municipalities rely heavily on the property tax and sales tax for discretionary funding, but the rates for these taxes have been taken largely out of their hands ----a result of the stringent voter approval required for raising such taxes. This has given rise to attempts by growing jurisdictions to regulate their development with an eye prima ly to generating tax revenue. This prioritization of tax -generating development projects has been referred to as the "fiscalization of land use policy" (Altshuler and Gomez -Ibanez, 1993). Oris result of this fiscalization is a particular emphasis on sales -tax -generating land uses (sometimes known as the "retail bias"), and a disinclination to accommodate new residential development. Residential development is often viewed as a net fiscal loss for municipalities. When projecting the costs of growth, cities and counties—and their consultants—typically use fiscal impact models that attribute the costs of most services to households, rather than to firms. Residents, unless they are childless or affluent, are commonly estimated to require more in city services than they pay for with their taxes and user fees. The consequence is a fiscal policy bias toward sales -tax generating activities. Cities overwhelmingly focus on retail development, where feasible, as a strategy for fiscal balance. There are two kinds of problems with this approach. first, whether such models are correct is debatable. Some cities, such as Phoenix, Arizona, have surveyed their service departments, and found that nonresidential uses are significant consumers of police, fire, parrs, and the like. This is not commonly done in California. Second, the benefits of attracting and retaining retail development are often not only lower than expected, but also more short-lived. The average supercenter is expected to generate about $140 million in gross sales per year, about 75 percent of which inlay be taxable. But the net fiscal benefit will be less, and in some cases substantially less, due to several factors, including the effects on other retailers. An analysis of the most recent data available finds weak correlations between the presence of large retail general merchandise stores and taxable sales in the Bay Area. Thanks to their size and to retail shopping by grocery patrons, supercenters will exceed conventional discount stores in taxable sales. But supercenters may be even more prone to capturing existing municipal taxable sales, since supermarkets are ubigiaitous in cities in the Bay Area. The net effect on the municipal fiscal situation is unclear; Hauch depends on local market conditions. The basic math is easy: Supercenters are expected to generate on the order of $140 million per year in store revenue (Saporito, 2003 4), about 75 percent of which can be expected to be Ray Area Grocery Industry Report Wage 75 of 104 taxable.$ If one percent were returned by the state to its originating local government, as provided for by California law, this would yield revenue of about $1 million per year to local coffers. However, the net impact is less clearly positive than might appear on first blush: In most instances new retail outlets tale some share of business away from existing retailers in the same city. This is even more likely to occur withsupercenters, for reasons explained below. Large general merchandise stores such as Target, Kmart, and Wal-Mart are not strongly associated with higher tax revenue in the Bay Area, with few exceptions. Because most grocery items are nontaxable, the expansion of a retail store into a supercenter is unlikely to be followed by a proportionally equal expansion in sales tax revenue. There may be a relatively small increase in retail revenue, as a result of cross -slopping that generates higher retail sales, but this will be a small jump in taxes in exchange for a considerable increase in the size of the retail store. At the regional level, retail sales is for the most part a zero -sun game. A big box located on the border of one city may simply drain tax revenue from an adjoining town. Such competition is locally rational but can have negative economic impacts for the region.. Large retail stares draw customers from a geographically extensive area and have many employees. Cities rarely account for the resultant budgetary costs due to increased traffic, use of police and fire services, and employee and patron use of local amenities such as libraries and parrs. The likely magnitude of such impacts will vary depending on the particular conditions. landscapeThe fiscal The passage of Proposition 13 in 1478 capped the maximum rate of appreciation of a property at two percent per year. New assessments are only made when property is sold, meaning that a business or household that stays in one place for a long time makes smaller contributions over time as a percent of the market value of the property. Over any given period of time, this contribution may not beep pace with the rising costs of city services. Residential property changes hands far more often than commercial property does, so it is reassessed more often, and the amount of tax revenue derived from residential property has risen somewhat faster than the amount derived from commercial property. A decade ago residential taxes accounted for 32 percent of the total property taxes collected in California; today they account for 38 percent ( orain 2003). The local sales tax rate generally cannot be changed, outside of a referendum requiring two- thirds of the papular vote. Local sales tax in the study area ranges between 7.25 and 8.5 percent (Hoard of Equalization 2003), one percent of which is returned for discretionary use to the municipality where the transaction took place. For study area counties where the sales tax ss Need sources for the following, $1.04 million in revenue; 40 percent grocery sales; 35% of grocery sales taxable; $60 + $15 = $75 million. Bay Area Grocery Industry Report .Page 76 of 104 exceeds the 7.25 percent statewide floor, the additional tax is levied to fund county transportation agencies and/or the Bay Area Rapid Transit system, with few exceptions. Because municipalities cannot control tax rates, they attempt instead to control the development within their boundaries., seeking development that will bring high property value or taxable sales. Large retail establishments have the potential to bring large amounts of revenue, at least in the short terra, even to cities that cannot hope to attract high property value land uses. Car dealerships, which move high-priced merchandise at a relatively high volume, are considered an ideal land use, and are frequently subsidized by local governments, Big -box retail stores, which sell less expensive items but do so in massive quantities, are also considered fiscal winners. A final incentive for cities' pursuit of retail lies in the perception that it is relatively immobile. There was a time when economic revitalization consisted of pursuing manufacturing firms. But manufacturing plants, as states and cities learned to their chagrin, can be built almost anywhere. As soon as it was less expensive for there to be located in other states or other countries, they left (Norton and Mees 1.979; Bluestone and Harrison 1982), In contrast, the conventional wisdoms goes, retail needs to be near its customers, and is thus less prone to flight. A Wal-Mart store in Salinas cannot leave for Mexico or Malaysia, regardless of how much less expensive land or labor there might be. Impacts on municipal tax revenue Municipalities and their consultants commonly believe that big box discount general retail stores have a positive influence on net sales tax receipts. This has been disputed by some researchers, who point out that large retail stores, and general merchandise discounters in particular, might cannibalize sales of existing retail stores within the city limits, depending on the particular size and geography of the municipality. If big box retail stores increase sales tax receipts, one might expect a correlation between the presence of such stores and retail taxable sales for municipalities. This question was analyzed using taxable retail sales data from the California Board of Equalizations and population data from the state Department of Finance for 116 cities in the 12 -county study area. Taxable retail sales among study area cities in 2001 ranged between $667,000 (Hillsborough) up to $8 billion (both San .lose and San Francisco). Per capita sales ranged all the way from a low of 6 cents up to a remarkable $746 per resident, although 80 percent of cities fell in the range between $2.50 and $18.71 per resident. The high outliers lead to a very skewed distribution, with a mean of $22.50 and a standard deviation of $90. These data were merged with data about the location of discount retail and wholesale club stores from five chains: Costco, Kmart, Bard's Club, Target, and Wal-Mart.59 Of the 116 cities in the dataset, 51 (or 44 percent of the total) had one or more of these stores in 2003. There were 26 cities with two or more (23 percent of the total). At first glance, total taxable retail sales were not highly correlated with either the presence of any discount retailers or the number of such retailers. In the regressions results, neither the " Data on locations of the big box retailers was collected in 2003. Bray .Area Grocery Indusoy report Page 77 of 104 presence of one or more big boxes (represented with a dummy variable) nor the number of big box stores had any significant relationship with taxable sales with the city as the unit of analysis. On the other hand, per capita sales told a different story. In a regression using per capita retail sales, big box stores per capita was highly statistically significant. The regression indicated that for each additional general discount store per 10,000 population., a city would be expected to have an additional $22 per capita in retail sales. Since more than 90 percent of cities in the Bay Area. have less than $22 per capita in retail sales, but many have one or more of the general discount retail stores in the dataset, the highly skewed distribution of stores seemed to be influencing the analysis.$° Further inspection of the data revealed that two small cities with very high per capita retail sales --Sand City in Monterey County, and Cola in San Mateo County—were driving this result. These cities have very small populations (lass than 300 residents in Sand City, less than 1,200 in Colina) along with taxable sales in the moderate range ($200 million per year in Sand City and $765 million in C:ohna). Colina has a Kmart and a Target, while Sand City has a Costco. Conventional regression analysis assumes a normal distribution of the independent variable, which is not true of our data. One method to restore normality is to remove outliers from the analysis. Sand City and Colma were rezrrovM from the dataset and the regression was recalculated. The number of big box retailers per 10,000 capita was no longer strongly correlated with taxable sales per capita. This result was robust to city size. The same was true when the analysis was restricted to cities of less than 100,000 (100 cities), cities of less than 50,000 population (79 cities), and cities of less than 25,000 population (49 cities). What conclusions can be drawn? The analysis tends to confirm two rather unexceptionable premises. First, very small cities can get a big payoff frown a big box. Second, for cities of moderate size and/or geographic extent, general merchandisers do not by themselves ensure high tax. receipts. The fact that that a correlation was not found between per capita retail sales and the presence of one of the five kinds of big box store in the data set, except for two extreme cases, does not by itself mean that big box retail stores have no effect on retail sates. There are other more likely hypotheses to explain this result, One is that the taxable retail sales revenues of cities are largely a function of market factors, which cities can do little to significantly change. A second, potentially contradictory, hypothesis is that many retail uses (including other big box specialty formats such as Horne Depot, Toys -R -Us, and Staples) contribute to the overall taxable sales profile of a city, and general merchandisers are just one part of that profile. This may contradict the first hypothesis insofar as municipalities attempt to attract myriad sales tax generating uses. These alternative explanations cannot be addressed in detail here, however, it is clear that in the Bay Area the location of general merchandise big box stores does not by itself lead to a taxable sales payoff for municipalities. 60 Conventional regression analysis (that is, ordinary least squares) assumes that (lie underlying distribution of the independent variable is nomal. This is clearly not the case with taxable sales per resident, day Area Grocery Industry Report How much taxable revenue will a Page 78 of 104 As noted above, it is questionable whether permitting a conventional general merchandise discount store will lead to a net increase in sales tax receipts. This effect may be exacerbated for a supercenter. This is because supercenters compete with supermarkets and grocery stores, a store format that is more evenly spread across the landscape than existing retail stores and shopping centers. As a result, the potential payoff for most municipalities is reduced. Even if the average city doesn't have a regional ,shopping center or downtown retail concentration to worry about, it has plenty of its own supermarkets and grocery stores that the supercenter may draw patronage from, This issue can be set aside for the moment to address one of the main questions confronting cities. What volume of taxable sales can be expected to occur at a supercenter? Supercenters are different from conventional discount stores in several ways. First, they sell groceries and drugstore items, many of which are not subject to sales tax. Cold food and prescriptions are not taxed, while prepared food and most other drugstore items are taxed. In California, the Board of Equalization allows grocers to estimate a percentage of grocery sales that is not taxable and reduces their payments to the state by this amount (BOE Reg. 1642.5).63 The percentage of taxable sales tends to be in the range of 25 to 35 percent .62 The format for the grocery component of a supercenter is actually a combination store that is, a supermarket and drugstore combination. Therefore the percentage of sales whieb are taxable in the "grocery„ component of a supercenter is likely higher than the average supermarket in California, which does not carry as many taxable items as does a combination store. Second, supercenters are bigger than discount stores, primarily so they can accommodate the increased selling space needed for the grocery items. Various newspaper and magazine reports put the size of an average Wal-Mart supercenter at between 180,000 and 190,040 square feet, while the size of a conventional discount store is somewhat smaller, perhaps up to 124,000 square feet. Since the estimate of the average selling space for the grocery/drugstore component of a supercenter is 60,000 square feet, most conventionally sized supercenters are equivalent in size to a conventional Wal-Mart plus a large combination store (supermarket and drug). Third, supercenters will have more customers per day than a conventional store due to the grocery component. Supercenters are widely reported to have substantially more retail sales than a conventional discount store due to cross -shopping from those who came primarily to buy groceries, or who came specifically to take advantage of the one-stop shopping for grocery and retail items available at the supercenter. These countervailing effects complicate taxable sales predictions. On a square foot basis, retail sales may be less. Because the retail sales component is increased by the presence of a grocery store, and the store as a whole is much larger, gross taxable sales will almost certainly be greater. Gross non-taxable sales may fall, however, as discussed earlier. ¢' The percentage is not applied to "nongrocery taxable items" such as gardening supplies, sunglasses, stationery supplies, hardwaro, distilled spirits (ice., alcohol), and so on. 62 Interview with Dick Hagaman, staff at the.Analysis & Statistics Department at the California Board of Equalization department, 9/18/03, Hagaznan said that there are no official statistics available on this question, but 35 percent has been used as a "rule ofthuiab" there for a lung dine. Bay ,4rea Grocery Industry Report Revenule stat4111�Lojth�__!upercenter format Page 79 of 144 In addition to the predicted average revenues from a land use, local municipalities are concerned about the stability of those revenues. Food sales tend to be less volatile than general merchandise sales. People always need to eat, while during economic downturns they are likely to forgo some leisure consumption. While food sales accounted for between six and ten percent of total sales tax revenue throughout the 1990s in Northern California, general merchandise stores ranged between. 15 and 23 percent of total revenue (see Figure 5). Fi ure 5: General merchandise and food. stores as rcent of retail iaxabie sales California Source: California. State board of Equalization, "Taxable Saes in California (Sales & Use Tax)„ [1990-2001, except 1992 and 1996]_ The values for 1992 and 1996 use the average between before -year and after -year values of sales Similarly, Figure 6 shows that taxable sales per pen -nit also vary considerably more for general merchandise stares than they do for food stares. The considerable spikes in taxable sales per permit that are evident at the end of the decade may reflect the results of retail consolidation— the closure of some stores as others (most likely discounters) enter the market and begin commanding a larger share, The subsidy process It is not uncommon for municipal governments to offer substantial subsidies to retail establishments that expect to generate high levels of sales tax revenue. In 1998, the city of Long Beach abated half the projected sales tax revenues from a car dealership in order to lure that car dealership away from the city of Signal Hill (Shu -it 1998). In 1993 the city of Lake Bay.4rea Grocery Industry Report Page 80 of 104 Elsinore agreed to reimburse Wal-Mart $2.2 million in sales and property tax revenues in exchange for the company building a discount store there (Perkes 1990. �i urs fit . �e��r�l rrti�reh�r�di�e arty i��a stcrr�s i�xa�bls sales �r �rrrr,it ih,au�arzd� Source: California Mate Board of Equalization, "Taxable Sales In California (Sales & Use Tax)" [1990-2001, except 1992 and 1996]. Values for 1992 and 1996 use the average between before -year and atter-year values of sales. To procure tax revenue, most city goverzzments see their only rational course of action as competing for businesses that would have located among them even without subsidies or inducements. The results can often be counterintuitive. If every city focuses on building retail, a region can quickly become saturated, which raises the risk of closures, vacancy and blight. From 1990 to 1998, the Los Angeles Community Redevelopment Agency focused heavily on luring retail development to that city; in the same amount of time, the amount of retail space in Los Angeles County increased over 24 percent, while the population increased only 8 percent (Los Angeles Alliance for a New Economy 1999). Retail development also has a relatively love multiplier effect, so city govern rents who pursue it should be aware that they are chasing tax revene at the expense of lamer economic health. Planning in pursuit sof tax revenues generally contradicts other planning goals, such as the creation of duality jobs or the provision of affordable housing. Regardless of whether a municipality decides it is in. its interest to pursue or even subsidize the location of a supercenter, the net fiscal 'impact on the region is probably negligible. Bay Area Grocery Industry Deport Mage 81 of 104 The effect on the region of ignoring other planning goals is potentially more serious. As shown above, however, even when it comes to municipalities acting entirely in their short-term self- interest, elfinterest, a supercenter may or may not create a net fiscal benefit, It depends. Bay area Grocery Industry Report Chapter i IssuesPolicy ': ► y, .Page 82 of 144 The Bay Area faces a substantial transformation of its grocery industry over the next few years. These changes reflect the national resta°ucturing underway in the grocery sector as well as consumer preferences, In general many consumers will see price savings, grocery workers will experience significant wage reductions, and several local governments will encounter a mix of economic development and fiscal impacts, none all good or bad, It is a nixed picture that looks better or worse depending on where one sits. In particular, while benefits are diffuse, the wage and other impacts will tend to be highly concentrated in certain places and for certain people. The winners and losers are not only different groups; in this instance, they win and lose to very different degrees. Some of these changes are best left to the private sector to sort out, while others are matters of public concern.. Where does this leave a local city council considering a proposed supercenter? The choices, and the implications of those choices, are complex and less than transparent. Offered in part as a tool for local decision makers, this report concludes that the following; issues are important: The entry of supercenters into the Bay Area market will exert substantial downward wage and benefit pressure in a sector that currently is a source of high -wage entry-level jobs. o Supercenters will affect land use and traffic.. Consumers will likely drive longer distances to shop at supercenters as compared to neighborhood supermarkets. Local governments and regional agencies will have to weigh the impact of that extra driving. + Supercenters might also impact land use plans by competing with smaller shops located in more dense downtown. areas. To the extent that market transition leaves older, abandoned retail or grocery sites in its wake, issues of local blight and community health might. become a concern:, particularly where conventional grocery stores serve as anchors for community shopping centers, + The fiscal impacts of supercenters are likely less beneficial to local governments than is commonly assumed. Municipal governments should assess whether supercenter revenues represent increased taxable sales, or a shift of sales within the municipality. Supercenters will result in reduced prices for grocery items, with significant benefits to consumers. Lower grocery prices are a considerable benefit in high cost -of -living regions, such as the Bay Area. The costs of supercenters are likely to be concentrated on supermarket workers (in terms Bay area Grocery Industry Report Page 83 of 104 of wage and benefit impacts) and at particular locations (in terns of traffic impacts), while the benefits are more widely distributed and diffuse. Mediating this distribution of costs and benefits is an appropriate issue for public concern. Supercenters present challenges that will require such public sector attention. The apparent familiarity of big -box retail and grocery shopping belies the complex issues municipalities will soon face if, as expected, supercenters enter the Bay Area market. The main purpose of this report is to identify the range of impacts likely associated with these trends. Given these, what should local officials do? In practice, each project is best addressed by a case-by-case systematic review of each category of impact and the tradeoffs those impacts often imply. To facilitate that approach, the report provides the following check list of impacts and the primary specific tasks required. This list of key considerations is neither complete nor fully detailed. Neither are all list items equally important, it does, however, indicate the scope and scale of the challenge faced by local decision makers. A. Economic and Employment Impacts aHow mach will the supercenter change grocery prices and selection locally? TASKS: Need an estimate of the average grocery purchase mix of items • Need an estimate of the price changes for those items • Calculate ripple (i.e., multiplier) effects of consumer prices on local economy How much will the new supercenter displace existing local retail market share? TASKS; Need to inventory the local retail base * Assess market areas and market impacts What will be the impacts on the local work force? TASKS: Assess impact on existing retail Calculate direct impact of job changes, lower wages and benefits ® Calculate impact on net employment Calculate ripple (i.e., multiplier) impacts of wages, benefits and employment changes on local economy Will the new supercenter lead to vacancies or changes in local land use? TASKS: Inventory vacant land and commercial properties. Assess re -use or redevelopment possibilities for competing sites. Buy Area Grocery Industry Report Page 84 of 144 B. Municipal Finance Impacts How much will the new development require in public services? TASKS: Services and capital expenditures: Calculate cost of infrastructure & utilities • Traffic and other service impacts? • Calculate the cost of associated economic development incentives, such as tax credits Assess the impact of redevelopment zone tax -increment financing. SHow much will the new development change local tax revenues? TASKS: Assess net changes in local retail sales • Calculate not changes in sales and property tax revenue. • Examine the stability of the retail. sales tax revenue over time. C. Community Impacts Will a given big -box footprint possibly expand in the future? In the same line of business? 'MASKS: Ask about future plans up front * Examine industry trends Plan for expansion contingencies SWhat localities will benefit from and/or be disadvantaged by supercenter development. TASKS: Assess the differences between local and regional impacts. Are local gains at the expense of losses in other cities? Must these be mitigated? How will the new retail outlet affect your community's quality of life? For example, will it reduce the appeal of a downtown core that you are trying to preserve or revitalize? TASKS: Inventory locations of competing retailers. Assess. impact oar existing local retailers. Bay Area Grocery Industry Report Page 85 of 104 Adamy, Janet, 2002. 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Fixing Broken Windows: The Police and Neighborhood Safety, The Atlantic Monthly, Mareb. 29-38. Zellner, Wendy. 2002. flow Wal-Mart Deeps Unions at Bay. Business Week. October 28: 38(5). p 94. Bay Area Grocery [ndustry Report Page 91 of 104 Current market shares Market share data are provided on the basis of pre -defined market areas that are smaller than the 12 - county study area, Market shares for the aggregated area, with the exception of Sonoma County, are estimated by weighting shares for the supermarket chains by the percentage of total household effective buying income accounted for by each submarket. (Sonoma County market share data are not available.) The Oakland metropolitan statistical area (MSA), consisting of Alameda and Contra Costa counties, is the largest submarket within the study area, with 34 percent of the population and 32 percent of the gross effective buying income (EBI). The San Francisco MSA, consisting of Marin, San Mateo, and San Francisco counties, and the San Jose MSA, consisting of Santa Clara County, both account for a share of EBI higher than their population, as these areas have higher average income than the rest of the study area.. Finally, because of their relatively low household income, the Vallejo -Fairfield -Napa MSA (consisting of Napa and Solano counties) and the Monterey - Salinas "designated market area" (consisting of Monterrey, Santa Cruz and San Benito counties) account for 17 percent of the population of the area but only 13 percent of purchasing power, This information is shown in Table AI, below. Pay Area Grocery.1ndussoy Report Page 92 of 104 Table Al. Population & effe tine :bIre In�orpe for saaiamarkets exce t Sonear�a Ca�rnt Area Abbreviation Si SF Oak VF MS San Vallejo- Monterey- SanJose Francisco Oakland Fairfield Salinas Full Name of Area MSA MSA MSA MSA DMA San Francisca, Santa San .Alameda, Cruz, San Total, 11 - Santa Mateo, Contra Napa, Benito, County Counties Clara Marin Costa Solano Monterey Area Population 1,740,132 1,779,917 2,453,587 536,968 738,686 7,249,290 As percent of total 24% 25% 34% 7% 10% Households 582,317 702,635 884,984 181,829 236,119 2,567,884 As percent of total 23% 27% 34% 7% 9% E131 80,910 71,426 64,056 53,986 62,448 HH x FBI ($ bil) $47.12 $50.19 $56.69 $9.82 $14.75 $178.55 As percent of total 26% 281 32% 5% 8% % Chains 79.0 78.9 87.4 81 A 82.5 85.4 Sup % Sales 89.0 80.7 87.1 89.2 80.6 70.1 Sources: Trade Dimensions (2093) and authors' calculations. The purchasing -power shares by submarket from. Table Al are used to estimate distributer and company shares of the market in the l I -county area, as shown in Tables A2 and A3, below. Bay Area Grocery Industry Report .Page 9.3 of 104 �"a%le ��: �larkei �h�re b dt�irl�uic�r �tuci area �� t �vnv�a Gotar� Distributor MS Oak SF SJ VF Total Safeway 2.73 12.97 12.98 8.27 1.61 39.57 Albertsons 1.47 T53 3.72 5.74 0.76 19.22 Unified Western 0.43 2.29 4.56 3.72 0.47 11.47 Super Store 1.45 3.62 0.22 2.72 1.16 9.17 Fleming 0.80 2.07 0.81 2.21 0.69 6.59 Ralphs 0.45 0.47 2.89 0.18 4.00 Whole Foods 0.12 0.70 1.10 0.82 2.74 Trader Joes 0.07 0.76 0.56 0.37 0.02 1.78 Small Suppliers 0.05 0.51 0.28 0.66 0.08 1, 58 Grocery Outlet 0.12 0.44 0.11 0.21 0.07 0.95 Smart & Final 0.08 0.25 0.37 0.21 0.04 0.95 Military 0.24 0.21 0.41 0.86 Mountain Peoples 0.27 0.06 0.20 0.26 0.79 Natures Best 0.06 0.22 0.28 Tree of Life 0.03 0.03 Total 8.29 31.74 28.05 26.41 5.50 100.00 Source: Original data from Trade Dimensions (2003); estimated market shares for 11 county area calculated by authors based on submarket area share of effective buying income (EBI) for households contained within submarket areas. Table A3 estimates the percentage of each submarket within the study area, with the exception of Sonoma County. (Data are not readily available for Sonoma County because it is a small MSA.) It is notable that in every subinarket, including the less densely settled areas of Monterey -Salinas (MS) and Vallejo -Fairfield (VF), the market share of unionized chains is quite high. It is highest in Oakland and Contra Costa Counties (Oak), at 70 percent, and lowest in Napa and Solano Counties (VF), at 57 percent. Union supermarkets account for about two-thirds of revenue in the study area as a whole, excluding Sonoma County. Safeway is the dominant store label in all markets, with a total share of about 38 percent area wide. Albertsons is second, with 20 percent; miscellaneous independent supermarkets not affiliated with chains take the third spat, with 9 percent; and the next biggest players at 3.7 percent and dropping are Nob Bill, Food 4 Less, Whole Foods, and F aley's. The rest of the chains, of which there are a total of 39 (not shown in complete detail above) each have less than two percent of the total market in the study area, but do snake up 22 percent of the total, Bay Area Grocery Industry Report Page 94 of 104 iabI+a � . rat sha # � �� stud ro oxe rmoma Count Company/Group MS Oak SF SJ VF Total Un? Safeway 2.73 72.05 12.50 8.72 1.61 37.62 Y Albartsons 1.47 7.53 3.72 5.74 0.76 19.22 Y Independent 1.00 2.38 3.09 2.24 0.44 9.16 N Nob hill 1.04 0.70 0.22 1.64 0.09 3.70 Y Food 4 Less 0.16 1.17 0.59 0.95 0.18 3.05 N Whole Foods 0.12 0.70 1.10 0.82 2.74 N Raleys 1.52 0.98 2.50 50% Pak N Save 0.92 0.48 0.55 1.95 Y Save Mart 0.41 0.41 0.92 0.09 1.83 N "grader does {1.07 0.76 0.56 0.37 0.02 1.76 N Bell 1.32 1.32 Y Andronicos 0.86 0.31 0.13 1.30 ? PW 0.13 0.11 1.00 1.24 Y Cala Foods 0.98 0.98 Y Military 0.24 0.21 0.41 0.86 N Lunardis 0.10 0.37 0.37 0.84 ? Smart & Final 0.08 0.25 0.31 0.16 0.04 0.84 N Mollie Stones 0.70 0.05 0.75 N Food Maxx 0.73 0.73 N Raiphs 0.29 0.22 0.18 0.69 Y Draecgers 0.45 0.16 0.61 ? All tethers 0.67 1.29 1.23 2.36 0.69 6.24 N Total 8.29 31.74 28.05 26.41 5.50 100.00 Total union (est.) 5.53 22,31 19.33 17.65 3.13 67°95 Union share of area 66:79 70,29 68.99 66.83 56.91 Source: Original data from Trade Dimensions (2003); estimated market shares for 11 county area calculated by authors based on submarket area share of effective buying income (El3l) for households contained within submarket areas. Trade Dimensions does not provide data an the gross market sales that would enable a per -store estimate of revenge across the study area, but data are available for selected MSAs through the Shelby Report, including the Satz Francisco MSA. As shown below, revenue per stare reaches a high of $28 million fbr Draeger's, which has only two stares in the area. Safeway and Whole Foods average $23 milli©n per stare. Bay Area Grocery Industry Report Page 95 of 104 Table A4: Market share and revenue Der tore San Francisco MSA 2003 Source: Shelby Report/ Trade Dimensions, 2003 Supereenter Estimates of supercenter revenue in comparison to conventional grocery store revenue are a key assumption in attempting to calculate the potential market capture of supercenters in the Bay Area. Journalistic accounts and industry reports provide one source from which to estimate these numbers. In 2002, a supermarket consultant reported to a reporter from EISA Today that Wal-Mart aebieves a third more volume in grocery sales and related items than traditional stores. (Albertson's is apparently responding by focusing on a combination food and drug format (Grant 2002)) A 2003 report by Merrill Lynch reports that an average Wal-Mart discount store has annual sales of about $40 ~:pillion, with food and food -related merchandise accounting for about ten percent of that (Barry 2000. In a supercenter, by contrast, total amival sales are expected to average $100 million, and grocery merchandise is expected to account for 40 percent of that. These food sales figures are twice that of an average supermarket, and almost 50 percent above the combination drag- and food -stares of the large companies such as Kroger and Safeway (Barry 2003). ACV in Fled, per Market Retailer Stores millions store Share S afeway 41 $963 $23 41.85 Albertson's 20 $315 $16 13.70 All tethers 48 $299 $6 12.99 Ralphs 20 $134 $7 5.62 Whole Foods 4 $94 $23 4.08 Mollie Stones 6 $85 $14 3.70 Smart & Final 8 $72 $9 3.11 Trader Joe's 7 $60 $9 2.63 Draeger's 2 $56 $28 2.42 Food 4 Less 3 $43 $14 1.88 Lunardi's 3 $29 $10 1.26 Deho6f Ent. 4 $23 $6 0.99 Real Food 5 $22 $4 0.94 Andronico's 2 $19 $9 0.82 Pacific Supermkt. 2 $19 $9 0.82 United Mkts. 2 $16 $8 0.70 Nob Hill 1 $13 $13 0.56 PW Super 1 $9 $9 0.41 Tawa 1 $9 $9 0.41 Picadiiiy Circus 1 $7 $7 0.29 Tropicano Russell 1 $7 $7 0.29 British Food Center 1 $5 $5 0,21 incon 1 $3 $3 0,12 Total: 184 $2,300 $13 100.00 Source: Shelby Report/ Trade Dimensions, 2003 Supereenter Estimates of supercenter revenue in comparison to conventional grocery store revenue are a key assumption in attempting to calculate the potential market capture of supercenters in the Bay Area. Journalistic accounts and industry reports provide one source from which to estimate these numbers. In 2002, a supermarket consultant reported to a reporter from EISA Today that Wal-Mart aebieves a third more volume in grocery sales and related items than traditional stores. (Albertson's is apparently responding by focusing on a combination food and drug format (Grant 2002)) A 2003 report by Merrill Lynch reports that an average Wal-Mart discount store has annual sales of about $40 ~:pillion, with food and food -related merchandise accounting for about ten percent of that (Barry 2000. In a supercenter, by contrast, total amival sales are expected to average $100 million, and grocery merchandise is expected to account for 40 percent of that. These food sales figures are twice that of an average supermarket, and almost 50 percent above the combination drag- and food -stares of the large companies such as Kroger and Safeway (Barry 2003). Bay Area Grocery Industry Report Page 96 of 104 This is borne out for individual markets studied, including Houston, Dallas, Phoenix, Kansas City, Denver, and Atlanta ('fable A5), While there is plenty of variation in the average revenue per supercenter, most of this appears to be due to an initially low per -store revenue when first opened, or when several are opened simultaneously. The equilibrium per -store revenue amount is in the 35 to 40 million dollar range, which is about twice the revenue of an average store in the largest chains in the market, whether that be Pry's and Albertson's in Phoenix, Hy -Vee and Cosentino's in Kansas City, or Kroger and Randall's in Houston. In these western metropolitan areas, Wal-Mart supercenters took in between 250 and 300 percent of the revenue of an average supermarket. Tall AS* Wal-Mart suoercenters for selected metro olitan areas 1997 to 20Q3 Range over all years and markets High Low Median Stores 28 1 8 Revenue per store $48 $15 $27 Market share 18,30% 0.49% 4.77% Note: market share for Wal-Mart supercenters only; neighborhood markets in Dallas and Houston excluded. Market areas may not be equivalent to metropolitan statistical areas in all cases. Source: Shelby Report i Trade Dimensions, Kansas Year Dallas Houston city Denver Phoenix Average 1997 Stores 8 2 2 4 Revenue per store $27 $27 $41 $32 Market share 4,65% 1.04% 3.73% 3.21% 1996 Stores 6 2 3 4 Revenue per store $24 $27 $36 $29 Market share 4.13% 1.04% 4J7% 3.31% 1999 Stores 13 6 3 1 1 5 Revenue per store $22 $22 $33 $22 $22 $24 Market share 5.70% 2.35% 4.09% 0.67% 0.49% 3.00% 2000 Stores NA 10 6 3 6 6 Revenue per store NA $20 $23 $15 $20 $19 Market share NA 3.35 5.64 1.25 2.56 3,21% 2001 Stares 21 16 11 4 8 12 Revenue per store $25 $27 $25 $23 $26 $25 Market share 9.56% 6,63% 10.93% 2.50% 4.22% 7,00% 2002 Stares 26 21 12 6 9 15 Revenue per store $29 $30 $25 $20 $30 $27 Market share 13.48% 10.00% 12,11% 3.33% 5.34% 9.00% 2003 Stores 28 25 13 7 11 17 Revenue per store $38 $41 $37 $37 $48 $40 Market share 18,30% 16.69% 17.99% 6.75% 10.10% 14,00% Range over all years and markets High Low Median Stores 28 1 8 Revenue per store $48 $15 $27 Market share 18,30% 0.49% 4.77% Note: market share for Wal-Mart supercenters only; neighborhood markets in Dallas and Houston excluded. Market areas may not be equivalent to metropolitan statistical areas in all cases. Source: Shelby Report i Trade Dimensions, Bay Area Grocery .Industry Report Page 97 of 104 In Houston, as Wal-Mart supercenters have become more dominant, the total size of the market remained stagnant and thea declined over the most recent six month period. Similar patterns occurred in other metropolitan areas. Supercenter market share estimates for study area, 2010 Wal-Mart is currently in 67 of the top 100 MSAs by population in the US, its shares for the MSAs range from 0.3 to 28.6 percent, with an average of 9.2 percent. The number of stores ranges from 1 to 27, with a mean of 5.9 stores. Although there are some small areas where Wal-Mart has captured half or more of supermarket revenues, this probably will not occur in the Bay Area for several reasons. First, developing a number of large stores in a largely urbanized area incurs high land costs. Second, there is a high level of participation in land use decision making by local residents, who tend not to prefer big box formats. Third, the .high average incomes of local residents are less suited to Wal -Mart's low - variety grocery format. To estimate possible future market share in the study area, the $2.3 billion in revenue reported for the San Francisco IMSA, along with current and future population estimates, are used to estimate the current and future size of the study area market in revenue terms. The population estimates below are based on the State of California, Department of Finance, Interim County Population Projections. Sacramento, California, June 2001. Population for 2003 is estimated based on straight- line projection between the 2000 and 2005 values, Table A6: Size of future snarkt._sa��errriarket solea Population estimates San Francisco MSA (SF, San Mateo, Marin) ASAG counties (less Sonoma) _ Santa Cruz, San Benito, Monterey Expected market revenue multiplier San Francisco MSA ABAC counties ABACI + Santa Cruz, San Benito, Monterey Market size estimate ($ bii) San Francisco MSA ABAG counties ABAC + Santa Cruz, San Benito, Monterey Percent Increase July 2003 July 2010 July 2015 1,792,340 1,845,600 1,842,300 6,687,820 7,205,400 7,420,900 7,455,860 8,082,400 8,375,600 1.0 1.0 1.0 3.7 4.0 4,1 4.2 4.5 4.7 $2.3 $2.3 $2.3 $8.5 $9,2 $9.4 $9,7 $10,4 $10.8 7% 11% Sources; revenue for SF MSAfor July2003 from Shelby Report/ Trade Dimensions; population estimates from Department of Finance (June 2001). Bay Area Grocery Industry Report Page 98 of 104 This information on market size and market share is used to estimate Wal-Mart supercenter market share scenarios for the Bay Area study region in the year 2010, as noted in Chapter 2 and repeated below, T Assumptions: Market revenue, 2003, $ billions $9.7 Market revenue, 2010, $ billions 10.4 Store Development Scenarios (Existing Cities) Market Revenue Rev/Store Revenue Market Stores ($ millions, ($ millions,' Share Phoenix 2003 11 $48 $525 5.19 Houston 2003 25 $41 $1,018 9.8% Dallas 2003 28 $38 $1,061 10.2% Market Share Scenarios (Existing Cities) Source: Market Share estimates from Shelby Report and Trade Dimensions, and authors' calculations. Market Revenue Rev/Store Share ($ millions' ($ millions,' Stores Denver 2003 6.75 $702 $37 19 Dallas 2003 18.3 $1,903 $38 50 Further 2010 Scenarios, Store Basis, Author's Estimates Rev/Store Revenue Market Stores ($ millions: ($ millions, Share Scenario 1 10 $37 $370 4% Scenario 2 16 $40 $640 6% Scenario 3 26 $40 $1,040 10% Scenario 4 41 $48 $1,968 18% Source: Market Share estimates from Shelby Report and Trade Dimensions, and authors' calculations. Bay area Grocery Industry Report Appendix a=: Employment ! Payroll Comparisons Industries Page 99 of 104 Area 1998 1999 2000 2001 Alameda 33,751 33,544 35,627 35,423 Contra Costa 21,030 21,656 22,971 23,361 Marin 8,867 9,159 9,342 9,249 Monterey 10,405 10,723 10,626 10,755 Napa 4,326 4,684 4,774 4,893 San Benito 1,010 1,004 996 974 San Francisco 40,075 40,409 42,282 42,640 San Mateo 22,421 22,660 23,247 22,734 Santa Clara 52,228 51,155 52,372 53,526 Santa Crttz 7,458 8,059 8,378 8,726 Solaro 8,508 9,159 9240 9,545 Sonoma 1.2,868 12,422 12,4.22 12,453 CA 921.638 946.161 NIA e Not Available Source: County Business Patterns Annual (1998-2001), US Department of Labor, Bureau of the Census Bay Area Grocery Industry Deport Page 100 of 104 Table ; Ps roil er ern i ee In jh.e fold lad drI!]h! lace ind� t etu re 1998 to 2001 Area 1998 1993 2000 2001 Alamcda $13,397 $13,634 $13,498 $13,561 Contra. Costa $12,837 $13,287 $13,441 $1.3,150 Marin $14,954 $15,026 $15,267 $15,314 Monterey $13,687 $13,906 $14,076 $8,809 Napa $14,977 $14,740 $16,100 $15,090 San Benito $10,116 $11,099 $12,008 $1.1,578 San Francisco $16,422 $16,685 $17,267 $16,457 San Mateo $16243 $16,705 $16,917 $16,(}97 Santa Clara $14,143 $14,234 $14,887 $15,065 Santa Cruz $12,269 $11.,985 $12,412 $1.2,344 Solano $11,105 $10,870 $12,135 $10,646 Sonorm $121146 $12,435 $1.3,1.72 $12,769 County Average $13,525 $13,717 $14,265 $13,407 CaliforniaState $12,947 $1311:62 $13,290 $13,024 N/A - Not Available All figures adjusted to 2001 dollars using the CPI -W index for the San Francisco-Oaktand- San Jose County area Source: County Business Patterns Annual (1998-2001), US Depaniuent of Labor, Bureau of the Census Table X10: EmWovment in department Mores, study area, 199 to..2001 Area 1998 1999 2000 2001 Alameda 5,866 5,776 6,676 6,087 Contra. Costa 0 0 0 0 Marin. 954 946 1,151 929 Monterrey 15,896 14,634 14,972 14,591 Napa 1,010 953 974 1,496 San Benito 0 0 0 0 San Francisco NIA. NIA. NIA. 2,561 San Mateo 4,116 3,257 3,437 3,500 Santa Clara 9,160 8,507 9,910 8,760 Santa Cruz 1,082 958 942 821 sohno 2,279 2,121 2,367 2,401 Sonoma 2,372 2,328 2,328 2,545 Northern CA 1e 'ot 44,733 41479 44,757 45,692 California State 171.,946 159,919 169,988 162,699 N/A -plot Available Source; County Business Patterns Annual (1998-2001), US Department of Labor, Bureau of the Census Bay area Grocery Industry Report Page 101 of 104 Table All. Payroll Der emolovee for deoartmeint stores, study area. 1998 to 2001 Area 1998 1999 2000 2001 Amada $16,654 $18,840 $17,265 $17,765 Contra Costa $0 $0 $0 $0 Marin $21,556 $22,673 $19,305 $20,996 Monterey $16,543 $17,715 $17,401 $0 Napa $14,291 $16,858 $17,842 $1.4,484 Sari Benita $0 $0 $0 $0 San rramisco NI71 N/A N/A $279073 San Mateo $15,896 $18,306 $16,897 $17,309 Santa Clara $18,374 $20,261 $18,630 $19,431 Santa Cruz $1.3,459 $14,961 $14,620 $15,448 Solano $15,421 $17,783 $15,991 $16,122 Sonoma $16,861 $18,051 $17,152 $17,097 purity kr age $13,550 $15,041 $14100 $13,810 Caltfoa State $1.6,139 $17,723 $17,008 $17,158 NIA - Not Available All figures adjusted to 2001 dollars using the CPI -4V index for the San Francisco -Oakland -San Jose County area Source: County Business Patterns Annual (1998-2601), US Department of Labor, Bureau of the Census Table Al2; ErnDlovment in the accommodation industry, study area. 1995 to 2001 Area 1998 1999 2000 2001 Alameda 4,533 4,860 5,337 5,299 Contra Costa 1,664 1,799 1,993 1,775 Marin 1,273 1,155 1,111 959 Monterey 6,951 7,162 6,283 6,438 [papa 1,809 1,987 1,973 2,309 San Benito 52 78 81 85 San Francisco 22,841 23,599 23,284 20,288 San Mateo 5,373 4,968 5,512 5,929 Santa Clara 7,502 7,853 7,471 7,657 Santa Cruz 918 913 944 1,453 Solano 579 623 444 584 Sonoma 1,475 1,932 1,932 2,220 northern CA Region 56,966 58,928 58,365 56,997 California State 181,667 188,866 189,572 191,628 N/A- trot Auairabie Source: CountyBusinrss Patterns Annual (1998-2€101), US DepastmentofLabor, Bureau of the Census Bray Area Grocery Industry Report Page 102 of 104 Table A13 Pavroli per etl<11p(wee _gin the aC0QM nQdc'd1on lndu. ! t stu area 1998 to 2001 Area 1998 1999 20DO 2801 Alameda $19,445 $20,196 $20,438 $20,089 Contra Costa $18,459 $16,345 $16,974 $18,417 Marin $21,192 $22,589 $34,618 $20,696 Monterey $23,676 $25,611 $23,413 $8,893 Napa $24,367 $23,814 $25,174 $23,530 San Benita $16,029 $12,115 $12,489 $13,482 San Francisca $27,697 $28,449 $30,557 $26,593 San Mateo $23,367 $24,839 $25,415 $23,113 Santa Clara $22,035 $22,664 $22,504 $19,900 Santa Cruz $17,710 $17,740 $19,367 $17,834 Soiano $12,861 $10,955 $16,262 $15,033 Sonoma $18,517 $20,462 $18,821 $18,762 County Average $20,448 $20,582 $22,336 $16,862 $20,960 $21,199 $22,582 $19,813 All figures adjusted to 2001 dollars using the CPI -W indexfor the Sen Francisco - Oakland -San Jose County area Source: CountyBusiness Patterns Annual (1998-2001), US Departmentof Labor, Bureau of the Census Table A,14, Ernoloment in the eonstructim industry. shady area, 1998 tg 2001 Area 1996 1999 2600 2001 Alameda 35,239 39,026 41,418 43,746 Contra Costa 20,865 22,522 25,159 26,485 Marin 5,815 6,892 8,254 9,110 Monterey 5,204 6,225 6,396 6,736 Napa 3,123 3,283 3,349 3,467 San Benito 1,112 1,234 1,342 1,381 San Francisca 18,731 21,119 23,928 24,382 San Mateo 18,508 19,070 21,924 24,758 Santa Clara 40,792 45,438 49,658 53,996 Santa Cruz 4,190 4,851 5,284 5,212 Solano 8,308 9,198 10,192 10,904 Sonoma 10,202 11,878 11,878 12,891 Study Area Total 174,087 192,735 216,782 225,069 California State 621,722 705,552 755,188 795,840 /A- Not Available Source: County8usiness patterns Annual (1998-2001), US Department of Labor, Bureau of the Census Bay Area Grocery Industry Report Page 103 of 104 Table A15: P°avroll Per erns lovee in the construction Industrv. study area, 1998 to 2001 Area 1998 1999 2000 2001 Alameda $82,279 $50,360 $52,903 $48,831 Contra Costa $47,230 $48,203 $51,321 $47,928 Marin $46,196 $47,281 $45,409 $42,313 Monterey $40,054 $36,652 $37,523 $31,723 Napa $39,405 $40,772 $40,942 $42,170 San Benito $30,432 $33,652 $32,048 $30,849 San Francisco $50,773 $48,322 $55,006 $52,343 San Mateo $54,622 $54,678 $55,976 $53,557 Santa Clara $51,79.2 $50,702 $55,176 $49,665 Santa Cruz $39,407 $37,711 $38,259 $36,950 Solan $39,170 $41,555 $43,854 $40,385 Sonoma $40,909 $40,646 $41,595 $39,196 County Awage $44,356 $44,211 $45,831 $42,826 California State $41,870 $40,501 $41,839 $39,795 NIA- Not Available Al figures adjusted to 2001 dollars using the CPI -W indexfar the San Francisco -Oakland -San Joss County area Source. County Business Patterns Annual (1998-2001), US Department of Labor, Bureau of the Census (7, Bay Area Grocery Industry Report Page 104 of 104 Chairman: Lenny, end.occas, Director, McKinsey &. Company, Chair, !McKinsey Global Institute 'ice Chairman. Keith Carson, Supervisor, District S, County of Alameda Robert M. Rerdahl, Chancellor, UC Berkeley J. Michael Bishop, Chancellor, UC San Francisco Del Bor gsdorf, City Manager, City of San ,lose Jerry Brown, Mayor, City of Oakland .Taint Condron, Councilmember, City of Santa Rosa Michael Covarrublas, .president & CES?, TMG Partners Jim. Cunneen, President & CEO, San Jose/Silicon Valley Chamber of Commerce Donald Eaton, Mayor, City of San Carlos Chortles (Chuck) Foster, C. Foster Consultant Service Judith Goff, Executive Secretary -Treasurer, Central labor Council of Alameda Nati Gonzales, Mayor, City of San dose John Hennessy, President, Stanford University Michael Kasper-zak, Jr., Mayor, City of Mountain View Regis 8. Kelly, Ph.D., Executive Vice Chancellor of Research, UC San Francisco Rachel Krevans, Managing Partner, Morrison & Foerster David M. Lawrence M. ,, Chairman & CEO Emeritus, Ka iser Founda tion Health Plan, Ira c. William L. Lee, City Administrator, City & County of San .Francisco Eugene Y. Leong Ph .D., Executive Director, Association of Bay Area Governments John P. McCaffrey, Managing Partner, PricewaterhouseCoopers LLP Juba Miller, Councilrnember, City of Sunnyvale Joseph N. Mialace, President & CE©, Pacific Maritime Association Horace Mitchell, Ph.D., Vice Chancellor for Business & Administrative Services, UC Berkeley Cynthia Murray, Supervisor, County of Marin Michael Nacht, Ph.D., Dean, Goldman School of Public Policy, UC Berkeley William Nack, business Manager, Building and Construction Trades Gavin Newsom, Mayor, City and County of San Francisco Robert T. Parry, President & CEO, Federal Reserve .dank of San Francisco Edward ar d E+ . Penhoet Ph.D., Dean of Public Health, University of California, Berkeley Gwen Regalia, Mayor, City of Walnut Creel Guillermo Rodriguez, Senior Director, Public affairs, Pacific Gas and Electric Company Robert Schroder, Mayor, City of Martinez Gordon Smith, President & CEO, Pacific Gas and Electric Company Joyce Taylor, Senior Vice President, External Affairs, SBC Robert Wor=th, Regional President, Tells .Fargo Bank President: R. Sean Randolph and t& Ray Area Council Bay Area Economic Forum 200 Pine Street, Suite 300 San Francisco, CA 94104 Tel: (415) 981-7117 Fax: (415) 981-6408 E-mail; jRfnDyjba. e_qo_n_f,_or_.o_r_9 Website: wwwbayeeonfor.org 06/03/2003 `SUR 14:54 [TX/RX NO 5181.1 9004 (And, How to. Control ft) male love whaes [wide suite= storax, 'T"lacy hate what's on the outsMc.n In d*-xe:: F d*WA 'I: McMahon, a national expect on mud grh= wwros the lov hate re- latioraship Americans have with big - box supe- mores. les hard to argut with the popularity of Wal-Mart, Target, Home Depot, Lowe's, and their many imitators. As Wal-Mart itselfpoints out, "All customers appreciate good service, low pricing, and great selection.'® With $ Nobillion in sales in 20(31, %I -Mares ntw status as tier-W(>rld's bkwcst busi- ness speaks for itself x So does the rapid, growth of snide cowF arnies as Rome D --- Por, Target, and i.:owe's; whose sales rmchc,d W billion, $24 billion, and $18 billion, rmpectivtly, in 70W.' And yet, at arty given moment, hundreds of cs orp nizatio ns across the coun- try arm fighting tootle acid nail to keels these retail behernoths otic of their r pm- rtruinldt& "Is the worst of the suburbs the bcst we can hope fore asks a flier distributed by citizem in New Orleans protestixng a proposal 199,OW squart- foot Wal-Mart stair: in the historic Lower Oardcn Distric-0 "We're not gaining a store; we'r'e losing Baur c ovimurnity,'° 6mcnu a citheaxs' group in DmorA Iowa, in an ad placed in [,SSA Tam� Opponents of a MpmA Home Depot in Mountain View, R- fornia, have opened their own office, stocked with lawn signs, Iitemtme, orad petitims, to protest the giant store.$ "I Don't Shop at Sprawl -Malts," reads a laumper sticker its Gretxnfield, Massa- cbusetts? A pmp called Mainsheet Defense ,trod sued the city of Norme]4 Minnesota, over its apPxp l o(a spr wl1ng 'forget stoic an the out- skirts of towns What's behind these banttlest In the view ofriaarny, lft boxstor" impoft hid- den ec*ts that&n't appear on the price tap cif the products they sell: nailer tn- gestiorat loss of trees, open apace and farmlarnd; displaced small bttsin sscsr substitution of jobs that srrp xt fow- lies with law pa-yi ng jo6 that duet; air and water pollution; dying downtowns ,vith vacant buildinab m-idonv d shop pity centtrr, a degraded, sense of corn. unit; f, and sprawl_ V�e list ofprobktns iarnked to big-hox stores is long. Whether one laves or hates big -box stores, it is irxtisputable Haat their C&Cts are long-term and signl&i ant, Local pubbe officials owe it to their corutitu, eants to consider these effects -and to becornc familiar with tools avaRab„ted kw mitigating tht rn—�a^, am appm ingbig- box nores. Such tools. include impact assessments, design standards, planning rnomi aria, retail size limits, interpvr•rn- mcntal Vrermtrits, and theZvitMrawal ofsubsidies for retail sprawl. Impact Assessments the Idea behind '"Impact assessments” is a simple one: communities .should Wk c6iclj at herr la%t develolats mt pr jmts will Qffec�t their towns, and miti- gate potential hat-tn whenever possible, Whitt environmental impact state mer is are standard fame for large miects, economic impact assessments ure less common, even though major commercial d,svelc>iaments can devas� tate the economic vitality of a down- town or -Main Strtet. Arthur Fmmroex, who launched the widely -mad travel guide series, has observed: The destruction of Anitrica's downtowns has occurred all over the eounrq as a direct re- sult of mall dtvedopmetnt on the outskirts, and especially because of the constxinction there of mammoth stores of the co mantel on PW a MarWAp,il 2002 Vole 43, No. 2 1 05/03/2003 'TUB 14:54 [TX/RX NO 5191 006 0.cmdnucd f7'om Pw 7 :dal -Mart var ty. In addition to disfiguring those ouukirts, they leave forced out of b mess nearly every major category of downtown sbl*o TO see how aro economic Impact assessment can help protect local com- Munity character, corbsidcr the rxp:>eri- ence of Lake Placid, New York. When Wal-Mart proposed to build aro 60, sgoare-fMt stare surrounded by nine acres of asphalt in a scenic preservation district on the edge of this small resort town, local residents xecviled- Aroonog other tia-w,gs, they €eared that the big - box spar-Wl typrlcally generated hY Wales Marts wed make take Placid les at, tractive to tourism? a €taple sof the to l economy. "People come to our unite valley fest a sense of renewal_to get away from the pressures of urban life," explained one resident. "Vj th its strip - mall architecture, traffic ligbts, and tlae bulldozing of thousands of tri for a parking lot greater than all the cora- biped Vices available downtown, the Wal-Mart will deface our view of Whiteface Mountain. The busincss re- -tired to support a store of this size eatens lake Placid and its neie"c- Uig villages."F° , l3eueloprnent proposals in the °'e of Lake Placid are regulated +. ,'e town of North Elba, why r Ing late calls for "away undue advent: impact on the natural, physical, social and economic resources of the Villa Torun [to] be avoided."gt In this case? the town's planning beard rejected the proposed superstore because its negative ccaraomic Impacts threaten- ed to harm "keV Placid's cearrrmun- it'd character" The economic impact study conducted for the proposed Wal-Mart said that it could take up to ,1.4 years to refill retail space likely to Meconin chronically vacant dare to the sup.-x-stow'5 czonst mction- Such chmnlc vacamies...would almost inevitably result in fewer tourists visiting Viae area, which would In turn result in less sales overall, resulting in a net downward spiral in the psychological, visual, and economic character and condi- tions of t:he...downtown_ - These potcotial impacts would .have a significant unmiti- gamble adverse Impact on the character and culture of the community by resulting in va- t stsore{wnts [and) a loss of "critical $pass" in existing down- town areas ...tx Lnsberg, Vin., prtrtyide $res to Ug -box sprauul, pfaty by Qommme g. Oemmrom I Munici W .f a"tr- Wei- art sued the planning b6atd for der its request to brtild, but in Eebru2i, ,::1998, a court upheld the board's decisiom" Other jurisdictions have rtjected big box stom air putcondidons on their approval as a result 6f i rapact msmsrment findings. In Vermont, for example, the state environmental beard denied per. mission for a developer to build a xupetatom outside. St_ Albans after an impact assessment rstimated Haat the I00,flW.squar+e-fomstore would cost the public $3 for every $1 of public benefit: The big box rctadcr appe�led this ded, $lora W the YtsrnMt Satgrerne Comm, but in 1996, the court validated theboard's ruling -1$ The court observed, ".Ps amunicigr,aliW8 ability to Pay fear Ep ublic) services depends on its tart base, that is„ the appraised value of prop mq [ora the katal tax sour]. TO the extent that a proJ eces impact on existing retail stores negativcly affect.$ appraised Property values, such impact is a factor that re- lates to the Public health, safety, am wclfarrc.'°"s Aman, Montana, now requires economic; as well as traffic and envi- ronmc.ntal, impact analyses for all new retail stares over so'000 scp<lare feer.'y When a big -box retailer proposed to eacparrd its e7&ting gore from 125,0CR to 705,DW sgraare feet, the city commis- sioned an ecoaaaxnie impact study. 7be study recommended that the retailer be asked to help gray for a shuttle service running from its store to the downteowrr, and to contribute to a promotional campaign benefitting existing stores as well as the supemore.to Design Standards Another reason for. citizen opposi- lion to big -box steges is their design: nondescript, enormous, "cuff the $heli' buildings set irn a sea of asphalt: with no windows, r0oiiints, or attrmpt to rrgsest the architectural aharactes of the tOCal caraartautaity. Thousands of communities have $matted design standards to Improve the appearance o(comsr "eial dcirelopmcnr. Cathedral City, California, iEvanstoN Wyoming; and CUppe Cod, usetts, we just a feww ref d�e local jurisdictions Haat have used deign smndards to Imptckc the character of big -boat stores.W 1K 06/03/2003 TUB 14:54 TX/RX Nig 51911 0007 Evanrston's design standards 0 hof publicbearings dt ing a temporary inpratorium on big -box stares after o retailer anrmrKtd piazu to v atc an existing stow and build a bigger or c. Tht city denied the. rttailer's request for an amendment m yawora's ordinance limiting retail stores to 3000 square feet, astnd then adopted strict dcsiwt standards to erasure that the proposed store, as well as all future big - box stares, would be Compatible with the town's ard-itectural heri€agc.R° TL4, standards requirt all stores over 25,E square feet to use -red ser• light brick, simulated brick, grey sandstcae, ztative stone, cultn,rcd stone or woad an at kart 30 percent of the main facade (cin- derblock is not allowed can the facade)® use taxtb tones fat facades instead of jarring colors; and bmakupmanotonous 'Widing facades with intemst,irng roof Braes orad architectural detalls,11 On Crape Cod, srores with foot- print$" of over 50,000 square feet must either be designed, or screened with vcgttarion, to avoid negative visual impacts on their saac mindings; strip de- velopment is prohibited; and parking rneast go to a -,e side or rear of buildings wherever possible_. "Developments of regional impacts" --projects exceeding 10,000 square f tp are subi to "- tial scmdny and must show the Qkpe l Cara mission that their benefits outweigh their detriments -P Under a new polley expected to be approved soon, stores will be hmited to footprints of 15,t square feet unless they locate in %rowth incentive zones" or am full} screened 14 Big, -Box Blight, Retail Glut, and Retail Size l.irnits Many communities state Cape Cod's view that retail sprawl is "int# lcimt ad unsustahuble ll As t Gape's regicmal place explains, `"Tine surplus ofretail op- Brad ons berth loa4ly and nationally In - di to that ovtvrctaik dw rot add to tete region's cconorrnic jail. It ends rap hurting smaller, locall�owned busil .nests and creating blight when exist, Ing retail buildings we vacato&"2 The U.S. had only five square feet of retail space pet person in 19M. today, that number is 70 square fete 1s "Developers and retail chalns have over -saturated T'ru& gawmW bi bk-box stows in mwth m rrr Wa. AmaAk md)r by car. bfg $ x starts ge nwate prw= to uQm adds for arm anew& mA are ger rally fiwr csstW peck tdw ezaarraot af}mr! to clrfvec Pieta t7 CM=V,-_e E. bcamwnt the st 6a bs aaad UfJor-myod the sides," says Burt Flickinger, ill, managing di- rector 4 Reach Marketing ofWestport, Conrnecttc uL" Even duyugh Wal-Mart has vacated 426 of its stores, the com- pany plans ro build 46 million square feet of new retail space this year." lazed, a big-lxax building supply scare. has moved into a new structtwe but allowed its previous one across the street to sit vacant for tlac rest five yvars. In a pre- emptive strike against big -boat blight, Buckingham Township, Pennsylvania, grassed an onlinaatce requiring develop - Tile idea behind 'impact assessments- is a simple thea communi- ties should look closely at how large developments will affect dieir towns, and mitigate potential harm whenever possible. While environmental impa�tstatements are standard fare for large projects, economic impact assessments are less common, ever, though major commercial developments can devastate the economic vitality of a downtown or blain Street. As retailers close older, smaller stores and, open larger new ones farther out in the countryside, terms like "res, tail graveyards" and "grreyf kids' have emerged to describe dee growing prob, !erre of'aracanc suptrstmm. Local cefiicialss are cosacerrxed that these outlets breed crime and vandalise -4 depress nearby Fropt'ay v4ucs, W MMIC municoli, tics with ffa wncial and legal Hiabilitim stnellville, owrgla, his three big-6ox stares sitting empty In Bardstown, Kentucky, an old Wal-Mart built di- rectly acres the street from My Old Kentucky ldome, a state park and ma- jor tourist attra don, stood vacant for 011rrr3st ten years. In Hagerstown, MM, to to put money Into an mcmw account to cover demolition its in cast the superstores [lacy Wild ever become va- cartO Peachtree City, (3corgia, requires that contracts between property own- ers axed big -box ttananm state chat: the atnanr may not vacate flit building and then prevent the landlord from leasing l prvpfay to another tt=01 Ury der an agmtra ant negotiated by Evanston, Wyoming, in 2001, a big -box retailer Tnust help the city find tenants for a store it vacates so that it won't just stared empty., Limits can, the she of starts offer are increasingly popular way to ,prevent cora6nwed on Pge 30 no Ma rdApr a 2002 Val, 43, No. 2 9 06/03/2003 TUE 19:54 [Ta/RX NO 51911 0006 overbulWing, which often ovt rwhelms communities with vastly more. ret2il ace than they can absorb, from walpoie, New 1-i2t%-r ire, when stores are upped at 52,000 square feet, to C bco Ing, C rPunty, Arizona, where thty an limited to 70,O 1 square feet, com- rnunitity, aMX3 the country have adogt- ed limits on the size of bio�box storm?" ,A-nc,dmr P"nuising appm acka is to limit the footprint of new stores Oakhtn-- burgs Mar~yland's-orclinanct allows stores, but limits their footprint to 80,000 u arc fecO This icy has resulted in several trona -story big -box buildinp. Likewise, multi -story big - box mtsailers can be found in New York City, Cbl, Seattle, ens, and other coir munitim Intergoveal mental Agreements the of the biggest challenges facing communities arises when big -box developers pit adjoining jurisdictions against catlro other. Many towns fear that if they Impose any conditions on big,box superstores, the scores will simply move to the neighboring corn- munity, wlatre. anything goes. 'Their -Jgbbor gets all dee sales and party . revenues, they get all €lee tic. Mate law can help towns avoid be- coming privies in intergovernmental bidding wars. Acting pursuant to Oregon Pobcy, Hood Piver (a small city on the Cc+ um— baa river Gorge in Oregon) has ex- uted an t:Irbarr Qzowda Man emesis AVeement with the Cbunty of I ocd River Haat requires the county to adopt regulations similar to thosc of the city?i "I"lae city's big•box ordinance in- cludcs trio•planting requiresnraats in- tended to break up the "sca of asphalt" look in parking lots, and a bare on stom with footprints of over 50,i W square fett>a As is true elsewhere in Oregon, dty Polky ptobibirs sewer lint Wtn, Aons €utAde designated urban crowth boundarlea oarless a bcalth haz6rd ex- isWl To avoid "leaap"fa ' development (Mmom development that -jumps hap- ly over usrodeveloped auras) Hood River will only annex land that is con- tiguous to the city. INN " fvltMkfjaul LAV/1c^r -learning Moratoria `mber of municipalities have en-' i... - -J to "rary development snorato- ria to give local planning agencies tune to devilop smndwds for the des%,x6 and size of big -box. storm One example, is Fort Collins, Colorado, which xbpted a sbc -r onih wxatodu to in 1994 on all Stores over BOND square feet." C osacesr:ed that such opc►ations alight carate an "irmvenible negative impact" on the city, Fort CAXins c:re,. ated a special mk force comprised of developer$, cldzcns, planners l 0& ers to dtAse design guidelines for orm the guidelines ultimately adopted- * prohibit long bl;mlr walls Haat dis_ courage peri an activity; * ri7 arx%te. display wuAows, awnings, and other features to add visual in- tst to the shores; and require sidewalks linking stares to transit stops, street crossx, and building tn"ancM" governments that dole out fat, .ial iraasn ' b€ boac sto.4$ °'he dam: s's .'gait local merchanm No- body sfmab up for therra.."a finder its sateen growth policn Maryland has de- cided it no longer makes sense to fo= taxpayers to subsidize Wasteful and ineffident development, se the state leas "pulled the plug on subsidies for swl. Developers can stili build sxx development, but the state will no longttsubsidire the construction ofnewo of ter and z;rv= limes to mtddicp of-rsow)ierr `sprawl sites;'° instcA state fonds are directed toward designated Tricarity ddiav Arcas,� which it rltadc existing communities and areas for which neer growth is ptacuaed by I" goVernrrlent$.43 The "Class" Issue A tour -ata complaint is that big -box builders often try to pit one clas's of People against anod$ or in their efts to get controversial projects approved, in an argument that goes something like Another reason for citizen apposition to big -boy stores is their design: nondescriptm enormous, "off the self" buildings set in a sen of asphalt, with no windows, roof lines, or attempt to respect the arciaitectural character of the local community, Thousands of communities have enacted design -standards to improve the oppearance of commercial davelopmeriL Mort mostly, Foston. Maryland, adopted a Wday moratorium on big - box stores before adopting a 65,W0 square -foot cap on such developments, likcwisc, Rockville, Maryland, used a six-month moratorium to develop an ordaraarce with. a similar eapi6 Withdrawal of Subsidies for Big -Box Sprawl Kenneth Swnr, an ccerrrom1st at Iowa State University who has studied sv,worts for y is at the number of local govertuatnts that ac, tually raaWdue these operations. In a 2001 study, he wks, "is it fait to give €axpayere money to big corporations that will tl*n use it to help prat existing finals out of busitacssl," alluding to a "zeta sum game being played by city this: l0r, "elitist" to oppose big -1 ox stores, which greatly benefit lower In- come people by giving them bigh-qual- ky goods at rock -bottom priers. 'bels argument would ring less hallow had retailer: not Effectively'reclllned"older cities and towns, where meetly low- income people live. The argument would also warrant rnort credence if big -box stores were more willing to locate in places that are accessible by transportation anodes affordable to people with modest incomes. ,At present, rtrosthi bcrx stares are far firers town, totally inaccessible to € nyone who is too paw, too young, too disabled, or we old to drive. However, that situation is not al- ways the cue. To its credit, 'Target's willingness to recycle an empty depart- rs r r. 08/03/2003 `TUB 14s54 [TX/RX NO 5101) `1108 s ent stege in downnwwn Fasadena,,_ lifcrrsiia, eletnonsttace� chest big-& retailers can rake a prem fend still w stores in locatknu that am accessible to costo nets by foot, bus, and cat. And in Rutland, Vermont, 'a[ -Matt drevr praise froth preservationists for agreeing to recycle a smaller than usual stare (at former 75,000 squart-fbot Kmart in the dowrntow'sn) instead of pavisng Aver a farm for an edge -of -town store that: would have harmed the cites clowtntaw n ,-,= Making ChDiCOS7hat save COMMU"iGes Can't we have stores with both low prices and comrnw-ity-fine ndly designt C)f cmirse we can. C;tatF munities have choices, TUep can put policies in place that win caata°nnce thrir ability to nego date for die kkJ of dc^tclopmtnt they want, oc they can aiclopt an 'anything gats" policy and be at the chesty of whatever corms along. Retail challis have choices, too- They can insist on look-alike, big -box sprawl wherever they build, or they can res�t the de- sire of distitnctive cxrrrnns u nines to pre- serve the scenic Vistas, hist:orfc places, and downtowns: that pcoOe love. For mate information on ways to reduce seaptratace sprawl, sec: Detter IVioUs jorSupmrvm: Aha -weaves as $fg Rox Sprawl and How Su rstores Can Harm Cc7 nmurefrks (And Wh4t Citd- Hetes Gt Do Above It), both available dwough the National Tmst's wtb site at tavwe n4l erg (go to Ihablicatim-0; Tire How 'farm Advazaaw, by Stacy Mitchell (Minneapolis: Institute for Local SelfRelfarncc, 2000), available at www itst org; ar d 13ew Mokh for Vc- velojmnem, by Edward T. McMahon, at www-tfstcl.arg. Dotes 1. Telephone interview with Uward T. McMahon (Fri rn aay 5, 2002). 2. Wal-Mart web rife at hitp://www, walttaaxt tormMm. I How atitillik z , al ht4p4 /www.hOmtdept.gcom; Tawct Corporation Annual Report 2MO, acht /wwwiwgt#wgx {'A�[tYf$t�taftClBtlQrn�®l.•RW'�'P3 A$nrt{ial �C�X!!� 2OW, at http JjwWW-lowtsarrtrfllcrrlactloon- pg&p$AboutEowcslannualrcport &topic- Aboud-O s 4. Flier dish iWEe4 by lltbaon C saatscrmcy in New thleat!,atwwwfuthaia .otg. 5, Arlvestistwtnt, MA.ToDa, April % 1999, at pact IM 6. joshna L K , mmuon V. AtwvPft to St* Km for Hmx VqK THE MLR NFW$, at http-//www.mercury canter ccreen ()anvarg 14, Z4L?2). 7. N=per sticker p"AWO by Sprawl-Dust- trs, Grcenflekl, MA.; Set htslr.(j t'spraw1- bustcmcexrn. 8. Linda Mack, Gmj ?lyes so Tonigbr A ,b,u T t in XvrO�W Mvaat� Srt t; Tt16MF., June 3, 2001 9. Prefiled ec$artn�riy s�Ardnur I",cstrtrter in 77se 5t. A Gtvup 6y�d Soares, ),�., I fond Um F aTaJON71, una 1.3,199$,ExliiUt C.8, at page 4. 10.1ztrcr froom Hal Vl-&A to Natknut Trust fnflistorkritservatam (April 14,1994) (txe isle with the author). I). ,)otatr VMAM C* Lata Pun rm" ap Nom Elm tAm Ust Com Part V, App-n- dix E [Dryelopmctni Cornsi4wAlom). 12.'fo"'Ma1 Orth M f'lanrihVI3%UASty cheat of Ftrulirtgs find fir, Nvpo Wars° Store, January 9, 1996 at page 15. 13.fd.at14. 14. Wal-Mart .Stores, Inc, v Plan nhe Bd. of Towyn oM*r+ iib., 738 A.1? 2d 93 (ILY App Div_ 1998)- 1 S. In rc Wal-M2,n Stares, Inc- 702 A.2d 397 M 1997)- 16. Id. at 401. 17. T kpbonc Intcavkw with Clark jolmson. City Martaga, Tkaoman, Mctana ()art—y 16, 2001),, Ron Tsciiida, P,cnnrarrric forepart Stxa% to be ftrxtdW for furs Soares, BOMM DAut Cma•8iaA Doe. 19, ZODI, at ,rage 1. 18- Bay Axa Ike nomics, Fr -um& trr�u Analysis ©f Wd MQrt F*awim, at page iv ( fOt3nary 1, ?GD1J, at htW-1/ bvzcma L nctJPtaanitrgzetnnn %20Wa1-Marg ZO itnpacts�7.t�tandy 1�I3f? I9. City of C.athe" C7ty, C oNwnaa, Design Guidelines (Septembrx 1989, . May .1"7), Ey non, Wyo., OrCllr=C6 00-08, DrSign Review Standatdx (20ft, Capt , MA, DrdVft the Fie to Honor die fare, ksign Guidelines foe' die Cod, Second Edi - ti^ IM 20. TrIephonc into" icw with Paul Knopf, Di- mctor of Planning, Evanston, Wyo mhV (Ftb- nau z, 7o02). 21. Evwxstov, Wyo , Winanm 0474)6 (UM) (, sWnding Irvars On CUT OD&, fit- 21, ¢ 1 Zi -15 (b) KA (q), 22, nt 1004 -int" o!a wIdirrg is ael'WA b7 dX $gum f0mge 4 at ats1T 23. TclepbMe inresview wide )obn Lkrrana". Deputy Director, Cape Cod Commission Oatnuary 29, 2W2). 24-1d,; see also "A Guiok to the Review Po - cm for 1%Ycloprr nts of Regional Impact"O at J, .I capecvdcomuits omoffsm htm. Cod Corentrnissiorn Itcgiornal Policy �� (#�9b?a atpa�cSB, r�her��fie�apewd ccxtnrreission.oreJ tom,. 26.1d. 27. Tdephtitne interview with Burt fiickk�gq. 113, Managing Director, RevcVMarkcj1;rg Qanuary 27, 2002). 2& M. 29. Telephone interview with, Candy May, N- lic Relations for Wal-Man'Realty Division (F;-_tnw7 12, 2002); sec also htrp/}'wwwwal- rraatotaltysoru- 30i I iia %arch Tmertnship, PA, C7rciirw,,ct 9f� 02, §5 (1998). 31. PEAcmw Cay, GSA., C ti Zoning, Ar- ticle X, Appmd4 A, 41M6 Grnet-al Co mncr tial Disuict 0994). 31 ETmao t-4 Wym, Resolution OI -09,A Roo- lutiorn o(& City cOvanno o, Wyoming au• a m wng elre txemtio n of -A Metuoratndsirrr of I.Indentanding with Blal,Matt Mores, Int. (February 28, 20D1). 33. 111 full teat at these two arrdinancts is afaihble at http;J/vrr-w.ncwrules.arg{ retaiVsizc hu nl, along with others dealing with retail stores, irnelaading corrimunity im- pact review laws, neighborhood serving Zonas, and wwrc. 34. Gaithtrsbwrg, MD., Ne gf&tW Thrce L, d Um Fixe, at page 25 (1997)- 35. Tekphosne Interview with Cori Johnson, Gitg cfl hoer Riva Manrnbv Dcpa ttwnt Mb- nrary 5, 2007). 36_ Hard River, OK, Ovdinxncc No. 1619 (ZOO)). 37. Telq"e intemew with cm, JQN15on. C".aty opfl fomolltiva Mweeiing Dq=uacnt (F4 - Mary 5.=). 38, Fart Colliers, Cider., Clydinamt No, 11I Uuly,1994). 39. Fn Collins, CAo, Deign Sratr dm is and Gid for I=F Iteral EsdfrlriisltWnts, Cary of Fart C'iollins Gtrmmuinity Flarmirng and virm axmtal Services (1995)- 40. Faanon, MD., Ovaitnarncc No. 390 (ataew)4 (Sept-, 1999) and winner No, 399 (Match, M); RoAville, MD-, Ordiruthce No. 13-W (August, 20a)); all as www.rnex shales.fx�rxtal�ar�i:vi#1e..littnl. 41. Storne, Ktwitth E., and G wgnnne M. Arta, 71z Fmpmt of Bit -Box 13td1dirrg?vinucriads Stares on host Tmm and Surx4m&ng Cmattaes in a tildadu clan State, Aargust 20DI, at page 28; tdgAxorne intaAcw wide Kenneth Ea Stone Qanuary 14, 2002). 47-VerLm 6tvMtw wid, Ketutet E Stmt uantaty 14, 2WZ), 43<Matybrnd Depwtment o(the 1 RYitonvn nE, Marogiiv Mmylcmd's G=J, WW You Neat tri Abm Sm.a C v uk at pages (Wy 1997); ftitelner itdomnaticn is available at 17tWWWww. vpstat�tnd.tscjstnangtv�vt#njitulex.#ntrt►1_ �,. No Matcch/A,ptil 210002 Vol. 43, No, .2 31 08/03/2003 TUE .14:64 [TX/RX NO 519.1) l��xo 0 9 Y�r'y, 4 t ,q rj r Prepared for the Independent Grocers Association of Calexico LM Richard A. Parker, .; Louis M. .. 1 Parker San Diego, CA 858-279-5070 t Page Executive Summary ............................. .......... ............... i Introduction......— . ... ....................... ......................... I Pose of Report ....................................................... 3 San Diego: A City of Villages ........................................... , .. 4 The City of Calexico- The Impact of Wal-Mart on Isocal Merchants .............. 7 National Small Business and band Market Experiences with Supercenters and Big -Box Retailers ................................ 14 WholesalerImpacts ..................................... . ............... 19 Big -Box Closures......................................................19 Legalizing the Fight ...................... . ............................ < . 20 Big .Boxes, Neighborhood/Community Development, and Economic Stability ............................................... 22 Aesthetic Implications of Big Boxes .................. .................... 23 Implications for the City of Villages Strategy ................................ 24 SelectedReferences ....... .............................................. 25 In July, 2000, Rea & Parker Research released a study entitled "The Potential Economic and Fiscal Impact o:f Supercenters in San Diego." This study concluded the following: • The introduction of supercenters into the San Diego region will depress wages and benefits in the County by between $105 million and $221 million annually. ,Application of the regional multiplier could expand this annual negative impact on wages to $440 million. The wage gap bewreen grocery workers and supercenter employees is higher in San Diego County than in either Los Angeles or Orange Counties, causing the wage impact to be proportionately more detrimental in San Diego than for its Southern California neighbors. Lost pension and retirement benefits will also impact the region negatively by an additional $9041701 million per year. Health benefits will be reduced to employees resulting in poorer quality care for grocery employees and consequent increased public costs which may exceed $9 million per year, The total of these costs represents economic losses of $300-$600 million annually and public costs of up to $10 million. per year. Fiscal benefits, in the form of sales and property taxes, are frequently: less than originally expected and are not likely to cover the costs of traffic, police, and fire protection, among others. There are negative impacts on land use to be encountered as a result of the greater level of instability in the discount retail sector and the more space consumptive nature of discount retailers vis--a-vis grocery stores, a At particular risk from this increased instability are small, local stores that surround supermarkets in neighborhoods and depend upon the supermarkets' drawing power. Economic harm to or closure of supermarkets in favor of supercenters will do significant financial damage to these smaller, local stores, causing negative fiscal impacts and an increased potential for urban decay and blight. It is the last two findings from last year's report that have caused Rea & Parker Research to revisit the supercenter issue. In particular, the City of Sart. Diego, which has long been at the forefront of urban planning activities and concepts that foster sustainable, human scale development, has been formulating its City of Villages Concept, as incorporated into the City of San Diego General Flan Strategic Frarnework. .dement Working .Draft of October, 2000, The City of Villages strategy itself is one in which the city willl be defined by places ("Villa-ges") "where residential, commercial, employment and civic/education uses are connected to create a cohe- sive whole." Village design is to be pedestrian -friendly, with significant public spaces and transit serv- ice ----all designed to encourage local shops, restaurants, businesses and services, with mucli human - scale, street level activity and reduced dependence on the automobile trip. The question arises from this strategy: "Do big box retailers, particularly supercenters, support or counteract this policy? Secondarily, and of immediate interest, the City of Calexico, California is faced with a proposal from Wal-Mart to build a supercenter store in that community. Richard A. Parker, Ph.D. and Louis M. Rea, Ph.D. of Rea & Parker Research believe that the case made last year about economic harm is strong and well documented but that only a minimal amount of attention was devoted to the last two findings in that report ---and those latter two findings may currently be the most pertinent to both San Diego and Calexico. This report examines how supercenters engender instability its the retail sector, cause negative eco- nomic impacts to neighborhoods and communities, and increase the potential for urban blight. In this report, Wal-Mart, because of its magnitude as the world's largest retailer, is used as the prototyp- ical supercenter that has caused severe economic harm to local economies throughout the country. Wal-Mart is not alone in this regard, but it is singularly significant. It is shown in this study that big box retailers, such as Wal-Mart, do not support, but indeed operate contrary to urban planning activities and concepts that foster sustainable, human scale development, The potentially negative impact of supercenters on San Diego's City of Villages concept is made clear through the case study of Calexico, California, This small border community has been signifi- cantly impacted by a traditional Wal-Mart store and is in danger of further impact from a proposed Wal-Mart supercenter. Based upon the Calexico case study as well as various other examples of Viral --Mart's impact on neighborhoods and local economies throughout the country, the evidence leads to the conclusion that supercenters in general and Wal-Mart in particular promote economic instability, destroy local businesses, depress wages, and lead to urban blight. Specifically: Wal-Mart does, in fact, cause significant ]warm to local merchants, particularly to businesses where it was in direct competition. Direct competition or not, however, the overall business climate is hurt and most merchants and services do suffer. Small businesses have sometimes succeeded with a big box retailer present when they relocated away from their former location nearer to the big box, along the chain highway access routes. This movement however, aggravates the big box impact on the former retail location as those businesses relocate, so that while the business may survive, the remaining retail core suffers nonetheless. Wal-Mart or another big box invariably becomes the wholesaler to smallretailers in town and, therefore, controls BOTH the wholesale price and the consumer's market price. Access to wholesalers is disappearing for the small. retailers, and, given that the discount retailer becomes the wholesaler, price competition becomes impossible. Without an independent wholesaler to A to the small retailer, that retailer cannot compete on the same playing field. Small businesses are forced to pay more for the sane products than do the big box retailers, which is ultimately one of the major causes of the closing of these small businesses — their putchasing powt r is lost. Many towns, cities, and states have taken the fight to regulate the size and market control of the big box retailers to the government, The strength of these mega -chains has made it difficult for local merchants and less song competitors to confront and restrain the construction of the big boxes by themsel-ves. Opposition is a difficult task especially when the big boxes often have support from politicians who provide tax incentives to these mega --stores r.. tax incentives not available to small businesses. What becomes eminently clear is that big box retailers, and Wal-Mart in particular, are formidable forces not only in retailing, but also in land use and urban spatial farm. Where Wal -Marts locate, they can and have destroyed small businesses and established retail communities in a planned, coordinated, calculated policy designed to control the markets into which they come. Economic stability is more often than. not crushed by the introduction of Wal -Marts into the local economy. Existing, long -terra businesses are damaged and often closed. Health benefzts are lost in many cases, along with pensions, especially when union jobs are lost. Even when union jobs are not lost, the retail jobs lost are replaced by a lesser number of big box part-time jobs, with a reduced level of benefits or no benefits at all, causing increased societal health costs and the instability and medical costs which accompany a less healthy population. When union jobs are lost, the community suffers a huge loss in buying power and economic activity Wal-Mart clearly has a policy designed to price their merchandise specifically, and almost mercilessly, to target some retailers for extinction. Once the market is controlled, certain of the traditional Wal. -Marts close as the company opens a supercenter nearby and then idles its former site so that competition cannot arise in its wake. The community is, therefore, dealt a double blew. Wal-Mart competition cannot be survived by many of the established small businesses in the area and they close. Blight sets in where these businesses had been located. Later, once retail dominance is established, the initial Wal- Mart that destroyed the retail community to begin vrith also closes in deference to their own supercenter nearby. Wal-Mart then maintains its former site in an idled state, adding fiirther blight. The area, which could have been open space or some other more stable form of development, is now part of the growing number of"dead Wal -Marts" littering cities. Big box development is the classic "slippery slope." Entering into a development arrangement with Wal-Mart, in particular, is replete with huge risks of damage to the local retail economy, weakening of long-standing social structures, destruction of mixed- use neighborhoods, reduced wages, declining levels of health care in the community, an affront to local aesthetic values, sales tax revenue increasingly reliant upon a single large corporation, and, in the ultimate extreme, the potential horror of an urban ghost town. Wal-Mart and other supercenter retailers are not a type of development that supports a pede,strian-oriented village .retail concept. They do not foster the growth and health of small businesses or of the shopper who uses public transit. Wal -.Mart, and especially the supercenter Wal-Mart, is a sprawling, space consumptive, single -story blank wall. It sits behind huge expanses of parking spaces in order to facilitate large volume purchases that cannot be accommodated by public transit. It is the same in appearance whether it be in San Diego or in hies .Moines, Iowa. Hi There is nothing in the Wal-Mart experiences of those many communities throughout the United Mates that are: discussed in this report and ofthose others similarly burdened, but not discussed, that would provide even the dimmest hope that a cohesive and economically flourishiag City of Villages can coexist with the disassociated barrenness of big box retail. T9 Since the early 1990s, supercenters have been entering the retail market in large numbers. Supercenters combine large ("big box") discount retail, operations with grocery store products into a single store, which can be as large as 250,000 square feet. In the 1960s, Meijer, a Michigan-based company, was the first to combine a grocery and general merchandise store. Meijer currently operates well over 100 supercenters in the Midwest. Most of these stores include forty departments featuring over 120,000 different items. Wal-Mart began experimenting with the supercenter concept in 1988. At the end of 2000, Wal-Mart had over 800 such. stores. Kmart introduced its Super -Kmart concept in 1992 and now also has over 100 Super K. zaarts. Target entered the supercenter business approxi- mately 5 years ago and has built a relatively small number of Super Targets. Wal-Mart, the world's largest retailer, announced in November, 2000 that beginning with its fiscal year starting February 1, 2001, it will open in the United States: 170-180 new supercenters in addition to the 835 already in existence (952 by May, 2001) 15-20 Neighborhood Markets, a conventional supermarket of 52,000 square feet (203 have been opened previously) ® 40-50 Sams Club warehouse stores to supplement the 479 already open Almost 7 million square feet of warehouse space, including three new regional distribution centers for general merchandise, two for groceries, and two for fresh foods Approximately 100-110 of the new supercenters will be relocations or expansions of existing dis- count stores and the rest are to be in new areas. About one-half of the new Sam's Clubs will be expansions or relocations (Weir, Tom, " Does Wal. --Mart Rule?" Supermarket Business, November 15, 2000). Thomas Zaucha, president of the National Grocers Association, labels Wal -Mart's policy as "satura- tion bonibin,g. They have the ability to come into the market with their supercenters, with their Neighborhood Markets, with their traditional Wal --Marts, and with the clubs." The fundamental concern is that these stores (Wal-Mart, K -Mast, and Target) are using the entire grocery industry as a "loss leader." David Rogers, a supermarket consultant with DSR Marketing Systems (Deerfield, IL) has postulated that "the danger for supermarkets is that Wal-Mart will use their grocery business" to pull customers into the store and then "recoup [their costs] on general mer- chandise with higher margins." Rogers questioned how traditional supermarkets will be able to com- pete with this marketing strategy (Shills, Edward, "Measuring the Economic and Sociological Impact of the Mega -Retail Discount Chains on Small Enterprise in Urban, Suburban, and Rural Communities," 1.997). In July, 2000, Rea & Parker Research released a study entitled "The Potential Economic and Fiscal Impact of Supercenters in Saga Die o." `dais study concluded the Mowing: The introduction of supercenters into the San Diego region will depress wages and benefits in the County by between $1.05 million and $221million annually. Application of the regional multiplier could expand this annual negative impact on wages to $440 million. • The wage gap between grocery workers and supercenter employees is higher in San Diego County than in either Los Angeles or Grange Counties, causing the wage impact to be proportionately more detrimental in San Diego than for its Southern California neighbors. • Lost pension and retirement benefits will also impact the region negatively by an additional 58041.70 million per year. • Health benefits will be reduced to employees resulting in poorer quality care for grocery employees and consequent increased public costs which may exceed 9 million per year. • The total of these costs represents economic losses of $300-$600 million annually and public costs of up to $10 million per year. • Fiscal beriefits, in the form of sales and property taxes, are frequently less than originally expected and are not likely to cover the costs of traffic, police, and fire protection, among others. • There are negative impacts on land use to be encountered as a result of the greater level of instability in the discount retail sector and the more space consumptive nature of discount retailers vis-a-vis grocery stores. • At particular risk from this increased instability are small, local stores that surround supermarkets in neighborhoods and depend upon the supermarkets' drawing power. Economic harm to or closure of supermarkets in favor of supercenters will do significant financial damage to these smaller, local stores, causing negative fiscal impacts and an increased potential for urban decay and blight. It is the last two findings from last year's report that have caused Rea & Parker Research to revisit the supercenter issue. In particular, the City of San Diego, which has long been at the forefront of urban planning activities and concepts that foster sustainable, human scale development, .has been formulating its City of Villages Concept, as incorporated into the City of San Diego General Plan Strategic Framework Element Working Draft of October, 2000. The City of Villages strategy itself is one in which the city will be defined by places ("villages") "where residential, commercial, employment and civic/education uses are connected to create a cohe- sive whole." Village design is to be pedestrian -friendly, with significant public spaces and transit serv- ice --all designed to encourage local shops, restaurants, businesses and services, with much human - scale, street level activity and reduced dependence on the automobile trip. The question arises from this strategy: "Do big box retailers, parficulaAy supercenters, support or counte et this policy;, Secondarily, and of immediate interest, the City of Calexico, California is faced with a proposal from Wal-Mart to build a supercenter store in that community. Richard A. Parker, Ph.D. and Louis M, Rea, PhR of Rea & Parker Restarch behave that the case made last year about economic barm is strong and well documented but that only a minimal amount of attention was devoted to the last two findings in that report ----and those Tatter two findings may currently be the most pertinent to both San Diego and Calexico. E The purpose of this report is to revisit the supercenter issue particularly as it relates to the last two findings of the July 2000 Rea & Parker study. Specifically, this report will examine how supercenters engender instability in the retail sector, cause negative economic impacts on neighborhoods, and increase the potential for urban blight, hi this report, Wal-Mart, because of its magnitude as the world's largest retailer, is used as the prototypical supercenter that has caused severe economic harm to local economies throughout the country. Wal -.Mart is not alone in this regard, but it is singularly significant. It will be shown in this study that big box retailers, such as Wal-Mart, do not support, but indeed operate contrary to urban planning activities and concepts that foster sustainable, human scale devel- oprnent.This planning vision has been proposed for the City of San Diego — a city that has tradi- tionally been at the forefront of creative planning strategies. A review of the San Diego plan will help to facilitate an understanding of how supercenters tend to negate this concept of urban planning. The potentially negative impact of supercenters on San Diego's City of Villages concept willbe made clear through the case study of Calexico, California. This smallborder community has been significantly impacted by a traditional Wal --Mart store and is in danger of further impact froma. pro- posed Wal --.Mart supercenter, Based upon the Calexico case study as well as various other examples of Wal -Mart's impact on neighborhoods and local economies throughout the country, the evidence will lead to the conclusion that supercenters in general and IAW-Mart in particular promote econornic instability, destroy local businesses, depress wages, and lead to urban blight, 0 r In the City of Sara :Diego General Plan Strategic Framework Element Working Draft of October, 2000 the City declares its planning vision as follows: We have a role as stewards of a remarkable resource: a city on the Pacific of great cultural and physical diversity, In the 21st century, as the city grows, San Diego roust continue to evolve in harmony with its exceptional natural beauty, always treasuring the unique character of its neighborhoods, striving for equity, yet building a strong sense of connection to the rich mosaic that is Sara .Diego. Among the Core Values declared are the following: We value the city's extraordinary setting, defined by its open spaces, natural habitat, and unique topography. We value walkable, tree -lined communities. We value a convenient, efficient, aesthetically pleasing multi -modal transportation system We value parks, accessible by .foot, transit, bicycle, and car, as areas to support neighborhood, community, and regional interaction and convenient recreational facilities and programs. We value the promotion and encouragement of affordable housing and an overall diversity of housing types and costs. VVe value a compact, efficient, and an environmentally sensitive pattern of development. The City of Villages strategy is named in this plan element as the city's preferred growth strategy. The City of Villages Strategic Framework Element is designed to guide the update of the entire1979 Progress Guide and General flan of the City of San Diego and its 43 community plans. As such, these visions and values will guide the City through the first quarter of the 21st Century and is, therefore, of par=ount importance and significance iia the land use decisions with which the City will be confronted. The strategy itself is one in which the city will be defined by places ("villages„) "where residential, commercial, employment and civic/education uses are connected to create a cohesive whole." Village design is to be pedestrian -friendly, with significant public spaces and "excellent" transit service. Of fundamental importance, growrdx is to encourage local shops, restaurants, businesses and services, with sheet level activity and vitality supported by improved transit service, better walkability, and r ducedto de e de ce. The strategy proposes to accomplish its goals through creating incentives for increased densities and reallocating resources from lower density areas to the higher density growth areas, along with encour- aging mixed-use commercaallresxdentW development. The City of Villages economic component focuses on the retention and expansion of existing busi- nesses and maintaining and creating middle-income employment opportunities. Businesses will be encouraged to reuse and infill key employment clusters in existing urban areas. San Diego's City of Villages Strategy falls under the general planning rubric known as "Smart Growth." Smart growth has a long history in urban planning debate and implementation, but its core values and orientations were well stated and most widely accepted in 1991. ril In 1991, the Local Government Commission brought together a group of leading architects to syn- thesize new ideas and trends in community land use planning. A nonprofit, nonpartisan, member- ship organization, the Local Government Commission (LGQ is composed of elected officials, city and county staff, and other interested individuals. Serving as a complement to the League of California Cities and the California State Association of Counties, Commission members are com- mitted to developing and implementing local solutions to problems of state and national significance. The ideas from that meeting were drafted into a vision document for local elected officials as an alternative to urban sprawl. The document was presented to 100 local elected officials in the Fall of 1991 at a conference at the Ahwahnee Motel in Yosemite National Par],, where it received great acclaim. This document has come to be known as the Ahwalince Principles. Fifteen community principles are detailed in the document, as follows: L All planning should be in the form of complete and integrated communities containing housing, shops, work places, schools, parks and civic facilities essential to the daily life of the residents. 2. Community size should be designed so that housing, jobs, daily needs and other activities are within easy walking distance of each other. 3. As many activities. as .possible should be located within easy walking distance of transit stops. 4, A community should contain a diversity of housing typos to enable citizens from a wide range of economic levels and age groups to live within its boundaries. S. Businesses within the cormxaunity should provide a range of job types for the community's residents. b. The location and character of the community should be consistent with a larger transit network. 7. The community should have a center focus that combines commercial, civic, cultural and recreational uses. S. The community should contain an ample supply of specialized open space in the form of squares, greens and parks whose frequent use is encouraged through placement and design. 9. Public spaces should be designed to encourage the attention and presence of people at all hours of the day and night. 10, Each community or cluster of communities should have a well-defined edge, such as agricultural greenbelts or wildlife corridors, permanently protected from development. 11. Streets, pedestrian paths and bike paths should contribute to a system of fully -connected and interesting routes to all destinations. Their design should encourage pedestrian and bicycle use by being small and spatially defined lay buildings, gees an8 lighting; and by discouraging high speed traffic. 12. Wherever possible, the natural terrain, drainage and vegetation of the community should be preserved with superior examples contained within parks or greenbelts. 13. The community design should help conserve resources and minimize waste. 14. Communities should provide for the efficient use of water through the use of natural drainage, drought tolerant landscaping and recycling. V2 15. T11m street orientation, the placement of buildings and the use of shading should contribute to the energy efficiency of the community. Further, there are four Regional Principles: 1. The regional land -use planning structure should be integrated within a larger transportation network built around transit rather than freeways. 2. Regions should be bounded by and provide a continuous system of greenbelt/wildlife corridors to be determined by natural. conditions. 3. Regional institutions and services (government, stadiums, museums, etc.) should be located in the urban core. 4. Materials and methods of construction should be specific to the region, exhibiting a continuity of history and culture and compatibility with the climate to encourage the development of local character and community identity. In line with these principles, The City of Tillages strategy defines .its "concept" with specific objec- tives designed to address growth "when and if it occurs so that the quality of life of San Diego's cur- rent and future residents is improved, rather than degraded."These objectives are as follows: 1. Providing a large enough population to support neighborhood amenities in the form of local shops, restaurants, businesses and services. 2. Creating street level activity and vitality 3. Supporting improved transit services, better walkability, and reduced auto dependence. 4. Creating public spaces such as pocket parks, squares, greens, and plazas that help generate a sense of neighborhood and city identity. 5. Planning of necessary public facilities. 6. Providing for more efficient use of employment lands. i. Creating new, affordable housing opportunities while preserving the vast majority of established single-family neighborhoods. 8. Reducing pressure to develop rural portions of San_ Diego County and other areas outside of the San. Diego region. The evolution of City of Villages strategy from the Ahwahnee Principles is clear. Bath declare walkable, transit -oriented, naturally formed and naturally sensitive communities to be the key building block of urban planning. doth seek to slow, if not step, the spread of urban sprawl, single story development, and vast expanses of parking lets and road networks designed to move people significant distances by automobile in exchange for a policy oriented toward the enhancement of smaller -scale development that supports non -motorized transportation (such as walking or bicy- cling) and the increased use of public transit. ,� 1 11 AV e It is of great legitimacy to seek to understand how supercenters might impact the City of Villages strategy, and Calexico offers an immediate and nearby example of a small community ("village") and the impact of the addition of a Wal-Mart store in 1992 to Haat community, Rea $c Parker Research has been engaged in a study of the impact Wal-Mart has had upon local businesses in Calexico. In a an effort to understand directly and practically how the infusion of Wal-Mart into a local economy affects the City of Villages strategy and the associated Ahwahnee Principles, the case of Calexico can be instructive. Calexico is a small city, not unlike the "visages" of San Diego in that regard. It is also a city on the International border with Mexico, with a rich heritage of the two cultures. Therefore, although the differences between San. Diego and Calexico are great, indeed, they do share certain qualities, espe- cially when viewed in the context of the City of Villages. It is not unreasonable to view the case of Calexico in terms of what might occur in a single village within San Diego's City of Villages when a big box is developed near the village center. As such, the experiences of Calexico and other smaller communities can shed much light on the relationship between big box retailers and neighborhood, village -based community development even in a large city such as San Diego. Calexico is a city in the Southern California desert region know as the Imperial Valley. Its population currently approximates 30,000. Calexico is located 230 miles southeast of Los Angeles, 125 miles east of San Diego, .260 miles west of Phoenix, and immediately adjacent to and across the International border from the City of Mexicali, Baja California, Mexico, with its population of over 1,000,000 residents (estimates reach as high as 1,600,000). This proximity led to the coining of the City's name as a merging of Mexico with California. There is currently a proposal in Calexico for a Wal-Mart supercenter to be built on the main north - south highway in Calexico, Imperial Avenue, farther north than development currently stretches. Rea &. Parker Research solicited the aid of the Calexico Chamber of Commerce in obtaining a list of merchants who -were willing to speak about their experiences in Calexico since Wal --Mart opened a traditional store and Sam's Club (since closed) in 1442 on Imperial Avenue, approximately 1 mile north of the existing downtown area and south of the proposed supercenter location, Eleven merchants were so identified, and Rea & Parker Research was able to complete eight in- depth interviews in full. Each merchant was interviewed in person at his/her store and was asked 5 questions plus whatever others arose spontaneously during the interview. • What has been your business' experience since Wal-Mart opened in Calexico? • From where do you purchase most of your inventories and supplies? ® Where do you do your banking (loans, investments, etc.)? • What kinds of charitable activities do you do and/or contributions do you make? • What kind of health plan do you provide your employees? Pension plan? The results of the interviews are provided below, bort can be summarized relatively succinctly, as follows: d -M d;d, in fact, cause significant harm to downtown merchants, particularly to businesses where it was in direct competition. Direct competition or not, however, the overall business climate downtown was hurt and most merchants and services did suffer. Inventories and supplies are purchased directly from the manufacturer or from wholesalers in Less Angele& Banking is entirely local except for the one chain interviewed, wed, which banks in Los Angeles. This is in sharp contrast to Wal -Mart's overseas purchases and movement o€`funds out of the region relatively quickly, which act to depress local economic multipliers and overall economic headtla. 0 Some of the merchants make charitable contributions, although they are less able to do so since, their profits were cut by the competition from Wal-Mart. They indicate that they cannot match the "gifts" that Wal-Mart has made to local causes, but Wal-Mart cannot match to participation of these merchants in Little League, the school board, Junior Achievement, the lesion's Club, and so forth. The heath plan/pension plan .issue is mixed. Some merchants offer good PPO and HMO health plans for which they pay all or part of the premium (3 of the 8 interviewed). Others, particularly family enterprises, do not offer any plans. Wal -Mart's record is comparable to these small merchants, with approximately 38% of its workers having company health insurance. However, in contrast to all United States employers (60% of employees covered), Wal-Mart fares very poorly. The applicability of the Calexico experience to San Diego's City to Villages is clear. Calexico can, in fact, be viewed as a single village, where, prior to Wal-Mart, its downtown contained a successful col- lection of merchants, tightly contained within a few blocks along the International Border. The development of Wal-Mart damaged some of these businesses, causing certain of them to close and others to move outward, closer to the Wal --Mart along the main arterial highway in order to take advantage of the substantial amount of automobile traffic leading to an from the Wal-Mart. This elongation of the Calexico village damaged the village's retail sector economy, walkability, and spatial efficiency and has led to increased automobile traffic outside of the previously self-contained village. That is to say, Calexico experienced sprawl. It is the goall of the City of Villages strategy to foster small town design and a small tovan atmos- phere within each of the villages that agglomerate into the entirety that is, and will be, San Diego. Therefore, although much larger than Calexico, San Diego, through each of its many, intertwined village centers, will be subject to precisely the same impacts and pressures as have affected Calexico. That is to say, sprawl, increased automobile dependence, and the destruction of human -scale devel- opment—in the form of small businesses ----will be the ultimate impact of big boxes upon villages whether the villages stand alone, like Calexico, or are parts of a network of villages forming a larger whole, as is the case with San Diego. U Vaca Market — Fausto Rodriguez, manager. ® This is a clothing store. Rodriguez feels that he competes well with Wal-Mart in terms of prices. He has had to change his advertising practices to compete with a chain store such as Wal-Mart. He has had to be more aggressive with flyers and mailings letting people know that his prices are competitive, The general clientele or customer base is shifting from the downtown area to Wal-Mart. The loss of this base has hurt business. Also, those on the Mexican side of the border go right to Wal -.Mart and bypass the downtown area altogether, They enter through the second port of entry, which enables thein to bypass downtown. • Rodriguez fears that the loss of clientele will cause downtown Calexico to go the way of El Centro. ® Rodriguez feels than downtown merchants are particularly non-competitive with Wal- Mart when it comes to groceries and electronics. a He purchases his inventory from Los Angeles He is not aware of any banking locally. Vaca Mart is a chain and banking is probably in Los Angeles, ® .Any charitable contributions and/or activities are made from Los Angeles — the central office. There are no health or pension plans for the employees. Benefits are provided only according to what the law requires (e.g. paid vacation after one year of work, State Disability), Casa Susana -- Martha Garcia • Wal-Mart is bigger and more comfortable to shop in. This factor has drawn clientele generally from the downtown area toward Wal-Mart. ® Wal-Mart competes well with two products: 1) Electric fans which cost more at Wal- Mart but are of a better quality, and 2) Cloches which cost more but last longer. She emphasized that the sun rises for everyone and Casa Susana will survive. They purchase their inventory in Los Angeles. They bank locally at the Bank of America. Casa Susana provides toys for children and soap for churches, Ministers pick up these items for distribution. s There are no health or pension plans for employees. Tiend:a del Army — Willie Reisen, owner. • This store sells shoes, shirts, jeans, bats, etc. for men. • When Wal-Mart cause to town, they tools a big chunk of their market, People like one- stop shopping and they are looking for the best price for particular products. Wal-Mart can usually provide both. Before Wal-Mart, downtown Calexico was the main shopping area. W Reisen had to discontinue various products that Wal-Mart carried because he could not compete with then. These products include tents and sleeping bags, Prior to Wal-Mart, Reisen was able to sell whatever he carried. Reisen is only able to carry what Wal-Mart does not carry, He cannot go head-to-head with Viral -Mart. Reisen survives by carrying an increased variety of Brands – especially what Wal-Mart does not carry. Q Ever since Wal-Mart came to town, business has dropped 60%l Other businesses in the area also feel that Wal --Mart is "killing" them. Wal-Mart helps schools and the community at large, but they are "murder" for the merchants. Reisen donates when the community organizations come to him, but he can't make a "big splash" like Wal-Mart can. * Wal --Mart sends Calexico money out of town rather than keeping it in the community. Reisen has had to cut back 60% of his work force including employees who had been with him for over 10 years. Reisen buys his inventory directly from the manufacturer. These manufacturers frequently will not sell to discount chains. The discount chains often will not carry high line brands. A Mexican nationals are Reisen's primary clientele. Rcisen cannot afford health or pension plans for his employees. In 1991, he was planning to provide a health plan. This was the year before Wal-Mart came in and it was his best year financially. After that year, his business "took a nose dive". Garlans — Robert Gronich, president Garlans is a clothes store with, name brands similar to Robinson's -May or Macy's; these clothes are different from what Wal-Mart sells – they are on the higher enol. Since Wal-Mart has come into town, business has grown – he was not at all adversely impacted. Gronich considers his business to be very aggressive in terms of promotiom and advertising -- very different from other businesses in the area. . 80'/0 of customer base is Mexican nationals. The Mexicans are looking for a product that is not available in Mexico, Also, they are looking for something Viral -Mart does not sell but still at reasonable prices. Garlans uses local banks such as Bank of America and Valley Independent. Garlans tries to accommodate requests for donations and charity. Anyone who represents a legitimate charity (ID and letterhead) is givers a reasonable donation. Garlans also in involved in the community golf tournament associated with San Diego State University each year. * Garlans has two health plans: 1) An HMO with one hospital in Mexicali, and 2) A Blue Shletd APO. Garlans pays hoof the premium. * The community lakes W( J -Mart, Local businesses dislike ("hate") Wal-Mart, especially grocery stores. When a discount chain comes to town, grocery prices fall 20%. The community supports the variety, selection, and low prices associated with Wal-Mart. If the big box is not allowed in Calexico, it will simply locate in a neighboring town. Apple Market ---- Joe Moreno,manager/owner ® When Wal-Mart came to town, it had a definite impact on local businesses. Some businesses closed; others struggled but survived. Some are beginning to reopen. At Apple, business is starting to come bark. ® Before Wal-Mart, Apple Market's customer base was 60% Mexican and 40% local; through various advertising and promotional efforts, the mix has shifted to 20% Mexican and 80% local. Local people may buy snacks and other packaged products at Wal-Mart but they get their .main groceries at Apple. The fact that WA -Mart picks up people at the border and takes therm. to Wal-Mart is a major factor affecting the local business downturn. • Apple purchases their product from Unified Western Grocers in Los Angeles. • Apple Market hanks locally at Bank of America and Valley Independent Bank. • Before Wal-Mart, Apple Market was able to support multiple community groups such as Pop Warner, `I` Ball, Little League, etc. Now, they are not able to donate to everyone as before. Apple tries to help the schools and not turn people away. Wal -.Mart can give as much as they want. • Apple has a health plan for employees who work over 30 hours per week. This represents 10 employees. It is a PPO plan that Apple pays for in hall. • Moreno is actively fighting the expansion of Wal-Mart so that it will not include the sale of groceries. He contends that big box supercenters in other parts of the country have caused devastation to their communities. He argues that Apple Market, as a grocery store, is an anchor for other businesses. The tire business and the insurance business are nearby because of .Apple. If Apple were forced out, customers would not shop at these other places. The one stop Wal-Mart shopping would take hold. • Wal-Mart got the "royal treatment" from Calexico. They got tax breaks to motivate them to come to the area ---- breaks that other businesses in Calexico never got. This is unfair. Wal-Mart can come but they should pay their own way like everyone else. Perrone's, Isabel Perrone, co-owner This stare sells electronics equipment, including cell phones, stereos, and so forth. Wal-Mart does sell some electronics but Perrone sells equipment at the higher end where Wal-Mart does not compete. It is in the area of groceries where local businesses can really be hurt by Wal-Mart. The one-stop shopping concept is a difficult one with which to compete. • Verrone closed an electronics store downtown 3 years ago and .moved to Imperial .Avenue, Business has been up 100% since they €-roved. They are now in the flow of traffic of people going toward Wal-Mart. Wal-Mart got major tax breaks when coining to Calexico. The small businesses in Calexico have never received such breaks and this is not fair. • Calexico needs someone who loves the community and who will facilitate growth of industry and business positively. Calexico needs large businesses like Food for Less, Chuck E. Cheese, Target, etc., but these businesses should pay their own way, create jobs, create a diversity of product and consumer choice, and generate healthy competition M among businesses. Facilitating the continuous growth of one .large chain is not positive growth. • Perrone purchases their inventory directly from the .manufacturer. • All banking is local — primarily Valley Independent Bank. The Perrone family purchased 32 homes in Calexico and all were financed by Valley Independent. Isabel Perrone is actively involved in the community: She is president of the Calexico Little League and the Lions Club. She is vice president of the School Board. She is also involved in Junior Achievement where she speaks to school children about careers — specifically about expanding their horizons regarding the variety of opportunities and career choices available to them. • Perrone's has a health plan for its employees - Blue Cross paid for by employer. Flowers by Annette --Annette Tafoya, owner ® Flowers by Annette is owned and operated by husband and wife with help by two sons. - The family used to own a fumiture store downtown, but when Wal-Mart and Sann's Club carne to town, she could not compete and was driven out of business. Many other downtown businesses went under as well. Wal-Mart argues that they created 300 jobs, but probably at least this many lost their downtown jobs as a result of Wal-Mart. • Wal-Mart already has a garden center where they sell plants but not cut flowers. It is a matter of time until Wal-Mart also sells flowers. When this happens Vial -Mart would take about 40% of her business leaving her only 60% of what she has been making. This could force her out of business again and this time force leer to leave town. She was born and raised in Calexico and does not want to leave. • Wal-Mart already sells coffee cups and staffed animals as she does. She feels she has the advantage in terms of service. She can help customers put gift packages together where Wal-Mart does not yet have that capacity. • She banks locally for everything with Washington Mutual. • She purchases merchandise from San Diego and out of state —wherever she can get a good deal. • In the community, she helps at the women's shelter and helps at her church. ® She has no non --fancily employees and no need for an employee health plan. • Wal-Mart is great for the consumer; terrible for local merchants. She does not want to see the supercenter tape away her livelihood. Jean's Jewelry, Pak, Yong Htar, owner • This Is a small outlet within the Price Center (across Imperial Avenue from Wal-Mart). Pak sells inexpensive costume jewelry and sundries. Wal-Mart carries much of what he sells and people assume it is cheaper at Wal-Mart. Pak contends that his merchandise is cheaper. Pak says that representatives from Wal- Mart come to his shop to see what he has and Wal-Mart copies his retail strategy. The one stop shopping is good for consumer, but not for merchants. In El Centro, a garden shop that was there for 40 years was driven out of business by Horne Depot. im Wal-Mart lays lots of people off in slow, ron-peak tunes, but in busy times, they Dire many. They pay no benefits to most of these temporary, part-time employees. Pak has service to offer his customers, 50% are from Mexicali and 50% are local. s Wal -,Mart is a great economic force that cannot be stopped. Their profits do not stay in the community; they go back to Arkansas. Wal-Mart makes contributions to the community and they brag about it, Pak donates money through his church, Special Olympics, and to the veterans. Pak banks locally through Washington Mutual and Valley Independent. Pak purchases his inventory from manufacturers and wholesalers in Los Angeles. • Pak has no health plan for employees, State disability only. IN f r r `•,r. N' The 2000 report by Rea & Parker Research discussed economic and land market impacts of big boxes in other communities throughout the United. States. It presented the findings from a handful of reports and summarized their conclusions briefly, as presented below, Marlon Boarnet, Ph.D. and Randall Crane, Ph.D. ("The .Impact of Big -Box Grocers on Southern California: jobs, Mages, and Municipal Finance") elaborated upon various Grange County cases in which a discount retailer closed one store in order to open a larger and newer store nearby. Case after case indicated that these vacated stores did riot find a new occupant very easily, if at all, causing fur- ther closures among the small complementary local. stores. These stores spend much time vacant, causing physical and economic blight and creating an "attractive nuisance" (legal terns for site that attracts illegal activity) for vandals and others with property damage in mind. Clearly, building one store and then vacating it for another is worse than not building at all from a land market and land use planning perspective. A report by Edward B. Shils, Ph.D. from the Wharton School, University of Pennsylvania, entitled "Measuring the Economic and Sociological Impact of the Mega -Retail Discount Chains on Small Enterprise in Urban, Suburban, and Rural Communities," was published in. .1997. Shils elaborated upon the impact of discount retailers on small local businesses in Eastern Pennsylvania, San Diego, Chicago, and Syracuse, New York, and found that the new stores replaced traditional "Main Street" retailers, eliminating thousands of Jobs formerly in stores employing one to tern persons. These were family type enterprises in which 1? full-time jobs were ultimately lost for every one new part-time, near -minimum wage job in the discount retailer. In certain communities, job losses were up to 5 times the number of new big box jobs. On visits to all the locations cited above, Dr. Shils and his staff "witnessed the increasing decay, both physically and morally of the stores and their environment in malls that had been in their ascendancy in the 80s and 90s." Where a supercenter had been opened one-half mile away from the older mall and where after 6 months to 1 year, "traffic density in the older mall begins to die as shoppers go to the newer and larger mega -retail discount store, whether it be a Target, Kmart, or Wal-Mart. Within a year, every second or third retail store is closed. These stores then take on a ghettoized, boarded -up appearance. Graffiti, iron grills, unsightly signs then appear, and what five to ten years earlier was a handsome mall in harmony with the coun- tryside, now resembles an urban ghetto ... what was witnessed was not `urban sprawl' but `suburban' as well as `rural sprawl."' Rea & Parker Research has expanded upon this summary with additional information derived from the sources cited alcove and from additional sources indicated below and has included a handfixl of these in this .report. The upshot of. this additional information confirms the exPer'ience of Calexico that big boxes and, in particular, Wal. -Mart represent a rejection of any kind of small business, village -oriented devel- opment policy. That is, there is nothing in the Wal-Mart/big box experiences of these communi- ties throughout the United States that would provide Dope that an economically flourishing small town atmosphere can coexist with big box retail. It is noteworthy that although intensive statistical analysis of the impact of big boxes is lacking, there does exist a large base of anecdotal information. The incidents and quotations cited are very typical W of local experiences with big boxes throughout the United States and are valuable and convincing by their preponderance and consistency among various jurisdictions. Included are a disproportionate number of San Diego region examples, with a sampling of com- ments and examples from other parts of the country. These examples are not to be considered uni- versal. That is to say, although the overall impact of big boxes is quite apparently a strongly negative one as it applies to small retailers, that impact is not what is experienced by all small retailers. A lim- ited number do succeed with a big box present—in particular those that do not compete directly with the big box, dealing in services, high-end products, or special handling of customers and their needs in selected niche markets, including one or two Calexico merchants. Other small businesses have succeeded when they relocated away from their former location nearer to the big box, along the main highway access routes. This movement however, aggravates the big box impact on the former location, so that while the relocating business may survive, the existing retail core suffers nonetheless, again doing damage to the strategy of local, village -oriented retail development in favor of a sprawl- ing, outwardly expanding movement of such development on a much larger scale. Selected National Retailer Impacts San Diego region: "l will close my business by July 1. No tax concessions were offered to bring my business into town or to keep it in town. Many products which were sold in my store and made available from the manufacturer solely for `independent' stores now have appeared in the discount stores via gray market trading. My customers were always quick to tell me about the great deals they got. (Oceanside, California merchant quoted in Shits report)" Another Oceanside business owner: "We are a family business in existence for over 20 years. Two locations (Escondido and Oceanside). When we opened typewriter shops, the sold typewriters. Now Price Club, Sam's, Wal-Mart, Kmart, Silo, Circuit City, Sears, Montgomery Wards, all sell typewrit- ers, word processors, at prices less than we can purchase from the manufacturer as a dealer. As a deal- er we have quotas to .meet in order to stay a dealer and be able to buy machines, supplies and parts. We have had to change into service oriented bminess." .(according to Sylvia Jones, owner of East County Travel (E Cajon, California), "Von's leaving was devastating [Von's supermarket joined Wal-Mart in a new shopping center a few miles away] to so many in this location. A lot of businesses closed"... Of 1.9 businesses in the old shopping center, 14 are closed. (E..A. Barrara, "For locals, large chain may offer convenience as well as headaches", Alpine Herald, October, 1.999). "The old adage in retail that 20% of the items make up 80% of the sales is pretty much true. The big box retailers tend to stock and sell mostly these items. As the big box retailers come to dominate the market, traditional retailers are driven out of business because they can no longer survive just selling the slower selling items" (San Diego Home Improvement retailer in Shils report.) More from Shilse San Diego Jewelry Store: "We cannot afford to go into a malf and, of course, could not produce/compete in price with the larger volumes necessary for discount sales. We are seriously con- sidering going out of business after 22 years in San Diego." W Oceanside Electronics/Appliances: "The large retail stores have nothing but a negative effect on small businesses, especially in California. There is only so much business to go around and the increase in the number of stores only means that each one's slice of the economic pie is that much smaller." Oceanside Sporting Goods: "Large discounters will move in with lower prices. Independents will be forced out and then when competition's gone, prices will go up again...We have just liquidated due to discount competition." Chula Vista. Hardware store; "The big chains casually sell cheap products which puts the home owner in need of our services. However, duality products' prices can't compete with big chains, so we end up with a `rip off' reputation for charging a decent price for quality work and quality material. Chula Vista Searing/Fabrics: "Originally these mega -stores offered depth and low prices ... very com- petitive prices. Price/Costco has zero profit price margins. They are selling at cost only, deriving their profit from quick, high volume sales and 60-90 day terms from their suppliers." Poway hood Products: "Wal -Dart's arrival _forced . forced Long's Thug Store out of business so the site— the second major business of Poway Town and Country Shopping Center—has been vacant for over two years. Several adjacent businesses were forced to close." Oceanside Eye Glasses/Contact Lenses: "Please tell these cities that want these stores the truth about lower wage jobs, etc. They don't understand that they are putting small business out of busi- ness. Unfortunately, here in Oceanside, they don't care'." Chula Vista Office Products: I do not like the City helping major stores open with tax breaks/land deals, etc. when the effect is to put many small business people out of business, Unless they are bringing new buyers into the city, they are only moving sales tax dollars from one place in their city to another." San Diego Carpeting/Flooring: Their size [big box chains] lets them buy for less. They pay their help less money; consequently, workmanship is .poor. Too late for the customer; they have already signed the contract. These large companies know exactly how to stop people from backing out. Even when the product quality is bad," Oceanside Paper Products: "In general, there is already too much retail space now available and the giants are killing off the small retailers. While some of us hope to grow big enough to compete, most of us will not survive. Community planners and local and state governments put too much emphasis on tax revenue and not enough on duality of life.,' West/Southwest: In the small town of Nowata, Oklahoma, (pop. 3,900). Wal-Mart came to town and "ravaged all the small businesses. And when it cavae to the point where they were not satisfied, they left" says t�e Mayor of Nowata. The store was not supported by the residents of the town so they closed up shop and moved to a larger Super Center 30 miles away– after all the local stores had closed, the town was left with no ,jobs and no stores (Norman). "I travel a lot and observe other small communities (e.g. Eureka, C.A., Grants Pass, OR) where the small`Main Street' has become one way only and boarded up or vacancy signs proliferated about the main part of town. property values declined and Main Street moved to the outskirts near the Interstate. This is progress?" (Shils) Wr "Pam Bland of Unicorn in Taos, New Medco tells of buying spiral notebooks last month for the school season. Her wholesale price was 65 cents each; Wal. -Mart was selling the exact same note- bo6ks for 17 cents. How can she possibly compete ?" Newsletter: "Horsefly" by Charna Staten (Sept 99 issue) In Hearne, Texas, Wal-Mart opened a traditional store that put a number of downtown merchants out of business. The money that they earned did not stay in local banks—"going out as fast as it came in." Wal-Mart sent representatives out throughout town regularly to see how products were priced, then cut prices to win the competition. Small merchants could not withstand this battle and eventually closed. Wal-Mart then raised their prices. Once they had control of the town, Wal. -Mart closed their traditional store and opened a supercenter 20 miles away. They refused to sub -lease their closed site, thereby eliminating any chance .for an economic rebound locally. (video: "Wal. -Mart; Not As Advertised", Community Voice Video) South. An example of the impact that big boxes can have upon even longstanding, successful smaller stores is the story of the Jones Stores, which employed approximately 500 people and were spread throughout North and South Carolina. President Michael K. Jones announced in April 2001, that all 38 stores in the chain would be closed by May 2001 "as a direct result of the Big Box Retailers cur- tailing his market" (Holland, Lee. "The Mom--And-Pop-Shop Vs. The Big Box: Size Matters When You're Up Against The Godzillas Of Retail," Mornin Star, Wilmington, N.C.) "`Bowman's Hardware is closing!' The rumor had spread like wildfire through the small. Georgia town just weeks ago. Now the store building stands quietly empty. The auction is over and the owner is gone... Bowman's is the eighth Main Street business to close since Wal-Mart came to town." (Archer, Jeanne and Taylor, Don, LIRAAa nstSl e Wa1-_Marts, American Management Association, 1994) [An unpublished personal story on a Wal-Mart chat site by joli@sconcept.com 1. Once upon a time, my hometown had three hardware stores, a fabric store, a handful of grocery stores, 2-3 phaxinacies, and several clothing stores. One day, Wal-Mart came to town. It was full of all sorts of nice things to buy, and the prices were a little bit lower than the other places in town. Soon a hardware store and a clothing store closed. Then a pharmacy, another clothing store, and the fabric store. Yet another hardware store failed, and another pharmacy. Soon, Wal-Mart had raised their prices in the fabric 8_ craft department, and as the selection slowly dwindled to almost nothing, the prices continued to rise. After a while it was almost cheaper to drive to the town 1/2 hour away -especially since there was no fabric worth buying at Wal-Mart anymore. Hardware prices were getting pretty steep, too. The clothing... well, the clothing department became smaller, and the prices rose there, too. Well, gee, said the Wal-Mart manager, there's no competition, so we can bring the prices up a little. Nobody will notice, not really." Now, my hometown has 'many, many empty storefronts on .Main Street. Many people are out of work. Wal-Mart is busy, but not as busy as it used to be. You see, people got tired of the prices rising, and the selection dwindling (since there wasn't any competition, they could do that, you know) and they started driving to nearby towns. Well, 15, 30, and 45 minutes away. It was better to go out of town, because you might actually be able to find that fabric for the quilt you're sewing, or decent school clothes for the kids. Prices will be lower elsewhere, and you'll actually have a choice of items." ib East. Described in the Shils Report was the situation that happened in Philadelphia, PA. The entire story is quoted directly from the Shils Report. The French retailer, Carrefour, received a five-year tax abatement and opened a 260,000 square foot store. After 41/2 years, they left the city without paying any taxes. Furthermore, they had promised the City Council that 600 - 800 new jobs were to be created when, in rcality, only 250 were produced. At the same time, five independent food stores and one non-food store, a number of apparel stores and various other small businesses were forced out of business during the years Carrefour was open. It has been estimated that the net effect was a loss of 1,000 jobs. Bottom line, when Carrefour left, there were very few small businesses left to .fill the gap in the loss of jobs. In February of 1998, Caldors, a New England based retailer founded. by Cal and Dorothy Sennett in 1951 closed after 49 years in business, When Caldors closed, 22,000 workers were let go, 1.45 stores in nine states were also closed. Norman (Norman, Al. "The Case Against Sprawl" at jyny.sprawl- busters.coin.) argues that "industry analysts say it was expected: Caldor's was losing money to Wal- Mart, had fallen into Chapter 11 territory since 1995, and never recovered." According to Norman, "it would take more than 100 Wal-Mart Supercenters just to break even with the 22,000 jobs that went down with Caldors." In Ticonderoga, New York, workers with 30 ,years in the grocery business who were formerly employed by the Ticonderoga Great American Market, have lost their jobs when the store folded up after Wal-Mart r noved into the area. Even though. Great American had won awards for being one, of the friendliest stores in Ticonderoga, sales at the grocery store fell 20 percent after Wal-Mart opened, forcing its operator to close. A Philadelphia bookstore in Shils regarding competition from large stores selling books: 1 have sur- vived for two years, now I'm closing up" Midwest. Merchants in Cadillac, Michigan directly tie their downtown's vacancies to the arrival of Wal --Mart in the early 1990x. The small retailers who moved to new malls on the city fringe general- ly have done fairly well, while those who stayed downtown have suffered. " Merchants must recog- nize new customer markets, and not try to compete directly with Wal-Mart." A small retailer in Lapeer said "she could not buy goods wholesale for less than what Wal-Mart was selling there retail." A Kohl's supermarket, and a small independent grocer, closed after Wal-Mart moved into Racine, Wisconsin. Wal-Mart not only has destroyed good jobs that helped grow Racine's economy but also makes unlikely the development of an inner city grocery store, which a Racine study, commissioned by the city, said would help revitalize the community. "I have personally seen. Wal-Mart and other discount stores completely shut down a small town in southern Indiana. Businesses which had been in operation for years were closed and the only oppor- tunities for employment were minimum wage jobs" (Apparel retailer in Shils) "We have Super Kmart, Wal-Mart, and Eagle about three blocks apart in Elk Grove. It's not fury anymore. 50% or more of office supply dealers have gone out of business in the Chicago area (Office Supply retailer in Shils)" BE What may be worse than the loss of retail jobs is the change that occurs in the wholesale market when big boxes become dominant. Six .hundred small business owners responded to a survey for the Shils Report. They were asked, "Axe wholesalers stili available for retailers to buy from?" Oddly, many small grocers responded that they now buy many of their meat products from Sam's Clubs, a sub- sidiary of Wg-Mart, because the cost is lower than their previous wholesaler purchaser. Other retail- ers purchase products from Sam's Club or Costco also. The effect is that Wal -.Mart or another big box becomes the wholesaler in town and controls both the wholesale price and the consumer's mar- ket price. Access to wholesalers is disappearing for the small retailers, and, given that the discount retailer becomes the wholesaler, price competition becomes impossible. This loss of the wholesaler obviously has a domino effect on the entire retail market, and the loss of this industry may have a greater effect than the loss of a specific number of jobs. Even if a small gro- cer or other retailer does not want to support NAW -Mart, they -would have to when Wal-Mart becomes the wholesaler. This collapse of the wholesale market does not go unnoticed by big box retailers themselves. Price Club/Costco, for example, actively markets their chain as a wholesaler to grocers, restaurants, and other retailers, The store provides these retailers special prices and special wholesale purchasing shopping hours. Without an independent wholesaler to sell to the small retailer, that retailer cannot compete on the same playing held. The small businesses are forced to pay more for the same products than the big box retailers, which is ultimately the actual cause of the closing of the small businesses --- their pur- chasing power is lost, as is real price competition. Herein is the perverse paradox of big box as the wholesaler. When Wal --Mart, for example, comes to an area, it is perceived as helping to reduce prices in the community, which it may, in fact, do in the short run. What Wal-Mart does, instead, is as old as the predatory pricing practices of the robber barons of the. late 1800s. They reduce prices initially, drive out the competition, and. achieve a domi- nant market position that provides them the opportunity to raise prices over the much longer term without any competitive pressure or restraint. Their lower prices lead to higher prices ultimately, with fewer choices, poorer customer service, and lower quality. The community ultimately suffers. Big box stores also do not always stay in the market for long periods after they initially locate there. The anti -sprawl group, Sprawl Busters, counts 380 abandoned Wal -Marts in the United States in the last five years. (Dinsmore, Christopher. "Big Empty Boxes Are Stacking Up Big -Box Vacancies." ViMjnian_-_Pi1 Norfolk, Va., Apr 1, 2001, D-1.). It is argued by some that big --box stores are designed for a brief shelf-life—that big boxes usually do not own the buildings, instead leasing them from developers who make their money from the project in the first several years (high -lease contracts for first few years and then drop off in rental prices). By then the mega -store moves to newer locations and they "will often continue to lease the abandoned space [at the back -end lower rents] to prevent a competitor from moving in, effectively prohibiting the center's redevelopment" ("Fold Big -Box Stores Before It's Too Late." The Atlanta Contituti�n, Atlanta, Oa., Oct 17, 2000, A-18.). m In 2000, Kmart announced that it was planning to close 72 of its underperforming stores (66 tradi- tional and 6 super stores --7 in California). These stores were almost all profitable but their potential for growth and eventual expansion were seen by the company as inadequate. Kmart is'only the latest in a growing list of big -box retailers that have closed up shop and left big empty spaces. The list includes: Montgomery Ward, Be -Lo Stores, Winn -.Dixie, Sears Hardware, Hannaford, Just For Feet, Home Quarters Warehouse, Upton's, Superfresh/Farmer Jack, Giuliano's Fresh .Market, Roses, Ames, Woolworth, Drug Emporium, Pic N Pay, Funscape, Discovery Zone and Jumbo Sports. Further, J. C. Penney, OfficeMax and Office Depot have announced that they are closing underper- forming stores. In April, 2001 , the Virginian -Pilot reported that the toNvn of Hampton Loads had more than 70 vacant big -box or quasi -big box stores roughly 3.4 million square feet of empty space. The Chicago market has about 9.5 million square feet of vacant big -box space (Dinsmore). . From Florida, "As of today there are 33 `available' or `dead' Wal-Mart stores in Florida waiting to be leased out. Florida has a bad case of the `empty box syndrome', and it looks like Wal-Mart is plan-- nirig to empty out more, About 5 years ago, the company opened a supercenter on Route 50. Nov they want to put one in Brooksville and in Spring Hill. Citizens in Spring Hill are speaking out against the supercenter, since one Wal-Mart in their town is one more than enough. " Building a Wal-Mart supercenter one quarter of a mile from an existing Wal-Mart is part of the Sam Walton saturation strategy ("We become our own competition") but it just breeds empty boxes. Florida is ranked near the top in dead Val -Marts." (Hernando Today, "Dead Wal -Marts" June 14, 2001) According to Peter Grant in a column written in 2000 for the Wall Street Journal ("Plots and Ploys"), NW -Mart has a strategy in place to replace "many of its outlets with large supercenters. Nationwide, this has loaded the company with an inventory of 28.7 million square feet of surplus space." Currently, at least three and maybe four Wal -Marts will be closing in a parish near New Orleans to "make way for supercenters. Making matters worse, the parish already is littered with. seven other vacant big box stores." Many towns, cities, and states have taken the fight to regulate the size and market control of the big box retailers to the government. The strength of these mega -chains has made it difficult for local merchants and less strong competitors to confront and :restrain the construction of the big boxes by themselves. Opposition is a difficult task especially when the big boxes often have support from politicians who provide tax incentives to these mega --stores — tax incentives not available to small businesses. California Assembly Bill 84, dubbed the "Big Box Bill", would have prohibited local governments from approving construction of retail stores of more, than 100,000 square feet with more than 1.5,000 square feet devoted to non-taxable item (e.g,: groceries). Not surprisingly the big box retailers were vocal in their opposition to AB84, using newspaper advertising space and their financial power to rally support for their position. Governor Gray Davis vetoed the bill using strong language in sup- port of free competition (Springer, Jon, "Big -1 ox Bill Vetoed in California" o inL, C,-„ enters TqAaX). Mf There have, however, been some success stories in the legal war. In Warrensville, Ohio city officials successfully passed a number of ordinanccs that severely restrict the size of retail and entertainment establishments that can be developed. The mayor, Marcia Fudge, said "We want to ensure that we have a quality development, and this is one of the necessary steps, to keep the big -box retailers out of our city" (Mills, Lila, "Warrensville Sets Limits To Keep Out `Big Boxes' Move Hinders Jacobs' Plan For Retailers." Qevelarrd Plan Dealer, Cleveland, Ohio, May 2, 2001). Santa Fe, New Mexico is in the process of instituting "Big Box Standards," with the current City Council and Planning Commission debating just how much to limit new big boxes. Some favor 1.50,000 square foot limits --others 75,000 square feet° ---still others favoring a hybrid with 150,000 allowed in some places and 75,000--100,000 elsewhere. No matter what is ultimately decided, a Emi- tation of some nature will almost definitely be implemented. (McDonald, Jonathan, "Councilors want Teeth in Big Box Store Rules", Santa Fe New .Mexican, March, 2001) In August, 2000, San Luis Obispo County (California) also successfully passed an ordinance that limits the amount of Boor space that stores over 90,000 square feet can devote to non --taxable items. The lativ prevents Wal-Mart, as well as Target and K -Mart, from opening supercenter stores in that county. In Lancaster, California, a judge ruled (June, 2001) that the city could not condemn a 99 Cent Store in order to provide land for a Costco expansion. The judge held that Lancaster's action was "nothing more than the desire to achieve the naked transfer from one private party to another." Veal -Mart sued the city of Ferro over the denial of a special use permit for a new superstore. In the Washoe District Court lawsuit, Wal-Mart claimed that the City Council's November vote against their project was `arbitrary, capricious, unlawful and was not supported by substantial evidence.' Council members had voted 5-2 to reject Wal -Mart's bid to build a 207,000 -square -foot store in northwest Reno, citing concerns about 'Increased traffic congestion. A case was brought under the Arkansas Unfair Trade Practices .Act, charging Wal --Mart with preda- tory pricing and resulted in a national discussion on whether or not national discount retail drains might be prosecuted for violations of this nature. The first decision in favor of the independent phar- macies was overturned in Wal -Mart's favor in the .Arkansas Supreme Court. Of interest is the fact that, in the proceedings, 'VVal-Mart did admit selling below their cost. However, Wal-Mart denied the predatory charge, claiming that they regularly sell a variety of items below cost, including such standards as Crest® toothpaste and ListerineO mouthwash. They maintained that selling below cost does not violate the law or destroy competition. Wal -Mart's attorneys argued in a pre-trial- brief that the law should not be applied to individual items, but rather to Wal -Mart's "market -basket or full line of products." If the entire line is not priced below cost, they contended that it was not a violation of the statute. A similar action was brought in Oklahoma. Wal-Mart was found to have violated an Oklahoma state law that required retailers to sell products at least 6.75% above cost, unless the store is having a sale or snatching a competitor's price. Wal-Mart settled out of court during an appeal and agreed to raise prices at all of its stores in the state. In 1994, the State of Michigan criticized Wal -Mart's practice of displaying its own prices vs. competi- tors' prices, The signs sometimes compared items of different sizes and were alleged to be not fair com- parisons. The case was later dropped after Wal -Marr agreed to change its advertising and display ads. 91 POP I'1# Vii! w and Economic I.r ility What becomes eminently clear is that big box retailers, and Wal-Mart in particular, are formidable Forces not only in retailing, but also in land use and urban spatial form. Where Wal --Marts locate, they can and have destroyed small businesses and established retail cominunities in a planned, coor- dinated, calculated company program designed to control markets into which they come --for exam- ple, srmall communities such as Calexico. While Wal -Marts provide jobs, they are predominantly minimum wage and frequently without ben- efits. An average Wal -.Mart employee makes about $11,700 a year -- nearly $2,000 below the poverty line for a single mother with two children and is not covered by a company health plan, Wal-Mart does provide some comparatively minor charitable contributions for a company of this size and profitability (up to $2,000 snatching; funds for volunteer efforts by employees, a teacher of the year award program, and $300 to young people's organizations that participate in Grandparents Day activities, for example). But while they make these contributions, they are driving long-standing businesses and merchant community service networks into positions of being less able to continue what they had been contributing. While Wal -Marts earn substantial revenues, these funds move quickly into and out from local finan- cial institutions, whereas local business' funds stay in local banks to be loaned and recirculated for local economic benefit. While Waf-Marts provide some sales tax and property tax benefits, these benefits are frequently negated by the tax advantages given. to them initially and the lost revenue from the businesses harmed. While local. businesses frequently obtain thein- products from nearby wholesalers, such as Calexico's relationship with Los Angeles, V1 -'al -Mart is producing its own products in China, the military junta state of Myanmar, or in Honduran sweatshops. This policy has prompted the Domini 400 Social Index to remove Wal-Mart from its list of"Socially Responsible" corporations, claiming that "NIVal-- Mart's vendor contracting policies and procedures have failed to meet the standards set by prominent human and labor rights activists) or those attained by other prominent companies that are similarly exposed to sweatshop controversies." (Green, Frank, "Wal-Mart Removed from Socially Responsible Dist, San Diego Inion Tribune, May 18, 2001) Regarding Myanmar and Honduras, the Index con- tends that, "Other companies that have been exposed to sweatshop and Myanmar controversies, including The Cap, lair Claiborne, Nike, Timberland, and Reek, have taken steps to improve their records on these issues. In contrast, Wal -Mart's progress has been minimal." For example, after the Federal Trade Commission charged Wal-Mart with not identifying the country of origin on apparel items listed on its Internet sales site, Wal --Mart removed the items, preferring not to disclose where the clothing was made. Economic stability is more often than not crushed by the introduction of big boxes into the local economy. Existing, Long -terns businesses are damaged and often closed. Health benefits are last in many cases, along with pensions, especially when union jobs are lost. Even when union jobs axe not lost, the retail jobs lost are replaced by a lesser number of big box part-time jobs, with a reduced level of benefits or zone at ail, causing increased societal health costs and the instability and medical costs which accompany a less healthy population. When union jobs are lost, the community suffers a huge loss in buying power and economic activity (as detailed in the Rea & Parker Research 2000 report). EE Adding further to the economic and societal instability brought on by big box development is the tendency for the big boxes to become the wholesaler for local small businesses, completely destroying any chance for real price competition. Wal-Mart clearly has a policy designed to price their merchan- dise specifically, and almost mercilessly, to target some retailers for extinction. Then, once the market is controlled, certain of the traditional Wal -Marts close as the company opens a supercenter nearby and then idles its low-cost leased space so that competition cannot arise in its wake. The community is, therefore, dealt a double blow. Wal-Mart competition cannot be survived by many of the estab- lished small businesses in the area and they close. Blight sets in where these businesses had been located. Later, once retail dominance is established, the initial Wal-Mart that destroyed the retail community to begin with also closes in deference to their own supercenter nearby. Wal-Mart then maintains its former site in an idled state., adding further blight to an area that would not have been developed in the first place were it not for the initial big box. The area, which could have been open space or some other more stable form of development, is now part of the growing number of "dead. Wal -Marts" littering cities. Big box development is the classic "slippery slope." Entering into a development arrangement with Wal-Mart, in particular, is replete with huge risks of damage to the local retail economy, weakening of long-standing social structures, destruction of mixed -fuse neighborhoods, reduced wages, declining levels of health care in the community, an affront to local aesthetic values, sales tax revenue increas- ingly reliant upon a single large corporation, and, in the ultimate extreme, the potential horror of an urban ghost town. An increasingly prominent issue in local communities is the aesthetics of big boxes. Photographic artist Myron Brody is currently traveling around the country with an exhibit of photographs of each and every Wal -Mast store in America (McDonald, Frank. "Snapshots From The World Of Wal- Mart: Myron Brody's Photographs Attempt To Capture The Impact On America's Landscape Of The `Formula Architecture' Of Wal-Mart Stores." Irl h Ti es, Dublin, Apr 6, 2000). Brody con- tends that his interviews with Wal-Mart architects and designers have pointed out that the reason for the starkness of the big boxes is that any additional amenities reduce the ultimate value of the store. Trees in the parking lot take away parking places or are avoided because of bird droppings. Planters and other decorative amenities can be tripped over, causing lawsuits. The design policy of Wal-Mart is single-mindedly that any amenity will cost additional money and will not generate additional traffic to the stores, so Wal-Mart and other big boxes have routinely fought against communities that have sought to have the stores be more attractive and more consis- tent with local. character. These big boxes are defiantly void of attractive, healthy, noise reducing landscaping and are absent even the slightest semblance of any noteworthy or distinctive architectur- al enhancements. They are the same in appearance whether they are located in San Diego or in Des .Moines, Iowa. R3 In the year 2000, in an era of land use planning which seeks to encourage "smart growth" and "tran- sit -oriented development," a retail policy which turns away from Main Street retailers and toward large suburban sprawl types of retail developments, which depend exclusively upon the automobile, is antithetical to the vision and wisdom of the stated policies which seek to encourage the opposite, such as San Diego's City of Villages Strategy and their inspiration, the groundbreaking Ahwahnee Principles. Wal-Mart and other supercenter retailers are not in -fill developments that support a pedestrian -ori- ented village retail concept. They do not foster the growth and health of small businesses or of the shopper who uses public transit. Wal-Mart, and especially the supercenter Wal-Mart, is a sprawling, space consumptive, single -story blank wall. It sits behind huge expanses of parking spaces in order to facilitate large volume purchases that cannot be accommodated by public transit. Once again, paraphrasing from the City of Villages strategic framework: Village design is to be pedestrian -friendly, with public spaces and significant transit service ----all designed to encourage local shops, restaurants, businesses and services, with much human -scale, street level activity and reduced dependence on the automobile trip. There is nothing in the Wal-Mart experiences of those many communities throughout the United States that were discussed above and of those others similarly burdened, but not discussed, that would provide even the dimmest hope that a cohesive and economically flourishing City of Villages can coexist with the disassociated barrenness of big box retail. PU Albright, Mark. "Hanging in the Balance." St. Petersbura-Timgs, St. Petersburg, Fla., Apr 9, 2002, Archer, Jeanne and Taylor, Doan, U A ns t Wal -Marts, American Management Association, 1994 Bar:rara, E. A.., "For locals, large chain may offer convenience as well as headaches", Alpine Herald, October, 1999 Center of Excellence for Sustainable Development, United States Department of Energy, "Ahwahnee Principles", Em w.sustainable.doe. ov Chai, Jimmy. „Fountain Valley Residents Still Concerned As Demolition Begins For Wal-Mart." Corn Cou M_RegL ter, Santa Ana, Calif., Mar .22, 2001.. Daykin, Tota. "Communities Force Big Box Retailers To Rethink Designs." Milwaukee Journal SeantiajL1, Milwaukee, Wis., Jun 1.5, 2001. "Dead Wal -Marts", Hernando Today, June 14, 2001 Dinsmore, Christopher. "Big Empty Boxes Are Stacking Up Big -Box Vacancies." Virginian — Pilot, Norfolk, Va., Apr 1, 2001. Dodd, Scott. "Big Boxes Leave Decay In Their Wake." The San Diego Union - Tribune, San Diego, Ca., Jan 14, 2001. "Fold Big -Box Stores Before It's Too Date." The Atlanta Constitution, Atlanta, Ga., Oct 17, 2000. Grant, Peter, "Plots and Ploys", Street Tournal, 2000. Green, Frank, "Wal-Mart Removed from `Socially Responsible' list", 5an„Diego,Union Tribune, May 18, 2001. Hall, Jason. "Home Improvement Sma.1 Stores Offer Personal Touch." Sarasota H raid Tribune, Sarasota, Fla., Dec. 6, .2000. Holland, Lee. "The Mom -And -Pap -Shop Vs. The Big Box: Size Matters When You're Up .Against The Godzillas Of Retail." Morn ag Star, Wilmington, N.C., Jan 15, 2001. National Trust for Historic Preservation. "The Effects of Superstore Sprawl on Communities." A Pro osal to the enM. ckson Found tion. September 27, 1994. McCartney, Jinn. "SuperTarget Taking .Aire at Big Box Sector." Shopping Centers Today, February 1, 2000, wwwjcsc.org. McCartney, Jim. "Big -Box Strategy: Emulating the Little Guy." Shop in_C,enters Today, November, 2000. www.icsc.or . McDonald, Jonathan, "Councilors want Teeth in Big Box Store Rules", Santa FL New Mexicgn, March, 2001 Mitchell, Stacy. "Bucking the Chain Store Trend." Rocki Mountain News. March 17, 2000. McDonald, Frank. "Snapshots From The World Of Wal -Matt: Myron Brody's Photographs Attempt To Capture The Impact On America's l=andscape Of The `Formula Architecture' Of Wal-Mart Stores." Irisd im ,s, Dublin, Apr 6,20K Mills, Lila. "Warrensville Sets Limits To Keep Out `Big Boxes' Mcrve Hinders Jacobs' Plan For Retailers." Oie e n De -a e , Cleveland, Ohio, May 2, 2001, Norman, Al. "The Case .Against Sprawl: Excerpt from My 1999 Book `Slam -Dunking Wal-Mart," Y=�PrawlbuaLeom. Parker, Richard A., Ph.D. and Idea, Louis M,, Ph.D,, "The Potential Economic and Fiscal. Impact of Supercenters in San. Diego.", San Diego Countv `J_'axnaver l�ssociation, July, 2000. Price, Erica. "America's Downtowns Using Innovative Strategies to Rebound." Nation's Cities Wee , October 24, 1994, Rayfield, Susan. "Topsham Residents Debate Limiting'Big Box' Retailers, A Public Hearing Centers On The Potential Impact Of A Wal --Mart." Portland Press -Herald, Portland, Maine, Oct. 20, 2000, Reid, Keith. "The Wal-Mart Approach." National Petrc�leurri News, Chicago, May 2001, Vol, 93, Issue 5. Robinson, Elizabeth. "Jolly Keen Giant Stamps Its Way Along The Supermarket Aisle: Elizabeth Robinson Assesses The Likely Impact On UK Retailers Of Wal -Mart's Planned Takeover Of Asda." Eirtancial Times, London, Jun 19, 1999, Rutherford, Mega. ",2nd `Big Box' I n Works? Neighbors Wary Of Plans For Site At Broadway, Pan tano Road." &izQaj D ._Stat, Tucson, Ariz., Apr 2, 200 . San Diego, City of, General Plan Strategic F ewor Elerrien , Working Draft, October, 2000. Shils, Edward B. PhD. and George Taylor. "The Shits Report: Measuring the Economic and Sociological Impact of The Mega -Retail Discount Chains on Small Enterprise in Urban, Suburban, and Rural Communities." The Wharton School. University of Penns ylvani ,Feb 7, 1997, Springer, Jon. ""Big -Box Bill Vetoed in California." Shopping Centers Today, International Council of Shopping Centers, www.icsc.org. Staten, Charna, "Horsefly', September, 1999 Issue, Taos, New Mexico Stone, Kenneth E. "Strategies for Co -existing in a Mass Merchandising Environment." Iowa State University Press, March 1992. Sutherly, Ben. "Local Stores Set to Battle Giants." Dayton Daily Nems, Dayton, Ohl(), Feb 12, 2001. "Try to Halt Blight From Big -Box Stores." Virginian - Pilot, Apr 9, 2001.. "UFCVLr Union Joins Activists to Challenge Wal-Mart." Hometown Advantage Bulletin, August 2000. www.newrules.org "Wal-Mart: Not As Advertised", Community Vice Video, 2001 Weir, Torn, " Dees Wal-Mart Rule?" SuRemarket Business, November 15, 2000 Zw6bach, Elliot, "Wal -Dart's Concentrated Solution."cm ar t N ws, April 1, 1999 Prepared for the Orange County Business Council ,, By. Marion Boar net, Ph.D. Asscoeiate Professor Department of Urban and Regional Planning and Economics University of California at Irvine ME Randall Crane, Ph.D. .Associate Professor School of Public Policy and Social Research University of California at Las Angeles This Executive Summary HigHights thelcey finding from the research, Persons desiring a more complete description of the research are referred to the finai reports available on-line at www.ocbc.larg, The Dpinions expressed in this report ore those of Professors Soornet and Crane. ORANGE COUNTY BUSINESS COUNCIL 2 PARK PLATA SUITE 100 IRVINE, CALIFORNIA 92614-5904 TFL. 949.476.2242 FAX 949;476,2240 www.ocbc.org A C0MP#,I~`CE COPY C3 TWS PVPORT 45 AVMLAKE ONLIN' AT WVxtW,0C1sC.0RG EXECUTIVE COMMITTEE CHAIRMAN OF THE BOARD Thomas H. Nielsen President The Nielsen Company CHAIRMAN ELECT Thomas P. Merrick President Strategic Planning Associates IMME01AT£ PAST CHAIRMAN Dick Allen President DIMADentures, Inc. PRESIDENT, CEO & SECRETARY Stan Oftelie President & CEO 0C8C TREASURER Robert S. Grant Managing Partner Deloitte & buche LLP VICE CRAM-aOARD DEVELOPMENT Wayne D.Wedin Pmsiident Wedirn Enterprises VICE CHAIR -ECONOMIC €3EVELOPMEI Peter Case Senior District Vice President Merrill Lynch VICE CHAIR-I-ONG RANGE PLANK€E Rill Ross Vice President, Public Affairs Disneyland Resort VICE CHAIR -PUBLIC AFFA{RS Jo Ellen Allen, Ph. D. Director of Public Affairs Southern California Edison Company VICE cHAiR-STRATEG#C INITIATIVES Robert Hovee President RAH Consulting Group Inc. VICE CHAIR - SP1_CiAL PROJECTS Gary H. Hunt Executive Vice President The lrvine Company EXECUTIVE STAFF VICE PRESIDENT RESEARCH & COMMUNICATIONS Wallace Walrod VICE PRESIDENT BUSINESS DEVELOPMENT William Carney V€C£ PRESIDENT DEVELOPMENT & INVESTOR RE0,TtOl Mike Noonan VICE PR ESIDENT PUBLIC AFFAIRS Julie Pu entes There is a revolution going on in your grocery store. It is a change that is in its earliest stages, but it is a change so profound that Goldman Sachs said earlier this year that it is "the biggest secular market share shift in American retailing today - bigger so far than even the Internet." It is a megatrend that is both consumer -driven and a decision by the so-called big box discount retailers to sell groceries, produce, dairy, and other food products, promising benefits in the farm of lower prices and greater choices for consumers. It is a megatrend that w411 affect what we eat and where we buy it. And it is a megatrend that is collding with an extraordi- narily complex local issue - the fiscalization of land use by local government decisionmakers. For more than 20 years, cities have been romancing big box retail stores - the sales tax generating land uses that bring tax dollars into city government to pay for police, fire, and cattier municipal services. However, as the report - The impact of Big Box Grocers on Southern California - illuminates, the decision by big box discount retail stores to expand from taxable (and tax -generating) products to non-taxable (and neon -tax generating) groceries could have a profound effect on municipal finances while generating significant community impacts. To place this national megatrend in a local decisionmaking context, the Orange County Business Council asked UCl Professor Marlon Boarnet and UCLA Professor Randall Crane to explore the impact of big box discount retailers moving into the grocery business - and to develop a checklist that local government officials could use to assess the expansion or conversion of existing retailers into the new supercenters. OCBC believes that the relation- ship between land use decisions and local finance economics deserves closer examination. The 115 -page report Drs. Boarnet and Crane developed is summarized in this document. It does not advocate near appose supercenters or big box retail centers, but does offer key questions on municipal finance and community impacts that local government officials should consider when confronted with local land use decisions which will shape their communities. We hope this study will provide context and assistance to the serious deliberations of decision€nakers who will help shape the revolution that is going on in our grocery stores and our big box retail discount stores. Sincerely, President and CEO ®range County Business Council E X E C U T 8 v E S V M M A R Y THE IMPACT OF BIG BOX GROCERS ON SOUTHERN CALIFORNIA a r The Califor KEY FINDINGS research report, The impact of Big Box Grocers on Southern nio: jobs, Wages, and Municipal Finances, was prepared for the The aggressive entry of supercenters such Orange County Business. Council by Professors Marlon Boarnet (Linin as those operated by Wal-Mart into the versity of California, Irvine) and Randall Crane (University of California, Southern California grocery business is ex - Los Angeles). The author is publish broadly in the areas of local eco- pected to depress industry wages and nomic development, land use, and municipal fiscal policy. The Grange benefits at an estimated impact ranging from a low of $500 million to a high of almost County Business Council also has along -standing interest in both the $ I.4 billion per year, potentially affecting fiscal impacts of local land use issues and the economic impacts of 250,000 grocery industry employees. government decision-making and the changing California business climate. s � The full economic impact of those lost fn this report they examine the enormous, and ever-growing retail wages and benefits throughout Southern grocery business, and the many changes occurring this industry. California could approach $2,8 million per One of the most important developments is the combination of big- year. box discount retail and grocery sales into a single store known as a " Discount retail chains that operate supercenter. Several discount retailers, including K -Mart and Target, supercenters, including Wal-Mart, typically have experimented with the supercenter format, but Wal-Mart has offer much less comprehensive health care been the fastest growing developer of supercenters in the past de- coverage than major California grocery cade.While IC. -i fart and others have experimented with retail grocery chains. One negative economic impact of sales in recent years,Wal-Mart has quietly become the second largest Supercenters could be a dramatic reduction grocer in the country by adding large grocery stares to their retail in health coverage for most of the 250,000 stores to form supercenters that are often as large as 220,000 square grocery employees in California. This can lead to lower duality of care for grocery feet. For that reason, this research focuses son the potential impacts of employees whose health insurance benefits the entry of Wal-Mart supercenters into the Southern California mar- are reduced. Icet. Yet the analysis is intended to illustrate some of the impacts of supercenters more generally, whsle using the case: of Wal-Mart as an The fiscal benefits of supercenters, and of example of a potential near-term entrant into the Southern California discount retail more generally, are often retail food business. much more complex, and lower, than they first appear. This is particularly true when This study is designed as an aid to public decision-making regarding big box retailers close existing stares to move into larger quarters elsewhere, when supercenters, which have negative as well as positive impacts, Neither they expand an existing store into food, a re always and when retailers reconfigure an existing well understood, or POLICY QUESTIONS store to sell food without expansion, in carefully cons id- The nature of the grocery bossiness has changed each case the addidonal tax revenues gen- erated will in part come from existing e re d, i n the dramatically in some areas, with conventional gro- businesses elsewhere in the city in the form municipal race for sales tax revenue, eery stores having difficulty competing on wages. of lost market share. However, this report Cities, starved for sales tax revenue but also Supercenters, especially Wal-Mart clean shows that the Y protective of their existing retail base, are un- sUperCellteiS, are OftOfi C011Ve1"S[4nS Cid X• fiscol benefits of sure of how these big -boxes will affect either isting discount retail stores.Thus local of - supercenter, and of their economic structure of their fiscal bottom ficials should carefully consider the possibil- discount retail mare line. This study is designed mainly as an aid to ity of a future conversion to a supercenter, and any attendant negative economic,fis- are much generally, public decision-making regarding such projects, cal, or land use impacts, when approving more complex, and which have negative as well as positive impacts. big box discount retail projects, even when often lower, than Neither are always well understood, or consid- the proposes land use does not include they first appear. ered, in the municipal race for sales tax revenue. immediate plans for grocery sales. THE IMPACT OF BIG BOX GROCERS ON SOUTHERN CALIFORNIA The grocery industry is an often unnoticed but vit-a,I part of many local economies. in an era of increasing part-tJrne em- ployment and reduced pay and benefits, grocery chains pro- vide what is becoming increasingly rare - entry level jobs that pay living wages with good benefits. The retail food sector employs 2.50,040 persons in California; slightly more than half of chose are in the Southern California region. Of the 128,000 Southern California grocery employees, the 80,000 employees of the major chains are unionized and earn at- tractive wage and benefit packages. The average grocery employee at a major Southern California chain earns $32,385 on a full-time annual basis - virtually the sane as the average statewide pay for A job sectors. It is also instructive to compare grocery employment and wages with other industries that are commonly considered an important part of the Southern California economy. Em- ployees of the major grocery chains earn wages that are es- sentially the came as the average annual wage paid in the con- struction industry, and the 80,000 unionized Southern Cali- fornia grocery workers number about one-third of the region's total construction employment. Few doubt the role that construction plays in providing good wages and economic oppor- tunity to persons with entry-level skills. Grocery employment serves a similarly important role in the economies of South- ern California cities and for the entire region. Compared to other industries that provide entry-level jobs, such as the tour- ism sector; wages at major grocery chains are close to double what can be earned in, for example, ho€el and motel employ- ment. Major Southern California grocery chains also pay, on average, more than twice as much as the pay earned by gen- eral merchandise employees_ This is representative of the pay gap between grocery stares and the discount retail firms that have entered the grocery market in other states. 35,000 AVERAGE ANNUAL WAGE COMPARISON MAJOR SOUTHERN CALIFORNIA GROCERY CHAINS ALL CALIFORNIA EMPLOYEES CALIFORNIA CALIFORNIA CONSTRUC- HOTEL TION AND MOTEL EMPLOYEES EMPLOYEES SOUTHERN CAL(FORNIA GENERAL MERCHANDISE EMPLOYEES Three sets of policy issues are important i e Supercenters are often conversions of exist- ing discount retail stares, and local officials should be aware of that possibility. in 1999, Wal-Mart estimated that 72% of all new Supercenters would be built by converting existing Wal-Mart discount centers. Because the grocery and general retail industries differ dramatically in their pay scales, function within the community, and abil- ity to generate sales tax revenues, this is far from: a simple expansion of an existing business. Local offi- cials should be aware of the possibility for conversions of existing discount centers into supercenters. 2, The grocery industry in Southern Califor- nia alifoniiia pays substantially higher wages, and offers better benefits, than many of the dis- count retail chains that currently operate supercenters. By far the largest controllable cost in the grocery industry is wages and benefits. Large labor cost differentials do not persist in the gra- cery business. Should a discount retailer enter the Southern California grocery market and compete effectively while paying wages below the current norm for the industry, the pressure on existing chains to Jower wages and benefits would be im- mense. As an example, estimating that Wal-Mart supercenters could capture from 10% to 205'. of the Southern California grocery market, we calcu- late the direct value of lost wages and benefits to range to nearly $1.4 billion per year. Accounting for the multiplier effect as those wage and ben- efit cuts ripple through the economy, the total economic impact on the Southern California economy could approach $2.8 billion per year. 3. The fiscal benefits of supercenters, and of dis- count retail more generally, are often complex. Supercenters in particular combine many non-taxable food items under one roof with general merchandise. Furthermore, any discount retail out- let potentially shifts sales from existing local retail, and the net impacts on local safes tax revenues are far from certain. E X E C U T I V E S U M M A R Y t � Y A brief synopsis of the research is given below, For the full study, including citations for all information, data sources. and a detailed description of the meth- ods, see the full report, available at www.ocbc.org. The wage and benefit impacts of the entry of big box grocers into the region are estimated using a two step process. First, we estimate the market share that Wal-Mart supercenters are expected to capture in Southern California, based on current averages of between 47 and 57 stores per distribution center. Using data on market share and number of stores in several urban areas, we conclude that one distribu- €ion center roughly translates to a 10% market share of Wal-Mart supercenters in Southern California. The assumptions that let to that estimate were uniformly conservative, and so we also use an estimate of 20% long -run market share for supercenters, comparable to the major existing chains in Southern California. ESTIMATES OF REGIONAL INCOME LOSSES 4rN $MILLIONS) FROM LOWER WAGES PAID BY BIG BOX GROCERS 3,000 2,500 2,000 1,"x00 1,000 500 !# WAGI<' GAP BETWEEN MAJOR GROCERY CHAINS AND DT&CouNT RETAfLERS We then calculate the wage impacts of these market share estimates. even a 10% market share for supercenters is a substantial competitive threat to existing chains, and those chains are likely to respond aggressively. Case studies of similar competition be- tween low and high labor cost grocers illustrate that grocery chains cannot tolerate large labor cost gaps. This evidence indicates that in the short-term gro- i 0 " . cery chains typically seek to close approximately one half of the wage gap with major competitors. Over the long term, the grocery chains may seek to lower wages to their workers to eliminate the entire differ- ence between their pay and that of discount retail employees an average difference of over $9 an hour currently. Using data on current wages and benefits, we calcu- lated that the direct impact on workers in Southern California would likely fall in the range of about $500 million to $1.4 billion per year in lower pay, depending on the big box grocers' market share, Using the South- ern California Association of Governments estimates of how these lowered wages would impact the re- gional economy, the total regional drop in spending ranges from about $1 billion to over $2.8 billion per year. The numbers will rise the larger the market share of big box grocers, and could well top even these figures over time. In addition, we find that the tax rev- enue impacts of big box grocers are uncertain, While big box retail does typically capture taxable sales from out- side the jurisdiction, it also captures business from local retail, thus hurting MEDIUM ESTIMATE the local economic Base of the com- HIGH ESTIMATE munity. There is evidence as well that the initial growth in sales tax revenues from the big boxes may not be either steady or sustained in some situations. More to the point of this report, a much larger share of food sales are not tax- able at all. Most of the Wal-Mart supercenters result frorn the conver- sion of existing Wal -Marts into a combination of general merchandise and food sales. Thus, the floorspace devoted to taxable sales may actually fall as these conversions continue. There is also evidence that general merchandise stores are far more vulnerable to market shifts than food stores. Thus, this trade off presents itself. big box ret- ailers will most likely boost overall retail sales and tax THE IMPACT of BIG BOX GROCERS ON SOUTHERN CAL I FORMA revenues on entry, only to be among the first to con- solidate or fold when conditions begin to change. if a big box were to include food sales in its operations, then free-standing food steges would likely yield mar- ket share and in some cases became vacant, while taxable sales from grocery operations would shift to locations that are much ore prone to the impacts of regional business cycles. Col GENERAL MERCHANDISE TAXABLE SALES PER PERMIT IN LAGUNA NIGUEL. 1991 '1997'1993'1994'1995'1996'1997 (NOTE; THE WAL-MART OPENED IN 1995) These potential impacts ars; significant, with respect to both the vitality of the local economy and the pub- lic budget bottorn line. The transformations in the grocery 'industry thus present local officials with some key policy considerations. The grocery business is a vital part of the economic and the community fabric of most every municipality in the region.The changes occurring in that business have the potential to quickly and adversely affect the economic health of localities, and officials should be aware of that potential as they evaluate future discount retail projects. In particular, the following questions are important in evaluating discount retail projects, Is there potential for changes in the use of the property? Discount retail chains are increasingly taking on the functions of grocery stores, In light of that trend, local officials should both be aware of the potential for the conversion of discount retail sites into supercenters and inquire about future plans for discount retail stores seeking lo- cal planning commission and city council approval. 2. How will the discount retail stare affect the to cal labor force? Discount retail chains traditionally pay substantially less than the grocery industry in Southern California. Local officials should care- fully asses the possibility that a particular discount retail project might depress wages in other stores in the municipality. 3. What are the fiscal impacts of a discount retail store? At the most general level, local business both require public services and have the poten- tial to produce local tax revenues - a point often missed when officials focus exclusively on the tax revenue side of the equation. Any land use, even big box retail outlets that: are perceived as mu- nicipal cash "cows", must be carefully evaluated. Some land uses do not generate tax revenue that outweighs municipal costs. In other in- stances, the data in the full report (particularly Chapter 3) suggest that discount retail stores produce only short-term increases in local sales tax revenue. And the cyclical nature of rertail sales tax revenue suggests that the revenue streams from supercenters might be highly vari- able over time. Local officials should carefully evaluate these and related issue when they as- sess the fiscal impact of a discount retail outlet or supercenter. For decades, grocery stores have been hidden but important parts of the health of many Southern Cali- fornia municipalities. Recent changes in the grocery industry have the potential for catching local officials unaware of the possible impacts in their communi- ties. The full report (available at www.ocbc.org) highlights the potential for economic impacts as dis- count retail chains develop supercenters, while also emphasizing the uncertain nature of any local fiscal benefits. Local officials should carefully evaluate the implications for their communities. E X E C U T I V E S V MIM A R Y 7I► M► y1 f ME 761 Overall, our analysis of these data illustrate the great complexity, and possibly unintended conse- quences, of the entry of large footprint discount retail into the grocery business,To help prepare local and regional official to review proposed big box projects generally, we suggest communities systematically assess the positive and negative local impacts of such projects. The following checklist is one way to do so. It proposes a systematic review of the impacts on local workers, on municipal finances, and on ether key community issues. ECONOMIC AND EMPLOYMENT IMPACTS How much will the neer big -lacy outlet cut into existing local retail market share? TASKS: Need to inventory the local retail base Assess market areas and market impacts What will happen to the local workforce.? TASKS: Assess impact on existing local retail Calculate direct impact of job changes, lower wages Calculate impacts of less medical coverage and other fringe benefits Calculate ripple impacts of lower wages on local economy (multiplier impacts) Will the neva big -box outlet lead to vacancies or changes in local land rase? TASKS: Inventory vacant land and commercial properties Assess re -use or redevelopment possibilities for competing sites LQ MUNICIPAL FINANCE IMPACTS Flow much will the new development cost your municipality? TASKS: Services and capital expenditures: Calculate cost of infrastructure & utilities (i.e., streets, sewer connections, water lines, etc.) Traffic and other service impacts? Calculate the cost of associated economic development incentives (e.g., tax credits) Assess the impact of redevelopment zone tax -increment financing How much will the new development really change Ideal tax revenues? TASKS: Assess net changes in local retail sales (e.g., including sales lost to the new big box) Calculate net changes in sales and property tax revenue Examine the stability of the retail sales tax revenue over time COMMUNITY IMPACTS Will the big -box footprint possibly expand in the future? In the same line of business? TASKS: Ask about future plans up front Examine industry trends Plan for expansion contingencies What: localities will benefit from and/or be disadvantaged by the big -box development? TASKS: Assess the differences between local and regional impacts Are Fatal gams ar the expense c -f l0ses in other.. cities? Must. these be mitigated? How will the new retail outlet affect your c:rarnmunity's quality of life? For example, will it. reduce the appeal of a downtown tare that you are trying to preserve or revitalize:? TASKS: lnvenr.ary locations of competing rerailer• Assess impact On existing {oval retailet-s alt'v Prepared for the Orange County Business Council M Marlon Boarnet, Pb.D. Associate Professor Departments of Urban Planning and Economics University of California at Irvine 949-824-7695 mgboa.rne@uci.edu and Randall Crape, Ph.D, Associate Professor School of Pudic Policy and Social Research University of California at Los Angeles 310-206-1859 crane@ucla.edu with the assistance of Nicholas Compin, Angela Koos, Gree Macey, and Amanda Wallace. Find Report: September 1.999 The following research analysis, The Impact of Big fax Grocers on Southern Californ Wages. �d t r C "itae nc , was prepared for the Orange County Business Council by Professors, Merlon Boarnet (University of California, Irvine) and Randall Crane (University of California, Los Angeles). The authors publish broadly in the areas of local economic development, land use, and municipal fiscal policy. The Orange County Business Council also has a long- standing interest in both the fiscal impacts of local land use issues and the economic impacts of government decision-making and changing business climates in California. In this report they examine the enormous, and ever-growing retail grocery business, and the many changes oc&iring in this industry. One of the most important developments is the combination of big -box discount, retail and grocery sales into a single store Known as a supercenter. While K -Mart and others have experimented with retail grocery sales in recent years, Wal-Mart Inas quietly become the second largest grocer in the country by adding large grocery stores to their retail stores to form massive retail "supercenters", often as large as 220,000 square feet. This study is designed as an aid to public decision-making regarding such projects, which have negative as well as positive impacts. Neither are always well understood, or carefully considered, in the municipal race for sales tax revenue. .however, this report clearly shows that thefiscal benefits of supercenters, and of discount retail more generally, are mmch more complex, and often lower, than they first appear. The nature of the grocery business has changed dramatically in some areas, with conventional grocery stores having difficulty competing on wages. 4 Cities, starved for sales tax revenue but also protective of their existing retail base, are unsure how these big -boxes will affect either their economic structure or their fiscal bottom. line. This study is designed mainly as an aid to public decision-making regarding such projects, which have negative as well as positive impacts. Neither are always well understood, or considered, in the municipal race for sales tax revenue. And now the supercenters are coming to California. What will happen? The aggressive entry of supereenters such as dross Operated by Wal-Mart into the regional grocery business is expected t0 depress industry wages and benefits at an estimated impact ranging from a 1€'w of $500 million to a high of almost $1.4 billion per year, potentially effecting 250,000 grocery industry employees. (Chapters 2 and 4) The fall economic impact of those lost wages and benefits throughout southern California could approach $2.8 billion per year. (Chapters 2 and 4) Discount retail chains that operate supercenters, including Wal-Mart, typically offer much less comprehensive health care coverage than major California grocery chains. One negative economic impact of Supercenters could he a dramatic reduction in health coverage for most of the 250,000 grocery employees in California. This can lead to lower quality cage for grocery employees whose health insurance benefits are reduced. (Chapter 2) ® The fiscal benefits of supercenters, and of discount retail more generally, are often much more complex, and lower, than they first appear. This is particularly true when big box retailers close existing stares to move into larger quarters elsewhere, when they expand an existing store into food, and when retailers reconfigure an eyisting store to sell food without expansion. In each case the additional tax revenues generated will in part carne from existing businesses elsewhere in the city in the farm of lost nlarkct share. (Chapter 3) 4 Supercenters, especially Wal-Mart supercenters, are often conversions of existing discount retail stores. Thus local officials should carefully consider the possibility of a future conversion to a supercenter, and any attendant negative economic, fiscal, or land use impacts, when approving big box discount retail projects, even when the proposed land use does not include immediate plans for grocery sales. (Chapter 1) 2 Overall, our analysis of these data illustrate the great complexity, and possible unintended consequences, of the entry of large footprint discount retail into the grocery business. To help prepare local and regional officials to review proposed big box projects generally, we suggest communities systematically assess the positive and negative local impacts of such projects. The following checklist is one way to do so. It proposes a systematic review of the impacts on local workers, on municipal finances, and on other key community issues. Haw much will the new big -box outlet cert into existing local retail market share? .:k TASKS: u:> Need to inventory the local retail base Assess market areas and market impacts MWhat will happen to the local work force? TASKS: --,> Assess impact on existing local retail a:> Calculate direct impact of job changes, lower wages Calculate impacts of less medical coverage and other fringe benefits W Calculate ripple impacts of lower wages on local economy (multiplier impacts) Will the new big -box outlet lead to vacancies or changes in local land use? TASKS: ;--�> Inventory vacant land and commercial properties. Assess re -use or redevelopment possibilities for comnetin2 sites. How much will the new development cast your municipality? TASK: Services and capital expenditures: Calculate cost of infrastructure & utilities (i.e., streets, sewer connections, water lines, etc.) Traffic and other service impacts? Calculate the cost of associated economic development incentives (e.g., tax credits) Assess the impact of redevelopment zone tax -increment financing. 0 How much will the new development really change local tax revenues? TASK: Assess net changes in local retail sales (e.g., including sales lost to the new big box). Calculate net changes in sales and property tax revenue. Examine the stability of the retail sales tax revenue over time. J Will the big -box footprint possibly expand in the future? In the same line of business? TASKS, . _, Ask about future plans up front z:> Examine industry trends Ilan for expansion contingencies What localities will benefit from and/or be disadvantaged by the big -box development. TASKS: T--� Assess the differences between local and regional impacts_ L> Are local gains at the expense of losses in other cities? Must these be mitigated? How will the new retail outlet affect your community's quality of life? For example, will it reduce the appeal of a downtown core that you are trying to preserve or revitalize? TASKS: L> Inventory locations of competing retailers. Assess impact on existin- local retailers. 11 ExecutiveSummary....................................................... The Policy Questions....,... ......<.................................... Ivey Findings___ .... .................... ............. ____ A Checklist for Evaluating Big Box Detail Projects:... 1. Economic and Employment Impacts ................... 2. Municipal Finance Impacts .................................. 3. Community Impacts..... ........... _ ....... ___ ............. ........................................................... 1 ........................................................... l ........................... 3 ........................................................... 3 ................................ 3 4 Listof Tables ...... ®.....................................................................................................................6 Listof Figures. ..... . ............ ....................................... . ............ .................................................. 8 Chapter1: Issues and Trends...................................................................................................9 A. Policy Issues........................................................................................................................9 B: The Grocery Sector in the United States...........................................................................11 1. Trends and Corporate Consolidations. ....... __ .... _ ... __ ........ __ ...... ..................... _11 2. Competition....................................................................................................................13 3. State of the Retail Food Industry...................................................................................14 C: The Combination of Big -Box Discount Retail and Grocery Sales...................................19 D. The Economic Importance of the Grocery Industry.........................................................22 E. 'ghat This Means for Orange County......................<........................................................29 Chapter2: Job and mage Impacts......................................................................................33 A. Differences in Employment & Wages Across Discount Retail & the Grocery Industry., 33 B: Examples of the Labor Market Impact of Wage Differentials — Cases from Canada....... 45 C. "gage and Benefit Impacts of Wal-Mart Supercenters in Southern California.................47 D. Projected Markel Impact of Wal-Mart Supercenters in Southern California ...... ..e..e.,.....48 E: Labor Market Impacts,._... .................. _ ......................... ............... ....... .......................... 57 1. Economic Impact of Lower Wages Paid to Supercenter Employees .............................57 2. Economic Impact of Lower Wages Paid to Grocery Employees ................................... 58 F: Regional induced Impacts and Land Market Impacts ......... ...... ____ .............. ............... 63 1. Regional Impacts............................................................................................................ 6- 2. Land Market Impacts ....... ............. .......................... ......................... ................. .............. 64 Chapter 2 Appendix- health Care Coverage Issues ................. ................................ ............. 67 Chapter 3: Municipal Finance Impacts.................................................................................80 A. the Piscallz tto o and Use Planning..,.<..............................................<....,.................. 80 B. Big Box Fiscal Experiences..........................................................<...................................81 C. Taxable Saps and Tax Revenues......................................................................................83 D, The Fiscal Impacts of Big Box Grocers............................................................................ 84 E. Summary .... ____ ....... ........... ................ ....... ................ ....<................................................ 93 Chapter4: Concluding Comments ............................... .......................................................... 94 References...............<................................................................................................................... 99 Appendices...............................................................................................................................103 5 List of Tables Table 1-1: EBfTDA Multiples for Recent Supermarket Merger.,; and Acquisitions ..... __ 12 Table1-2: Rates of Return .............. __ ... ..... '-'-1_.-- ............. .......... ........................ ......... 13 Table 1-3: Food Store Sales by Size and Ownership (1997).........................................................15 Table 14., Types and Number of Stores (1988 vs. 1998)..,.. ... _ ........ __ ..... __ ........ ........ . .......... _ 16 Table 1-5'. Median Average Store Size........ ......... .......... ____ ...... _ .............. __ ....... ............... 16 Table 1-6: SupermaTXdt Facts (Year End 1997) .. I . .... I ............ ........ ....... ............ ...... ... 17 Table 1-7: Top Ten Food Retailers by Annual Sales . .................... .......... _ ......... __ ........... 18 Table 1-8: Top Ten Food Retailers by Store Count ........... - ........ 11.111 ............. ............... is Table 1-9: Store Counts of Super Kmarts & Wal-Mart Supercenters ......... Tablcl-10: Wal-Mart Store Transformations ...... ...... ___ ........... ................ ............ 21 Table 1-11, Total Yearly Employment for the Grocery Industry ...................................................22 Table 1-12: Total Yearly Payroll Per Employee for the Grocery lrjdvstry....................................23 Table 1-13: Total Yearly Payroll Per Employee for all Industries in California............................23 Table 1-14: Total Yearly Employment for the Construction Industry ...........................................24 Table I-15: Total Yearly Payroll Per Employee for the Construction Industry .............................25 Table 1-16: Total Yearly Employment for the Tourism Industry ..................................................26 Table 1-17: Total Yearly Payroll Per Employee for the Tourism industry ....................................27 Table 1-18; Total Yearly Employment for The Hotel and Motel Industry ........... .... __-_ ............ 28 Table 1-19: Total Yearly Payroll Per Employee for the Hotel and Motel Industry ....... ..... 1-11_-28 Table 1-20: Big Box Retailers in Orange County__. .... _._ .................... - ...... _ ...... ____ .... ___29 Table 2.1: Total Yearly Employment for the Grocery Industry .....................................................34 Table 2,2: Total Yearly Payroll Per Employee for the Grocery Industry .......................................34 Table 23: Total Yearly Employment for the General Merchandise Industry................................35 Table 2.4: Total Yearly Pay -roll Per Employee for the General Merchandise Industry................35 Table 2.5: Total Yearly Employment for the Variety $tore Industry............................................36 Table 2.6-. Total Yearly Payroll Per Employee for the Variety Store Industry .............................37 Table 2-7: Hourly Wage Structure of tile Major Grocery Chains in Southern California ............. 19 Table 2-8: Comparative Benefit Analysis ..... ....... ......... ........ ......... _ .... ..... ......... ....... ... 41 Table 2-9: Comparison of Sonthem California Grocery & Wal-Mart Wages .................. .. .... 44 Table. 2-10: LA Metro Area Market Share Information................................................................ 50 Table 2-11: Market Share Points Per Store —. ....... .... __ ....... _ ..... _'_ .................... _.. . - 5 1 6 Table 2-11 Regional Supermarket Market Share Percentages ....................................................52 Table 2-13: Market Share Information, Selected Comparison MSAs ............................................53 Table 2-14: Estimated Wal-Mart Southern California Market Share .......... ............ 54 Table 2-15: SCAG County Population Forecasts ................ ........... ....... ___ ........... 56 Table 2-16: Direct Economic Impact of Lower Wages Paid to Supercenter Employees ..............57 Table 2-17: Near -Term Indirect Economic Impact from Lower Wages........................................59 Table 2-18: Indirect Economic Impact of Lower ............. __ ........... __ .............................. .60 Table 2-19. Estimates of Total Wage and Benefit Impact.............................................................61 Table 2-20: Estimates of Total Regional Wage and Benefit Impact..............................................63 Table 2-21: large -Scale Vacancies in Orange County and Site Information ...............................64 Table A2-1: The Uninsured in Major Metropolitan Areas............................................................7© Table A2-2: Percent Distribution of Uninsured Households by Income Level, 1990-1995_ ...... 71 Table A2-3: Trends in Health Insurance Coverage .,.. ............. .............. .... __ ................... ... 72 Table A24: Percent Uninsured by Age and Gender, 1990-1995..................................................73 Table A2-5: Sources of Health Insurance.... ................ .................... .................................. 74 Table A2-6: Reasons for Ineligibility of Employer -Sponsored Health Insurance ........................75 Table A2-7: Number of Workers Offered, Accepting, Ineligible,.-. ..................... ...... __._ ........ 76 Table A-2-9: Getting Medical Attention ............. ....... ...................... ....... .......... __ ..... 78 Table A2-9: Studies Examining the Relationship Between Insurance and Health .......................79 Table 3-1: Wal-Mart Locations in Orange County and Opening Dates ............. .................... _ .... 88 Table 3-2: Sales Per Square Foot and Selling Square Foot ......... ............... ........ ................... _ _ 91 Table 3 -3: Pearson's Correlations for Orange County Taxable Sales ....___...... .......... ...............92 List of F' Lg-ur-es-------A Map1-1 ......... ............................. .................. -... .,,.... .............................. ........... ................ 31 Chart 2-1: Components of Dourly Wage- ... ................. ............. -- ....... 42 Chart 2-2: Estimates of Total Wage and Benefit impact ..... ......................... ................. — 62 Figure 2-1. Vacant Grocery Store in Costa Mesa ....:............... .......... - ....... ...,.........,....,, 64 Figure 2-2. Vacant Grocery Store in Costa Mesa. ...... —.................................................. 65 Figure 2-3: Vacant Grocery Store in Costa Mesa.. ....... ....... ............... 66 Figure 3-1. Estimated Total Sales: Food Stores and General Merchandise ................... 84 .Figure 3-2. Taxable Sales: 6encral Merchandise as a Percentage of Total Retail ......... 85 .Figure 3-3: Food Taxable Sales as. a Percentage of Total Retail Taxable Sales—........... 86 .Figure 3-4: General Merchandise Taxable Sales per Permit ... .... -..... ....... — .................... 86 Figure 3-5: Food Stores Taxable Sales per Permit _....,..—..........--- .............................. 87 Figure 3-6: General Merchandise Taxable Sales per Permit in Anaheim ........................ 89 Figure 3-7: Food Stores 'Taxable Sales per Permit in Anaheim,...... ................ ........... -- 89 Figure 3-8: General Merchandise Taxable Sales per Permit in Laguna Niguel ......... _a.... 90 Figure 3-9: Food Stores Taxable Sales per Permit in Laguna Niguel ..-- ....................... 90 Figure 4-1, Estimates of Regional Income Loss From Big Bax Grocers ........................ 93 8 A. O Cy 'the grocery business in the United Mates is currently undergoing dramatic and rapid change. Some differences in food retailing are evident even to casual observers — for example, stores across southern California have changed ownership and sometimes names as part of the recent mergers in the grocery industry. Yet the food retailing business is changing in ways that go beyond the larger trend toward corporate consolidation, Several major retail chains, all with little previous direct connection to the grocery business, have begun to combine discount retail and full-service grocery stores under one roof: These "supercenters" represent a restructuring that will have potentially more dramatic impacts on local public policy than the current wave of consolidation among traditional grocery chains. In this report, we examine the local and regional impacts of the trend toward combining discount retail and groceries under one roof. At first glance, the issues might seem minor — two classes of goods that previously were sold in different stores are now increasingly sold in the same. place. Yet that seeming ordinariness belies the importance of the grocery industry for local economies. There is little public awareness of the ways that the discount retail and grocery industries differ — differences that suggest that a trend toward merging the two activities will change the face of the grocery business. The policy issues from such a restructuring of the grocery business are twofold. l.. The trend toward combining discount retail and grocery sales raises the potential for unanticipated changes in local land uses. Discount retail firms, such as K -Mart, Target, and Wal-Mart, often build supercenters by adding a grocery store- onto an existing discount center. When considering whether to approve specific discount retail stores, local officials might often not consider the possibility — a very real passibility, as this report documents — that the store will expand in the near future into full service grocery sales. This might seem nothing more than an ordinary expansion of the floor space of a particular business. Yet the expansion of a retail store into groceries is an expansion from one business sector into a different line of business, with different competitors and different community, economic, and fiscal impacts. The food retailing and discount retailing industries differ dramatically, so that an expansion of a discount retail site to include grocery is best considered a change in the land use rather than a simple expansion of an existing land use. Most importantly, grocery and discount retail have different impacts on the local community, economy, and municipal revenue stream. This leads to the second policy issue. 1. Because of differences in pay and benefits in the discount retail and grocery sectors, la shift from traditional grocery stores to supercenters creates the very real risk that high wage jobs will be replaced with low wage jobs. The grocery industry, nationally and in southern California especially, has traditionally paid good wages with attractive benefit packages. Average wage and salary pay for full-time hourly workers in major southern California chains is $32,386. The major southern California chains offer a complete benefit package, including health care coverage for employees and dependents, and a retirement plan. Discount retail traditionally pays substantially less, uses more part-time workers, and offers limited or no health insurance or retirement plans. Everything that is known about the discount retail chains now entering the grocery business suggests that supercenter employees earn wages and benefits comparable to discount retail employees, substantially less then what southern California grocery workers earn. Thus the development of a robust supercenter sector- in southern California will lead to the conversion of high wage jobs into love wage jobs. The purpose of this report is simple: The grocery business is changing and public officials should be aware of the potentially adverse impacts on cities and local economies. Yet the seeming ordinary nature of this issue is part of the policy problem. The pace of change in the grocery industry is rapid, an&the everyday character of most persons' experience with groceries belies the importance of the retail food business for local economies. Vire show later that the entry of discount retailers into the southern California grocery industry can lead to wage and benefit losses that could be as high as nearly $1.4 billion per year. The economic impacts on specific communities can be quite large. Yet unless local officials are aware of these issues now, they will be caught by surprise by the fast pace of change in the grocery industry. This report seeks to educate local officials about the policy importance of the changes in the grocery industry. In the rest of Chapter- 1, we discuss treads in the grocery business in the United States and more specifically in southern California. Two key points emerge from that discussion. First, discount retail firms are rapidly entering the grocery business. Second, discount retail and grocery are sufficiently different, in terms of pay, benefits, and employment practices, that the entry of discount retail into groceries will have profound economic impacts. We focus specifically on those labor market impacts, for the case of southern California, in Chapter 2. in Chapter 3, we discuss the broader community and fiscal impacts that can result from the entry of discount retail into the food retailing business. The rest of this introductory chapter proceeds in four sections. Section l3 describes the food. retailing business in the United States. Section C discusses the recent trend toward combining grocery sales with big -box discount retail_ Section D discusses the economic importance of the grocery business. Section l discusses the irriplications of grocery trends for Orange County and southern California. 10 A recent report on the U.S. food retail industry (S & P, 1998) identifies a few key trends that have emerged in the supermarket industry in the past several years. These trends are as follows: In an attempt to accommodate consumers' desires for increased shopping convenience, more and more food retailers are experimenting with cyber supermarket aisles in the form of home delivery and on-line shopping; 0 In an attempt to increase customer loyalty and boost profit margins, food retailers continue to develop private-label. products; In an attempt to adapt to such demographic changes as the aging and increasing ethnicity of the U.S. population, supermarkets are spending more time conducting market research; ! In an attempt to counter competition from retail formats encroaching on their territory supermarket retailers are opening more larger -sized combination food/drug stores; 0 In an attempt to achieve growth in a mature industry where opportunities for internal growth through physical expansion have narrowed, supermarkets are expanding through mergers and acquisitions. While each of these trends has contributed to the changing face of the food retail industry, consolidation has been the underlying theme for the supermarket industry in the past several years (S & P, 1998). The U.S, food retail industry, historically highly fragmented and diversified, became increasingly consolidated in recent years. In the past year, Kroger's $13.5 billion merger with Fred Meyer was the largest and most expensive deal in food retailing history. That merger created the nation's largest grocery store chain, with 2,200 stores in 31 states (Kroger, 1:999). Albertson's recent merger with American Stores for $11.7 billion made Albertson's the gyration's second-largest retailer specializing in food and drugs, with approximately 1,800 grocery stores and $35 billion in annual sales (Progressive Grocer, 1999). In the midst of the recent mergers and acquisitions, Safeway dropped to the rank of third -lamest chain (after being second for several years) with annual sales of around $25 billion_ Safeway recently acquired R.andall's Food Markets, a privately owned 116 store Texas-based chain, for approximately $1.8 billion. This now partnership will allow Safeway to continue its growth strategy while re-entering the rapidly gnawing Texas market (Safeway, 1999). The California chain has also had much success with both its 1997 purchase of the Vons chain in southern California, which brought Safeway back to southern California after a decade-long absence, (S & P's Industry ,Surveys, Supermarkets 4, Drugstores, 24 Sept 98) and its recent acquisition of Dominick's for $1.2 billion (Progressive Grocer, 1999). 0 Table 1-1 presents "Earnings Before Interest, Taxes, Depreciation and Amortization" (EBITDA) multiples for many of the recent supermarket mergers and acquisitions that occurred in the U.S. food retail industry since late 1996. While many consolidations occurred in order to achieve economies of scale in volume -based purchasing, procureren.t, distribution, information technology, and corporate overhead, many were defensive moves spurred by the pressures from the newer entrants into supermarketing, most importantly discount retail chains. 12 1275 1261 45 170 248 21 229 381 131 38 10 42 240 56 49 48 93 13 40 1/ 11' s shares at $1 10.1 9.4 7.3 10.9 10.6 8.o 3.4 8,0 12.0 6.6 9.0 5.7 8.2 8.3 8.0 10.3 7.7 6.7 5.7 8.5 Oct -98 May -99 Kroger Fred Meyer 821 12,890 Aug -98 May -99 Albertson's American Stores 1,5.7 11,865 Aug -98 Apr -99 Safeway Carr -Gottstein 49 332 Oct -98 Nov -98 Safeway Dominick's 112 1,855 May -98 Oct -98 Ahold Giant Food 170 2,634 Jan -98 Oct -,98 Albertson's Buttrey Food & Dnp; 43 169 Feb -98 Mar -98 Somerfield Kwik Save 882 780 Nov -97 Mar -98 Fred Meyer Ralphs Grocery 406 3,048 Nov -97 Mar -98 Fred Meyer Quality Food Centers 147 1,569 Sep -97 Mar -98 Richfood Farm Fresh Ho 253 4 .Tarr -98 Jars -98 Albertson's Seessels Holdings of 10 88 Bruno's Jul -97 Nov -97 Jitney -Jungle Delchamps 128 236 May -97 Sep -97 Fred Meyer Smith's Food & Drug, 151 1,955 May -97 Aug -97 Giant Eagle Riser Foods 36 469 Nov -96 Mar -97 Quality Food Hughes Family Markets 56 391 Centers Nov -98 N/A, J Sainsbury Star Markets 53 490 Apr -97 NIA. Kohlberg Kravis Randall's food Markets 122 714 s Roberts Mar -97 N/A_ Lund Fond Byerly's 11 90 Dec -96 NIA. Dart Group Shoppers Food - 225 Warehouse Dec -96 NIA, Bruno's Seessels lJoldirag 10 63 Sources; SEC Filings and Progressive Grocor's 60' Annual Report of the Groceri: Industry, April 1999. EBITDA w Earnings Before Interest, Taxes, Depreciation and Amortization a Enterprise Value = market value of equity plus not debt minus cash and cash equivalents Revenues, EBITDA and EBIT from Fred Meyer include acquisitions of Smith's, QFC and Ralphs. 4 Docs not indudo options g anted to Farm Fresh to purrebase 1.5 million RFH shares at $25. 5 1molied transaction value, assurnina a 64% acouired stake: includes ontiotn to purchase 3.6 million Ilan, 12 1275 1261 45 170 248 21 229 381 131 38 10 42 240 56 49 48 93 13 40 1/ 11' s shares at $1 10.1 9.4 7.3 10.9 10.6 8.o 3.4 8,0 12.0 6.6 9.0 5.7 8.2 8.3 8.0 10.3 7.7 6.7 5.7 8.5 Zo rtion Competition in the grocery industry is largely a. function of product price and quality, store location, quality of service, product variety, and overall store reputation. Because food retailers are interacting in such a fiercely competitive market, it is not uncommon for these retailers to see profit margins of only 1 or 2 percent on sales. This is illustrated in Table 1-2. Jan's 3.0 3.5 3.7 3.6 3.5 10.9 12.1 12.0 11.2 10.4 .Tan* 1.4 1.9 1.7 1.5 1.5 3.9 4.9 4.4 3.8 3.4 Dec 0.1 1.9 2.1 2.3 1.7 0,2 6.1 6.7 6.7 5.0 Feb* 2.6 2.5 2.6 2.2 1.7 6.9 6.8 7.1 5.8 4.7 Feb* 0.0 NM 0.6 0.7 0.6 0.1 NM 2.0 2.5 2.1 Dec 2.6 2.7 2,7 2.5 1.8 7.0 7.4 7.6 7.0 4.9 Dec 0.8 1.2 1.3 1.4 1.7 3.9 5.9 6.5 6.5 7.3 ,Tan* 2.4 0.2 0.9 1.6 1.9 5.9 0.5 1.9 3.5 3.4 - N/A. N/A. N/A. N/A. NIA. N/A. N/A. N/A. N/A. N/A. Sep 1.7 1.7 1.9 2.0 2.1 5.3 5.2 5.8 5.6 5.7 Dec 0.8 1.6 2.0 2.7 2.8 2.4 5.0 6.4 8.6 8.9 - N/A. N/A. N/A. NIA, NIA, N/A. N/A. NIA. N/A. N/A. Sep 1.2 2.2 1.7 NM 2.4 5.0 7.1 4.9 NM 7.5 .Tun 2.2 2.0 2.0 2.0 1.5 11.7 10.3 10.0 10.0 7.3 .tan* 3.5 3.2 2.9 2.9 3.1 9.9 9.0 7.8 7.9 8.3 I source; S dr P's Industry Surveys, Supe.rmarkety c& Drugalr,rav, September 1998, unless otherwise noted. 2 Net income divided by opeTating revenues. 1 Net income divided by averaga total assets. * Of thefolio- ing calendar year. NNI _. not meaningful NIA. _ not available. r. Source: S & P's Industry Surveys, Reiailing: General, Oct 1998. At first glance, these narrow profit margins seem to indicate that the grocery industry is a highly saturated market with no roomfor neer COM etitors, A closer look at food retailers' rates of return, however, indicates that the opportunity for new competitors to be profitable does in fact exist. More specifically, some food retailers are realizing a return on assets of 10 percent or more, indicating that new market entrants who are able to achieve high sales volume will be able to successfully enter the food retail industry. 13 In the past, food retailers commonly competed with local, regional, and national supermarket chains, as well as with convenience stores, membership warehouse clubs, specialty retailers, and discount food stores. In recent years, however, food retailers also faced competition from supercenters. In 1998, a few of the larger supermarkets, including Hannaford Bros and Winn- Dixie Stores, specifically cited Wal-Mart as a major source of competition in the geographic regions in which they competed (Hannaford Bros', 1998; Winn -Dixie's SEC Form 10-K). Several other major supermarkets, including .Albertson's, Safeway, and Food Lion, mentioned supercenters in general as a source of competition. According to Progressive Grocer (S & P, 1998), at year end 1997, total grocery store sales 'were $436.3 billion, of which $334.5 billion (77%) was contributed by the approximately 30,300 supermarkets in the U.S. that had $2 million or more in annual sales. 18,955 (63%) of these supermarkets were affiliated with a chain, and they had sales of $262.0 billion (78% of all supermarket sales). The remaining 11,345 supermarkets were independently operated, and they had sales of $72.5 billion. Table 1-3 provides a more detailed overview of food store sales by size and ownership at year end 1997, 14 S1 ,slal.i-muadns utW pu-u (aoilpm +ZS) Arel oq4 q4oq ai gos-o.oloui oqj of pajnqj.4uoo X11vo.12 Sgq suoillsinbou puu sjoRiatujo puz.4 luisnput luaozi atj �sivaX uol isud a4l JOAO P02UU1O 3ARq S0101S poloi poojjoioqwnupue sodf4 qjAkoqjouosij-edwoo e sap!Aold V- I "alqtli 'j@,jJ!RU.U,f)UAq PUUPaJ!LUIJ SOPnIOUl - ,Xluo malt jalm. miodas sopnjoul - ('666 p-icly puv 86f) [ [IsdV 'SRaAjnS Xasnpul s,,4 V S) Id, -)o.�D )qi /b m0dlly lVtlliUV S,=010 aAIMJRO.Q WO-tj olqul :;)ojnoS 9'Z1 o7t, Z' I I oov'£ L't7t' 9'6b1 L*8Z OOL,8 Czt 6'ZV 1 1,09 o0z'8I 0001 S'tH 0'001 0000E t'z 1 1'17s COE M'gt L't, Coz 9,0 NL C,q VLZ 1177 000'95 V,1 Z'9 Fo 081 L, I S L E'o OVE TZ 1 9"o M 97 9,11 O'l 01VI CS FU 17'E 017Z,17 67 S'Zl 9 E S9S'v 9*91 97L 6'8 StC 11 t7'8 L*9E 6'0 o 1, 1 1*81 8'8L 87 og,E V61 8,V8 9'� 9SL,g 9,8 L'U 1"E gL6'E 8'17 I'IZ S'Z 9L9'C L'O 6'Z 8,0 otlo, 1 1,09 o,z9z 6't,1 996'81 L'9L S'VU 6U 00 `0£ 0,001 9,9ct 0'001 OOOLZ I . 39,260 1996 38,600 1995 37,200 1994 35,100 ca 33,000 1xr °u arf 1991 31,500 1940 31,000 ource: Food Marketing Industry 1ctrivs 148,000 100.0 126,000 100.0 it1p9CE?sil5 ( rtllztt 30,400 20.5 30,700 24.4 hail Suplteis 0. 16,850 11.4 19,530 15.5 tttfiWp nd r t up a l tk t 13,550 9.1 11,170 &.9 ?ttares ra�l1�) 62,600 42.3 37,550 29.5 ns nt�ensrey) tqqr 55j,000 3T7.2 57,0(00 45.2 {{ ¢ �v1es`.` F .' 4V 3 s .•. N/A, Aj 1ViA, 7517 0.6 3urces: sfitlt Annual Report of the Grocery- Indusny, April 1989, and (fitly Annual Report of As the number of both lame ($2+ million) and chain supermarket increases, it is not surprising that the median average store size. is also increasing. Table 1-5 indicates that the median average store size has increased from 31,000 to 39,260 ft'- (2711io) in eight years. 1997 39,260 1996 38,600 1995 37,200 1994 35,100 1993 33,000 1992 32,400 1991 31,500 1940 31,000 ource: Food Marketing Industry Speaks, 1991-1999. 3 cited in httD://www.fmi.or2/kcyfacts/storesize,btmL Other interesting facts about the state of the supermarket industry at year end 1997 aTe found in Table 1-6. 16 for the Industry I Number of Employees 3.5 million Number of Grocery Stores 126,000 verage Supermarket 11,039,638 Square Feet of Typical Supermarket = 39,260 Square Feet of Selling Area 27,723 Number of Checkouts 8.8 Number of Full -Time Employees 64 Population Per Supermarket 8,820 Households Per Supermarket 3,259 Square Feet Per Person 3.14 Square Feet Per Household 8.5 Number of Items Per ,Supermarket ' 30,000 verage Annual Performance ($) Sales Per Supermarket 11,039,638 Sales Per Square Foot 398.21 Sales Per Employee 172,602 Sales Per Checkout 1,258,186 verage Weekly Performance ($) Sales Per Supermarket 212,300 Sales Per Square Foot 7.66 Sales Per Employee 3,319 Sales Per Checkout 24,196 Source: Table from Progressive Grocers Annual Report of the ,rocery Industry, as cited in S & P's Industry Surveys, April 1998 d 1999, unless otherwise noted. Source: Taken from Progressive Grocer as cited in Recall that at year end 1997, the supermarkets with $2-� million its sales accounted for $334.5 billion of the $4301.3 billion total grocery store sales in the U.S. The top ten food retailers had combined food sales of nearly $175 billion (40% of total grocery store sales). Table 1-7 lists the top ten food retailers in terms of annual sales at year end 1997, (Note that recent consolidations, detailed elsewhere in this report and in the report appendices, have changed this ranking in several respects.) Supervalu Inc ($17,241 million) and Fleming Cos ($15,373 million) are also among the top food retailers, but because their sales totals include revenues from wholesale operations, their relative; position in this ranking could not be determined. The top tern food retailers in terms of store couait 17 as of mid-1998 can be found in Table 1 -8. �ti t¢ try -Ann tv I Kroger Co 26,567 2 WaF-Mart Stores 25,000 3 Safeway Inc 22,484 4 American Stores Co 19,139 5 Ahold USA 18,500 6 Albertsons Inc 14,690 7 Winn-Dixie Stares Inc 13,219 8 Meyer (Fred) Inc 12,800 # 9 Publix Super Mkts Inc J 1,100 10 Great Atlantic & Pac Tea Co 10,262 Source: Table from S & P's 1ndust;y Surveys, Supermat-ketv &D?-ugsio-cF, September 1998. reported as an estimate ounce: profiorma Suvermarkets & st C (a 1i1 N fe, I Kroger Co 1,389 2 Safeway Inc 1,370 3 Food Lion Inc 1,175 4 Winn-Dixie Stores Inc 1,168 5 Great Atlantic & Pac Tea Co 919 6 Albertsons JDc 916 7 Ahold USA 830 8 Meyer (lined) Inc. 823 9 American Stores Co 904 10 Publix Super Mkts Inc 563 ounce: Table from S & P's Industry Surveys, Suvermarkets &. Druestores, Semember 1998. N Big -box discount retailers are currently engaged in a rapid trend toward incorporating full-scale grocery stores into their discount centers. Michigan-based Meijer was the first to combine a grocery and general merchandise store, doing so in the 196Os (Meijer, 1999). They currently operate 116 superceters in the Midwest. Fifty-nine of these stores are located in Michigan, thirty-two are in Ohio, nineteen are in Indiana, five are in Kentucky, and one is located in Illinois. Their stores are as large as 250,000 square feet, and most stores include forty departments featuring over 12O,000 different items. Although information on Meijer's expansion plans was limited, none of the resources available suggests that Meijer has'plans to expand beyond the. Midwest. More recently, Target has entered the supercenter business. Target has been experimenting with the supercenter format for four years. Target recognizes that the supercenter concept provides additional opportunities for future growth, yet its most recent annual report floes not emphasize the expansion of traditional Target stores into SuperTargets. In 1998, for example, Target opened fifty-five new Target stores, yet only fourteen of Target's 851 existing stores are currently SuperTargets. Target pians to open only two additional SuperTargets in 1999. Target's growth efforts instead appear to be focused on the expansion of traditional Target stores in the Northeast and mid-Atlantic regions of the U.S., including Baltimore, Washington, D.C., Boston, Philadelphia, Pittsburgh, and greater New York City. At year end 1998, Target operated sixty-five stores in these regions. By the year 2001, Target expects to double its store base in these regions (Dayton Hudson, 1998). Kmart introduced its Super Kmart concept in 1992. By 1995, the Soper Kmart store count was at eighty-seven stores. Since 1995, however, the conversion of traditional Kmarts into Super Kmarts has slowed considerably. The annual growth rate in Super Kmarts was only 3 percent in both 1997 and 1998 (Kmart, 1999). At year end 1998, there were 1032. Super Kmarts operating in twenty-one states throughout the U.S. (Kmart, 1998). While Kmart is a much bigger player in the supercenter business than Target,' the top priority of Kart's real estate strategy is the completion of its comprehensive conversion of traditional Kmart stores to Big Kmarts (Kmart, 1999). Big Kmarts differ from Super Kmarts in that Super Kmarts aim to provide the ultimate shopping experience by combining a complete assortment of fresh groceries with a broad selection of general merchandise (Kmart, 1999). Big Kmarts, on the other hand, emphasize those departments that are most important to the typical Kmart shopper. Additionally, located near the front of each Big Kmart store are everyday basics and consumables. These items are typically priced at a zero -to -three percentage differential from Kmart's leading competitors in order to increase inventory turnover and gross margin dollars (Kmart, 1999). By year end 1498, Kmart had 1,245 Big Kmart stores (Kmart, 1998). The remainder of eligible stores are expected to be converted during 1999 (Kmart, 1999). 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At Wal -Mart's current supercenter expansion pace, the firm will have more supercenters than traditional discount centers in less than ten years, Wal- Mart is a discount retail firm that is essentially transforming itself into a combination general merchandise/food retailing business, Because Wal-Mart is currently the most aggressive entrant into the supercenter market, much of this report will focus on the impacts of the entry of Wal- Mart Supercenters into Southern California. A thorough examination of Wal-Mart Supercenters will help grocery retailers better understand the effects and consequences of discount retailers' entry into the grocery industry. 21 M ..q liqIIIIIIIIII_ IS Table I -I l shows grocery industry employment (standard industrial classification, or SIC, code 54 1) for southern California counties and statewide. Table 1-12 similarly shows average per employee wages paid to southern California grocery employees. For comparison, Table 1-13 gives average annual per employee wages for all businesses in California. Ipertal 1,512 759 1,586 1,377 C35tics. 64,655 61,375 61,341 60,513 rarre:: 20,532 19,136 21,056 21,075 iveratii 10,057 9,358 9,356 9,726 n erarttn 10,338 10,371 10,778 10,63.3 : n > t g6. 19,540 18,911 18,538 19,739 eattii�a' 5,203 4,840 4,899 5,408 builer%ecz< 131,837 124,750 127,554 128,471 A St 247.117 238,913 241.180 250.206 22 $17,222 $15,749 $15,830 $15,717 $20,860 $21,231 $21,871 $21,729 $21,783 $22,458 $22,612 $21,948 $21,873 $22,357 $23,307 $22,410 $22,315 $21,995 $21,609 $22,323 $20,201 $20,443 $20,801 $20,175 $21,890 $22,999 $23,424 $20,429 $21,096 $21,483 $21,905 $21,508 $20,996 $21,495 $21,923 $2.1,154 figures adjusted to 1999 dollars using the CPI -W index for the Los Angeles -Riverside -Orange Statewide $30,120 $30,669 $31,232 $32,376 Source: County Business Patterns Annual (1943-1996); US Department of Labor, Bureau of the Census, * Payroll includes all forms of compensation: salaries, wages, reported tips, commissions, bonuses etc... All figures adjusted to 1999 dollars using the CPI. -W index for the Los Angeles -Riverside -Orange County area (US Bureau of Labor Statistics). - Excludes most government employees, railroad employees, and self - In 1996, the grocery industry in southerly California paid wages that were 65.3% of the statewide average. That comparison should be treated with some caution, as the County Business Patterns data shown in Tables 1-1.1 through 1-13 do not distinguish between full and part-time workers. To the extent that some grocery employees work part -tune, average annual full-time wages will be higher than what is shown in Table 1-12. That comparison understates the importance of the major chains in the southern California economy. Of the approximately 128,000 southern 23 California grocery employees, about 80,000 are unionized. Those union members, employed by the major grocery chains (Albertsons, Hughes, Lucky, Ralphs, Smiths, Stater Bros., and Vons), earnsubstantially higher wages than the non -unionized grocery employees. Drawing on information from the southern California employers, we show (in Chapter 2) that the average grocery employee at a major southern California grocery chain earns $32,385 - virtually identical to average annual pay for all of California.. Another way to get insight into the importance of the grocery industry is to compare it to more highly visible sectors. Dere we compare the grocery business to construction and tourism, because both are commonly associated with the strength of the southern California economy. In Table 1-14, we show employment in construction jobs in southern California counties, while per employee annual wages for the construction industry are shown in Table 1-15. 1,552 1,642 1,342 1,350 101,359 104,380 113,883 111,713 54,154 54,512 56,226 56,652 23,428 21,478 23,435 25,280 21,806 21,733 22,155 23,729 40,905 42,000 45,098 48,457 10,507 10,586 11,344 11,426 253,711 256,331 273,484 278,607 475,509 480,078 495,037 513,401 (1993-1996); US DepartmeTit of Labar, Bureau of the Census. M Statewide and in southern California, grocery employment is approximately half as large as construction employment. Construction pays higher wages — based on the data shown in Tables 1--12 and 1-l5, the average per employee wage in grocery is about two-thirds what is paid in construction. But again if attention is limited to the 80,000 employees of major southern California chants, grocery employees earn essentially the same annual wage as construction workers, on average. Few doubt that construction is vitally important to the southern California economy, and many recognize the role that construction jobs play in providing good wages and economic opportunity to persons with entry-level skills. Grocery employment serves a similarly important role. In southern California, the major grocery chains pay wages comparable to that earned in construction, and their 80,000 members in the region number about one-third the region's total cons"ction employment. Tables 1-16 and 1-17 slow, respectively, employment and per employee annual wages in tourism, which we define as hotels and motels (SIC 7010), racing and track operations (SIC 7948), amusement parks (SIC 7996), and miscellaneous amusement and recreation (SIC 7990). Employment and wages are substantially higher in the grocery industry than in tourism. 25 26 Because many of the categories of tourism employment do not report data at the county level, we isolate employment and wages in the hotel/motel sector in Tables 1-18 and 1-19. That more specific comparisons with the grocery sector yields the same conclusions — the grocery industry employs more persons, and at higher wages. 27 w Table 1-20 lists the big -box discount retail outlets in Orange County. The locations of Orange County discount centers are also shown on Map 1-1. Target has the most discount retail outlets in the county, with fifteen stores, followed by K -Mart, which has nine Orange County locations. K - Mart also has three K -Mart Super Centers in the county. Wal -Mart's presence in Orange County is exceptionally new — half of the Wal-Mart discount centers listed in Table 1-20 were built in 1997 or later. ... .. ..... ...... 7 777: C"6 17900 Newhope St Fountain Valley 92708 900 S Harbor Blvd Fullerton 92832 11000 Garden Grove Blvd Garden Grove 92843 115 Technology Dr Irvine 92618 .27972 Cabot Rd Laguna Niguel 92677 2655 El Camino Real Tustin 92782 22633 Savi Ranch Pkwy Yorba Linda 92886 10. 10870 Katella Ave Anaheim 92804-6116 2222 E Lincoln Anaheim 92806-4107 5 885 Lincoln Ave Buena Park 90620-3461 2200 Harbor Blvd Costa Mesa 92627-2501 16111 Harbor Blvd Fountain Valley 92708-1305 19101 Magnolia Huntington Beach 92646-223�3 1855 N Tustin Orange 92865-4604 2505 El Camino Real Tustin 92782-8920 .15440 Beach Blvd Westminster 92683-6237 .26501 Aliso Creek Rd Aliso Viejo 92656-2882 1095 N Pullman Anaheim 92808-2516 1000 W Imperial Hwy La Habra 90631-6901 .17090 Brookburst Fountain Valley 92708 629 S Placentia Ave Fullerton 92831 16555 Von Karman Ave Irvine 92606 1.2540 Beach Blvd Stanton 90680 29 OE £8926 MISUI€xIIsam ZZ I w PAM 9W IR IEft I £OLZ6 euv Blues aAy uappeJaN Ak 009£ MZ6 a2uel® is ulisrnl tq 00U LL9Z6 tan2iN euae-I kMd ela[IV OLt7LZ 01926 gDuex 1114100; 1(1 :)4uOD aumOZ Z099Z IZSZ6 Baia CA�H Iepoduil g 5652 IOSZ6 wiageuV is Rang M Ott £8926 aaxsulwisam PA[ff liaeag 001791 IOLZ6 RUV ewes qjL I a OE£ I bOLZ6 eud e1ues 101SU€1 s O0££ 59826 aBueip ullsnl K 161Z I69Z6 OPIA uOIsslW "-"N(i e1011V O05i7Z I E906 eaquH e -I "H Iepadiul g 0001 90926 aulAsl flAMd Baueueg 05L£ 9t,9Z6 €laeaa uo�Vull nH -IAV SUIRPV 2986 0178Z6 aAOID uapxeD PAI a iogi'gH 00121 EVK6 aAOSD uapx-e[) Isanlooiu I£8Ei KSZ6 uolxa[in Pn[Elepul-I egxo k OZ6 0£906 ssold.r D aAV eliajeM 5`x;89 80826 WlageuV P -d u0Aue3 VU'V ejUes g St718 IOSZ6 tuiageuV aAV u10aull �A 1881 95926 0101A case V PH zvd el 5£69Z i in Big Box Reta*l Gra:n'e Countvw 9. By CRY OW40, Linda IAVMR. Mgmw Orange county R: r 31 As we Mentioned before, the economic concern is not big -box discount retail per se, but the trend for discount stores to include full service grocery sales. Discount retail pays considerably less than the major grocery chains. The policy issue is thus that, if supercenter grocery sales will crowd out sales in grocery chains, some otherwise well paying grocery jobs will become lower paying jobs. The growth of low wage jobs has become a source of concern in Orange County. The Orange County Business Council, drawing on data from the U.S. Bureau of Economic Analysis, has shown Haat Orange County's per capita income growth from 1994 through 1996 was lower than competing high technology regions such as the Silicon. Valley, Seattle, Minneapolis/St. Paul, Austin, and San Diego. Per capita income growth in Orange County was also below both state and stational averages during that time period. The .Business Council has estimated that the majority of Orange County job growth from 1989 through 1997 was in relatively low paying sectors — for example, during those nine years, the county's service employment increased by 58% while manufacturing jobs in the county fell by 22%. Against haat backdrop, it becomes important to encourage jab growth in sectors that pay well --- especially those sectors, like the grocery industry, that offer a living wage to persons with entry- level skills. The errtcrg;ence of supercenters, which pay wages typical of the low-paying discount retail sector, threatens to convert many high wage jobs into low wage jobs. Because that fact is so central to the policy concerns in this area, we focus explicitly on the labor market impacts of supercenters in the next chapter. 32 Chapter and Wage, In this chapter, we examine the labor market impacts of the entry of discount retailers into the grocery industry in southern California, Because Wal-Mart supercenters are currently the most vigorous potential competitor to southern California grocery chains, we focus on that possibility. But the arguments developed here are general, and apply to any case where a new entrant in a market dramatically lowers labor costs. Using data on current wages and benefits, we calculate that the direct impact on workers in southern California Mould likely fall in the range of about $500 million to $1.4 billion per year in lower pay, depending 6A the big box food sales market share. Using the Southern California Association of Governments estimates of how these lowered wages would impact the regional economy, the total -regional drop in spending ranges from about $1 billion to over $2.8 billion per year. The numbers will rise the larger the market share of big box grocers, and could well top even these figures over time. The discussion below proceeds in four steps. First, we discuss the differences in pay and benefits across the: discount retail and grocery sectors, as those are vital for understanding the possibility that high wage jobs will be converted into low-wage jobs. Second, we describe what happened in Canada when a similar low -labor cost competitor entered the grocery business. Third, we estimate the likely impact that Wal-Mart will have on the grocery industry in southern California. Fourth, we examine the possible labor market impacts of competition from Wal -mart, focusing on employment impacts, downward pressure on wages, and the implications for employee health benefits. Tables 2-1 through 2-4 show employment and per employee annual wages for the grocery (SIC code 541) and general merchandise retail (SIC code 53) sectors for 1993 through 1996.2 All wage data are expressed in 1999 dollars. For the seven county southern California region, the per employee annual wage in the grocery industry was $21,508 in 1995; the per employee annual wage in general merchandise retail in 1996 was $14,432. In southern California, general merchandise employees earn, on average, about two-thirds the salary of grocery employees. That proportion is roughly constant for the four year time period shown in Tables 2-1 through 2-4.-' ' According to the definition of the Standard Industrial Classification (SIC) code system, general merchandise retail includes stores that sell a nurnber of [fines of merchandise, such as dq -oods, apparel and accessories, furniture, small wares, hardware, and food. ' The per employee wage data in Tables 2-2 and 2-4 allow comparisons between the broad categories of general merchandise retail and grocery. The question of competition between Wal-Mart and major southern California grocery chains is better infonned by specific comparisons, shown later in this chapter, for the major grocery chains and Wal- Mart. For example, the wage data in Table 2-2 likely understate per employee wages among the employees at major grocery chains, who are represented by union contracts. Approximately 80,000 southern California grocery employees, out of a total employment of approximately 128,000 for SIC 541, are union members, All employees of the major southern California grocery chains are union members. Also note that, because County Business Patterns does not 33 Imperial 1,512 759 1,586 1,377 Los Angeles 64,655 51,375 64,341 60,513 Orange 20,532 19,136 21,056 2.1,075 Riverside 10,057 9,358 9,356 9,726 San Bernardino 10,338 10,371 10,778 40,633 San Diego 19,540 18,911 18,538 19,739 Ventura 5,203 4,840 4,899 5,408 Soi3thern CA. legion 131,837 124,750 127,554 428,471 CA State 247,147 238,913 241,480 250,206 urce: County Business Paterns Annusl (1943-€996); US Deparunent of Labor, BUM Oftht Census Imperial $17,222 $15,749 $15,830 $15,717 Los Angeles $20,860 $211231 $21,874 $21,729 Orange $21,783 $22,458 $22,612 $21,948 Riverside $21,873 $22,357 $23,307 $22,410 San Bernardino $22,315 $21,995 $21,609 $27,323 San Diego $20,204 $20,443 $20,801 $20,175 Ventura $21,890 $22,999 $23,424 $20,429 Southern CA region $21,096 $21,483 $21,905 521,508 CA State $20,996 $21,495 $21,923 $21,154 Note' Payroll includes all forms of compensation: saltines, wales, reported tips, commissians, bonuses ctc. Clerical Workers (CPT -W) tram the US Bureau of Labor Statistics (BLS) (1982-94 =100). Reul dollars ca€culaltd using the CPI index for the Los Cnumy o u i report information on hours worked, the data in Tables 2-1 through 2-4 combine part-time and full-time workers. 34 Imperial 1,629 1,505 1,451 1,264 Los Angeles 57,738 51,873 56,264 55,797 Orange 21,031 19,101 21,041. 19,797 Riverside 10,843 10,203 10,725 10,236 San Bernardino 11,991 12,018 12,903 12,976 San. Diego 18,388 17,662 18,953 18,612 Ventura 5,190 5,340 5,484 5,22.1 Southern CA Region 126,810 117,702 126,822 123,903 Statewide 220,198 209,937 222,399 216,454 County Business Patterns Annual (1.993-1996); US Deparurtcnt of Labor, Bureau of the Census. Imperial $13,002 $13,725 $13,637 $15,259 Los Angeles $13,998 $15,483 $14,404 $14,290 Orange $14,023 $15,724 $14,300 $14,753 Riverside $12,520 $13,567 $13,595 $13,745 San Bernardino $13,537 $14,230 $14,055 $14,300 San Diego $13,783 $14,784 $14,436 $14,983 Ventur8 $12,761 $14,239 $13,630 $14,235 Southern CA Regions $13,737 $15,044 $14,245 ,$14,432 Statewide $14,284 $15,119 $14,579 $14,609 3urce: County Business Patterns Annual (1993-.1996); US Depagiment of Labor, Bureau of the Census. Payroll includes Ott forms of cnmpensalion: salaries, wakes, reported tips, commissions, bonuses etc. 11 figures adjusted for inflation using the June 1959 Consumer Price Index for Urban Wage Earners and lerical Wovkers (CPP -W) from tate US Bureau of Labor Statistics (BLS) (1982-84 - 100). 35 In Tables 2-5 and 2-6, we present employment and annual per employee wages in the variety retail sector (SIC cede 533). The Securities and Exchange Commission classifies Wal-Mart as beim in SIC code 533, which is a subset of general merchandise retail (SIC code 53).4 In 1996, per employee annual pay in variety retail Was $15,733 in Orange County and $14,147 in Los Angeles County. Overall, the Wage differential between groceries and variety retail is similar to the differential between grocery employment and the broader general merchandise retail category. ' Variety retail is defined as -establishments primarily engaged in the retail sale of a variety of merchandise in The low and popular price ranges." We caution that the low ernployrnent fig ures shown in Table 2-5 suggest that Wal- Mart srtd otber major discount retailers may not be reflected in the variety retail category, regardless of'SEC classifwation. Comparison to the wages for general merchandise retail shown in Table 2.4 may be more appropriate. 36 $10,228 $9,234 $7,778 n/a $12,484 $12,276 $13,312. $14,147 $12,143 $13,137 $13,573 $15,733 $10,355 $7,811 n/a n/a $11,008 $10,166 $11,491 $11,143 $10,661 $10,435 $10,853 $10,262 $11,862 $11,785 $10,599 $10,762 $11.,926 $11,752 n/a n/a $11,507 $11,414 $11,831 $12,399 ote: Saurce.'County Business Patterns Annual (1993-1996), US Dtrartntent of Labor, Bureau of the Cons u5. Payroll includes all farms of compensation: s.slarie5, wages, repcjn d tips, commissions, bonuses etc. 11 Frames adiusted to 1949 dollars usina the CPI index for the Los Ani!eies-Riverside-oraywe Countv area. Wages vary substantially across the general merchandise and food retail sectors. Any discount retailer, if it enters the food sector in southern. California and then pays its grocery employees a wage that is comparable to what it pays its discount retail employees, will, in effect, be converting high wage jobs into low-wage jobs. As an example, we compare grocery wages and benefits to those offered by Wal-Mart, because Wal-Mart is the discount retail chain that is most aggressively entering the retail food business. Because Wal -Mart's hourly employees are not covered by a collective bargaining agreement (unlike southern California grocery employees), it was difficult to obtain wage information for Wal-Mart. What we do know suggests that hourly employees at Wal-Mart earn a starting wage of approximately $6.00 to $7.00 per hour. Newspaper and consulting reports suggest that Wal-Mart hourly employees earned $5.00 per hour in 1991 (Stockton Record, 1991) and $6.00 per hour in the San Francisco Bay Area more recently than 1995 (Dolman, 1997). For the background research for this study, a Wal -Mast discount center in Orange County reported that starting hourly employees earn $7.00 per hour.5 Telephone conversations with Wal-Mart Supercenter managers in other states revealed that hourly employees at stores in Ohio and Missouri earned starting wages of approximate)y $6.00 per hour.6 The manager of an Ohio Vial -Mart Supercenter contacted for this study estimated that salaried employees in the bakery and meat departmetits received only a small wage premium over other store employees -- earning $0.25 more per hour.' 'telephone interview with personnel manager, Wal-Mart, Foothill Ranch, California discount center, July 22, 1999- A This information is from telephone interviews with managers of Vial -Mart Supercenters in alliance, Ohio and Springfield Missouri on July 8, 1999. 7 'Telephone interview, manager of Springfield, Missouri Wal-Mart Supercenter, July 8, 1999. 37 These data are not extensive, but the picture is consistent. Wal -Mart's Supercenter employees appear to be paid wages that are similar to wages earned by Vial -Mart's discount store employees, with hourly wages starting in the range of $6.00 to $7.00 per hour. The pay scales of gTocery workers at the major chains in southern California are listed in Table 2- 7. Most hourly employees are divided into one of three broad categories — general merchandise clerks, food clerks, and meat cutters. Both the meat cutters and the food clerks earn starting wages that are substantially higher than the $6.00 to $7.00 per hour starting salary at Supercenters. Effective October 4, 1999, food clerks at the major grocery chains will earn a starting wage of $9.78 per hour, while beginning meat cutters will earn $11.43 ,per hour. (The Food Employers Council, the collective bargaining unit for southern California. grocery chains, estiniates that as of July, 1999, half of all Dourly employees in southern California grocery chains are in the meat cutter and food clerk categories. (Bailey, 1999)) For the grocery industry in southern California, only general merchandise clerks earn a wage that is similar to Wal-Mart wages, general merchandise clerks start at $7.07 per hour. General merchandise clerks are a special category designed to allow grocery stores to compete in non-- perishable items with other, lower paying, retail outlets. General merchandise clerks do not handle food items. The general merchandise pay scale at the major chains is, in some ways, suggestive of what. happens when grocery stores must compete with competitors who have lower labor costs. 38 $18.98 $19.38 $19.78 $20.18 $17.98 $18.38 $18.78 $19.18 $15.82 $15.82 $15.82 $15.82 $14.06 $14.06 $14.06 $14.06 $12.31 $12.31 $12.31 $12.31 $11.43 $11.43 $11.43 $1.1.43 $17,70 $18.10 $1.8.50 $18.90 $16,70 $17.10 $17.50 $17.90 $14.67 $14.67 $14.67 $14.67 $13,04 $13.04 $13.04 $13.04 $1.1:41 $11.41 $11.41 $11.41 $9.78 $9.78 $9.78 $9.78 $12.37 $12.67 $12.97 $1.3.27 $11.27 $11.57 $11,87 $12.17 $9.78 $9.78 $9.78 $9.78 $8.70 $8.70 $8.70 $8.70 $7,61 $7.61 $7.70 $7.85 $7.07 $7.25 $7.40 $7.55 Source: Food Fmployce .s` Council, 1999 The gap in starting hourly pay understates the full wage differential that exists between nearly all current grocery workers and Wal-Mart employees, The current prevailing wage structure increases rattler rapidly -. food clerks, for example, will earn 33% more than their starting salary after one year of employment. It also guarantees part-time employees a minimum of twenty hours of work per week, and in October, 1999 that part-time guarantee rises to twenty-four hours per week. Part-time members currently usually work considerably 'more than the minimum guarantee - as of July of 1999, part time employees at the major grocery chains averaged 35.5 hours of work per week (Bailey, 1999). For these reasons, and because these employees receive an attractive benefits package (summarized later in this chapter), current grocery employees often pursue a career in the grocery industry- What: we know about Wal-Mart suggests that, as compared with current practice in the southern California grocery industry, the Wal-Mart pay scale increases less rapidly with experience, Wal-Mart is a heavier user of part-time work, part-time employees tikety work fewer hours per week, and the typical Wal-Mart employee stays with the company for a shorter time. The net effect of both the rapid increase in wages with experience and the longer average jots tenure for current southern California grocery employees implies that the wage differential between Wal-Mart and southern California employees will be larger than what is suggested by Table 2-7. 39 Yet hourly wages are only part of the. story. The current major grocery chain labor contract offers full health insurance coverage for all southern California grocery employees (full and part-time) and their dependents, with no co -payments or deductibles, Health plan costs are paid by the employer. Wal-Mart., in comparison, requires that employees share the cost of health insurance premiums. Insurance coverage is only available to full time employees. Mal -Mart health plans have deductibles that range from $250 to $1000, and employees must pay the full premium for dependents. A summary of Wal-Mart and the current southern California grocery benefit plans is shown in Table 2-8. Erf nine paid holidays per year six paid holidays per year One week after 1 year. Two weeks alter 2 One week after 1 year. Two weeks alder 2 years. years. Three weeks after 5 years. Four weeks Three weeks after 7 years. after 15 yeats. Five weeks after 24 yearn, Accrues at 4 hours/month, or 6 days/year. Accrues at .023077 hours for each hour worked (approx 4 hours per month) or 6 days per year, to a maximum of Annual cash buyout for unused sick leave. 192 hours (24 days). No cash buyout for accrued sick leave in excess of maximum, 50% of accrued sick leave may be used as personal time off from work. Several plans are offered. Most extensive Employer paid with employee sharing premium. Four coverage is the PPO Plan, Linder PPO plan, deductible options are offered ranging from employer pays Cull premium for employee and $250 to $1,000 with varying employee premium share, all dependents. No deductible. Most Employee part of premium ranges from $5.50 to $18.50 procedures reimbursed at 90 - 100%; $10 bi-weekly depending on deductible. doctor's office visits. Maximum out-of-pocket expense is $'.500. Employee pays full premium for any dependents. Plan includes employee co-insurance. Employer pays full premium for employee and Employee shares in premium payment ($2.50 bi- ali dependents. No deductible and weekly) and pays full premium for dependents. no co-insurance, Provides a defined benefit retirement plan.. Employer's contribution is $1.225 per hour No -cost visions insurance coverage. Retiree medical insurance coverage Plan includes annual deductible and co-insurance. Offers an employee stock ownership plan. Company pays 15% of employee company stock purchases to an annual maximum stock purchase of 51,800. (approximately $0.135 per lour) Offers employee -paid life insurance. Provides profit-sharing plan. Provides employee, 10% discount card on Vial -Mart purchases. Offers reduced -cost medical plan for eligi retirees. 1998 Wal-Mart Associate Benefit Book. Summary Plan Description. Food Employers' Council (Bailey, 1999). 41 Many Wal, -Mart employees are not covered by any of the company's health benefit dans. In 1995, 38% of Wal-Mart. employees were covered by one of the company's health plans; another 35% were eligible but did not elect. coverage, likely because of the employee cost-sharing and large deductibles; the remaining 27% were not eligible for health benefits (Source: IRS 5500 forms.) By comparison, in June of 1999, the health ,plans covered 77,540 employees at the major southern California grocery stores and 103,388 of their dependents at no out-of-pocket cost to the employee (Bailey, 1999). The contribution of benefits (health care included) to prevailing labor costs is shown in Chart 2m1. Taking account of job classification and experience, the average hourly wage at the major chains in southern California is $12.82, as of July, 1999. Employer contributions to health benefit plans are the equivalent of another $2.36 per hour. Pension and other employer trust contributions add another $0.32 to labor costs. Premium pay, including overtime, Sunday, and holiday premium pay, is the equivalent of $1.74 per hour. Vacation and unused sick leave come to $1.01 per hour, Totaling the value of employee wages artd benefits, a unionized grocery employee earns an equivalent of $1$.25 per hour, which translates to an annual average wage of $37,960. Excluding benefit payments and focusing only on wages paid to employees, the average grocery employee at a major chain store. earns $15.57 per hour, or $32,386 on an annual basis. $ I4,00 t�.nn S4J)O SMO $0.N Chart 2-1: Components of hourly Wage hourly pay heakh other trust premium pay vacation and benefits contributions unused sick leave pay fa corn ponents of hourly wage of $18.25 42 An informative comparison with Wal-Mart wages and benefits can be made with the information available. Assuming Wal-Mart hourly employees earn an average wage of $7.50 per hour, and assuming that Wal -.Mart employees earn premium, vacation, and unused sick leave pay in the same proportion to base wages that most southern California grocery employees now earn (likely an overestimate, given that Wal-Mart offers fewer vacation days than the current southern California contract), total Wal-Mart average hourly cash wage would be $9.11 per hour. Given that only 38% of Wal-Mart employees are covered by health care, compared with virtually all employees at the major chains in OUT region, the ratio of health care costs to base wages was scaled down by a factor of 0.38 to account for the lower share of employees covered by Wal-Mart health plans.s This resulted in an estimated cost 6f Wal-Mart health benefits of $056 per hour. Overall, this exercise suggests that Wal-Mart employees might earn the equivalent of $9.63 per hour, or $20,038 on a full-time, annual basis. Given Wal -Mart's heavy use of part-time labor, converting the wage to a full-time basis is likely an overestimate of the value of wages and benefits available to the typical Wal-Mart employee. Average hourly and the full-time annual equivalent wages are shoe for grocery workers and Wal-Mart workers, under different assumptions about Wal-Mart wages, in Table 2-9. s Chan. 2„1 shows that health benefits provided by the major grocery chains are, on an hourly basis, the equivalent of 18.4% of base hourly pay. That percentage was multiplied by 0.38, the fraction of Wal-Mart employees actually covered, to obtain an estimate of Wal-Mart benefit payments as a fraction of hourly pay. The resulting estimate is that Wal-Mart health benefits are the equivalent of 7% of base hourly pay. This is likely an overestimate. The Wal- Mart benefit plan requires an employee cost share, has. high deductibles compared to the union plant, and does not cover dependents. A1( these factors imply that the Wal-Mart plan will be less expensive, and less valuable, on a per - covered -employee basis, than that covering the ornployees of the major }grocery chains. IK s€Y,11 i�r'#fit at1 ::"€ A 3Trim , ': Ai >. s >; $12.82 $2.36 $0.32 $1.74 $1.01 $18.25 $37,960 $32,385 $8.D0 $0.56 NIA. $1.09 $0.63 $10.28 $21,373 $20,209 ax $7.50 $0.52 NIA $ L02 $0.59 59.63 $20,037 $18,946 $7.00 $0.52 NIA $4.95 $0.55 $8,99 $18,12 $17,683 Motes Wages are for typical, or average, empioyees. Zeal-Mart high estimate is based on an average hourly wage of $8.00 per hour. Wal-Mart n estimatc is based on average houriy wage of $7.50 per hour. Wal-Mart ion+ estimate is based on an average hourly wage of $7.00 per hour. Total annual pay inclu€les value of benefits. Artnual pay is restricted to Nvages, premium pay, and vacation and sick leave benefits only. Wal-mart hourly equivalents for benefits, premium pay, and vacation and unused sick .leave pay are assumed to be in the same proportion to base wages as for employees of the major chains in - r Califemin Wal -hurt Supercenters are an exceptionally new phenomenon in the United States. Five years ages, there were only 34 Supercenters nationwide. Supercenters have not likely reached market penetration anywhere in the United States, and to infer what can happen in a market with a mature presence of Supercenters it is useful to look elsewhere, An excellent example can be found in Canada. Loblaws, a Canadian grocery and retail chain, opened Re?d Canadian Super Stores (ROSS) in Canada several years ago. RCSS combines food and discount retail under one roof, paying wages that are typical of the discount retail industry, as do Supercenters in the United States. RCSS entered the market in Alberta in the late 1970s and early 1980s. Safeway has been the primary unionized supermarket in Alberta fory ears, and Safeway wages in Alberta were considerably higher than ROSS. By the early 1990s, competition with the lower labor -cost RCSS began to have a dramatically negative impact on Safeway profits,) Safeway executives estimated that the wage gap between their employees and RCSS workers was between $8.00 and $12.00 per hour in Canadian dollars. 10 In 1993, Safeway concluded it could no longer compete without drastically cutting pay and benefits. Management presented employees with two choices -- either Safeway would cut its losses and leave the Alberta market, or cut pay and benefits by the equivalent of $5.00 per hour (Canadian). Eventually, the unionized employees agreed to the pay and benefit cuts. Safeway implemented the pay cuts both by reducing pay and benefits and by buying out the contracts of 4,000 .experienced employees and replacing those workers with persons earning approximately $6.00 per hour with no benefits, 1 In 1997, Safeway employees went on strike in an effort to restore wage and benefit coltcessions that were part of the 1993 agreement. The strike ended without the union regaining the wage and benefit concessions that were part of the 1993 agreement. t2 In 1996, similar competition between grocery chains with dramatically different labor costs sparked a labor dispute in Vancouver, British Columbia. RCSS operated with a lower cost union contract than either of the two primary Vancouver chains -- Safeway and Overwaitea (a Canadian firm), 13 Safeway estimated the labor cost differential, including benefits, at Andreef (1997), L.aghi (1997), Smith (1997). The exchange rate for the Canadian dollar varied from a low of 0.7516 US dollars per Canadian dollar in December of 1993 to a high of 0,8020 US dollars per Canadian dollar in March of 1993. (Exchange rate infonnation is from the Pacific Exchange Rate Service of the University of British Columbia, t; :;115 c.ktatsk.cc5a� le ce. c.c1.) Tatting the midpoint of that range, this implies that the wage differential, in 1993 U.S. dollars, was between $6,21 and $9.32. ' ° Andreef (1997); Levant (1997); Smith (1997). '2 Kent (1997). 11 "The Changing Face of Labor," Grocer Today, September, 1996. 45 $11,58 (Canadian) per hour. The cost differential greatly reduced Safeway's and Overwaitea's ability to compete in the Vancouver market, and from 19$5 through 1996 RCSS gained nine percentage points in market share in that urban area. Having already faced similar competition with RCSB in Alberta, Safeway was committed to closing the labor cost gap before profits turned to staggering losses. After a bitter strike, Vancouver Safeway employees accepted a new contract that reduced pay and benefits. 14 As another example, A&P faced similar competition from low labor -cost competitors in greater Toronto in the early 1990x. Non-union competitors such as Sobey's had lower labor coasts, as did the "No Frills°' warehouse grocery chain operated by f.oblaw's. (The "No Frills„ stores were unionized, but under a different contract that allowed lower wages and benefits compared with what A&P's union contract required.) A&P felt Haat it was at a competitive disadvantage and forced a strike to gain contract terms more comparable to the lower wages paid to the non-union and "No Frills" competitors. The strike lasted from November, 1993 to February, 1994, The resolution was a compromise that did not fully satisfy either party. A&P came out of the strike in a weaker position, and was less able to renovate, expand, and open new stores than it would have otherwise. The union wakes and benefits were also downgraded as part of the resolution of the labor strife.'- Supermarket News stated in June of 1996 that, "Partly because of the residual effect of that strike, A&P converted 19 of its Ontario stores to Food Basics, a lower-cost format that it operates under a separate bargaining agreement."' 6 The lesson is that major grocery chains will compete, and compete vigorously, for market share and profit when faced with low-cost competition. That competition takes the form of both short-term and long-term labor disputes. in the short -run, the Canadian chains (A&P, Canada Safeway, and Overwaitea) sought immediate wage and benefit concessions once competitors with lower labor costs became clear competitive threats. The short -run concessions often took the form of buy-outs of more experienced, higher -paid workers combined with a two-tiered wane structure that. included substantially less valuable pay and benefit packages for new hires, In some instances those buy-outs were combined with wage and benefit reductions for existing employees. In most of the labor disputes, the chains involved sought immediate labor cost reductions. For example, in Alberta Safeway appeared to try to close between forty percent and sixty percent of the labor cost gap with RCSB. (Recall that the 1993 concessions reduced Safeway labor costs by roughly $5.00 per hour, approximately forty to sixty percent of the estimated $8.00 to $12.00 per hour gap.) Yet that estimate ought: not be taken as firmly indicative of the type of response that would occur in w Canada Safeway Limited, Press Release, July 8, 1996. is "The Changing Face of Labor," Grocer Today, September, 1996, pp. 134 R. is As quoted in "The Changing Face of Labor," Grocer Todq.y, September, 1996, p. 14, 1' "An Open Letter to Safcway Employees," newspaper advertisement placed by Canada Safeway Limited, Vancouver Sun, June 8, 1996; Andreef (1997); Smith (1997). M other markets. Given the dynamics of inion bargaining, it is possible that the concessions observed in Canada were interim steps, and that grocery chains will continue to seek labor cost reductions -until they have parity with low cast competitors. Labor represents approximately 60% of the controllable costs (excluding the cost of product) in the grocery industry, so competition often takes the form of meeting a rival's labor costs. Safeway argued in British Columbia that parity with RCSS in new faire labor costs was the only fair solution to the labor dispute. 18 A&P converted 19 stores in Ontario to a low-cost format to take advantage of the lower-cost union contract for such stores, 19 The mediator of the labor dispute in British Columbia was quoted after the strike as saying, "Safeway and Overwaitea are legitimately frustrated with the substandard pollective agreement in place between Real Canadian Superstore and UFCW Local 777 and that issue must be addressed."20 Overall, the experience in Canada suggests that major chains will seek parity with lower labor cost competitors, if not immediately them certainly in the long run through mechanisms such as two-tiered contracts that reduce costs for new hires or changes in collective bargaining agreements. The ability of grocery chains to obtain wage and benefit parity with low cost competitors hinges on the relative bargaining power of a chain and the union in any particular market, Yet the evidence suggests that wage and benefit differentials across stores that compete vigorously with each other will lead to substantial downward wage pressure until those differentials are closed. The same will almost certainly be true in southern California if Wal- Mart Supercenters enter the market; paying lower wages and offering limited benefit plans. An estimate of the labor market impact of Wal -Mart's entry into the southern California grocery market is given below. in the rest of this chapter, we derive estimates of the wage and benefit impact of Wal-Mart supercenters in southern California. Three types of estimates are developed — a low estimate, based on uniformly conservative criteria, a medium estimate, and a high estimate. The low and high estimates provide:, respectively, reasonable lower and upper bound impacts, although the low estimate, designed to be conservative, could quite possibly understate time full impact of supercenter competition in southern California. The logic of each estimate follows a two step process. First, we estimate, in Section D t k "An Open Letter to Safeway Employees," newspaper advertisement placed by Canada Safeway Umited, Vancouver Sun, Juste 8, 1996; "The Facts: A. Message to Safeway Customers," newspaper advrrtisetnent placed by Canada Safeway Limited, Vancouver Suri, 1996. " "The, Changing Face of Labor," Grocer T°odpts, September, 1996, pp. 13-18. 20 "The Changing Face of Labor,,, Grocer Today, September, 1996, pp. 13-1$. 47 below, the market share that Wal-Mart supercenters can be expected to capture in southern California. From that, we estimate, in Section E, the impact on wages and benefits bath for Wal-Mart employees and for employees in other chains that will see the need to meet Wal - Mart's labor casts. Wal-Mart typically builds stares within one day's drive of its distribution cel erszj, suggesting that southern California Supercenters built by the chain will be served by a southern California distribution center. Wal-Mart currently is seeking approval for a distribution center in Riverside County. The corporation has looked into sites near the intersection of Interstate 15 and State Route 60 that can accommodate buildings ranging froth 300,000 to over 1 million square feet.22 To the best of our knowledge, Wal-Mart has not stated publicly whether that center will be for food distribution, but the impact on the southern California grocery businesses, if the new distribution center serves Wal-Mart Supercenters, can be substantial. What follows below is a simulation predicated on the assumption that Wal-Mart builds one distribution center to serve Supercenters in southern California. Whether the currently planned Wal-Mart distribution center is for groceries is beside the paint, as the below exercise demonstrates what can happen if Viral -Mart decides to bring Supercenters to southern California at any time in the near future_ In 1998, Wal-Mart had twelve distribution centers serving 564 Supercenters -- an average of 47 Supercenters per distribution center. 2.1 If Wal-Mart enters southern California, it is quite reasonable to expect the firm to atter pt to achieve a similar scale economy in distribution. Wal-Mart is unlikely to build a distribution center, open two or three stores, acid theta abandon a local market. The current average of 47 stores per distribution center is suggestive of what to expect once Wal-Mart opens a distribution center for groceries in southern California. Yet 47 stores is a lower bound o.fthe, number of stores that can be supported by a distribution center. The economics of grocery retailing allows a much larger number of stores to be served by a distribution center, depending on the strategy of a particular fjrrn. Furthermore, Wal-Mart Supercenters are so new that it is possible that the chairs has not achieved their desired scale economy in food distribution, By comparison, Wal-Mart serves 1,889 discount stores with 33 Iron -food distribution centers — an average of 57 stores per distribution " Telephone interview with Dr. Kenneth E. Stone of Iowa State University on 29 July 1999. '2 Telephone interview with Shawn Purcell, Riverside Planning Office, Jule, 1999. `13 Phone interview with Lar. Kenneth E. Stene of Iowa State University on 29 July I999. (Original Sources of Data: Combination of various SEC Form 1 o -K reports and Discount Store News issues.) 48 center.24 If Wal-Mart eventually seeks comparable scale in food distribution, this suggests that eventually an average of 57 Supercenters will be supported by one distribution center. That number could be higher, but it is unreasonable to believe that Wal-Mart would open a food distribution center and seek less than their current average of 47 stores per distribution center. Overall, we simulate the impact of Wal-Mart on southern California market share by assuming that a fond distribution center will support either 47 or 57 stores. Given Wal - Mart's desire to place stores within a day's drive of a distribution center, it is likely that virtually all Supercenters served by a southern California distribution node will be in this region. Of course, Wal-Mart could build more than one distribution center in southern California, or could serve more than 57 stores from a single- center, The estimates below are purposefully a consmative estimate of the possible impact of Wal-Mart Supercenters in the southern California market. The next step in estimating Wal -Mart's impact is to assess how much market share can be expected from 47-57 stores in southern California. Our logic will flow from estimating Wal - Mart's market share to the impact of that market share on grocery employment, wages, and benefits. What follows is an estimate of Wal-Mart Supercenter market share associated with one distribution renter in southern California. Table 2-10 lists market share and number of stores for major chains in the Los Angeles urbanized area from 1996 through the first half of 1999. 24 Phone interview with Dr. Kenneth E. Stone of Iowa State University on 29 July 1499. (Original Sources of Dam Combination of various SEC Form I O -K reports and Discount Store News issues.) M Based on the information in Table 2-10, we calculate market share points per store for each chair, shown in Table 2-11 . Market share points per store are also shown in Table 2-11. Market share pet store is remarkably similar across the major chains (Ralphs, Vans, Lucky, and Albertsons.) to 1999, market share per store ranged from 0.144 for Albertsons to 0.169 I market share points per store for Vous. For comparison, "fable 2-12 gives market shares for several California urban areas, but the data source used for Table 2-12 does not report the number of stores, and so it as not possible to calculate market share points per store for other California urban areas. 50 For comparison, Tables 2-13 lists market sures and number of stores for major chains in three urban areas with Wal-Mart Supercenters — Atlanta, Dallas, and Fort Worth.25 Market sure per store is also listed for each chain in each urban area_ Market share per store varies much more across urban areas than within urban areas. For example, an average (or typical) store in Dallas can garner approximately OA market share points, and an average (or typical) stare in Fort Worth cari claire 0.9 market share paints — both substantially higher than market shares per store in Los Angeles. This reflects the smaller size of tate Dallas and Fort Worth urban areas and the fact that those markets are served by fewer stores. 25 The comparison MSAs were chosen based on the availability of data for urban areas with a relatively large number of Wal-Mart Supercenters, Currently, 5uperconters are predominantly in the South and Midwest. Many food industry data sources, sucti as Progressive Grocer, do not gather market share information on Wal- Mart and other discount retailers, The data in gable 2-13 is from the Shelhy Report, which does gather market share data for both grocery stores and discount retailers, but only in a limited number of urban areas. Choosing urban areas with both Wal-Mart Supercenters and Shelhv Report data led to the MSAs listed in Table 2-13. 51 ZS .Atta atuus :oqj ut suivga ngjo `u-egl xallaq AjjyIo!js $saq ju xo `jo pozdA4 ave 1eui stsuq axojs tad u uo sasegs p)[I a amid-eo of paloodxa aq uva saaluo-indnS pagj slsoHns £t`Z aige_L pur `yam uugxn oq4 jo aqs ag} oq of s.trnMe a.iois .tad oivgs aalj-ew jo juuutuualap .krou id aq4 `uru2,V o�luru�xp jou st aaua.tajjlp aql inq sumlo aat{4o auuos uttgl (sbscq a.tugs i-o3p-e a ;Djojs god B ao) xalpq fj1gBjp twop-od saoluaoladnS VoM 41ol pu- s-ulj,ea ulurlIV ut aajuaoiodnS uxW-jtAk nd sai gs IoNim ju �Ijuoijpods 5ut�00-1 -suaa-e a-ogtn ss010-91,1121s asouz gartiu ST uotj'ep'an aqa '-ai13 uugxn au utgI!m suzvgo sso.tov gonw rCmA jou scop gaols tad atugs jxfjuw `XImeliodtui Kroger 88 31.33 95 31.72 97 32.30 100 32.54 0.33 Publix 52 17.09 63 18.34 70 20.35 71 20.26 0.29 Winn-Dixie 63 11.43 65 11-21 59 10,01 56 9.80 0.18 Ingles 45 6.95 44 6.18 49 6.87 46 : 6.63 0,14 Super Disc (Club) - - 13 5.22 1.7 6.19 18 5,91 0.33 A&P 37 6.21 37 5.82 36 5.44 31 4,78 0.15 Wal-Mart 7 2,34 8 3,26 10 3.57 9 3.13 0.35 Harry's 3 2,38 3 2.41 6 2.75 7 2.59 0.37 Cub Food 13 6,15 - - - - - - - Bruno's 19 4.62 18 4,22 Albertson's 47 21.08 52 22.31 57 23,71 57 22.62 0.40 Tom Thumb 42 20.19 41 16,67 42 20.30 42 20.09 0.48 Kroger 40 14.76 40 1531 38 14.43 39 14.92 038 Minyard 60 1520 60 1523 60 15,29 60 14,66 0,24 Brookshire 26 7,54 27 7,81 27 8.36 27 7.92 0.29 Wal-Mart 5 142 8 4.85 8 4.13 11 5.06 0.46 Winn-Dixie 14 3.22 14 3,11 12 197 13 3.51 0.27 Fiesta Mart - - - - 5 1 .83 5 1.75 0.35 Food Lion 25 3,54 24 3.11 - - - - - Wal-Mart Hype 1 1,31 - - Albertson's 21 21.18 24 23,07 24 22.68 26 24,46 0,94 Winn-Dixie 31 IT24 32 18.63 34 19.08 35 18.46 0.52 Kroger 25 19.32 27 18.71 23 16,70 23 15.02 0.65 Minyard 21 10.47 22 10.06 22 9,76 25 10.93 0A3 Tom Thumb 9 8.16 9 6.26 11 10,84 12 10.91 0.90 Wal-Mart 5 6.90 5 7.32 6 8,10 6 6,48 1,08 Food Lion 9 2.80 10 3.28 - - - - - Wal-Mart Hype 1 2.65 - - 53 To be conservative, we assume that Wal-Mart Supercenters capture per -store market share that is typical, but not better than, the range observed for existing southern California chains. We bound projected Supercenter per -store market share to be equal to both the lowest number (0.144) and the highest number (0.169) for major chains in the first half of 1999.26 Combining that information with two estimates for the number of southern California stores served by one distribution center, we get overall projected Los Angeles area market shares associated with one Wal-Mart food distribution center, shown in Table 2-14. These are conservative estimates, both because the number of stores for one distribution center could be higher and because the market share per store, based on experience in Atlanta, Dallas, and Fort Worth., could be slightly Higher than evert the upper bound shown in Table 2-14. 47 6.77% 7.94% 8.21% 9.63% Note: Share per store is market share. paints per eaeh store, estimated as described in the text. Numbers its botd are estimated sout.hem California market shares for Wal-Mart Supercenters, for one distribution center supporting the number of sloros shown in the two rows. The largest estimate in Table 2-14, still a conservative number, suggests that Wal-Mart cart capture approximately 10% of the Los Angeles metropolitan area market. We take that as a lower bound for the possible market share of Wal-Mart Supercenters in the southern California market. The estimates that lead to a 10%, market share — one distribution center, serving from 47 to 57 stores, with each store capturing market share comparable to other chains in the region — are all conservative. Should Wal-Mart choose to enter the southern California market more aggressively, they could likely operate more than 57 stores from one distribution center or build additional distribution centers. As a high estimate of possible Wal-Mart market share in southern California, we use 20%. This is based on the observation, from Table 2-10, that the three largest southern California chains . currently average slightly more than 20% market share. Wal -Mart's efficiency i�n its core discount retail business, plus their quick expansion pace into groceries, suggests that in the long- term the firm could potentially compete with the largest of the southern California food chains. Below we use the two estimates of market share — 10% and 20% to obtain estimates of the economic impact of Wal-Mart Supercenters in southern California.. We start by providing some discussion of how quickly the estimated market shares might be realized, and what Wal-Mart competition means for existing southern California grocery chains. Because the time span of our data are limited, we are not able to estimate when or how quickly Wal-Mart might build to a tern or twenty percent market share in Los Angeles. Much of that depends on company strategy. For example, Wal-Mart now has 6.5% of the market in Fort Worth, and Supercenters are, for all practical purposes, a six-year-old phenomenon. Given. Wal -Mart's exceptionally aggressive history of building Supercenters, and their expansion pace, the chain could reach a ten percent share in Los Angeles, or most likely other markets that it targets, Hauch more quickly than would be expected for other competitors. In other markets, Wal-Mart has typically built Supercenters first in exurban areas and then in the rapidly growing urban fringe. This reflects loth Wal -Mart's traditional emphasis oil small towns and suburban markets and the difficulties of obtaining land for Supercenters that are, on average, 180,000 square feet, in central portions of urban areas. Given the exurban and suburban focus of Wal-Mart, it is likely that their plans for Supercenters in southern California will focus most heavily on Change County, the Inland Empire, the western San Fernando Valley and. eastern Ventura County, and Santa Clarita and the high desert areas to the north. This puts Supercenters in the most rapidly growing portions of southern California, suggesting that Wal-Mart will be a major competitor in the region's grocery industry. Given the fact that Los Angeles County contains almost two-thirds of southern California's population, and the fact that the market share estimates in Table 2-14 are quite conservative, it is reasonable to assume that the estimated Supereenter market shares of tern and twenty percent can be applied to all of southern California. Doing that, we next examine the competitive pressure exerted by a new entrant that has the potential to achieve markct shares similar to those shown in Table 2-14. One way to get a good intuitive feel for the type of competition represented by a new flan with, for example, a tern or twenty percent market share .is to ask how much growth in the market is least to the new competitor. Southern California is projected to grow rapidly over the next twenty years. Population growth projections, from the Southern California Association of C.rovernzraents, are shown in 'fable 2.15. Southern California grocery chains are no doubt aware of this future growth, and have likely built growth projections into their long-range business plans. While Superccriter market share will not all come at the expense of fa tore growth, it is a useful exercise to assume that all Supercenter market share is part of the overall growth in the southern Califomia market, and to then ask bow much growth would be captured by Supercenters. 55 `'i �t3t1 2 .2.< 138,400 149,000 172,000 207,000 241,000 280,000 87,92% AnIes 9,231,600 9,818,204 10,329,500 10,868,900 1.1,513,400 12,249,100 24.76% 2,595,300 2,859,200 3,405,800 3,105,300 3,165,400 3,244,600 13.48% ersd 1,376,900 1,687,800 1,06,900 2,265,300 2,531,700 2,816,004 66.84% M100 11558,600 1,772,500 2,005,400 2,239,600 2,512,7010 2,830,100 59.67% tra 709,900 712,700 744,900 804,300 861,600 932,300 30.91% "r.. 15,610,700 16,999,000 18,234,000 19,491,000 20,826,000 22,352.000 31.49°/, For illustrative purposes, we assume that the grocery market in southern California will grow in proportion to population growth, and that Wal-Mart Supercenters can achieve either the lower bound estimate of 10°1 market share or the higher estimate of 20% market share for southern California. If all of that market share comes at the expense of future growth in the grocery market, this implies that Wal-Mart Supercenters will captAire between 42% (for a 10% total market share) and 84°1 (for a 20% market share) of the growth in the market. We do not mean to imply that all Supercenter sales will be come from market growth. No doubt Wal --Mart, or any new entrant, can also take sales away from existing stores. Yet as an exercise it is useful to ask what would happen if all Supercenter sales were strictly from serving the growth in the southern California market, The answer is that, under that scenario, Wal-Mart would capture from 42% to 84% of all growth in one of the nation's fastest growing grocery markets over the next twenty years. The entry of Wal-Mart into southern California will be, for its competitors the equivalent of an event that would cut projected growth in sales by, using reasonable estimates, anywhere frotn 42% to 84%. The implication is that Wal -Mart's entry info southern California will almost certainly be perceived by existing chains as a major competitive threat, and they will almost certainly respond. The response, given the labor cost differential between Wal-Mart and southern California grocery chains, will most likely take the form of the type of wage and benefit cuts witnessed in Alberta and British Columbia, Canada.. 56 Competition from Wal-Mart Supercenters will result in lower wages for southern California grocery employees through two channels of influence -- (1) employees that would have otherwise worked in higher paying union jabs will earn lower wages and benefits, and (2) competition with Supercenters will cause unionized employers to lower their wages and benefits. We examine each channel of influence in turn below. Approximately 80,000 of the 128,400 southern California grocery employees are employed by the major grocery chains. As shown in Table 2-9, these employees receive a considerably more valuable wage and benefit package than Wal -Mari employees, based on the assumptions about Mal -mart wages and benefits listed in the note for Table 2-9. If Wal-Mart captures southern California grocery market share, some grocery employees who otherwise would have been employed by the major food chains will take jobs in Supercenters, at substantially lower wages. Thus, the first channel of economic impact is that low paying Supercenter jabs crowd out higher paying jobs. We assurne that the number of grocery jobs displaced is in direct proportion to the market share of Wal-Mart Supercenters; for example, if Wal-Mart captures a ten percent market share, ten percent of existing jobs at the major chains will be converted into lower -paying Supercenter jobs. For the three values of wage gaps implied by Table 2-9, we calculate the total annual wage bill lost for different assumptions about Wal --Mart market share. The results are shown in Table 2-16, below. $119 $127 91"37 $235 $255 $274 Note: Annual lost wages are calculated by multiplying the wage gaps in Table 2-9 by the estimated annual hours worked by employees of the major grocery chairs, Currently, these employees average 35.5 hours of work per week (Bailey, 1999), 57 Em .RLm:: Large labor cost differentials cannot be sustained in the grocery industry. The experience in Canada demonstrates that major grocery chains will ultimately close much of the labor cost gap. The implication is that the entry of Supercenters into southern California will affect the wages of all grocery employees in southern California, whether or not they work at Supercenters. The fact that low labor cost competitors exert downward wage pressure on an entire industry is not surprising. In a 1989 study of pay in the grocery industry, Paula Voos, an economist at the University of Wisconsin, found that as the fraction of the metropolitan labor force that is unionized drops, wages among the remaining union members fall (Vons, 1992). She noted that this relationship is common in many industries, and is indicative of the tendency of firms to lower wages to meet the labor costs of competitors. Using data for southern California., we estimate the annual impact of the downward wage pressure that would result from Wal-Mart Supercenters entering southern California. We assume that major chains in the region lower their wage and benefit package to immediately close part, but not all, of the pay gap shown its Table 2-9. Sassed on the experience of Safeway in Alberta (discussed in Section 13), we estimate chains would seek to close between forty and sixty percent of the wage gap in the near -terra. We later estimate the long -run impact on workers if major chains achieve wage parity with lower cost supercenters, closing all of the wage gap. We calculate the total annual value of reductions in pay and benefits in chains that compete with Supercenters, under different assumptions, below. $424 $636 $458 $687 $492 $738 $377 $565 $407 $611 $438 $656 -Note: Annual last wages are calculated by assuming that of the 80,000 unions members in 1999, the fraction not in Supercenter market snare (901/16 or 900%) retrain employed by the major grocery chants. They are assurned to experience wage cuts that close the difference between the wage gasp shown on the top row and the "amount of gap closed" shGwn on the second raw, So, e.g., ars the first colurnn the per hour wage cut is $5.03. That wage reduction is multiplied by 35.5 hours pt -r week for the average region member, and there annualized and multiplied by union membership less the fraction assumed to he working at Wal-Mart. Grocery chains in southern California are likely to seek to close the entire wage gap if Wal- Mart, or any low cost competitor, enters the market, In Table 2-18, we show the indirect wage impact on major grocery chain employees if all of the wage gap between current wage and benefit standards and Wal-Mart supercenter pay is closed. Note: Annual lost wages are calculated by assuming that of the 80,000 union rnerr hers in 1999, the fraction not in Supercenter market share (90`x/„ or 80%) remain members of the union. Those members are assumed to experience wage cuts that close the full amount of wage gap shown on the top row. E.g., in the first column the per hour wage cut is 57.97. That wage reduction is multiplied by 35.5 hours per week for the average union member, and then annualized and multiplied by union membershin less the fraction assumed to be working at Wal -Mari. In Table 2-19, we present low, medium, and nigh estimates of the total wage and benefit impact of Wal-Mart supercenters entering the southern California grocery market. (Illustrated graphically in Chart 2-2.) These are derived by summing the direct impact on supercenter employees, shown in Table 2-16, with the indirect impact on employees of other major chains, shown in Tables 2-17 and 2-18. The low estimates use the most conservative assumptions, and so represent a lower bound of possible impacts. As we mentioned earlier, the economic impact will likely exceed what is reflected in the low estimates. The medium estimates are calculated based on a 20% Wal-Mart market share while assuming that existing grocery chains do not close all of the wage and benefit gap with Wal-Mart. The medium. estimates assume that the amount of wage gap closed is the average of the gaps used in Table 2-17. The use of a 20% supercenter market share for the medium estimate reflects a reasonable long -run outcome, while the assuarrption that existing chains close only a fraction of the wage gap is more reasonable in the near-term than in the long -run. Thus the medium estimates mix both long -run and near -termor responses in the grocery market. Given that it is impossible to predict the exact timing of near-term versus long -run impacts, this mixing has the advantage of reflecting the influence of both, in some sense averaging effects that cannot be precisely attributed to specific years and effectively reflecting a "middle range" scenario. 60 The high estimate assumes that Wal-Mart obtains a 20% market share and that all of the wage gap with competitors is closed. a Chart 2-2: Estimates of Total Wage and Benefit Impact 62 f./..... .::{.9. L:: C:: i$:h?i''i,{;: iK-}fii:}.:: iii:: }iriii:::"r�`ii�}:•ii::: `<:;i:F?kii':k•:}�'ti•, f . 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':`.`,':Si}:t..v.t :{. .5--: v.':SV L::•. }:::i'r.'':}:i`::$'7,.':�v:`ik}:.:. n: .. }.:, i:�Y,S,\.r.• •s>Y.$;.:;i,; ,` r •1: v:! l.:vi i..i?:\'.' h}r."•. xt}✓vyi" hruiS'.. `': vb` vk>:i :. f,"�"v'+tiS":YC`4'C?�{I e'•.::�',ra.: i... :.•.,}.} ...F.;.;f :!::::;. .:51:::Sd.::rv;.F-}: \S: is ;ri:L'.5'u ��:. �. .:y.L:..,W::�$?:�: :.iLtt..:v'. :• :-.;1=`}'{S. r ..v}:i.::..rC.:.:..v ik:5'v:�:.}i. }f'k:l ;{::.:.vd;•.: :tivr :.r}Yrhti: {::,;. :+ $'+ ,i/ 'b::. ry'''oral 7 xi.{orf ..: :ar>:a.'r.,�f:✓}r:. .: .r,d r}:w::.= Wage $800 :•v.:- ;S}vd Impact S4l:L `IAFtlIE VASJ $ VIfV S400 - s. }r. r +4 nn }r.�f $7.97 $8.62 $9.26 Wage Clap Between Major Grocery Chains and Discount Retailers 0 Low Estimate 0 Medium Estimate ® High Estimate � 62 The overall impact of lower wages in the grocery sector goes beyond the impacts on grocery workers. Each dollar lost to the region in wages lowers the spending of grocery employees on goods and services in the region, and in turn reduces the income and hence spending of others. This effect is known as the multiplier impact of a change in local wages --a lost dollar locally generates more than a dollar in overall economic impacts as it ripples through the economy, The most common estimate of the multiplier impact of wage dollars in our region is provided by the regional council of governments, the Southern California Association of Governments (SCAG). SCAG's wage multiplier is currently 2.08. That is, each dollar increase in wages in the southern California economy is calculated to generate a total of $2.08 of new spending: The $ I increase plus another $1.08 in indirect multiplier impacts. The total impact is about twice the direct effect. The same relationship is calculated by SLAG analysts to hold for wage lasses. Thus, every $1 lost in wages in the region induces a total loss of $2.08. As an example, Table 2-20 calculates the total regional impact the SCAG multiplier generates for the wage losses estimated in Table 2-19. If the wage gap between Wal-Mart and southern California grocery chains is $9.26 per hour, for example, then the regional impacts are calculated to range between about $1.6 billion to nearly $3 billion per year, depending on the big box grocer market share 63 ► �:/ - � . is � Because they regain vulnerable to changes in the real estate market, there is a risk that big box retailers and supermarket operators will opt to vacate one or more sites when they are no longer cost-effective. A survey of vacant supermarket properties in Orange County provides an example of the county -wide impacts of corporate restructuring and consolidation. Table 2-2 lists vacant supermarkets located in Orange County. Note that much of this unused property became vacant when Alpha -Beta Grocers was purchased by Ralph's. The first site, located in Costa Mesa, neighbors a thriving Rite-Aid and specialty retailers, and serves to impede pedestrian traffic between the two (FigAire 2-1). The pathology of this underutilized property stems from its attraction of parking lot vendors with excessive signage (the parking lot in front of this site is leased for the sale of fireworks), its offering of temporary shelter to homeless persons, and its symbolic message to passing traffic on East 17th Street. 64 241 East 17" Street Alpha -Beta August 1994- 2.44 Remains Costa present acres Mesa 6€111 Chapman Alpha -Beta 1985-1999 3.83 Vacant Garden Avenue acres Grove 1748.2 Yorba Linda Ralph's June 30, 1997- 3.01 Remains Yorba Boulevard present acres Linda 23641 La Palma Ralph's July 1998- 9.4 Remains Yorba Avenue present acres Linda 11382 Beach Alpha -Beta 1947 -present 3.88 Vacant Stanton Boulevard acres The first site, located in Costa Mesa, neighbors a thriving Rite-Aid and specialty retailers, and serves to impede pedestrian traffic between the two (FigAire 2-1). The pathology of this underutilized property stems from its attraction of parking lot vendors with excessive signage (the parking lot in front of this site is leased for the sale of fireworks), its offering of temporary shelter to homeless persons, and its symbolic message to passing traffic on East 17th Street. 64 NOW LEAS040: CostaFigure 2-1. 241 East 17" Street, Usually the largest stare in a complex (referred to as the "Mase" or "anchor" tenant), big box and supermarket retailers will remain vacant longer than other shopping center components because they take the longest to sell_ When a base tenant is empty, the property owner will either sell land or lease to a new tenant. Often, the owner will want to sell after a base tenant has vacated. This is difficult, given the less frequent turnover rates and the square footage involved. When the owner does try to lease, potential lessees desire to lease the property for at least ten years, given the capital investment required to fix up the property and ready it for use. The owner, on the other hand, will typically want to lease a property for five years or less, especially when the market hasn't proven itself in the past for a given property, Therefore, lease arrangement difficulties encourage longer vacancies for base tenants. The vacant site in Figure 2-2, located in Garden Grove, has fallen victim to such a dilemma, remaining unimproved for more than a decade. 65 Vacancies for mase tenaws are further complicated by the cast to retrofit, zoning and environmental concerns. The cost of retrofitting, combined with unfavorable lease terms, limits the perceived ROI as determined by potential business partners. Zoning is also a concern. A base tenant vacancy may spark interest in rezoning the property for alternative uses. The time and resources required for cornmercial rezoning add further time to the vacancy. If the site was shared with a gas station, the EPA is required to perforin a risk assessment, and past, current, and future site owners as well as (enders are potentially liable for any encouragement of environmental harm of health effects. This constraint on redevelopment would apply to base tenants that vacate a property, encouraging the adjoining station to vacate as WCIL 66 67 Chapter 2 Appendix: Health Care Covera e Issues wr The incredible strength of the U.S, economy has shown no signs of abating despite the slowdown in many overseas markets. Since 1.992, the U.S. has enjoyed an unprecedented combination of a rising budget surplus, low interest rues, virtual price stability, rising wages and salaries, and low unemployment, Optimistic U.S. consumers and investors served as the main engine of national growth last year as they pushed the growth rate in domestic demand up from 4.5 percent in 1997 to 5 percent in 1998. Thus, it is no surprise that Americans also accounted for nearly half of the growth in world demand (arid output) last year (International Monetary Fund (IMF), 1999). Yet despite the unprecedented economic boom in the U.S. during this past decade, the erosion of health care coverage in the U.S. is taking Americans clown a dangerous path (Findlay and Miller, "Down a Dangerous raft The Erosion ofFlealth Insurance Coverage in the United States," National Coalition on Health Care (MCHC), May 1999). While it is true that businesses have increased wages and expanded fringe benefits" during this economic bourn, the number of Americans with no health insurance has risen over 20 percent since 1990, In 1990, 35.6 million of the non -elderly population lacked health insurance, By 1997, the number of uninsured below The age of 65 had risen to 43.1 million (Findlay and. Miller, 1999). In 1997, this translated into approximately one in six Americans being without health insurance in a typical month. Over the course of the year, around one in five Americans were without health insurance coverage for some period of time (U.S. Bureau of Census, 1998, and raiser/Commonwealth, 1997; as cited in MCHC, 1999a). Even if the U.S. economy continues on its path of strong growth, conservative estimates indicate that at least 47 million Americans will be uninsured by 2005 (MCHC, "The Uninsured Phenomenon," available from htip://www,nche.org/know/uninsured_mvths.html-, accessed 22 July 1.999b). It is also projected that 52 to 54 million non -elderly Americans, or one in five, will be uninsured in the vear 2009. In the event of an economic downturn, as many as 61.4 million non -elderly Americans, or one in four, could be uninsured in 2009 (Findlay and Miller, 1999). Figure A2-1 illustrates the steady growth in the number of uninsured non -elderly Americans since 1990 (table from Findlay and Miller, 1999; original data from Employee Benefits Research Institute (EBRI)). Z' An increasing number of large- and midsized companies now offer their employees retirement plans, child care services, flexible spending accounts, and various formas of insurance. 68 One of the more commonly believed myths about the uninsured population is that those that are uninsured are unemployed, but the reality is that most of the uninsured either work or are dependents of workers. In 1997, 57 percent of those aged 18 to 64 who had no health insurance worked either frill- or part-time (Findlay and Miller, 1999). Recent studies indicate that although the economy generated 5.5 million jobs between 1993 and 1995, the number of uninsured Americans continued to grow by one million in each of these years (MCHC, 1999b). Additionally, from 1996 to 1997, the number of uninsured Americans increased by 1.7 million, the largest annual increase since 1992 (Findlay and Miller, 1.999). Thus, the fact that the national unemployment rate recently dipped to a 29 -year low of 4.2 percent (IMF, 1999) does little to remedy the uninsured problem in this country. In many of the nation's largest metropolitan areas, the situation is particularly grim. In twenty-one of the nation's largest metropolitan areas, at least 20 percent of the non -elderly population currently lacks health insurance. Table A2-1 presents uninsured statistics for seven major U.S. metropolitan areas, including Los Angeles. P&I In sixteen states, the number of uninsured residents exceeds the national overage of 16 percent of all residents. Additionally, in Arizona, Arkansas, California, Mississippi, New Mexico, and Texas, more than one in five non -elderly residents do not have health insurance (U.S. Bureau of Census, 1998; as cited in Findlay and Miller, 1999). Thus, despite California's decline in the unemployment rate from 9.4 percent in 1993 to 5.6 percent in February 1999 (Kimbell, Dhawan and Lieser, 1999), sustained economic growth in California cannot be relied upon to address the uninsured problem. A..JUJALN.LU.RU For over a decade, researchers have agreed that income level is positively correlated to health insurance coverage. Simply stated, love -income Americans are at a muchgreater risk of lacking health insurance than the affluent. In 1996, three in five of the uninsured population were low- income-. 28 percent were living below the poverty level, while another 32 percent were near - poor with incomes between poverty and twice poverty (Davis, 1996). But the relationship between income and insurance coverage has became increasingly complex in recent years. More and more of the middle-income population are at risk of becoming uninsured because of the rising cost of health insurance since the mid-1980s. Today, adequate health insurance for many middle-income Americans is just not affordable (Findlay and Miller, 1999). The following three tables provide an overview of some recent trends in health insurance coverage. Table A2-2 illustrates that nearly one-half Of uninsured Americans live in households earning less than 133 percent of the federal poverty line, where the poverty line is defined as a single person earning less than $9,800 a year or a family of four earning less than $20,000 a year in income. Table A2-2 also illustrates that th.e largest percentage increase occurred among families with incomes of around $50,000 to $60,000 (or 351-400 percent of poverty). The second largest percent increase occurred among families earning approximately $10,000 to $15,000 in income (or 0-99 percent of poverty) (Thorpe, 1997). 70 0-99% 0.34 34.1% 0.343 100-133% 0.346 12.2% 0.322 134-150% 0.293 4.9% 0.307 151-185% 0.267 10.5% 0.251 186-200% 0 11 .3.6% 0.234 201-300% 0.138 15.1% O.148 301-3SO% 0.052 15.1% 0.060 351-400% 0.064 2.7% 0.095 400+% 0.051 1.8% 0.073 100.0% urce: Table reproduced from Thorpe (1997). (Original tabulations from the Current Population Survey, March 1991.) 36.6% 11.5% 5.0% 9.0% 3.9% 13.4% 14.5% 3.9% 2.2% 100,0% Table A2-3 paints out that middle income families with children were more likely to be without health insurance coverage in 1995 versus 1990 if their earnings were between $20,000 and $60,000. 71 72 Table A24 illustrates that the probability of being uninsured increased for men and women of all age cohorts (with men aged fifty through fifty-nine serving as the only excepiion). The largest percentage increase in uninsured occurred among adults aged thirty through thirty-nine. Table A24 also illustrates that the pattern of insurance coverage among young adults is changing. In particular, young adults aged nineteen through twenty-nine were at great risk of being uninsured. 0-18 4.7 13.4% 4.4 13.2% 5.3 14.0% 5.1 14.1% 19-29 6 2&.5% 4.4 .20.5% 6.4 31.7% 4.8 2:3.5% 30-39 3,9 18.6% 2.7 12.6% 4.7 21.7% 3.6 16.1% 40-49 2.1 133% 2.1 12.4% 3 15.7% 2.7 13.7% 5059 1.3 12.6% 1,5 12.6% 1.5 12.4% 1.8 13.8% 60-64 0.5 10.6% 0.8 14.2% 0.6 12.4% 0.8 14.5% Total 18.5 17.0% 15.9 14.5% 21._5 18.6% 18.8 16,1% Source. 'fable reproduced from Thorpe (1997). (Original tabulations from Supplements of the Current Population Survey, March 1991 and 1996.) Althou h it is commonly believed that the uninsured are typically middle-aged, unemployed, lower-income, and able to obtain care from primary care providers through acute care hospitals, this is not the case_. Of those who will be lacking health insurance coverage sometime this year, only 15 percent will be unemployed, on welfare, or live in a household where no one is working, The majority of the uninsured live in households with an annual income under $30,000 (NCHC, 1999a). Counting both uninsured children and adults, approximately 85 percent of the uninsured population are in households where the head of the family works full- or part-time (Davis, 1996). The typical uninsured American is actually a young adult, between the ages of nineteen and thirty-nins e , with children and an annual income between $40,000 and $60,000. This young adult is generally a contingent worker in a small business or in the service sector (Thorpe, 1997). The primary sc iarce of health insurance coverage in the U.S. is through employers. The government is also a large provider of health insurance both as an employer and through public health insurance programs such as Medicare and Medicaid (NCHC, 1999a). Table A2-5 provides a breakdown of the sources of health insurance for Americans. " Because Medicare coverage applies to nearly every elderly Annerican, nimt of the uninsured population is under the al;e of sixty-five (Rowland, Feder, and Keenan, 1998). 73 Private Employers Federal Government as Employer (Includes Military) State and Local Government as Employer Retired People with Employer -Based Coverage Medicare Medicaid Purchased Individually No Insurance irce: Table reproduced .from NCK, "Health Care Facts," available from (Original data from The U.S. Census Bureau, the Department of Labor, BBRI, and the wiser Commission oil Medicaid and the uninsured.) 120 17.3 219 13.2 38 41 16 433 In recent years, employers have quickly switched to managed care plans in an effort to save money while pusbizsg for improvements in the quality of care. As a result, most have abandoned the traditional "fee-for-service" health insurance coverage that often paid medical bills with no questions asked. Three of the more popular forms of managed care are HMOs, PPOs and POS plans. HMOs provide comprehensive coverage for a fixed payment given that patients and physicians and hospitals within their "network." PPOs, or Preferred Provider Organizations, enable a patient to pay less for care obtained through providers that the health plan has contracted to accept discounted fees. Service tees increase if care is obtained outside of the network, POS, or Point -of -Service, plans are often affiliated with HMOs. like PPOs, doctors and hospitals outside of the HMO's network can be used for an additional fee (NCHC, 1999x). Employer-sponsored health care coverage has been declining slowly but steadily since it peaked in the late 1970s, and recent trends indicate that the uninsured population is likely to increase as employment -sponsored health insurance continues to erode (EBRI, 1996; as cited in Davis, 1996), In 1987, 69.2 percent of the non -elderly population had health insurance through a job or a family member's job, but by 1996 this percentage declined to 64 percent (MCHC, 1999a). This decline in employer-sponsored health care coverage has been fueled in part by a reduction in the percentage of workers accepting coverage where it is offered (Thorpe and Florence, 1999). Ineligibility is another reason that employees are not taking health insurance through their employers. In 1997, 9.1 percent of wage -and -salary and alternative workers, or ten millions workers, were ineligible for health coverage through their place of employment. Table A2-6 74 outlives some masons for this ineligibility. Table A2-7 then outlines coverage by type, eligibility, and acceptance. Doesn't work enough 5:3.3% 2.6% 56.5% 5.9% 10.4% 24.6% hours per week or weeks per year Contract or temporary 7.7%0 3.2% 41.0/0 11.0% 13.0% 31.7% employees not allowed in plan Hasn't worked for 27.2% 4.5% 21.2% 4.4% 5,7°/Q 64.4% employer long enough Has preexisting 1.1% 8.8% 30.5% 3.7% 30.3% 26.6% condition Other 10.8% 2.1% 38.6% 6.71/10 22.6% 30.1% Total' 100.0% 3.2% 43.5% 6.0% 10.9% 36,5% Source: Table reproduced from Thorpe and Florence, 1999. (origina) tabulations Froin the Conlingmt Worker Supplement to the Current Populatimi Survey, February 190,) Nate: Number of workers is 10&.5 million, and the number of ineligible workers is 9.9 million. 75 Own Employment 66.7 66.7 n.a. n.a. n.a. Family Member 21.9 0.0 7.5 4.4 10.0 Individual Purchase/Other 9.6 0.0 0.8 0.9 7.9 Employment t Public and Other 2 4.5 0.0 0.6 1.1 2.$ Uninsured 20.3 0.0 2.5 3.7 14.1 All Workers 1.23.0 66.7 HA 10.1 34.8 Source: Table reproduced from Thorpe and Florence, 1999. (Original tabulations from the Contingent Worker Supplement to the Current Populatiart Sarzvy, February 1997.) t includes individually.purchased coverage, as well as coverage from previous employers, other employer, or own company, 2 Includes Medicare -Medicaid, labor union. association or club, school or university, and other. Many workers opt not to buy coverage through their employers because it is not affordable. In 1980, 74 percent of U.S. employers paid the entire cost of health insurance for their employees, By 1993,.this figure had dropped to 37 percent (NC1"IC, )999a). As the price of health care coverage has risen, many employers have passed along some of the cost increases to their employees. In 1998, for example, employees of small businesses (fewer than 200 workers) paid an average of 44 percent of the premium for family coverage, up from 34 percent just a decade earlier. Employees of larger businesses (more than 200 workers) have also been hit by the rising costs of health insurance through their employers. They paid ars average of 28 percent of premium costs for family coverage in 1998 (Gavel et al_ 1999). additionally, a recent study found that in 1996, 9.1 million employees who were considered to have employer-sponsored coverage did not even get any help from their employers in paying for that coverage (Carrasquillo er. al„ 1999;.as cited in ]Findlay and Miller, 1999). An indication of the extensive health care cost shifting is the fact that so many employees now opt for health insurance through a spouse's or parent's health plan. This is often done if the spouse's plan is cheaper, and employers are well aware of this occurrence. Employers have responded to this phenomenon in a couple of different ways. Some employers now restrict spouses from joining, their health care plan if their own job also offers therm coverage. Other employers have instead raised the cost for spousal and dependent care coverage (Mey(,-r and Naughton, 1996; as cited in Findlay and Miller, 199}). 76 Employers also pass along the rising cost of health care in a few less obvious ways. As an employee, a consumer, and a taxpayer, Americans are feeling the effects of some hidden costs of rising health care costs. Employers pass along some health insurance costs to their employees in the form of lower wage increases. In 1996, for example, employees earning between $30,000 and $50,000 were paid an average of $2,000 less because of the rising cost of health care. Consumers feel the effects of increased health insurance costs by paying more for products and services. Because government programs fund 47 percent of Americans' health care coverage, taxpayers eventually end up footing much of the bill. In 1998, health care accounted for approximately 20 percent of the federal budget, as well as around 20 percent of most state budgets (MCHC, 1999a). The decline in the number of workers covered by union contracts is yet another reason that the share of workers with health care coverage is on the decline. Studies indicate that union members are significantly more likely to have health insurance than nonunion workers. In 1995, for example, 16.8 percent of non-union workers were without health insurance, while only 5.9 of union members lacked coverage. Also contributing to this non-union coverage problem is the fact that many of the economic sectors experiencing the largest employment growth (e.g. the service and retail trade industries) tend to have few union members (Thorpe, 1997). Although the uninsured are sometimes able to obtain health care when needed, the means through which the uninsured obtain their care (e.g. community hea.ltb centers or public hospitals) do not guarantee access and health outcomes that are comparable to the insured (Rowland, .Feder and Keenan, 1998). Some of the consequences of being uninsured include failure to obtain preventive care, postponement of care, preventable hospitalizations, lack of a. regular source of continuing care, inadequate maintenance of chronic conditions, lower utilization levels for physician care, and higher mortality rates (Davis, 1996; and Rowland, Feder and Keenan, 3998). Table A2-8 and the discussion that follows presents statistics on some of these consequences of being uninsured. (See Table A2-9, for a closer look at some of the aforementioned consequences of lacking health insurance.) 77 Did Not fill Prescription 6% 21% 24% Had Difficulty Getting Deeded 10% 27% 51% Care (Assessed By Selo No Physician Visit in Fast Year 17% 19% 42% Postponed Care Due to Cost 12% 40% 55% Had Trouble Paying Medical 11% 33% 33% Bills Had to Change Life 4% 13% 17% Significantly to Pay for Medical Bills Source: "sable reproduced from NCIIC. (1999) Studies indicate that the uninsured are much less likely to receive preventive care. In 1995, for example, 52 percent of uninsured women did not obtain a Pap smear, while only 36 percent of insured women failed to receive this preventive care. Additionally, only 38 percent of insured women between the ages of 40 and 64 did not get a mammogram in 1995, compared to 69 percent of uninsured women (Brown, 1995; as cited in Davis, 1996.) Due to financial reasons, the uninsured are more likely to postpone care. A. recent study found that 71 percent of the uninsured delayed seeking care due to financial constraints, while only 23 percent of the privately insured population postponed care for the same reason. 34 percent of the uninsured reported going without needed care in the prior year due to financial constraints, while only 9 percent of the insured faced this dilemma (Davis et al., 1995; as cited in Rowland, Feder and Keenan, 1998). The uninsured have higher hospitalization rates for health conditions and chronic illnesses that do not typically necessitate hospital care, The uninsured are 2.8 times as likely to be hospitalized for diabetes than the insured, 2.4 times as likely to be hospitalized for hypertension, and 2.0 times as likely to be hospitalized for immunizable conditions. Given proper continued care, all three of these conditions can generally be treated and managed without hospitalization (Weissman, Gastonis, and Epstein, 1992; as cited in Rowland, Feder and Keenan, 1998), 78 Ayanian el cal., 1993 Matched hospital discharge data and Ne -w Jersey State Cancer registry for 4,675 women followed for up to seven years. Billings, Anderson, Hospital discharge data from 15 U.S, and Newman, 1996. urban areas and 3 urban areas in Ontario, Cauda. Data are from 1990 ftrr all areas except New York City, from 1982-1993. Donelan et al,, 1996. Survey interview data from 3,993 atatcrvie s of randomly selected adult respondents. Franks, Clancy, and National Health and Nutrition Gold, 1993. Examination Survey Epidemiologic Study that followed 6,913 adults from 1971 through 1987. Hadley, Steinberg, National sample of 592,54$ hospital and Peder, 1991. discharge abstracts in 1987. Weissman, Gastonis, N4aryland and Massachusetts hospital and Epsle n, 1992. clischarp data from 1967. Upon diagnosis,'umnsrrred women had significantly more advanced. disease than privately insured women. Adjusted risk of death was 49 percent higher for uninsured women than for privately insured women during the four to seven years following breast cancer diagnosis. Across .all urban areas in the i3.S., low-income me patients experienced higher rates of preventable hospitalizations than patients of higher incomes. Smaller diffetezaees in rates were found in the urban areas of Onwrio, Canada. The uninsured were four times more likely than the insured to report an episode of needing and not getting medical care and three times more likely to report a problem in paying for medical bills. Adjusted risk of death was 25 percent higher fog uninsured patients than for privately insured. The uninsured were up to three times more likely to die in the hospital than comparable privately insured patients, the uninsured were 29 percent less likely to undergo a coronat-y artery bypass graft surgery, and 45 percent less likely to undergo a total hip replacement than the privately insured, procedures subject to high physician discretion. In :troth states, uninsured patients with malignant hypertension had thrice the rate of hospitalization than the privately insured. In Massachusetts, uninsured patients vvith diabetes had nearly three tunes the rate of hospitalization of the privately insured. e: Tab}e from Rowland, Feder, and .Keenan, "Uninsured in America: The Causes and Consequences," ln: The Future U.S. Heattlicare. System: Who tti!I Ca�c for rhe and Uninsured? (eds Altrnaa, Reinhardt, and Shiclds), 1998. This chapter considers another issue of great importance to local officials, one often playing a central role in the evaluation of retail projects in particular: municipal tax revenues. Big box retail is often characterized as a no-brainer, fiscally speaking. These projects are described as needing little in the way of public services yet generating enormous sums of sales taxes, a substantial part of which goes directly into the city's general fund. But this view is not always accurate, as an undetermined share of the new tax revenue will simply reflect a loss of sales to existing businesses in the community, Tax rebates and other tax incentives reduce this revenue stream. further. More to the point of this report, big box retailers who shift some floor space to groceries are migrating toward a sales base that generates substantially less tax revenue. Food sales are, for the most part, not subject to sales taxation. This chapter reviews these issues to draw three principle lessons: 1, Discount retail is a competitive and fluid business, with implications for the stability of municipal revenues. Local officials should be cautioned that a single store they lure today comprising a huge share of the local retail base alight soon relocate to another location, either in search of a better incentive deal or to find room to expand. 2. Supercenters are often built by either expanding a discount center or closing a discount center and building a supercenter nearby. Local officials should consider the impact of possible future expansions on land use, community character, local employment base and local tax revenues. 9. The fiscal impacts of Supercenters are uncertain, both because many grocery items are non- taxable and because the net impact on localities must balance service costs and shifts in local retail base with any net gain in municipal taxable sales. The chapter explores these issues in detail in five sections: (A) The fiscalization of land use planning, (B) bis box fiscal issues, (C) taxablesales and tax revenues, (D) the -fiscal impacts of big box grocers, and (F) a short summary. Local governments in California have little direct control over their revenues. Property tax rates are largely fixed and property assessments are market based only the year in which the property changes hands, One thing local governments cat) control is permitted land developrneDl pattems, which. in turn influences the amount of land generating sales tax revenues, While the sales tax rate varies throughout the state, and sales tax revenues are collected by the state, a penny from each dollar of taxable sales is returned directly to the jurisdiction where the sale took place. This is known as the situs rule, So, it is not surprising that local officials have tended to seek out retail to bolster local finances, Some are better able, or more inclined, to do so and the end result is that the fiscal position of cities varies dramatically across the state. so one consequence is that the fiscal strategy of many communities is to seek retail development, particularly high volume retail such as automobile dealersbips and big box retail. This trend toward using land use planning to generate revenues is known as the "Fiscal ization" of land use (e.g., Lewis and Barbour, 1999). In this setting, large individual retailers have become the apparent "cash cows" of the municipal fiscal environment. In case after case, communities agreed to accept big box retail development as revenue generators rather than as means to meet other community demands. But the actual fiscal benefits of such efforts are unclear and undocumented. They may indeed backfire in some. instances, Four problems are most apparent: New retail development in a city is somewhat at the expense of existing retail in a city. Thus, a share of the sales taxes generated by new retail is not new to the city at all. In addition, some cities experience only a short term spike in sales tax revenues associated with big box retail, with tax revenues leveling off after only 2 or 3 years. This is even more true at a regional level, Tax competition among jurisdictions can even have negative regional economic impacts, especially when tax rebates and other locational incentives are involved. Large retail sites do impose additional community costs in the form of traffic, security, environmental, and other impacts (e.g., Altshuler and Gftez-Ibanez, 1993). ® Most grocery sales are not taxed, so the tax base of the host city will suffer as existing retail uses shift to groceries. The use of redevelopment zones further complicates the property tax part of this story, as redevelopment zones can divert some portion of any increase in ,property tax revenues within a zone away from municipal governments (e.g., Dardia, 1998). B. B11 B, CFISrIC . California municipalities have fgr yeazs engaged in fzetce cross -city competition fox sales tax revenues. This fiscalization of land use raises several concerns. Are communities offering deals that are worth more than the local benefits generated? Even if localities end up better off, do regions suffer as retail stores play one city off against another in search of the best deal? iso fiscal concerns cause local governments to devote more land to retail uses than they otherwise might? Now, with the entry of discount retail into the grocery business in other parts of the country, the already complicated questions of local fiscal policy and land use becorne even murkier. Several points can be gleaned from recent experience: 1. Tax incentive deals are often large. The Los Angeles Times (Shuit, 1998) xeports that Long Beach rebated half of the city's share of'sales taxes generated by a recently built automobile dealership. The deal was viewed by city officials as necessary to encourage the car dealer to relocate from Signal Hill, In Ventura, K -Mart requested dismissal of $1.5 million in 91 development fees for a Super -K, K -Mart's version of a supercenter (Sommer, 1995). The Super -K development was proposed for a site across the street from an existing K=Mart. Ventura council members acknowledged pressure to meet K -Mart's terms because nearby Qxnard had recently lured Prici Club and Wal-Mart with similar deals (Sommer, 1.995). Lake Elsinore's redevelopment agency, in 1993, agreed to reimburse Wal-Mart $2.2 million out of the city's share of sale and property tax to encourage the development of a discount store in that city (Perkes, 1999). 2. The tax deals, like the one involving Long Beach, often move businesses from one city to another. In the Bay Area, Costco recently relocated from Martinez to Concord (Finz, 1999). When Costco announced the move, officials in Martinez, faced with the loss of their single largest source of sales tax revenue, responded by trying to interest other discount retail turns, including Wal-Mart, in the site (Finz, 1999). 3. Some tax incentive agreements exact unexpected costs from government coffers. In 1956, the Colton Redevelopment Agency agreed to reimburse Price Club $2.5 million for the cost of land for the store. The $2.5 million payment, plus interest, was to be paid by rebating to the company half of all sales tax revenge generated for no more than fifteen years. The agreement specified that Price Club would pay the city a penalty if it opened other stores within a twelve mile radius. In 1992, because Price Club wanted to open two stores within the twelve mile radius, the agreement was changed to both lower the fraction of sales taxes rebated to 31 percent and remove the fifteen year time limit. In 1996, the store, then owned by Costco, was closed. Costco officials said that the Colton store's low sales were due, in part, to competition from other Price Club and Costco stores in the area. Yet the original incentive agreement had been tied to the store site, not to the store itself, and Colton. owed $900,000 of the $2.5 million agreement when Costco closed in 1996. The $900,000 debt remains, and interest is accruing on the debt, despite the fact that Price/Costco has not occupied the site for three years (Perkes, 1999). The above examples illustrate that any tax incentive deal is complicated and risky, and should be evaluated carefully. Efforts to luxe the newly emerging supercenters are even more complex, for several reasons. Supercenters are often expansions of existing; discount centers. In Macon, Georgia, Wal- Mart closed a discount center to open a new Supercenter across the street (Krause, 1999). 2. A.K-Mart near Omaha added grocery aisles without increasing floor space, likely in part to compete with a nearby Wal-Mart Supercenter (Olson, 1999). Had that occurred in California, the loss of retail floor space to groceries (most of which are not taxable) could have led to a reduction in sales tax revenue generated at the site. 3. In some cases, relocations of big -box retail outlets leave behind vacant store sites and smaller shops that lose customer traffic without an anchor tenant. Richland Hills, outside of Port North, reeentiy saw their Sam's Club membership discount store relocate to nearby North. Richland Hills (Hornaday, 1.999). In Lake Wales, Florida, Wal-Mart closed a discount center when it constructed a Supercenter two Mocks away. Store owners in the complex that included the old discount center expressed concern about the loss of customer traffic to the 82 new Supercenter location (Circelli, 1999). 4. The conversion of a discount center to a Supercenter can have unanticipated land use consequences. In Pinellas parr, Florida, Wal-Mart recently sought permission to double the size of a discount center as part of a conversion to a Supercenter. The firm proposed expanding onto six acres of wetlands adjacent to the discount center site. The expansion plants have generated heated opposition, as residents have argued that the wetlands should be preserved (Lindberg, 1999). The next section looks at broader regional trends. C. T. ABSE SALES AND TAx RL, VENM Local governments share an increasing, concern for the fiscal impacts of land use decisions. "Land" in this respect represents a resource that can be vacant, unproved (i.e., it contains a man- made structure that is in use), or abandoned. Due to the impact of Proposition 13'4 on the ability of jurisdictions to generate sufficient property taxes on commercial and residential land uses, land is increasingly gauged in terms of total and taxable sales generated by an owner or lessee. Of course, the ability of a locale to support a land use will be based in part on its potential market for items sold or distributed from a given site. Thus, cities are also concerned with the effects of different categories of land usage on employment and the overall vitality of impacted communities, This section concerns both the frscalization of )and use and the subsidiary impacts of land use decisions on community vitality, should the ability of a. given square footage to generate sales and tax revenue fall short, yielding of vacancy. Two categories of retail land use were chosen for purposes of comparison: general merchandise and food stores, General merchandise is defined as any retail establishment permitted to operate as a limited price variety, department, drug, or other general merchandise store (State of California Board of Equalization, 1997). Food Stores comprise supermarkets, grocery stores with or without alcohol, grocery stores with beer and wine, and specialty grocers, such as bakeries. In order to estimate the impact of these categories on a local government, let us consider their relative abilities to generate sales, and more importantly, taxable sales, Total sales generated by 17 Proposition 13, passed in 1979, limits the assessed value of property for tax piarl)oses to its 1977 value, or its purchase price if sold after 1979, plus a maximum of 2%, appreciation per year. 83 general merchandise and food stares in Orange County were calculate using taxable sales and the Census of Retail Trade (United States Department of Commerce, 1992) data. Since data pertaining to total sales are only available for 1987 and 1992, these figures were used to calculate the percentage of total sales by category that are taxable in Orange County. It was determined that in 1992, 70% of total general merchandise sales are taxable, compared to 38.6% for food stores. These percentages mirror those derived from 1987 data (State of California Board of Equalization, 1987). Data was compiled in an Excel spreadsheet for taxable sales Orange County city, and the above percentages were used to determine total sales. Figure 3-1 represents these estimates for 1990 through 1947. Figure 3-1 illustrates that following 1992, total food store sales began to fall, while general merchandise sales remained relatively constant throughout most of the County's recession period. Total estimated sales were $4.5 billion for general merchandise and $3.26 billion for food stores in 1997. It can be concluded that general merchandise has a far greater potential impact on the County's economy. Figure 3-1. Estimated ".Total Sales: Food Stores and General Merchandise Stores in Orange County (S thousands) To better understand the fiscal impacts of these categories that are realized by city governments, taxable sales were investigated. The State Board of Equalization maintains statistics for taxable sales as well as the number of store permits from which they are generated. Through use of such information, one can better understand the potential impact of a single land use decision, though 84 it remains potentially skewed by the range of store size in each category. It can also suggest previous impacts of big box retail sitings within individual jurisdictions. Figure 3-2 and Figure 3-3 show the percentage of taxable sales that are accounted for by general merchandise and food stores in Orange County, respectively. 85 �'ecrerea+® Z_3, �'e`rsnd Taa Qh1s� €k"oDntr �c 9 iBcarns+ntA�a nE'1°n4se1 T2u*�ai3 °I's�4rsshlP �rxteac Figure 3-4 and Figure 3-5 represent taxable sales per permit for the two groups. 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',F; �r:\.vM1.:v:'t;:?:r;.<�: th=;::.{;r;.{:.x}: ;�. ,: r• 2S:.yn:::;Y.':i:..sriy, ,=::';•f.::. :;�:S:u.2,h;��i�:rw%�;: e<�':i�'•;J v: .;s;a.:6 h -:.::;?.i.:;; �v.:ati,r::2c:: }:r :,. +s.F{;:'t `?:'�: 'L:t;:a rr..sJ;:s;.:. } �r.r.;. k{�fy : ,. � .tc•y..y .. „{ ;: x?:i}sti � v;iir - fi;: ^'R,. 'Y'71.,,..lra.,ax ,>='4:r`. '�::. W;�i; js,"r,•: "`•{ �`2:"v�:-�:•+:+:.:::. '\::,�• r:.�w, -. >�3y{^v'sti:+2},'•��l...r,::^�'i}:i::.i}v;.i�}'i:h:!;•irii:•:, 1:�:'::.:.�v:�}1:.....: i`ti'{:?::%'•:::ivSi i\:n1��tit��ji{ti=......v2':.i�{Yi �L':::�:{)r�£::; i::i:;v n�Sii:?::i; { it i�•t' 1991 1492 1993 199 1995 1996 1997 While general merchandise taxable sales per permit fell significantly in 1497, they remain more than four times higher than food store taxable sales. It remains evident that both industry groups are susceptible to economic and market shifts, although the trend for per permit taxable sales for general merchandise appears to be one of gradual and then accelerated decline, This decline suggests either a change in the industry mix in terms of the relative size of general retail establishments (Le., a growing proportion of smaller vendors could reduce sales per permit), or in the efficiency of permit operators. For instance, if big, box retailers do not continue to account for their high floor -to -area ratios (FAR) and intensive usage of parking space with similar gravity effects (i.e., the attraction of a proportionately larger market radius) and merchandise turnover, then lower sales per square feet would ensue. Another possibility would be that the mix of goods sold and purchased at larger retail establishments might be shifting to one that includes more non-taxable items, such as prescription drugs. To further investigate the impact of big box retail on a local economy, taxable sales per permit were calculated for two cities that have experienced the introduction of a Wal-Mart within the last ten years. Table 3-1 gives the opening dates for Wal-Mart stores within Orange County. 87 440 N. Euclid Street, Anaheim 1131/95 27470 Alicia Parkway, Laguna Niguel 1195 2595 F. Imperial Highway, Brea 1/98 2300 N. Tustin Street, Orange 1/98 3600 W, McFadden Avenue, Santa Ana 1/98 13331 Beach Boulevard, Westminster 6/20/98 Source: Cities of AnAheim, Laguna Niguel, BTra> Ozange, Santa Ana, and Figure 3-6 and Figure 3-7 show taxable sales per permit for general merchandise and food stores in Anaheim., while Figure 3-8 and Figure3-9 provide the same information for Laguna Niguel. The remaining Wal-Mart locations within Orange County were opened in 1998, for which complete sales tax data were not available. Figure 3-6: General Merchandise Taxable Sams per Permit in Anaheim ($ thousands) $3J500 :y4{:i{;v:r�:'F:�:•�:�V',,L��:;.iz�::yii:l�"-tifir',�'�,r:'F',rv`1':"n :`: ,1 f: r�4.�r�}rr..E�}.:}�.''r`.:ry ..c �- .. {�:i Ev ^'t:.�. {••.: :. +:i� ��: •,�:� ��. .. , _.v,V.y-}::F'[:<:{u`:.Y+,.,;:2+:�:>cS•''.'h:•R.' ... i,; U ��jJi\`�St:}:•'ith-.[>'•.r{};riy,•r {: ti'Y::. r,.v.:y. 900 •�S`�'.G:{,'; : .f. v.?:y'¢r-:s,�`;2,';2:>::`,:,:;2,Y.t@`:'�. r. 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Y,�A * .: �.`, yv 15ti-`f<Y % : i�' '! k a'S'yy'', .v', T ' i' •? i Y#�C.,c t J,AiY# y .S +45 �� 1 '+'•ii � i tfe Y, `Y 5 Y., . -`f'C •} .v ''+ hf'"'�,� SSalesryqey T(f(Y Q� (('�]�''��''�� y:�, � }t •.ti .}`R:":. .r�'i'3.�`R"�'«�a'�' �, . S }ar it �' ��:. Per ��y ViF'e.�"';':Y,y�4'i + a � ~i' �S sf•�i1`- i`J:f )#�' •f+2 t 5 l �4. i'� M1� �� .a / �i"; Perrrit $4, (in 000s) v, s{4' °„ r' `� v< .ii" ° y . ry , •ia r 4 �' +. �'.+�+.':'.r.'« �`' x,gr, �. ,}, a uicf:.•.d.. 5 ` t-;'"�yL 3:',.•+y r{$� .,#;��k,.�i. MAN ��`%�,{ :«�+'qq? •^ ' , 9 „• •s � •.. ti, r �t�k%.,±`'` .,:'»(',,'• } Y�'�'Cd��`ywE "'S' 1' w. `-�• :.� yT . n 4.tr.. ak.., lA ,Y;c.Z ,��vi"'r5.1 /¢•��py�.$/�� ` { re,`,'.¢{k a. C• _ • 9 9 ' •r' ?` :+t.. y»: f`.C,�•.F' t W` 'Y{s�*Yo>i <' ',. l..}fV y1vY#`,��,•a�,b�#�` �G'�i;:3:^`.2}a: 1a: RY�E�'i�.,:.•.�.." ` .f:..... �°J. 4 �i #�v ,T, `'�\'�:+�4t4. *�;; ..... .f° �:i�,a `:`t3 t,�*yt.�'k<�)y;S:?><<�''fc``�#'<:`,�•'; i.�x;:#•:�E y;;? "�``' `ay�:i u:,^'v {'�k1R' ,{;�Ow o° t .. rE.•t2;3 it+2::�� £1�{r4r}�. � �. ay��,tr. •% {a:.y�• as E,3 ;r 7{ r22Z'kr. t.: 4S�. Li^+�h'•'h �kY}i� "y4am 1990 I99' 119921993 199 1995 997 1996 99 1, Figure 3-9: Food Stores Taxable Sales per Permit in Laguna Miguel (S thousands) 90 The rapid increase in taxable sales per permit in 1995 suggests that the shear size of a Wal-Mart can change the fiscal landscape of oven a large city. Amazingly, gains in taxable sales per permit trade through the addition of a big box retailer were all but erased by 1997. This, too, reflects the volatility of large-scale retail operations, where establishments that would appear to be the "anchor" of given location are not immune to downturns or closures. Laguna Niguel is also instructive, as it represents a relatively sinal[ retail market. Between January, 1995 and December, 1996, general merchandise sales per square foot doubled. Again, these per -square footage gains were erased by the end of 1997. One lesson that can be gleaned frorn even a cursory glance at .Figure 3-6, Figure 3-7, Figure 3-8, and Figure 3-9 is that in spite of the inevitable fluctuations in taxable sales caused in part by the entry and exit of big box retail, sales per permit will always overshadow that which is generated by food stores. When we shift our analysis from permits to square footage, however, we find that much of this discrepancy is caused by the fact that big box retailers operate such vast facilities. While on a per square footage basis these stores may not be as efficient as grocery stores (see `fable 3-2), the size of the store, coupled with differential sales to taxable sales ratios, will result in the taxable sales gap presented. When considering the siting of a big box retailer such as Wal-Mart, fiscal impacts will undoubtedly Gonne into play. While these facilities can offer the promise of large aggregate tax revenue, they also pose some serious risks:. Pearson correlations were used to calculate the linear association between total taxable retail sales change from 1990 through 1997 and the component parts of general merchandise and food stores. Such a relationship will suggest the ability of one industry to weather changes in the overall retail market. While correlation does not necessarily prove causation, it can theoretically suggest the effects of one variable on another. 91 For instance, a significant and positive correlation between two variables would suggest that as one variable increases, the other will do the same. Fable 3-3 presents the results of Pearson's correlations, Correlations were also run for change -in taxable sales per permit from 1990 through 1997, between total retail and the two variables. Sig. (2 -tailed) Pearson 1.000 .591 .374 .944 .786 .062 til Correlation 21 21 21 21 Pearson 062 .068 Sig. (2 -railed) .093 005** .066 .000** .000** .769 N 25 21 25 25 21 25 .659 Pearson .591 1.000 .301 .645 .832 .068 i[ll Correlation Sig. (2 -tailed) ,005** .185 .002** .000** .771 N 21 21 21 21 21 21 le6.:'..: Pearson .374 .301 1.000 .224 .415 .515 ii : Correlation Sig. (2 -tailed) .066** .185 .282 .062 .008** N 25 21 25 25 21 25 ala 14 t Pearson .944 .645 .224 1.000 .780 .093 Correlation Sig . (2 -tailed} 00g* 002** 282 .000** .659 N 25 21 25 25 21 25 Pearson .786 .832 .415 .780 1.000 .042 Correlation Sig. (2 -tailed) .000** 000** .062 .000** .858 N 21 21 21 21 21 21 Pearson 062 .068 .51.5 .093 .042 1.000 Correlation ig. (2 -tailed) 769 .771 .008** .659 .8.58 N 25 21 25 25 21 25 These correlations suggest that as tote} taxable retail sales increase, total retail sales per permit and total general merchandise taxable saps will also increase. leo such relationships were found between total retail sales and taxable retail sales or sales per permit for food stares. In addition, changes in taxable sales per permit for the entire retail industry were significantly related to changes in total retail sales, changes in general merchandise sales, and changes in per permit general merchandise sales. Again, similar relationships were not found between total retail and food stores categories. 92 RV The risk implied by these results is twofold: general merchandise stores are far more vulnerable to market shifts than food stores, and changes in sales per permit is related to total sales. Thus, the tradeoff presents itself big box retailers will most likely enter a community, boosting overall, retail sates and tax revenues, only to be among the first to consolidate or fold when conditions begin to change. If a big box retailer were to include food sales in its operations, these relationships might also hold true. Free-standing food stores would likely yield market share and in some cases become vacant, while taxable sales from grocery operations would shift to locations that are much more prone to the impacts of regional business cycles. Large-scale retailers present a cost -benefit assessment problem to an interested city. Consider the typical public bearing for the siting of a Wal-Mart in Change County: concerns over potential clientele, crime, design changes and character are raised (Wolfe, 1999). The fiscal impacts of the facility are often seen as clear-cut, but they are not, particularly when a big -box retailer expands into food sales. This threatens to lower the taxable sales per square feet for a land use that is already riddled with inefficiencies and great risks should market conditions become unfavorable. 93 Chapter 4 Cond!!ding Comments The grocery industry in the United States and California is currently changing rapidly. One of the most important trends is the combination of big -box discount retail and grocery sales into supercenters. Wal-Mart stands out as the most aggressive entrant into the supercenter market. In 1990, Wal -Tart operated six supercenters. By the year 2000, Wal -dart is projected to have 714 such stores, solidifying its position as the leading owner and operator of supercenters nationwide. Three sets of policy issues are important. Supercenters, especially Wal-Mart supercenters, are often conversions of existing discount retail stores, and local officials should be aware of that possibility. In 1999, Wal-Mart estimated Haat 72% of all neve Supercenters would be built: by converting existing Wal-Mart discount centers. Because the grocery and general retail industries differ dramatically in their pay scales, function within the community, and ability to generate sales tax revenues, this is far from a simple expansion of an existing business. Local officials should be aware of the possibility for conversions of existing discount centers into supercenters. 2, The grocery industry in Southern California pays substantially higher wages, and offers better benefits, than Wal-Mart. If Wal-Mart or other low labor cost food retailers enter the southern California market, the ability of the grocery industry to provide high - paying, entry-level jobs will be considerably reduced. By far the largest controllable cost in the grocery industry is wages and benefits. Large labor cost differentials do not persist. Should a discount retailer enter- the southern California grocery market and compete effectively while paying wages below the current noun for the industry, the pressure on existing chains to lower wages and benefits would be immense. Estimating that Wal-Mart supercenters could capture from 10% to 20% of the southern California grocery market, we calculate the direct value of lost wages and benefits to range to nearly $1.4 billion per year. Accounting for the multiplier effect as those wage and benefit cuts ripple through the economy, the total economic impact on the southern California economy could approach $2.8 billion per year. 3. The fiscal benefits of supercenters, and of discount retail more generally, are often complex. Supercenters in particular combine marry non-taxable fond items under one roof with general merchandise. Furthermore, any discount retail outlet potentially shifts sales from existing local retail, and the net impacts on local sales tax revenues are far from certain. 94 The aggressive entry of supercenters such as those operated by Wal -Dart into the regional grocery business is expected to depress industry wages and benefits at an estimated impact ranging.frorn a low of $500 million to a high of almost $1.4 billion per year, potentially effecting 250,000 grocery industry employees. (Chapters 2 and 4) The full economic impact of those lost wages and benefits throughout southern California could approach $.2.8 billion per year. (Chapters 2 and 4) Viscount retail chains that operate supercenters, including Wal-Mart, typically offer much less comprehensive health care coverage than major California grocery chains. One negative economic impact of Supercenters could be, a dramatic redaction in health coverage for most of the 250,000 grocery employees in California. This can lead to lower quality care for grocery employees whose health insurance benefits are reduced. (Chapter 2) The fiscal benefits of supereenters, and of discount retail more generally, are often much more complex, and lower, than they first appear. This is particularly true when big box retailers close existing stares to move into larger quarters elsewhere, when they expand an existing store into food, and when retailers reconfigure an existing store to sell food without expansion. in each case the additional tax revenues generated will i part come from existing businesses elsewhere in the city in the forth of lost market share. (Chapter 3) Supercenters, especially Wal-Mart supercenters, are often conversions of existing discount retail stores. Thus local officials should carefully consider the passibility of a future conversion to a supercenter, and any attendant negative economic, fiscal, or land use impacts, when approving big box discount retail projects, even when the proposed land use does not include immediate playas for grocery sales. (Chapter l) The wage and benefit impacts of the entry of big box groceries into the region are estimated using a two step process. First, we estimate the market share that dal -Mart supercenters are expected to capture in southern California, based on current averages of between 47 and 57 stores per distribution center. Using data, on market share and number of stores in several urban areas, we conclude that one distribution center roughly translates to an 10% market share for Val -Mart supercenters in southern California. The assumptions that led to that estimate were uniformly conservative, and so we also use an estimate of 20% long -run market snare for supercenters, comparable to the major existing chains in southern California. We then calculate the wage impacts of these market share estimates. Even a 10% market share for supercenters is a substantial competitive threat to existing chaises, and those chains are likely to respond aggressively, Case studies of similar competition between low and high labor cost grocers illustrate that grocery chains cannot tolerate large labor cost gaps. This evidence indicates that in the short-term grocery chains typically seek to close approximately one half of the wage gap with major competitors, Over the long term, the grocery chains may seek to lower wages to their workers to eliminate the entire difference between their pay and that of discount ZR W retail employees, an average difference of over $9 an hour currently. Using data on current wages and benefits, we calculated that the direct impact can workers in southern Califortiia would likely fall in the range of about $500 million to $104 billion per year in lower pay, depending on the big box food sales market share. Using the Southern California Association of Governments estimates of how these lowered wages would impact the regional economy, the total regional drop in spending ranges from. about $1 billion to over $2.8 billion per year (Chart 4-1). The numbers will rise the larger the market share of big box grocers, and could well top even these figures over time. Chant 4-1: Estimates of Regional tneorne Losses From Lower Wages Paid by Big Box Grocers (frorn Table 2-20) $500 so $7.97 $8.62 $9.26 Wage Crap Between Major Grocery Chains and Discount Retailers El Low Estimate 0 Medium Estimate 0 High Estimate In addition, we find that the tax mvenue impacts of big box grocers are uncertain. While big box retail does typically capture taxable sales from outside the jurisdiction, it also captures business from local retail, thus hurting the local economic base of the community. There is evidence as well that the initial growth in sales tax revenues from the big boxes may not be either steady or sustained in some situations (e,g., )Figure 3-8). 96 83,000 $2,500 $2,000 Total Regional $1,500 Income Impact ($millions) $1,000 $500 so $7.97 $8.62 $9.26 Wage Crap Between Major Grocery Chains and Discount Retailers El Low Estimate 0 Medium Estimate 0 High Estimate In addition, we find that the tax mvenue impacts of big box grocers are uncertain. While big box retail does typically capture taxable sales from outside the jurisdiction, it also captures business from local retail, thus hurting the local economic base of the community. There is evidence as well that the initial growth in sales tax revenues from the big boxes may not be either steady or sustained in some situations (e,g., )Figure 3-8). 96 Figure 3-8® General Merchandise Taxable Sales peg° hermit in Laguna Niguel (from page 88) (Mote, The Wal-Mart Opened in 1995) 9000 :�4� :? M},5 �'''W .e��,:fit:k:"•�.':xµ'' `?•,," ` Sy,..S;;'yfi�'�:� l:i.:s.,{.,�,;,,.�,�. y:.x:, t .^/� )/�{ e/�� " "1�*� r•ti} �: A.y��-�:�Crf}'�..�:,r vLv'�r.3�•''1�e,:L Fv.,,';yY} 4. .},`'`„4::^:;}:hi: f 6/ 0 V - 4'.}y; ,}?'. ., ` 4 .:rv. .+L�.. - :::'S✓•,�A},S ' L�`y YX �':C �': 'ties •�'S$-� y�' �; '}• r- :.�:`+.4 '•,`i�v4`F£ ' ti}.. g rG�;$„ . <::� „�`,={'�n �{%,'`<i 'k "Ry�t, . •f y'a3 ` ',Y;t6..`ti �.,ttti;r , s. {i��•" �t' y�^; ar%,: '„2< " 'Y4,, t{"'' 11:°:3e d�r.yy.`c: vr':<zr:.;k;"2'{: V, • '. ;{, J�. ,'?. {�i' ••. .. .r. e?.4o-�c5;�:`:}"y wG,, , �' ' n;° `v s,�rr, .,fM.�°w: �, ..{.. •::.• a - { 5. wax S�;:eo- �'�'r ; •: s $L7 LL 50511P0(� •r: •.Yi: a°:•}.�•.a?f{.�.� { •-}� r: • 'k ?;',r.s ::•:<;•�';`<: Waw'},?r<x ..w -'h .`:}:'',Fw?'��:. �,��.;:a:.ti . ' fJ ?:;4. '#,`'?a:er{r.`��`�:��v:'t` Y,py..�{,,.;F- --••{ `}:."„s:.�} .`L't .�,ri'y�. ,�F��y'.+'•„3:ti,ti 4'{'>'st }•.}�? '��,� s - �rh... '?'h��` p •a v' .?1g47, - . 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' c.-)''-'},.,,,-9,';ya;4.a °.rr..`� "r „�h`.,.yx v r' L, :�k?cr��3'}.ar: �^'e��,{ ••f'r}Sh••M'-:?,.•is y,•:r ::d•..-. 5(S{ - - \i`.'i< i`.:1 -'r ' i5.t'yy�'"y�i.Xv'Y Z .k4i•: ;{.},+Y'C;'`. .:....:i <..o�t; • �3,°;�s4;•�.e:3ti h Fy�ikL•`3i;s•'i ' y. 4•.::. 1992 1993 1994 1995 19961997 More to the point of this report, a much larger share of food sales are not taxable at all. Most of the Wal-Mart supercenters result from the conversion of existing Wal -Maris into a combination of general merchandise and food sales. Thus, the floorspace devoted to taxable sales may actually fall as those conversions continue_ There is also evidence that general merchandise stores are far more vulnerable to market shifts than food stores. Thus, this tradeoff presents itself. big box retailers will most likely boost overall retail sales and tax revenues on entry, only to be among the first to consolidate or fold when conditions begin to change. If a big box were to include food sales in its operations, theca free-standing fond stores would likely yield market share and in some cases become vacant., while taxable sales from grocery operations would shift to locations that are much more prone to the impacts of regional business cycles. These potential impacts are significant, with respect to both the vitality of the local economy and the public budget bottom lime, The transformations in the grocery industry thus present local officials with some key policy considerations. The grocery business is a vital part of the economic and the community fabric of most every municipality in the region. The changes occurring in Haat business have the potential to quickly and adversely affect the economic health of localities, and officials should be aware of that potential as they evaluate future discount retail projects. 97 In particular, the following questions are important in evaluating discount retail projects. Is there potential for changes in the use of the property? Discount retail chains are increasingly taking on the functions of grocery stores. In light of thattrend, local officials should both be aware of the potential for the conversion of discount retail sites into supercenters and inquire about future plans for discount retail stores seeking local planning commission and city council approval. How will the discount retail store affect the local labor force? Discount retail chains traditionally pay substantially less than the grocery industry in southern California. Local ofBicials should carefully assess the possibility that a particular discount retail project might depress wages in other stores in the municipality, What are the fiscal impacts of a discount retail store? At the most general level, local business both require public services and have the potential to produce local tax revenues — a point often missed when off trials focus exclusively on the tax revenue side of the equation. Any land use, even big box retail outlets that are perceived as municipal "cash cows", must be carefully evaluated. Some land uses do not generate tax revenue that outweighs municipal costs. In other instances, the data in Chapter 3 suggest that discount retail stores produce only short -terra increases in local sales tax revenue. And the cyclical nature of retail sales tax revenue suggests that the revenue streams from supercenters might be highly variable over time. Local officials should carefully evaluate these and related issues when they assess the fiscal impact of a discount retail Nutlet or supercenter. For decades, grocery stores have been hidden but: important parts of the health of many southern California municipalities. Recent changes in the grocery industry have the potential for catching local officials unaware of the passible impacts in heir communities. This report highlights the potential for economic impacts as discount retail chains develop supercenters, while also emphasizing the uncertain nature of any local fiscal benefits. Local officials should carefully evaluate the implications for their communities. W. Keferences . Altshuler, A. and J. G6mez-lbdfiez. (1993) Regulation for Revenue.- The Political Fconomy of Land Use Exactions. The Brookings Institution an d The Lincoln Institute of Land Policy. A.ndreeff, Monica (1997) "Safeway Employees Picket Hiring Centre." Calgary Herald. March 20. Bailey, Bill. (1999) Food Employers Council. Telephone interview, Anaheim, California, July 29. Brown et ale, Women's Health -Belated Behaviors and Use of Clinical Preventive Services, New Fork: The Commonwealth Fund, October 1995. California State Board of Equalization (1990-1997). Taxable Sales in California (sales and use tax). Sacramento, California. Canada Safeway Limited (1996) Press Release: Safeway Reaches New Tentative Settlement with Ul"CW Local 2000 in British Columbia. July 8. Canada ,Safeway Limited (1996) "Ara Open Letter to Safeway Employees," advertisement placed by Canada Safeway Limited, Vancouver Sun, .Tune 8, p. A-28. Canada Safeway Limited (1996) "The Facts: A Message to Safeway Customers," advertise-ment placed by Canada Safeway Limited, Vancouver Sun, May. Carrasquillo, et al. (1999) "A Reappraisal of Private Employers' Role in Providing Health Insurance," New England Journal of Medicine, 14 January, Circelli, Deborah. (1999). When Wal-Mart Leaves, Other Businesses Suffer. Lakeland, Florida Ledger. July 17. News, p. A-1. Dardia, M. (1998) Subsidizing Redevelopment in California. Public Policy Institute of California. Davis (1996) "Uninsured in an Era of Managed Care," AHSR Presidential Address. Davis et al. (1995) "Health. Insurance: The Size and Shape of the Problem," .inquiry. Dayton Hudson (1998) Corp Annual Report, 1998 EBRI (1996) "Sources of Health Insurance and Characteristics of the Uninsured: Analysis of the March 1995 Current Population Survey," EBRI Issue Brief, February. Finz, Stacy (1999) "Big Costco Store .Applies to Move From Martinez to Concord." Sara Francisco Chronicle. February 4. News, p. A-17. Food Employers Council (1999) Summary Plan Description, Collective Bargaining Agreement for Major Southern California Food Chains, .Anaheim, California. Gabel, et al. (1998) "Health Benefits in 1998 for Small Employers," A report to the Henry J. Kaiser Family Foundation, February, as cited in Findlay and Miller (1999). Gofman, Robert (1997) A .Re-examination of Some Key Impacts of a Wal-Mart Stare in the City q f San Leandro, April. Grocer Today (1996) "The Changing Face of Labour," in Grocer Today, September, pp. 13-18. Hannaford .Bros' (1998) 1998 Annual Report. Hornaday, Bill W. (1999) Richland dills Set to Fill Sam's Void, Fort Worth Stlart Telegram. January 26. Metro, p. 1. International Monetary Fund (IMF), "World Economic Outlook," May 1999 Kent, Gordon (1997) "Union May Buy Ads to help Woo Safeway's Customer's Back" Calgwy Herald, June 9. Kimbell, Uhawan and Lieser (1999) "The UCLA Anderson Forecast for the Nation and California," March. Kmart (1999) web site: www.kmart.co . Kmart. Corp (1998) Annual Report, 1998, Krause, Thomas W. (1999) Wal-Mart Store to Close, Reopen Across Street. Macron Telegraph, August 7. Kroger (1999) Press Release, May 27, Laghi, Brian (1996) " Strike by Safeway Workers Stirs Emotions" The Globe and Mail. April 11, p. A-2, Levan, R., et al. (1998) "Nearly Circe -Fifth of Urban Americans Lack Health Insurance," UCLA Center for Policy Research, December, as cited in Findlay and Miller (1999). Levant, Ezra (1997) "Safeway Union Playing Chicken" Calgary Sun, May. Lewis, P. and E. Barbour. (1999) California Cities and the Local Sales Tax. Public Policy Institute of California. Lindberg, Anne (1999) Pinellas Park Wal-Mart Turns in Expansion Plan. St. Petersburg Times. June 9. Seminole Times, p: 6. Meijer (1999) Web site: (www.rneijer.com). Meyer and Naughton (1996) "Assessing Business .Attitudes on Health Care," A report issued by 90 the Economic and Social Research Institute, October. NCHC, "Health Care Facts," available from ww h , Jku wf ve a hnnl; Internet; accessed 22 July 1999 Olson, Jeremy. (1999) K -Mart Conversion Adds Grocery Area. Omaha World Herald, July 26. News, p. 11. Perkes, Courtney (1999) Warehouse Store is Gone, but City's Debt Still Grows. ,riverside Press nterprise, Moreno Valley Edition. July 4. Local, p. B-1. Personal Communication with each of the planning departments listed on the Wal-Mart openings table on July 26-28, 1999. Post, Kathy (1999) Planner with the City of Anaheim, Personal Communication, July 28. Progressive Grocer (1998) Market Scopewww.arnericaslstores.com) Progressive Grocer (1998-1999). Annual Report of the Cxrocery. Industry. Progressive Grocer as cited in httti,�/�v<uw.f�i.c�r�fi.� dJse ger. t.tatznl Progressive Grocer (1999) 66'� Annual Report of the Grocery Industry, April. Rowland, Peder,. and Keenan (1998) "Uninsured in America: The Causes and Consequences," In: The Future U.S. Healthcare System; Who Will Care for the Poor and Uninsured? (eds Altman, Reinhardt, and Shields). S & P's Industry Surveys (1998) Supermarkets & Drugstores, September 24. Safeway (1999).Press Release, 23 July. SLAG (1998) RTP Adopted Forecast, .April. Shelby Report (various years) The Shelby Report, Shelby Publishing, Atlanta, Georgia, Shuit, Douglas P. (1998) The Retail Wags the Dog. Los Angeles Times. July 17. Metro, p. B- 2. Smith, Andrew (1997) `.Strike Looms," Calgwy ,Sun. March 25. Sommer, Constance. (1995) Super K Developers Urge City to Waive S1.5 Million in Fees. Loc Angeles -Times. March 9. Metro, p. B-1. Stockton Record (1991)Feb. 28, p. B-5 Stone, Dr. Kenneth E. (1999) Iowa State University, Telephone interview, 29 July. Thorpe (1997) "The Rising Number of Uninsured Workers: An Approaching Crisis in Health Care Financing," NCHC. (Original tabulations from the Current Population Survey, March 1991.) 101 Thorpe and Florence (I 999) "Why are Workers Uninsured? Employer -Sponsored Health Insurance in 1997," Health Affairs, March/April. US Department of Commerce (1992) Census ofRetaail Trade. US Department of Labor, Bureau of the Census (1993-1996) County Business Patterns Annual. Foos, Paula B. (1992) "The Relationship Between the Earnings of Individuals Working in the Grocery Industry and the Percent of Such Workers Organized in a Given Metropolitan Area in 1987 and 1989," Department of Economics, University of Wisconsin, Madison, February. Wal-Mart (1998) Wal-Mart .Associate Benefit Book. Summary .Plan .Description Wal-Mart (1999) web site. www, vyal- mart. com. Weissman, Gastonis, and Epstein (1992) Journal of the American Medical Association. Wolfe, Joan (1999) Planner with the City of Orange, Personal Communication, July 26. 102 The following appendices are "Supermarket Fact Sheets", one page "summary of operations" on each of the fifteen supermarkets highlighted in the background section of the report. These fact sheets include information on such things as employment, size, average weekly sales per store, growth in number of stores, recent mergers, presence in Southern California, and labor union affiliations -where applicable and when available, 103 Appendix A: Albertson's Inc Sources: Alberlson`s 1998 Arxr:eras Report and SFC Fornr 10 K for the Fear Ended 28 January 99, and S cK P's Standard Corp. Descriptions, Cumnr. Neaa s , 1998. Employment - 80,000 FT + 20,000 PT = 100,000 ernployees Year En 1494 1M 12% IM I Number of FT emplayees 60,000 65,ON 71,000 75,@(111 80,000 Total number of employees 76,400 80,OM WOW 94,060 100,000 Size and Scute: Number of stares: 983 (Nate that this value increased to 1,580 following the merger with American Stores) Number of stores in California: 128 in Southern California and 48 in Northern California Number of distribution centers: 1 l Location (square footage) and type of center in California: 1. Brea (1,4 million sq. ft.): groceries, frozen food, produce, liquor, meat, and deli 2. Sacramento (0.4 million sq, ft_): groceries, frozen food, produce, meat, and deli Average stare size_ 49,200 square feet Size of the C©s super grocerylsuper drugstores: 35.000 to 82,€ 00 square feet Store Count: Year End 3.424 1249 192_f IM "A Combination Food -Thug 588 646 715 768 866 Conventional stores 88 78 72 72 86 Warehouse stores 44 40 39 38 31 Total number of stores 720 764 826 878 983 Geographic Location: 26 Western, Midwestern, and Southern states, including CA Recent Mergers: Albertsunt s and American Stores Co merger completed in Juste 1999. Albertson's acquisition of Buttrey completed in October 1998. Alberlsori s acquisitian of Bruno's completed in August 1998. Albertson's acquisition of Smitty's completed in April 1998, Albertson s acquisition of Seessel's completed in January 1998. Sales: YCALfrsd MQ 19-2 M 1.`?_U 129A 1m Net saes (million $) $ 8,219 $ 8,680 $ 10,174 $ 11,284. $ 31,895 S 12,585 $ 13,777 $ 14,690 104 Appendix Ba American Stores Co Source: American Stores Co's SEC Form 10-K for the Year Ended 30 January 99, S & P's Standard Corp. Deesrrip#iwrs, Ctmmpr_ News , 1998, and Albertson's News Release, 24 lune 99. The Company - The Co's stores operate under the following names: Acme Mkts, )e -vel Food Stores, Lucky Stoics, Osco Drug, and Sav-on Employment: 121,000 FT and FT employees Laser Issues-- "Approx. ssues_"Approx. 75 percent of the Cds employees are covered by collective bargaining agreements negotiated with local unions affiliated with one of seven di€ferent ialerrmtional taraions. There are approximately 118 such agreements, typically having three to five-year terans. (accordingly, the Co renegotiates a significant number of these agreements every Year... The largest collective bargaining agreement, which covers approx. 17 percent sof the Co's labor force, expires in October 2002" (SFC Form IO -K) . Size and Scope: Number of states: 527 supermarkets + 773 stand-alone drug + 283 combinfttion food/drug = 1,580 stores Number of stares in California: 353 supermarkets + 283 stand-alone drag + 48 cumbinatioan foodldxug = 694 stores Number of warehouse, distribution, and maintertance facilities: 15 Location (square footage) .and types of warehouse, distribution, and maintenance facilities in California: 1, Buena Park (1.2 million sq. fl.): grocery, meat, frozen food, dela 2. Irvine (1.0 million sq. ft.): grocery, produce 3. La Habra (1.2 million sq. t3.): general merchandise, liquor, bulk, pharmacy, reclaim 4. San Leandro (0.6 million sq. ft,): meat, produce, frozen food, bulk 5. Vacaville (t1.9 million sq. #1.): grocery Year -End 19N Lm 122fi 3997 Im Total selling area (thousands of sq. ft_) 31,179 32,523 33,823 35,114 36,043 Year End i92A €aroctre IIX= CRWhQ 119al Average square footage (thousands) 34 19 60 31 Total square footage (thousands) 17,727 14,356 16,979 49,072 Geograpbic Location: 26 U.S. states, including supermarkets and/or combination foodidrug stores in CA, DE, IL, IN, 1A, MD, NV, NJ, NM, PA, UT, WI j Recent mergers jJ American Stores and Albcrtsori s merger completed in )tune 1999. Sales: Year End 129 3921 ;942 tm L"A M 12M 1"7 3 Net sales (million $) $ 22,156; $ 20,823 $ 19,051 $ 18,763 $ 18,355 $ 18,309 $ 18,678 $ 19,139 $ 19,8 105 Appendix C: Food Linn, Inc --- ---- -- -- Sources: Food Lion, Im's 1996. 1947. and 1998 Annual Relivrts and SEC'Forni ](�-K for the Fiscal Year Ended 02 ,tan 99. Employment- 32,991 mploy ent:32,991 FT + 59,134 PT = 92,t 25 employees Y -ea yMd 19211 1921 3492 19 4 194a� i 41 19 R Number of FT and PT employees 47,276 53,583 59,721 65,494 64.840 69,345 73,170 83,871 92,125 Size and Scope - Number of stores: 1207 Number of warehouse distribution centers: 8 Year End 129 -ft i991 14[32 1993 tai94 149S IM 349 .192,E Average stare size (sq. t.) n.a. a1.a, n.a. n.a. 11.2. 28,011 29,330 31,207 32,218 Total store area (million sq. f3.) 19.4 22.5 26.4 29.0 27.3 30.1 32.6 36.1 38,9 Store Count (* = expected): rear End IM 19.41 .1222 [991 194 1225. Mft IM 1M 1999* Opened/Acquired 121 III 140 100 30 47 64 164 79 80 EnlargernentslRsmodels n.a. Ila. B.a. Ma. n.a. n.a. 124 99 141 140 Relocated 5 6 4 4 3 12 22 25 17 n.a. Closed 1 2 5 12 84 1 3 94 12 n.a. Total number of stores 778 887 1,012 1,4196 1,039 11073. 1,112 1,157 1,2D7 n.a. Geuerapbir Location (US- state and number of stores): NC (409), VA (266), FL (186), SC (112), TN (81), GA (56), MD (49), WV (17), DE (12), KY (12), PA (7) Recent Mergers: Food Lion acquisition of Kash n' Karry Food Stores completed in December 1996, Sales: 1491.! IM 1292 IM 1944 19K 1996 im 1i9'9R Net sales (mi3lion S)S 5,584 S 6,439 $ 7,196 S 7,610 $ 7,933 $ 8,2211 $ 9,006 $ 143,194 $ 1€3,219 Appendix D: The Great Atlantic & Pacific Tea Co, Inc Sources. A & P's 1998 Annual Report and SEC Form I O -K for the Fiscal Year Ended 27 Feb 99, mid S & P's Standard Corp. Descriptions, Cunnus, News, 1998. yment- 25,236 FT + 58,178 PT = 83,414 employees Laber Issues - Approx. 73,392 = 88 percent of the cawfoYees are covered by unicto contracts Size and Scope: Number of stores- 839 Ntmiber of warehouse distribution centers: 14 Average store size: 35.247 square feet Ave.ragc store size of most recent new stores and planned new stores: approx. 55,000 square feet Selling area: approx- 21-2 mfflion square feet = 74 percent of the total square footage YpArZad 7994 1291 im IM Total stare area (million &q. ft 33-3 31.1 30-6 30.6 28.7 Store Count (* = expected): YMMIDA 1296 IM IM 0-29* 2MR*- 2011� New store opLnings 30 40 46 55 65 75 EnlargementslRemodels 72 45 69 75 75 75 Closings n.a. 74 143 100 n.a. Ma, Total number of stores 973 936 839 n.a. n.a. n.a. Geographic Location: 18 U.S- states (Cl', MA, NH, VT, DE, MD, NJ, NY, PA, Mf, WT, AL, GA, LA, MS, NC, SC, VA), D.C., and Ontario, Canada Sales: Fear Lnd 12M im 199R Average weekly sales 195,200 $ 199,400 $ 210,500 Y&w-Lud IM IM IM 1"A 1,995 122fi im IM Net Sales (million 11,591 $ 10,499 $ 10,384 10,332 $ 10,101 10,089 $ 10,262 10,179 107 Appendix E: Hannaford Bros Co Source& Hannaford Bros Co's 1998 Annual Report and SEC Form 10-K for the Fiscal Year Ended 02 Jan 99, and S & P's Siandcard Corp. Descriptions, C>kmm. N",,.s , 1998. Geographic Location (U.S. state and number of stores) ME (46), NC (27), NY (23), NH (21), VA (18), VT (8), MA (6), SC (1) Sales: Ygor FUd 1991 .M I Net Sales (milli -on 3) $ 2,.008 $ 2,064 $ 2, 100 7994 IM 112fi 1 19�R S 2,292 S 2,568 S 2,958. $ 3,225 $ 23,600 associates Size and Scope: Number of stares: 150 Total square footage of selling arca of existing stores: 5.2 million Average square footage of selling area of new food stones planned for 1999: 42,300 ywFFnd 129A 145 322fi 1997 IM Average seiling area per store (sq. ft_) 3€1,100 31,100 32,300 33,400 34,500 Total selling area (sq. ft.) 3,547,000 4,166,000 4,490,900 4,947,0300 5,1711000 Store Count (* = expected), Y .9r ,gad ] 9 A .1295 1296 IM IM 19W Opened 10 13 13 15 3.1 4 Closed 5 3 7 6 9 n,a_ Scald 0 0 1 0 0 n.a. Acquired 20 6 0 0 0 n.a. Total number of stores 118 134 139 148 150 n.a. Geographic Location (U.S. state and number of stores) ME (46), NC (27), NY (23), NH (21), VA (18), VT (8), MA (6), SC (1) Sales: Ygor FUd 1991 .M I Net Sales (milli -on 3) $ 2,.008 $ 2,064 $ 2, 100 7994 IM 112fi 1 19�R S 2,292 S 2,568 S 2,958. $ 3,225 $ Appendix dix ', The Kroger Co Sources: Krogees ]998 AnnuatRepart an4 SEUForm If1-K for the Year Ended 02 January 99, Kruger Preys Release , 27 May 99, and 5 & P's Standard Crap. Descriptions, Cumm, News , 1998. The Corripany: The Co's food stare banners are as follows: Kroger, Ralphs Supermarkets, Smith's Food &. Drug Stores, Fred Meyer, Quality Food Centers (QFC), King Snoopers, Dillion Stores, Fry's :Food &. Kraig Stores, City Market, Gerbes, Food 4 Less, Cala Foods, Bell Markets, PriceRite, FoodsCo, Owen's Supermarkets, and llilander Food Stores. Employment. Approx. 213,€ 00 FT and PT employees Labor Issues: "[Kroger is) party to more than 1641 collective bargaining agreements with local unions representing approximately 158,000 employees. During 1998 (Kroger] ategotiated I i labor contracts without any material work stoppages. Typical agreements are 3 to 5 years in duration and, as agreements expire, [YToger expects) to enter into new collective bargaining agreements. in 1999,35 collective bargaining agreements will expire" (;SEC Form 10-K) . Size and Scope - Number of supermarkets: 1,410 (Note that this value increased to 2,200 following the merger with Fred Meyer) Number orf convenience stares: 747 Stare Count (food stages only) - Year End 1996 1991 1228 New stores 38 37 26 Relocated stores 35 25 31 Acquisitions (new) 4 10 10 Acquisitions (relocations) 3 5 8 Expansions 36 19 21 Closings 13 11 18 Total number of stores ma. n.a. 1,410 Geographic Location: 31 U.S. states, including CA Recast Mergers - Kroger and Fred Meyer merger completed in May 1999. Sales: YULE" i'l46 1997 Im Food store sales per sq. ft. $ 401 $ 398 $ 405 Yeaec l nd -229 1291 tM 1m 19A 19.95 .I.n.Ci I2 .1MA Net sales (million $) $ 2(i,26t $ 21,351 $ 22,145 $ 22,384 $ 22,959 $ 23,93$ $ 25,171 $ 26,557 S 28,203 m• Appendix G: Publix Super Markets, Inc Source: SEC For?n1O-K for the Year Ended 26 December 98.. Employment, Approx. 46,600 FT 4- 70,400 PT � 117,000 employees Size and. Scope: Number of stores: 586 Number of distribution centers: 8 Store size- From 27,000 to 60,000 square feet Total retail space: 26-3 million square feet Store Count (* = expecteft Xeatymd IMA Im 1296 Im im 1992—* Opened n.a. n.a. R.al n.a. 31 n.a. Expanded/Remodeled n -a, n.a. Ma, n1a. 45 n.a. Closed n-& Ma. n.a. n.a. 8 n.a. Total number of stores 470 508 534 563 586 634 Geographic Location (U.S. state and number of stores}: FL (471), CA (91), SC (21), AL (3) Sales: 'rear Egad IDA im Im im Im Net sales (million $) $ 8,665 9,393 S 10,431 11,224 $ 12,067 110 Appendix P Ralph- Grocery Co Source: ,SEC For7n 1.0-K for the Year Faded 01 February 98. The Company: Prior to the Kroger -Meyer merger, Ralphs was a wholly-owned subsidiary of Food 4 Less Holdings, Inc. and an indirect, wholly-owned subsidiary of Fred Meyer, Inc. The Co operates under the following retail formats: Ralphs, Cala, Bell, l~alley's, Food 4 Less, FoodsCfl Size and Scope: Number of stores: 409 Number of main distribution and warehouse .centers in Southern California: 3 Total Ave, sq. ft. Southern California 13,914,GW 40,400 Nei -them California 654,000 24,200 Midwestern 1,423,000 37,400 Store CGUnt: Southern f".alifnrnla Northern C"_aiif"mi ;liebit Format Ralphs 264 - - Cala - 8 - Bell 13 - Falley's - - 5 Food 4 Less 8[i - 33 FoodsCo - 6 - Total number of stores 344 27 38 Geographic Location: Southern California, Northern California, and certain areas of the Midwest Sales - Year End 19-M i 947 Net sales (millioD S) $ 5,515 $ 5, III 264 8 13 5 113 6 409 Appendix 1; Ruddick Corp (Harris Teeter) Somees: Ruddick Cotp's 1995 annual Report Laud SEC F'nrm 1O-K for the Fiscal Year Ended 27 Sept 99. The Corporation: ,Ruddick Corp is a holding company which is engaged in baro primary businesses: 1, Harris Teeter, Inc. operates a regional chain of supemiaTkets,, Arad 2_ American & Efrrd, laic- rria nfactures and distributes industrial and consurner sewing thread. Data is for Harris Teeter only, unless othemise noted. Employment: 9,5411) FT + 7,$110 PT = 17,300 employees Labor lsstmes: "Warehouse employees and drivers at Rams Teeters warehouse neat Charlotte, NC, are represented by a union, but Harris Teeter is not part to a collective bazgaining agmement cavering such employees" (SEC Form 1O-K) . Size and Scope: Number of stores: 144 YQarEnd 1926 9x97 1 .average square footage per store n.a. 36 38 39 n.a. Average square footage per new store (thousands) 40 47 58 50 46 Total square footage (millions) 4.3 4.7 4.9 5.3 5.6 Stare Count (* = expecteesl)_ Year Faari 1296 .dM 1 New store openings ❑_a. 13 Iii n.a. Enlargcrnerbtsfltemodels n.a. at.a. 27 32 Closings n.a. 4 4 n_a. Total number of stores 134 138 144 n.a. Geographic Caseation (U-S. state and artttrrber of styes): NC (93), SC (22), VA (17), GA (9), TN (3) Sales: iii 129 1295 1"M I%U IM Average weekly uet sales per store $ 223 S 235 S 259 $ 273 S 292 fear c aSN 1.M 1992 723 1224 199 19-% 19M 3.40 Harris Teeter net sales (anillion S) S 1,213.1 S 1,270.4 $ 1,412.3 S 1,578.9 S 1,711.8 $ 1,833.0 S 1,931.2 $ 2,132.2 American & Lfsrd net sales (million S) S 248.6 S 243.3 $ 264.8 S 277.0 S 298.0 S 309.5 $ 368.9 S 355.1 Total net sales £aniilion $) $ 1,421.8 $ 1,513.8 S 1,677.1 S 1,855.9 $ 2,009.9 $ 2,142.5 $ 2,300.1 $ 2,487.4 112 M 1661 [EIdy p-Jja)J&Un3 JZU)w SUGA ptz'g k8m*9 '9661 xaquaanoN srt pa3aldmoo s,Narvc moajo uos3ll;mb3e e(eesapS 6,661 PdV ul Patalduroa jo vopas[nbae ABntiagus '6661 tut ur 3uaUIZZI WTI 4ATVstllap e pauiits SjjW Poo.3 SjipPU-O2i Pup ,Ceffiajes :SaOgrsraabav Pue sxa3.capLT euaaam tsprtspD usa3saA� Pop WW 'VR '-1I `CIS '3N `A.M `OD `ZV `KW.I N 'Cl `AN `IH ')IV 'VM, `)IO `VD) sa3uis 'S'n Ll :uoaieaoj aegdudoaD p"u L617`I 89£`1 Z90`1 690'1 Z99`1 saro$s jo INtunu fo3o-L K L£ Li 5£ 9i Was zsa PasaD sazo3s 09-59 917 L£ 0 Z£ Oz p=do sazo3S - 91£ - - Pas€ul)ae salols suO A £ I I - - Pa.Ilnbau sasta$s s,3l0rurwO(j 051 fl£Z 181 ltr[ 901 [L paialdulo�slapouaaA T r66f 9wa V66C C fWT TMTIMX :(pa�sad�ca = �) lrsa� asoBS 9"19 Z £S L*GV 1"0$1 5'6£ (suorlpm) aRsiooj aspnbs [cues ls3o L %SZ 6L£ 000,09 MD azoua %ZS OLL GOW05 of Od o'oc %U 2K 00o,f}£ augl ssal 000159 :s -,mals moujo a�gmaoj amnbs a2nx A-V (afuso�r[p� uzaf{3naS ua sasca3s suoh bZ£ �ulpaa[aezt) L6�i`1 :saso$s�o zagtxcat�l :ado3S pue azl� (Y -(II ivio, 3.79) , asa C kxa,za S3UautaasSe asagl,lo saqurn€c gueogl u2is e sa3scia8auaa Kc,%eJLS `�jSuapzosaV -sssaX and o3 do jo suuar 2ullseq slwulx asgv auzas gl!m'suzzal hl{porde `sivaxuaaa?� dans @0b -xoiddv ase asatl;g, -suoaun le€aas[geuxawt auaxa-u!p aAlo&,,i,lo;;uo ql3 - patelluje sircanm le --q ap!- 1palu)023u sauaugaasae Sululpgzeq 2n[IIaa(lna q paranoa azp ppsup pup -SCl at{31st saa icsgr%za s, Ge,�ca es p 3rtaarad Ob "xoadd�r., :Satssl jar{e-l. "'OLI 004i`Lbl 000'611 000,t,I 1 060`011 saakojduxa Id per' j. jo sagtunN 9w rm 9m STU MT '8661 ` s<stW 'wwn 'sErasldr,rssa '600 p.anpr DIS s,d tea' S Pup ` X009 000 6661 dAIK,309 rill ` s'asva#a xsa.tj KUA),a9aiS'66 peel ZO PuPu-J leak leasgA zql soj y-() I w o_r 3_VS pup t.suday Ipmad y &661 s,aul ,(encaJss :saasnas 3u Cuaj :f xiaddV Appendix : Stater Bros Holding Inc Source: SEC Form d O -K for the Year Ended 27 September 98. Employment: Approx. 2,700 FT + 6,000 PT = 8,700 employees Labor Issues: "Substantially all of the C o's (8,100] hourly employees are members of either the United Food & Commercial Workm, or International Brotherhood of Tearrasters labor unions and are represented by several different collective bargaining agreements. The Co's collective bargaining agreements, with the United Food & Commercial Workers, which corners the largest number of employees, were renewed in October 1995 and expire in October 1999. The International Brotherhood of Teamsters agreement was renewed in September 1998 and expires in September 2002" (SSC Form 10-K) . Sipe and Scope: Number of stores: 112 tear Efld 199A 129S 1.9 Average store selling area (sqfl.) 20,708 20,773 20,845 20,845 20,991 Average overall stare size (sq, ft) 28,517 28,717 28,809 28,809 29,451 Store Count (* = expected): y Pat End 19-9-4 IM 122fi IM JIM 1999* Opened 3 - 1 - 2 2-4 Replaced 1 I _ - Ma. Closed 1 - - - rs.a. Total number of stores 111 114 110 110 132 114-116 Geograpblc Location (Southern California counties and number of stares): Sacs Bernardino (46), Riverside (35), Orange (16), Los Angeles (13), and Kern (2) Sales: N-ZaLEnd 1l' u 199-5 199-6 IM 1�$ Average sales per stores (thousand $) S 13,997 S 14,298 S 15,503 $ 15,617 $ 15,551 Average sales per selling square feet $ 492 $ 499 $ 538 $ 542 S 537 Average sales per total square feet S 680 $ 689 $ 744 $ 749 $ 743 lCor End! IM IM IM 12M Net sales (million $) $ 1,540 $ 1,580 $ 1,705 S .1,718 S 1,7261 114 Appendix L: Supervalu Inc Source: Supervalus 1999AP?nualReport for the Year Ended 27 February 99. Employment: 50,000 FT and PT k:mployees Size and Scope: Number of stores: 345 (including 20 Save -A -Lot stores in California) The number of Supervalu retail food stores operating under the following banners is as follows: I. Save -A -Lm 142 (Note That Save -A -Lot also has 630 licensed stores) 2. Cub Fonds: 65 (Note that Cub Foods also has 52 franchised stores) 3. Sbopn Save. 45 4. Scott's Foods., 22 5. Laneco: 19 6. biggs/bigg's Foods: 10 Hombacbers-, 5 8. Other stores: 37 Geographic Location: Supervalu is the nation's leading food distfibutor, serving 48 US. states, Save -A -Lot currently operates in 33 states, including California. Recent Acquisitions - Supervalu acquired 48 stores in 1998, including 29 Randall's Food Mitts and 12 Sbop'n Save stores. saler. ytar-Lud IM IM IM IM 199A 1225 1"fi IM IM IM Net sales {million S) 9,735 $ 10005 $ 10,632 $ 12,568 $ 15,937 $ 16,564 $ 16,486 S 16,552 S 17,201 $ 17,421 115 Appendix : Wal-Mart Stores, lase Smvices; Val-,'vfaz-t's 1999 .qtr wd Report and SFC Form til -K for the Year Ended 31 January 99. Ea ployuwnt: Number of FT artd FT associates: 780,000 in The U.S. { 130,000 internationally = 914,000 associates yk� M Im 1922 Im Im Im 19M 199 Nturaber of associates 328,00(} 3 7 1,WO 434,000 528,000 522,044 675,000 729,000 825,000 910,OM Size and Scope - Number oft -LS. stores: 1,869 Disctsamt stores + 564 Supercenters 1451 St4iNTs Clubs= 2,884 stores Average store size: Discount stores: 94,3W sq. ft.; Supercenters: IS 1,200 sq. ft.; and SAM's Clubs: 121,2.00 sq. 11 U -S. Stine Count expected), XczwEndl21 1997 129 1.99 19.44 im 1495 1397 i9�R Wal-Mart stores 1,568 1,774 1,848 1,950 1,985 1,995 1,460 1,921 1,869 1,819 Supercenters 9 10 34 72 147 239 344 441 564 714 SAM's Clubs 148 208 255 4l7 426 433 435 443 451 458 Geographic Location: Discount stores in all f4O U.S. states, Canna, and Mexico Supercenters in 29 U.S_ states (excluding CA), Argentina, Brazil China, Germany, Korea,Mexica SAM's Clubs in 48 US. states (incttading trA), .Argentina, Brazil, China, Mexico, and Puerto Rico Saks: liar oods 22% Food 32.8% Svf?goods/Domestics 21% %lsdries 31,6% Grocery, candy, and tobacco 16% Hardlines 22.11/o Pharnace aticals 90/0 Service Businesses 7.8% Electronics 9% Softlines 5.7% Sporting goads and toys 7"/0 Health and beauty aids 7% Other T-14 Nrl SaIZ uAllinu Ys sass ,[,%Zi im 133.1 3 -Zi Im .3m Discount spares & Superccniers n.a_ n.a. n.a. n.& ra.a. n.a. $ 71,844 S 81820 $ 95,395 SA.I+li's Clubs n.a n.a. n.a n.a. TIA n.a. S 19,785 S 24,568 $ 22,881 International n.a. n.a. n.a. n,a, n.a. ba.a. S 5,€302 $ 7,517 S 12,247 cnber n.a, 13.2. n.a. n.a. n.a. n:a, S 5,232 $ 5,953 $ 7,111 All Wal-Mart stores $ 32,602 S 43,837 $ 55,484 $ 67,344 $ 82,494 $ 93,627 $ 104,859 S 117,958 $ 137,634 116 Appendix N. lie Foods market, Inc Soutces: Whole ]=Gods' 1998 Annual Rieport.J or the Year Ended 27 September 98, SEC form 10-K for the Year ended 28 Sepwmber 97, and S & P's Standard Corp. Descriptions. Cuo nr. News , 1998_ Employment: Over 84,000 crnployees Lat)or Issues-. "The err playees of the Compratty are not represented by a labor union or collective bargaiiiing agr'eemcrtt" (SSC Form 1 U K) . -Size sod Scope: Number of stores: 87 $\ aw 1w of distrtbulion Centers: 8 Average store size: 24,000 square feel Average store size of moss recent neer stores and pianned new stores: 30,000 to over 54,000 square feet Store conot {* expevtedj: Year EMr1 iml 1'13 1445 1996 MI Number of stores 42 49 61 68 75 87 97 112-117 G eographic Location 19 U.S. states (including CA) and 13.C. salev 1eeJ[. t lisattr U)L filnse T.2m 1997 I °(i'1+—._ ange Im ffm $fLutge Grocery S 204 S 210 2.9% S 10.84 S 11.34 4.6°I Produce S 118 S 12€1 1,78fO S 11.13 5 11.62 3.9% meatiseafood S 93 S 9.6 3.28/ S 12.86 S 13.50 5.0% Specialty S 110 S i 15 4.5% S i 1.21 S 11.52 2.8% Nutrition S 159 S 175 10.1% S I L65 S 12.00 3,0% Prepared Foods S 37 S 35 -5.48/ S 9.35 S 9.92 51% Front End 5 339 S 376 10.9% S 9.01 S 9.48 5.2% Weighted Average S 77 5 78 1.3% 5 M31 S 10.78 4.6% s - Note that the average pray shown includes both gainsharing bonuses and pas' for all store reams but does nor include Stare Team Leaders or regional and nalional , rvpporr.stajj; who typically earn higher hourly wages- YraY r �:na6pn� 1-IL3, ii94 IM Mb 1991 IM Store sales per square foot S 597 S 639 5 625 . S 636 S 638 S 670 Average weekly sales per store 5 217,116 S 243,520 S 238,776 S 253,555 S 277,141 S 291,690 Year Eud 1993 1994 IM IDA 1497 12.2$, Net Sales millions S 332 S 402 S 496 S 892 S 1,117 S 1,390 117 Appendix 0:Winn-Dixie Stores, Inc Sources: Wim -Dixie's 199' Annual Report and SEC Form 10-K for the Year B aeled 24 June 98. Employment, 57,000 Ti + 92,000 P$ " 139,000 employees l Number of employees 112,000 123,000 126,000 136,000 139083 Size and Scope: dumber of stores: 1158 Ym� m 199 1225 Average store size (thousand sq. ft.) 35.1 37.3 38.3 40.7 42A Total retail area (million sq. ft.) 40.7 43.8 45.7 47.£8 49.6 Store Count (* = expected): Yeae Fad 1-29A 192:5 Mfi IM IM 1299 OpenedlAcquired 60 108 61 83 84 85 Enlarged/Remodeled 87 85 128 79 136 90 Close&Sold 66 92 58 87 90 11.a. Total number of stares 1159 1175 1178 €174 1168 Ma. Geographk Location (tocation and number of sures): FL (427), NC (126), GA (119), AL (101), 5C (77), LA (77), TX (67), KY (61), VA (35), TN (23), OR (20), ISS (15), GK (5), IN (2) and the Bahamas (13) Sales: Net sales (millioza 1 192fi IM IM 11,082 $ 11,788 S 12,955 $ 13,219 S 13,617 118 �•J M:1 :I I MMOITIM MEASURING THE ECONOMIC AND SOCIOLOGICAL IMPACT OF THE MEGA -RETAIL DISCOUNT CHAINS ON SMALL ENTERPRISE IN URBAN, SUBURBAN AND RURAL, COMMUNITIES Study Director Edward B. Shils, Ph.D., J.D., LL.M. George W. Taylor Emeritus Professor of Entrepreneurial Studies Director Emeritus, Wharton Entrepreneurial Center The Wharton School University of Pennsylvania February 7, 1997 Go To Preface] Table of Contents TABLE OF CONTENTS Cha r I Surviving the Invasion of the Mega Stores: The Impact of Mega -Retail Discount Chains on Urban, Suburban and Rural Economies. Chapter II Who are the Mega -Retail Discount Chains - How Did They Evolve? Chaster III The Pending Impact of the Arrival of Large National Discount Chains on Small Retailers in Pennsylvania, California, Illinois and New York State with Respect to Wages, Employment, Profitability etc. of Affected Small Businesses. Chapter IV The State of Mind of the Small Retailer in America: His Fears and Concerns About Survival Part I Can small retail entrepreneurs survive chain competition by utilizing updated marketing and management strategies? Part II Narrative "quotes" from respondents in the following 4 states: A. California B. Pennsylvania C. Illinois . D. New York Chapter V Are Mega -Retail Discount Chains Subject to Review by State and Federal Regulatory Agencies, With Respect to Antitrust Statutes? Also, the Subject of Predatory Pricing is Examined. Chester VI Predatory Pricing - Part I - The Arkansas Wal-Mart Cases ChyZer VII Predatory Pricing - Part H - The Arkansas Wal-Mart Appeal, as well as A Comparison of State v. Federal Alternatives Chapter VHI Retail Corporate Welfare Chapter IX The Employment Picture of the United States Chapter X Conclusions and Recommendations Appendix AttijUdinal Survey BibliogMphy lf Pa T T Go o: Iov oge I 'F CHAPTER I SURVIVING THE INVASION OF THE MEGA STORES The Impact of Mega -Retail Discount Chains on Urban, Suburban and Rural Economies Traditionally small retailers, department stores and well-known retail chains such as Sears, Penney's, Woolworth's, Krogers and various food and supermarkets were able to live together in relative peace. Sears, Penney's and Woolworth's were designed to be part of the "Main Street" environment. The original purpose of S.C. Penney was to be part of the community and to increase consumer buyer capability; not to interfere with local businesses and entrepreneurs. With the advent of Kmart, Wal-Mart, Target and other mega -retail discount chains, a new era in retailing developed. As the mega -retailers were able to discount all types of products, "one stop" shopping became the vogue aided by the more intensive use of the automobile and new highway networks. The large mega -retail discount chains developed such strong competitive advantages that the "Main Streets" of cities and towns became threatened, and the "Mom and Pop" stores were soon part of a dying breed. "Partnering" developed between the mega -retail discount chains and the manufacturers allowing these chains to buy "direct." In many cases they eliminated the regional wholesalers 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. Powerful chains were able to secure federal, state and local funds to help defray the capital outlay and debt service cost of building the "Big Boxes," Supercenters and Power Centers. These funds should and could have aided in the rehabilitation of the dying downtown districts. Besides the economic effects of large "behemoths," the growing downtown traffic congestion and parking problems have created a new commercial environment in both urban and rural areas, usually pulling consumers away from "Main Streets" downtown and into the Targets, Kmarts, Home Depots, Wal -Marts and other mega -retail discount stores located in adjacent areas situated on formerly zoned "industrial" areas replete with more than ample black -top parking lots. Furthermore, citizens have begun to feel the effects of social changes taking place in their cities and towns. The impact of these giant competitors begins to reduce employment on the old "Main Street." Loss of job opportunities for both young and old leads to social instability, crime, violence and creates a broad negative impact upon the "sociology" of the community. As these "Big Boxes," or warehouse type stores, locate near the traditional business areas, commercial activities tend to drain away from the "Main Street" and transfer away from downtowns, causing the "hollowing out of the city," states Sylvia Lewis. I Edward O. Wells reported on a study by Kenneth Stone, Professor of Economics at Iowa State University and a Wal-Mart guru, that the revenues generated by major discount chains such as Wal-Mart (or Kmart) and others, have actually been revenues lost by local merchants. His hypothesis appears based on the assumption that these areas consisted of static populations where the retail market had largely remained unchanged. When major discounters enter, therefore, sales tend to be taken from those originally destined for local stores. This is actually a shifting of market shares, and not necessarily newly generated sales through an increase in the market or its demography. In fact, between 1980 and 1990, total retail sales increased only 8% while total retail space soared by 40%.2 This re -allocating of sales from one area to another has been extreme enough to be detrimental to local economies. And sales were not the only area affected: jobs as well shifted and not even jobs with as much to offer were the result. Further concern arises as Wal-Mart and Kmart move aggressively into the food industry with their "Supercenter" facilities. Both chains have developed 100,000 - 200,000 square foot "Boxes" which sell a full line of food as well as general merchandise. Additionally, Kenneth Stone's early studies found that towns outside of Wal -Marts had lost sales on an average of 25% because of the attracting of consumers to these new centers.3 More recent data on retail square footage shows that the United States is in a condition of being "'over -stored' with 19 square feet of retail space per capita compared with just half that level a decade ago. "4 The following chapters in this study are concerned as much with the "desocialization" of traditional family communities, sometime ethnic, religious, racial, blue or white collar, or socialized by national origin or with the economic impact of the mega -discount chain on the small retailer. As the retailers fail to survive, so do the neighborhoods fail, with resultant urban crime, drugs, gangs and blight. The writer's interest in the impact of the giant retail discounters upon small retailers was aroused because of his long-time exposure as a professor teaching the values of small business entrepreneurship and as well as an expert in a number of trade associations in the dental, sweater, women's apparel and carpet retail industries' small businesses. Further, in 1973, as Chairman of the Department of Management at the Wharton School of the University of Pennsylvania, the writer founded and became the founding Director of the Wharton Entrepreneurial Center, which became a prototype for hundreds of such centers at colleges and universities throughout the world. The writer is no longer associated with the center except as one who holds Director -Emeritus rank, The center and its teaching program in Entrepreneurial Studies were designed to explore the entrepreneurial spirit in America's youth and to instill in both undergraduate and graduate students both special skills and an intense desire to create and grow small businesses in America. The concern is not only with the establishment of small retail businesses, but also with depriving the creative entrepreneur of developing new products and getting shelf space. Further thirteen Small Business Development Centers (SBDC's) were set up in colleges and universities throughout Pennsylvania. Students and faculty assisted small entrepreneurs, many of them retailers to sharpen their skills to be more competitive. This program was funded in part by the U.S. Small Business Administration (SBA) and SBDC's became a model for other states and universities. It was apparent in 1973, that for America`s largest corporations to compete globally, they would down -size their staffs, and hence export tens of thousands of jobs to other nations. This has occurred as expected. There was and still is a need to save small business in the United States and to "grow" new businesses; retail, wholesale, service and manufacturing. During the past 23 years, there has been substantial new job creation by small U.S. entrepreneurs. These gains have been overcome by major corporate down -sizing and the loss of j obs in the manufacturing sector. Illustrative of this has been a shift of manufacturing jobs to low labor cost areas throughout the world. Business census data discloses the fact that the number of small businesses in the United States has increased 49% since 1982. As of 1994, there were approximately 22.1 million non-farm businesses, of which 99% are small by size standards set by the U.S. Small Business Administration (SBA). These include corporations, partnerships and sole proprietorships. Almost two-thirds of the 22.1 million businesses operate full-time, the rest part-time.5 The writer's concern about loss of jobs in retail resulting in great part on the inability of the small retailer to compete with the mega -retail discount chain might very well contribute to a reversal of the trend in which small business is compensating for the continuous loss in jobs in America's major corporations. The SBA tells us that, "Small businesses employ 53% of the private work force, contribute 47% of all sales in the country, and are responsible for 50% of the private gross domestic product. Small- business -dominated industries produced an estimated 62% of the 3.3 million new jobs created during 1994."6 SBA data prepared for the 1995 White House Conference on Small Business corroborate the writer's concern, that small business offers perhaps the only refuge for the corporate redundant employee. As to the current employment scene, note the following SBA statement: Most recently, between December 1993 and December 1994, employment in small -business -dominated industries increased 4.7 percent, generating 2.03 million new jobs. During the 1990-1991 recession, small firms helped stabilize the economy by generating jobs in the service sector. Most of the job losses during this period came from contractions of large firms which have lost over 4 million jobs since the mid -1980's.7 Despite the fact the thousands of "Main Street" merchants with 10 or more years of business experience have closed down in a losing fight with mega -retail discount chains, located in urban sprawl in obsolete, and battered and declining "Main Streets," strip malls, out-moded malls or free standing stores; nevertheless retailing still attracts those with limited capital who still want to be self-employed. These entrepreneurs large and small still employ almost 20 million workers in retail establishments. It is imperative that the nation save the small retailer. In a national report on "County Business Patterns" in 1993 for the United States, there were 19,777,219 workers engaged in retail activities or 21% of the entire non-agricultural work force of 94,807,076. Of the total of 19,777,219 retail employees, 6,953,455 or 35% worked for small retailers with less than 19 employees. For small retailers with 29 to 49 employees, there were 4,825,666 retail employees. In other words 11,778,000 retail employees worked for firms with under 50 employees; or 60% of the total. Despite the developing dominance of the mega -retail discount chains, retailers who are relatively large have a combined total retail employment of only 40% or about 8 million jobs in the category of 50 employees and greater. To insure the dominance of "small business" in retail activities the County Dalton report of the U.S. Department of Commerce for 1993 showed a grand total of 1,551,510 retail establishments --large and small. The ultimate possible impact of more and more powerful mega -retail discount chains will be to displace tens of thousands of small business entities and make millions of retail employees "redundant," something that automation failed to accomplish. In the job category of 0-10 employees, there were 1,317,122 retail establishments or 85% of the total. The SBA also lauded the new job creation of small businesses as follows: "During the entire 1976-1990 period, small. firms provided 53 percent of total employment and 65 percent of net new jobs. From 1989-1991, the latest Census data available produced under contract for SBA, indicated that small firms with 0- 4 employees created 95 percent of the new jobs. Of the 2.6 million new jobs created, 1.5 million came from expansions of new small firms with 0-4 employees which moved into the 5-19 firm size category. The remaining jobs came from births of new small firms."8 While small retailers struggle to stay in business against major odds both with national competitors who buy direct with mass purchasing and resultant discounts, small and large manufacturers appear to be giving up. The U.S. employment sector showing the greatest decrease is the manufacturing sector. Joblessness in this sector has to be made up in service or retail industries. In 1985, there were 19.2 million manufacturing jobs in the United States. By 1995, this had dropped to 18.2 million, a loss of one million jobs during a time in which population had grown by 22 million and the civilian work force by 18 million.9 Small manufacturers have been put out of business as the US free trade policy encouraged imports first from Japan, then later from Taiwan, Hong Kong, India, Pakistan, South Korea, China, Singapore and numerous other nations. This policy also negatively affected the American small retailers who did not have the ability to contract for mass purchases from overseas, low -labor cost areas as did major retail chains and mega -retail discount chains.(as evidenced by the media's preoccupation with Kathy Lee Gifford and Michael Jordan and their association, no matter how remote, problems with child labor in manufacturing plants where products with their names on them are produced). Small businesses appeared to be most successful in the past 22 years in creating jobs in service and retail industries, particularly in information systems, computers, health care, etc. Now a reversal is being observed in the major metropolitan areas, such as Philadelphia, New York City, Chicago, Los Angeles, San Francisco, Miami as well as in suburban and even rural areas of the United States where small retailers are closing in downtown and "Main Street" areas unable to compete with because of the arrival of the huge mega --retail chains. These "mega -stores" now include among others, Kmart, Wal-Mart, Sears, Montgomery Ward, J.C. Penney, Dillards, Target, Home Depot and other powerful retail chains. These chains have succeeded in eroding regional wholesalers who supply the local retailers and the retail base of cities, suburbs, rural areas and small towns are suffering with job loss and urban sprawl. Wholesalers are being eliminated rapidly as manufacturers become captive to major mega -retailers and the manufacturers are beginning to take on wholesale service functions such as interactive information systems, warehousing inventory and just -in - time delivery. Furthermore, mega -retail discount chains have their own quasi- wholesale/retail firms such as Sam's Clubs, to which some retailers must go to purchase merchandise in the growing absence of the traditional wholesalers. In fact, Wal-Mart has invested heavily in interactive systems to the point where the company only carries about two weeks' supply of stock and gets it to the stores prior to their being in an out of stock situation. 10 As an academician and small business consultant, the writer became concerned in late 1993 and early 1994 about not only the economic impact of the mega -retail discount chains on jobs and joblessness in America, but also the sociological impact of these changes. In the city, loss of retail stores creates social instability. Many of the eastern cities, historically consisted of ethnic enclaves. The ethnic and minority population had depended on the pharmacies, groceries, shoe stores, apparel stores, variety stores, bookstores, not only to meet consumer needs, but to supply jobs for teenagers and adults. As the mega -retail discount chains such as Target, Home Depot, Kmart and Wal-Mart entered the urban and suburban areas, job opportunities in small retail establishments began to disappear as small retailers, wholesalers and service activities began to suffer and eventually closed, not being able to compete with the "giants" on a basis of price, national brands and almost 24 hours of open store service, often on a seven day basis. As stores closed in the city enclaves, as well as in suburban and rural malls, the result has been in part to create further "ghettotization." Retail stores are. boarded up, marked with graffiti and as jobs are lost in the neighborhood, even neighborhood housing also begins to decay. Welfare rolls rise, crime and violence increase and unemployed youth often turn to underground employment, drugs, crime, school truancy and eventual "drop outs" from both school and society. Traditionally, there were always jobs in the neighborhood stores; in the grocery, butcher shop, shoe store, apparel store, pharmacy, and there existed a close kinsmanship between the local store owners and the community. The store owners knew the names of the "kids," saw them "grow up" and helped them with full and part- time employment as they advanced in their school and college pursuits. To combat the new arrival of mega -stores, communities have turned to the law (zoning, councilmanic ordinances) in hopes of deterring the proliferation of the mega -retail discount chains, who often contribute to pollution, highway congestion near public schools and who often are subsidized with tax abatements and other incentives to build and grow which are not available to small businesses. Communities have attempted to maintain their traditional social and economic cultures. Nevertheless, the force of these mega chain stores continues to influence and dominate the "Main Street" culture. The strength of these mega chains has made it difficult for local merchants and less strong competitors to confront and restrain the inevitable construction of the "Big Boxes." Restraining the rise of the mega -stores by protests or setting up opposition groups is a difficult task indeed; there have been some failures, nevertheless, there have also been considerable successes where communities and community groups have organized effectively. Opposing the giant mega -retail chains with their huge financial resources is often cost prohibitive for neighborhood groups. A desire to survive requires new marketing strategies to be formed and implemented by local and regional store owners. Many of these strategies have been selected by hundreds of respondents found in the tables and charts in Chapter III of this study. This portrait of the "free" retail market is not a happy picture. However, one can say, "The cities of the United. States are turning into ghettos, so what's the difference?" Things are expected to be better in suburbia, in rural areas and in America's small towns located in New England, the South, the Midwest and the Far West. However, urban decay, stimulated in part by the movement into "Main Street" avenues and to the suburban and rural malls, has now spread throughout America in almost every state and region and has created cemetery -like sprawls in towns and malls, once pleasant and inviting to local citizens and travelers, Earlier entrance of the mega -discount chains into mid -town America (the small towns) struck a cheery note with promises of jobs and services by the new retail discount "giants." However soon the "Main Streets" of these towns were decimated, by repeated small store closings, unable to compete with the new American retail "giants." Moreover the effect on the remaining retailers by the "moving out" of a mega -discount store after several years, becomes particularly destructive to the survival of the remaining small retailers in malls formerly dominated by a retail "giant." The free wheeling race between mega -retail discount chains such as Wal-Mart, Target, Kmart and others is best exemplified by Wal -Mart's planning strategy promulgated by its Chairman at the June 7, 1996 annual stockholders' meeting. In discussing Wal -Mart's future growth and expansion plans, David D. Glass, Chief Executive Officer,_,said: "We're going to dominate North America." I I (Emphasis added.) Obviously, conquering the retail market in North America is Wal -Mart's agenda and this is further evidenced by the strategy of placing urban stores in a manner which creates a 10 mile radius and rural stores with a 35 mile radius. In a 1993 New York Times article quoting Kenneth Stone, a noted academician who has become an expert on Wal-Mart, he said: "What happens is that Wal-Mart has a saturation strategy. They come in with stores 60 miles apart and then they are 10 to 12 miles apart. About three years after a Wal-Mart opens, stores near it begin to close." 12 What chance could a smaller, less aggressive enterprise; successful in the "Main Street" tradition, have against a multi -billion dollar company proudly advocating dominance. The chances for a free market on a level playing field is disappearing year by year, month by month. The writer's interest in the mega -retail discount chain project and its sociological and economic impact on America led first to Eastern Pennsylvania (including Philadelphia). Following were visits to Southern California, mainly the San Diego area, including such communities as Chula Vista, Poway, Oceanside, Mira Mesa. Then the impact of the mega -retail discount chains in suburban and rural areas in Chicago, Illinois, including Chicago, Kanakee and Des Plains were studied. Later, visits and observations were made in New York's Finger Lakes region, including the Geneva, Auburn and Syracuse areas. In all these areas, profound changes were found both in joblessness and socialization. Where many jobs were promised by the mega -retail discount chains, they often turned out to be low paying jobs, without medical benefits and customary fringes. These new stores replaced the traditional "Main Street" retailers, eliminating thousands of jobs formerly in stores employing one to ten persons (see the typical small retailer profile in Chapter III), These were family type enterprises and usually provided family income and wages that assisted family members to continue their education by enrolling in colleges and universities and often medical and insurance benefits. In studies, such as one completed in the Lake Placid, New York area, the conclusion was reached that in exchange for 1 new part-time job in a mega -discount chain, about 1_ full-time jobs were eliminated in smaller stores. 13 This was also observed by the author after interviews with surviving small retailers in areas invaded by the major chains. This w4s quite different from the rosy picture painted before Zoning Boards and City Councils about substantial increases in jobs to be expected in the community as a result of constructing Superstores and Power Centers. Also observed in Philadelphia, Pennsylvania, the French retailer, Carrefour, received a five year tax abatement and opened a 260,000 square foot store. After 4 and one-half years, they left the city without paying any taxes. Furthermore, they had promised City Council that 600 - 800 new jobs were to be created when in reality, only 250 were produced. At the same time, five independent food stores and one non-food store, a number of apparel stores and various. other small businesses were forced out of,lbusiness during the years Carrefour was open. This occurred prior to the opening of the Franklin Mills Mall in the same area. It has also been estimated that the net effect was a loss of 1,000 jobs. Job loss in a neighborhood leads to social and economic disintegration. This has become a recurring theme of this study. In travels and interviews, the writer also noted that the degradation and "ghettotization" of the cities and towns were gradually being transferred nationally to the suburban and rural areas of the United States, almost as infectious diseases run rampant, without community concern and medical care. When a developer in East. Aurora, Arkansas, proposed a 47.8 acre retail mall with 263,000 square feet of retail space at an industrial park a scarce mile away from the town's traditional downtown center, citizens immediately began organizing protest groups. They were ready to fight to protect their way of life from what they viewed as an invasion. Gerry Kermouch, in a 1994 article in Brandweek Magazine, quotes Peter Pitegoff, a law professor and president of the Villagers for Responsible Planning, "We are afraid that a discounter would undermine local retailers, create traffic problems and undermine the historic character of East Aurora." 14 The citizens of East Aurora, Arkansas were not the only people who voiced outrage at prospective entrance of behemoth retailers into their "Main Street" cultures. Towns throughout the nation have expressed their discord with the invasion of these "Big Boxes," the large warehouse -like structures which threaten the survival of the small retailers. Community groups have developed conferences and seminars throughout the United States on how to confront the almost daily arrival of these mega -stores. Often citizen groups, by petitioning their elected officials have prevented the major retail discount chains from beginning warehouse -like shopping sites. However, closer analysis of the retail industry, its strategies, and the trends that perpetuate the industry's growth suggest that the inevitable will occur; unless small, less leveraged retailers and "Mom - and -Pop" stores can create new strategies to survive against the new competition. Enlightened governmental leadership, both local and national should provide support and encouragement for small business leadership to execute survival strategies. The American economy will require a balance of large and small retail businesses in order to provide millions of well paid positions necessary to provide goods and services in a growing national economy. As the history of retailing in America was studied, the writer noted that from the traditional small size retail chain there emerged the department stores. These examples of grandeur were generally found in municipalities with substantial populations, such as the large city. Later, as retail discount chains came into existence, the department store had hard sailing, and despite the development of branch stores in suburban areas, the record of the department stores suffered along with the small retailer. Employment in the department stores also became downsized as personnel costs were cut in the face of competition from the Kmarts, Wal -Marts, Targets and J.C. Penney's. Although discount retail chains were first noticed in the 1950's, America watched one creative and fantastically managed company develop from a five-and-ten store into a company with $82 billion in sales in fiscal 1995 and fiscal 1996 sales over $93 billion and projected sales over $105 billion in fiscal 1997. (Most of these major retailers have fiscal years ending January 31 st or very close to that date). Wal-Mart Stores, Inc., this formidable retail chain in one year opened 147 new Wal -Marts, and 163 Sam's Clubs in the United States alone. 15 Although Wal-Mart was not the first in the market, it influenced the marketing and planning of its competitors and exercised a major impact upon the growth of the entire discount retail chain business. According to Edward O. Welles, "From 1960 to 1985, annual sales by discount stores in the United States exploded from $2 billion to $68 billion, with Wal-Mart responsible for igniting much of that growth." 16 Discount retail chain stores, such as Kmarts and Wal -Marts have recognized the need for sites which supply a variety of brands and products at a reasonable value. Wal-Mart achieved success by first providing products that "were up to 15% cheaper than those available in 'Mom -and -Pop' stores," according to the Harvard Business Review. 17 Its competitors also followed with similar marketing strategies. Large discount retail chains and similar mega -stores have continued to grow and expand in the United States. In addition, barriers of entry have developed, preventing increased competition. Their strategies and decisions have been able to influence the entire nation's economy, basically because of their strong leverage on both suppliers and customers. "When the original Wal-Mart locations could support one store, the customer population was large enough to maintain two rival discounters. Thus, once Wal-Mart established a store in a particular area and had prevailed over the small Iocal retailers, it was seldom threatened with future local competition from other discounters, including Kmart."18 By excelling over its competitors, the growing strength of Wal-Mart caused a shifting in the market. Economies of scale were definitely in favor of operations of the growing mega - retail discount chains. The larger discount retailers developed their own "hub -and -spoke" distribution systems, which permitted them to purchase from suppliers for all their locations, thus lowering the costs of doing business substantially compared to that of the traditional stores and the regional retailers. Since price has consistently become a more significant factor for consumers, local competition would repeatedly lose the price wars and leave the market to the mega -retail discount chains. Today, the advent of the mega -discount chain has not only undermined the survival ability of the traditional department store and the "Main Street" retailer, but also has begun to disfigure and transform former grandiose retail malls into. replicas of the city ghettos. Furthermore, the jobs that are lost in "Main Street" types of small businesses do not provide the full picture of what a community loses in terms of gross domestic product. In fact, the House Committee on Small Business has published the Dositive impacts that a new small business entering a community can have. The data in the followingquote lends considerable additional weight to the multiplier effect on wages and the sociological effects a small business can have on a community as described throughout this study: "The establishment of a small business has a large, positive effect on the local economy. A small business with 100 employees in a town adds: 351 more people; 79 more school children; 97 more families; $490,000 more bank deposits; one more retail establishment; $565,000 more retail sales per year and $1,036,000 more personal income per year." "Small businesses also seem to be more community minded. They give more in charity to community service organizations per employee than do large businesses, according to the SBA's Office of Advocacy. In addition, small firms tend to target their donations to direct service providers."I 9 On visits to California, New York, Illinois and Pennsylvania, the staff witnessed the increasing decay, both physically and morally of the stores and their environment in malls that had been in their ascendancy in the $0's and 90's. Typically these malls might have had a normal sized mega -retail discount chain store (60,000 square feet) as an anchor. Conceivably, a major rival might then construct a supercenter (200,000 square feet) which would then be opened one half mile away from the older mall, with a new parking area and an invitation for new stores to open in the area. After 6 months to a year, the smaller discounter surrenders, and the store becomes vacant. Traffic density in the older mall begins to die as shoppers go to the newer and larger mega -retail discount store whether it be a Target, Kmart or Wal-Mart. Within a year, every second or third retail store is closed. These stores then take on a ghettoized boarded -up appearance. Graffiti, iron grills, unsightly signs then 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, DC describes these developments as "Urban Sprawl." What was witnessed was not "urban sprawl," but "suburban" as well as "rural sprawl," These mega -retail discount chains, in their race for demographic and marketing supremacy in each region, after influencing the closing of small retailers in the area, then compete over the leftover consumer "bones." Ultimately, one major chain opening in an adjacent area destroys the competition, leaving the formerly successful mall appearing like a giant, desolate unkept cemetery. Factors determining consumer buying clearly favor large retailers, since they have been able to maintain the consumers' needs for low prices and convenience by having "one- stop shopping." In addition, these giants with stronger leverage have been able to maintain lower prices because of lower costs. Price competition still remains in the industry, despite the numerous closings of the small retailer, but the large discounters among themselves continue to fight price wars. A recent example was Dallas, Texas where Wal-Mart, Kmart and Target competed head-on with energetic promotions while maintaining costs so low that products were priced so competitively that the differences were usually within pennies.20 As the price. wars go on between the large and small retailer and indeed among the major discounters themselves, not only do retail jobs disappear, but also the traditional harmony of the rural and suburban areas is invaded and the results are ugly both from an economic and a sociological point of view. One recalls a powerful Latin phrase by Plautus, which when translated is "The soldiers laid waste to the town. " This is certainly an apt description of the continuing decimation of the "Main Streets" of historic towns, cities and yes, rural malls. Were one fortunate enough to be alive in the United States, say in the year 2100, he or she and fellow survivors would wonder what caused the entrepreneurs of the late twentieth century to bequeath to subsequent generations, these rapidly developing monstrous national "cemeteries," formerly grandiose malls and attractive "Main Streets." With present prospects facing developers these days in the United States, these destroyed and abandoned malls will be with us for many generations, since the financial challenge for their correction seems impossible to meet. During travels on this study, the staff also visited many formerly prosperous "strip centers." These were generally the work of small developers and attracted the boutique or unique retailer, also traditionally found in the old "Main Street" stores. Strip stores within a mile or two of a neve Supercenter, constructed by a major discount chain appeared likewise to be endangered by the newest major competition. Even when a florist, indicated to our interviewers that because of her long experience, "superior knowledge" and the fact that her store purchased merchandise more frequently than did the Supercenters, that she would survive; nevertheless she evidenced concern about the vacancies on her left or right. Interviews with courageous owners of florist shops, apparel stores, pet food stores, automotive stores, pharmacies and others all ended with a typically sad statement: "No matter how effectively I can compete, if the store next door becomes vacant, traffic density diminishes, and my store will have to close as well as the one next door. "21 These courageous retailers cooperate in securing new tenants for the vacant stores, but it is a sad and losing fight. In some of the huge malls visited, as much as a 33% vacancy rate within six months to one year of a new "mega box" being completed in the area was observed. Additional business from these new chain stores has always been considered a benefit, but the chaos that developed from entering and leaving suburban areas created havoc to their economies and to the aesthetics and milieu of the former prosperous malls. Discount stores that enter towns take a wedge of land and build massive structures. The new Superstores be they Target, Kmart or Wal-Mart or other chain structures tend to be newer and ever increasing in size, And recently, the entrance of Power Centers, shopping centers with multiple "Big Box" structures and other discounters and retail space totaling at least 1 million square feet. Notable has been the rapid and continuous expansion of the Super Kmarts, the Wal-Mart Supercenters and the Sam's Clubs. Because these stores have moved into or near towns, cities and suburbs, and have contributed to the economy with force, if they decide to H leave, as many stores do, a shakeup on less stable economies causes devastation. Examples of the losses caused by the pullouts of such giants can be aptly illustrated by Glendora, Ventura and Hesperia, California where hundreds of thousands of dollars were lost by communities in infrastructure development, land development and environmental impact reports, not to mention foregone taxes. Collectively the losses total in the millions. Our national study of the social and economic impact of mega -retail discount chains upon areas in Pennsylvania, California, Delaware and New York included visits and interviews in each area. Visits were preceded by sending out 6,000 questionnaires to retailers in each of the four states requesting such information as their sales volume; number of employees; potential impact on sales, profits and employment by the arrival of mega - retail discount chains near their businesses. They were also asked to describe their survival strategies which would enable them to compete profitably. Of the six thousand questionnaires sent to retailers in these four states, almost 10% were completed fully and returned with both detailed quantitative and qualitative data. The quantitative results are set forth in Chapter III with tabular and graphic charts plus a research analysis. Information provided by these store owners was computerized and the staff was able to forecast the loss of jobs, impact on store volume, employment, profitability and other significant data for each state in the study. Each questionnaire also contained subjective comments on how the small retailer visualized his/her future and what alternatives could be followed in order to save their firms. All of the subjective narrative data will be found in Chapter IV. The data received from each of the four states could be extrapolated in order to estimate the collective impact on community employment and local and state tax revenues. However these forecasts would be based upon the expectations of the respondents as to whether they could weather the competition of the mega -discount retailer moving into their neighborhood. Would they survive or would they possibly liquidate or go into bankruptcy? Generally there was extreme pessimism expressed; rarely was there optimism conveyed by the respondents. One of the questions posed this concern: Are wholesalers still available for retailers to buy from? The answer showed the increasing fears of retailers that wholesalers were disappearing because major suppliers were selling direct to the Kmarts, Home Depots, Targets, Wal -Marts and J.C. Penny's and had no time or inclination to sell to wholesalers or small retailers. Strange as it may seem, many small grocers, meat markets, etc. often shop at Sam's Clubs, a subsidiary of Wal-Mart in order to be able to have anything on their shelves to be sold. As retail giants rule the marketplace, they have the buying power to negotiate the lowest prices with their suppliers. In a sense, suppliers become part of a "partnering" network in which their principal capacity is contracted for by the major retail discount chains. It all adds up to a power shift to a privileged circle of merchants," state Zellner and Benedict.22 Suppliers and manufacturers work diligently to secure the right to supply the large bulk retailers, in hopes that the low profit margins in the business can be countered by larger sales volumes. The retail "giants" in the discount field have been able to develop a barrier to entry for other less influential retailers, resulting in a reduction in competition. Manufacturers and suppliers to the chains, in hope of selling more, unfortunately have not realized the unceasing barrage of demands from retailers, who want everything from discounts for new -store openings to penalties for shipment errors, to an increasing volume of requests for free samples. As the retailers gain more leverage, they become more demanding in the manufacturing of specific goods, deciding on colors, and sizes, how much to ship, when to ship and where to "drop ship." Although low prices do benefit consumers, suppliers and manufacturers are being squeezed to be leaner and more flexible with respect to chain retailers' demands. In addition, smaller suppliers are less likely to have the ability to accommodate, increasing the likelihood of being removed from the market. Chains utilize interactive information systems (EDI) in a most dominant way through "partnering" with suppliers and manufacturers. Regional wholesalers are less likely to possess sophisticated business and information systems required to meet the needs of the mega -retail discount chains, hence wholesalers are apt to disappear and harm the remaining small retailers. While the author believes in a free market and is a devoted supporter of the free entrepreneurial system, the "free" market means different things to different people. Inasmuch as the principal method of the mega -discount retail chains in competing with the smaller retail store and the traditional department store is pricing; this pricing pressure could very well include possibilities of predatory pricing, as defined in both state and federal laws. Concern over the likelihood of predatory pricing as defined by the Robinson-Patman Act as well as various state laws will be reviewed in Chapter V. The economic and social impact made by the mega -retail discount chains needs to be measured by a large variety of criteria. In the next decade the nation, state, cities, towns and villages will be able to see whether the promises made by the mega -discount retailers have materialized. Did the municipality make mistakes in judgement by encouraging the free entries of these giant discount retailers into the areas? Did the promised additiorml employment take place? How long were these jobs viable? Were there subsequent reductions in personnel in the chains? Did the new chain discounter close and move away? What was the impact on the viability of the "Main Street" stores? Was pollution increasing by the presence of the "Big Box?" Did traffic congestion increase highways abutting on public schools? Were the chains subsidized by tax abatements, right to retain sales taxes to pay off the new building and given other incentives not available to the small retailer? Did the surviving "Main Street" retailer learn new techniques in marketing, inventory control, and other modern business practices in order to survive? In the economic jungle where "survival of the fittest" can almost be analogous to economic and social viability, prey might still remain alive by developing skills that protect it from predators. Equally important as a contributor to the lack of social and economic planning is the real estate developer. The developer, often in concert with the mega -retail discount chain, comes up with ideas for new real estate developments; malls, Power Centers and the like; and, at times is irresponsible when it comes to tying in his project to help the economic planning for both the community and the nation. The importance in maintaining economic and sociological liability is long --range planning. Real estate developers have been notorious in short-range planning, in which they plan many projects where their gains and recoveries are based upon a five-year return on investments leaving the long- term problem to the community at large. This lack of integration into good long-range planning shows it is not only the mega -retail discount chain that can be cited, but also the ,developers. Additional review of this problem community by community would show that when communities make their long range plans often they are susceptible to almost periodic amendments as a result of the pressures of chains and developers. The following chapters will attempt to answer such questions: Is there a possibility of co- existence between small retailers and the mega -retail discount chains? What strategies are possible for small retailers to survive? is the entry of the large discount retailer inevitable? Can community groups concerned with urban sprawl develop strong and effective opportunities to stop entries of the super "boxes" in given locations where traffic density, pollution, neighborhood schools, etc. are threatened? in some cases states have implemented laws to put ceilings on the amount of retail space that can be allotted to a supercenter for its commercial and parking activities. Retailers large and small are beginning to understand that marketing has become more complex than in the past. Instead of just maintaining low costs and putting products on the shelves, both chains and local traditional retailers need to strategically look at themselves versus all other competitors in the area. Image remains important, as well as the unique products that are marketed. Retailers now need to consider other new forms of shopping. Besides discount stores, outlet and direct mail shopping have also become popular. As "Main Street" stores realize the threat they'face in competing against mega -stores, buying groups, "co-ops" and coalitions might be formed. These groups need not be designed to prevent the entry of competitors, but to coordinate organized marketing strategies for the "Main Street" area of shopping. According to Erica Price, "Defining and implementing annual work programs, producing print pieces, such as business directories and maps to promote the business district; providing design assistance to downtown business and property owners; hiring a full-time downtown director to manage an economic enhancement effort,"23 are all coordinated efforts in the right direction. Business communities can also coordinate activities to open stores at hours convenient to the busy consumer. Since Americans appear to have less time; since many hold two jobs, often evenings are allocated to taking care of errands. Besides the need to prepare for possible entry of large competitors, "Main Street" cities, counties and towns should prepare for the possible moving out of these enormous. influences of business By understanding the implications that such a move might have on a local economy, agreements could be made with businesses entering the community. As previously mentioned, the French firm, Carrefour, after building a major "box" of over 260,000 square feet in the Northeast community of Philadelphia moved out four and one half years later, leaving an unsightly "box" which demoralized the adjacent business community. A few years later a mega -outlet Mall, Franklin Mill s was built on an adjacent property. Moreover, the City of Philadelphia had mistakenly provided 5 years of tax abatements. During this time all Philadelphia municipal services were available at no cost. When approving the construction of a "Big Box," economic plans should also be included, well before the actual moving out happens. Various estimates indicate that the "loss to the City was over $5 million, this aside from the cost to the State of Pennsylvania for road construction, etc. The vacated mega -retail discount firm should retain a .continuing financial responsibility for specific plans such as converting the newly vacated warehouse -like stores into another more acceptable form of shopping area. Plans should be made by the urban authority ahead of time on the disposing or recycling of the vacated structures. Kenneth Stone, previously mentioned, a specialist in retail trade and Wal-Mart activities, has realized that "the only hope small merchants had [is] to niche around them."24 By specializing in unique products, local merchants can separate themselves from the usual discount products sold in retail chains. Local merchants need to prevent themselves from entering in a perfectly competitive situation, competing solely on price and marginal cost. The low pricing strategies must be left to the mega -discount retail chains. The small retailers, to survive, must create their own image and differentiate themselves as unique, rather than "me -too." There is a very slim chance that unique boutique type retailers, not depending on price rivalry but on service and product differentiation might survive in the presence of the major discount 'Big Box." With unique, individualistic strategies and by maintaining less inventory, the surviving smaller retailers must take advantage of flexibility in rapidly changing inventories; an advantage not generally available to the large corporate retailers with more complicated supplier -retailer distribution methods. In later chapters, this study will attempt to balance and explore the experiences of the many communities who battled the entry of the mega -retail discount chains as compared to those states and communities who offered tax abatements, building subsidies, reduction of sales taxes to defray costs of capital outlay and debt service and various types of what recently has been described as state and federal "Corporate Welfare." One state that has refused to accept the large "mega -boxes" has been Vermont. The state has maintained a "keep Vermont green" force which has kept Wal-Mart and other major chains from easy entry. The state has made enough noise that the anti -sprawl National Trust for Historic Preservation placed the entire state on its June 1993 "America's 1 i Most Endangered Historic Places" List which is prepared annually.25 More recently, Vermont has modified its anti -Wal-Mart position by permitting their entrance by capping the size of the building. The National Trust for Historic Preservation has led the fight to prevent "Superstore Sprawl," In a major book released in May, 1994 the Trust launched an attack on the latest phase in America's retail race. The Trust does not appear to oppose job creation. It is against job forecasts that do not materialize and is against negative impacts on the environment; increased traffic congestion and the sapping of the viability of traditional businesses which lead to weakening civic vitality. The following statement is taken from the "Preface" of the recent Trust publication entitled, How Superstore Sprawl Can Harm Communities ........ 26 "(1) The American retailing industry entered a new phase at some point during the last decade. Whereas the sixties and seventies had witnessed an proliferation of regional shopping malls in the suburbs, the late eighties and nineties have seen a rapid growth in sprawling discount superstores near the interchanges of major highways." "(2) On the one hand, it is clear that these superstores are delivering something many Americans want: good products at low prices. Indeed, these operations could not succeed otherwise. People want and need the jobs they provide. Local governments want property taxes and sales tax revenues they generate. To the extent that the discount superstores deliver affordable prices, create jobs, and strengthen local tax bases, the National Trust applauds them. They are filling a major market demand and doing so very well indeed." "(3) On the other hand, it is clear that the low prices offered by many superstores include hidden costs. Having worked with local communities across the country on downtown revitalization efforts, the Trust has come to recognize that the scale, location; and design of these stores create major problems. These include:" • "sapping the economic vitality of downtowns and "Main Streets" by shifting the retail center of gravity out to highway interchanges on the edge of town." • "displacing existing businesses, especially independently owned small businesses that contribute significantly to local civic life, by building stores vastly out of scale with a town's ability to absorb them." "setting the stage for higher property and state income taxes by creating developments that are costly to serve and require new roads, water and sewer lines, police protection and other public services.." "causing the waste or abandonment of previous public and private investments in existing buildings, streets, parks and other community assets." "homogenizing America by building stores that have no relation to their surroundings." The National Trust for Historic Preservation asks the mega -retail discount chains to answer the following challenge: "But can the consumer benefits provided by the superstores be achieved only through the creation of more urban sprawl and all the sprawl brings: traffic congestion, automobile dependence, air pollution, dispirited or dead downtowns, despoiled country sides, and weakened community ties? Or could some of the benefits be provided without so much damage to the environment and local communities? We think these are questions that should be asked."27 The Trust also poses an equally important challenge to the many communities facing the invasion of the super "Boxes": "And communities have choices. They can encourage or discourage certain types of development. If a community doesn't want superstore sprawl, it can take steps to prevent it. If a community wants a superstore, it faces a whole host of other questions relating to whether the store comes in on the community's terms. Where should the store be located? How big should it be? How much new retail space can the local economy absorb without suffering the negative fiscal and economic impacts created by a commercial glut? Can the store be designed to help preserve the community's livability and attractiveness? How can the store minimize negative environmental, cultural, scenic, fiscal and economic effects? Above all, what is the long-term impact of the decision?"28 One of the major recommendations of the 1995 White House Conference on Small Business was designed to a reverse the financial plight of the declining "Main Street" establishments. The recommendation follows: "139. Congress should legislate the creation of a Small Business Relief Fund to economically assist small businesses that are displaced by the establishment of a big business in their localities where the big business will contribute an annual fee for the fund." 29 This author will attempt to analyze, in succeeding chapters, the responses to the challenges posed to both the mega -retail discount chains and the communities they wish to enter. _.__.._...._._..___ .......... ...................................... o To:' To o P - ------ _._._....,._,..,......_`, CHAPTER H WHO ARE THE MEGA -RETAIL DISCOUNT CHAINS - HOW DID THEY EVOLVE? WHAT ARE THE LATEST DEVELOPMENTS AND EXPECTED TRENDS? Chapter 1 generally described the concerns of small business about the creation of the mega -retail discount chains and what can happen in the future of American retailing as . these chains continue to growand displace not only small retailers, but department stores, chain grocers, pharmacies, regional supermarket chains and ultimately an almost unbelievable list of retail and service activities. With serious displacement, what will be the impact on the social stability of the neighborhoods and enclaves? How will the environment, aesthetics and natural beauty of the landscape and terrain be affected? What effect will the arrival of the mega -discount chains have on local retail unemployment and joblessness which breeds crime, as well as other community negative events? One begins with the traditional small retailers and progresses through the department store period; the Sears, Roebuck and Montgomery Ward era; the Woolworth's and J.C. Penney stores; factory stores, chain grocers such as A&P; supermarkets chains such as Kroger's and more recently the formidable power of the mega -retail discount chains, including the rise of Kmart, Target, Wal-Mart and their thousands of stores; then the Warehouse Clubs such as Sam's Clubs, Price/Costco and such new major arrivals in the home improvement field as Home Depot and Builder's Square. Background of Retail Merchandising in the United States The Evolution of the Independent Retailer and "Main Street" In the 19th and early 20th Centuries, small entrepreneurs opened thousands of retail shops in enclaves or neighborhoods of the nation's large cities. Most of these enclaves were populated by immigrant families and represented the ethnic, religious and racial diversities that was popularly described as America's "melting pot." Similarly the nation's rural areas, towns and villages grew into small urban areas and the small retailers collectively developed the nation's traditional "Main Street." "Main Street" America, particularly in New England, the South and the Midwest created. a charming traditional set-up of groceries, drug stores, gift shops, bookstores, men's, women's and children's apparel stores, hardware stores, bicycle shops, general merchandise stores, and later special "niche" boutiques. This period is best described in Constance Beaumon_fs 1994 publication How Superstore Sprawl Can Harm Communities.l The Early Part of the 24th Century Featured Department Stores and Giant Retail Chains Each metropolitan area of the United States saw the rise of the aristocratic department stores, such as John Wanamaker's in Philadelphia, Macy's in New York, Filene's in Boston, etc. These stores, were built in a grandiose style similar to the moving picture theaters of that period. The department stores were architectural gems, often featuring organs, art, and catering to family culture of a rising middle class. They provided a tremendous variety of goods and services. Most products were nationally branded. Shopping and dining in fabulous restaurants in the department store was a pleasure for the entire family. Children had the toy department; men had a sports department and a rich offering of men's apparel. Women had a range of popular priced merchandise to the exclusive designer lines. Personnel served the customer almost on a one-to-one basis. Soon department stores chains such as Federated, Filene's and Hechingers followed. These stores were so designed that they complemented the smaller stores in the large cities as well as the stores on the typical "Main Street" in the smaller towns and urban areas. The small retailer was not pressured by serious discount price competition and for the most part, large and small retailers dwelled in harmony. Also the first half of the 20th Century saw the rise of three major retail giants; J.C. Penney, Montgomery Ward and Sears, Roebuck. These stores rapidly developed into mature chains rivaling each other on price and product, and in a sense were the forerunners of the current mega -retail discount chains. Also during the period such chains that harmonized without creating chaos on "Main Street," were Woolworth's, Grant's, S.S. Kresge, Mattingly's, etc. They were earlier referred to as "Five -and -Dime" stores, but evolved into more sophisticated types of merchandisers. Their prices were generally lower than in the department stores. However, they seemed to harmonize with the rest of "Main Street," and the competitive environment had little in common with today's competitive "attack and destroy" environment. 1966 -1995 The Rise of the Retail Chains The 1960's were impacted competition -wise in retail by the entry of chains who would become the ultimate discounters; i.e., S.S. Kresge's, Kmart, Dayton -Hudson's Target, Wal-Mart, Woolworth's, "Woolco" among others. These stores began to emphasize discounting, broader inventories and advertised and promoted unusual values. All experienced steady growth from the sixties to the eighties. While Wal-Mart had a strong start in the Midwest, it opened only about 500 stores in the sixties and seventies. These discounters had vigorous rivalries over price competition, but more on a regional basis than national one. Sears continued to maintain a very strong national position. In the early eighties Wal-Mart was still best known in the small towns and cities in the Midwest. In the 1970's, there were a number of specialized or "category" retailers who entered the retail market. They included Toys "R" Us, Walgreen's Drugs and Home Depot. Ruse of the Wholesale "Clubs" in the 1970's In the 1970's, the wholesale clubs began to make an impact. The first was the Price Club Wholesalers in 1976. Then, in 1983 the Costco Wholesale Corporation opened. The two were later to merge in 1993. The "Clubs" currently include in their memberships large numbers of legitimate smaller retailers who are limited in buying from wholesalers because of the "direct" mass purchases of the mega -retail discount chains. The smaller retailers take advantage of purchasing from Price/Costco and Sam's Clubs at low prices and thus are able to stock their stores with inventory. This is not a solution to the inability of the small retailer to survive permanently, but it gives them a chance to stay in business at least temporarily. Price/Costco and Sam's Clubs generally sell a limited line of products, based upon the concepts of a "good buy." Suppliers often consider themselves as having excessive inventories and therefore at limes are anxious to unload at reduced prices. The Warehouse Clubs qualify as "Big Boxes" and may average 120,000 square feet in size. These are like traditional warehouses with little or few sophistication or frills. Price/Costco operated over 200 stores in the United States, Canada and Mexico with sales in 1995 of $1$.6 billion. In most Clubs members pay a dues of approximately $35 each and are able to buy at what might be described as "wholesale" prices. Sam's Clubs parallel the Price/Costco facilities. Sam's Clubs were opened by Wal-Mart in 1983. Wal-Mart operated over 400 Sam's Clubs stores by early 1996. In 1994, Wal-Mart acquired 99 PACE club stores which have been converted to Sam's Clubs. Sam's Club sales exceeded $19 billion in fiscal 1996.2 Both Sam's Clubs and Price/Costco set up warehouse type facilities, generally on "industrial" land, much cheaper by the acre than commercially zoned land. The Clubs generally do not buy from distributors but generally only buy "direct" from suppliers and manufacturers. As might be expected they have very low labor costs and do little advertising. Selling Direct to the Public (Factory Stores) Many manufacturers have their own factory outlets in malls throughout the United States. Hundreds of such factory outlet malls exist in the nation; and retail sales are estimated to be $8 to $10 billion per year and rising. The Impact of the Automobile and Super Highways on Traditional Retailing "Main Street" merchants have been severely handicapped in retaining customers during the past 20 years because of improved highways and the development of malls and rnega- retail chain operations in areas outside the perimeter of the traditional urban "Main Street." Free parking areas have been set up near the "Big Boxes" and Supercenters constructed by the Kmarts, Wal -Marts and other mega -retail discount chains. Parking spaces (blacktopped) are ample, compared to the restricted and expensive parking in the central downtown areas. The mega -retailers, discounters and manufacturer outlets offered free parking, low prices, wide product lines and impressive merchandising, promotion and advertising. Because of the huge buying power represented by mass purchasing, the traditional independent retailers began to lose influence with their suppliers, who in a non-financial sense began "partnering" with the mass purchasers represented by the mega -retail discount chains. "Partnering" also included interactive information systems (EDI) and other cost savings and benefit items for the major mega, discount retailers. Significant market share formerly possessed by small retailers collectively began to be lost to the mega -discount retailers. Aside from the history of improved highways and the mobility of shoppers and the desire for a one-stop shopping location, Wal-Mart, Super Kmart and others employ a current strategy of "destination" stores. The "enveloping" area is a strategy to locate within a 5 mile radius in urban areas and 25 mile radius in rural areas. The objective of these stores is to attract customers directly and purposely to their location as a 'one-stop," sole destination. The ability of the traditional retailer to survive is seriously threatened unless there is reasonable zoning regulation by state and local governments to protect the traditional "Main Street." A later chapter in this study will describe the history of the Fair Trade legislation in the United States with the Sherman Act going on to the Federal Trade Commission Act, the Clayton Act and the Robinson-Patman Act. These pro -competitive acts will be discussed as to whether the "enveloping" theory is an intrusion in a free and fair market and what needs to be done to counteract it. Mobility in driving to the "Big Box" to or from work has become a way of life for many consumers. Also driving to the "Big Box" at night or on Sundays when the small retailers might be closed further directs sales away from "Main Street." The Rise and Increased Impact of the Mega -Discount Retailers on the Small Retailer (as well as the "Big Box" Approach) Starting in 1962 no one could have foreseen the startling developments in retailing to take place during the next 30 years. 1n 1995, combined sales of Kmart, Target and Wal-Mart were over $150 billion. Discussions of these major discount retail chains follow: (1) Wal-Mart Wal-Mart has had the most meteoric growth during the past 15 years growing from about 275 stores in 1980 to 2,157 stores in January 1995, with 160 more scheduled to be built by January 1996, 3 Actually in 1995, 117 new stores were built giving them a total number of stores of 2,330 in January 1996. In 1990, Wal-Mart became the Number 1 retailer passing both Sears and Kmart that year. Wal-Mart was the initiator of the concept of Supercenters. It first introduced this concept which includes groceries; special services and food courts in 1988. It was planning almost 150 Supercenters, of which 80 were to be built in 1993.4 As of January 1996, 154 Supercenters were operated by Wal-Mart. Their high quality management, modern business systems and inspired executive leadership helped total operations reach a sales volume of approximately $93 billion in fiscal 1996 with double-digit increases in growth expected during the next decade. (2) Kmart Kmart was a new venture of S.S. Kresge Co. in 1962. At that time, Kresge had been in business 63 years and was well supplied with corporate and managerial talent. By 1981, Kmart had grown to 2,000 stores. Since that time, Kmart experienced both growth and later downsizing. By the end of fiscal 1995, sales volume reached $34.3 billion. In the 1980's, Kmart purchased Builders Square and Walden Books. Further development followed with the purchases of Pay Less Drug in 1985. In 1991, Kmart acquired Pace Membership Warehouse, Inc., Marko, Inc., OfficeMax and Sports Authority. In 1992, it purchased the Borders Bookstore Chain. Despite Kmarts early growth and profitability, it failed to match the aggressive leadership enjoyed by Wal-Mart and others in the early 1990's. Kmart's more recent plan was to concentrate on its principal mission; general merchandise plus a new Supercenter concept involving discount groceries. The company's Super Kmarts were designed to rival Wal -Mart's newest Supercenters. Recently, Kmart began to downsize, and to make decisive changes in top management. Joseph E. Antonini was ousted as chairman and outside director Donald S. Perkins was named as his successor. Currently, Floyd Hail is Chairman, CEO and President. Kmart had eight consecutive quarters of disappointing earnings. Personnel moves were in concert with the disappointing earnings and finally posted a 4th quarter loss of $420 million ending January 1996. Much of this loss dealt with the write-off of its investment of the Builders Square chain. The Builders Square write-off followed a spinoff of 3 non- core businesses; Office Max, Borders and Sports Authority. Kmart appeared to be learning the hard way that its best strategy is to go back to its discounting roots. In early 1997, after a further write down of Builders Square by over $350 million, Kmart is entertaining merging this division with Waban's HomeBase division to move into the number 3 spot in home improvement chains behind Home Depot and Lowe's. 5 In 1994, close to 175 Walden Book Stores were closed and to discontinue operations in about 70 smaller Kmart stores were discontinued. In 1995, after news of the change in the chairman's position, the drastic change in top executives was followed by an announcement that 73 additional Kmarts would be closed. Further actions to sell or spin off Office Max, Inc., the Borders Group and Sports Authority Inc. have aided in Kmart's financial recovery. (3) The Target Chain The Target Chain was derived from the Dayton -Hudson Corporation. Dayton -Hudson opened the first of its current 500 plus stores in 1962. Target is also in the "Big Box" business, creating the "Great Lands" stores. They are often as large as 125,000 square feet. They were among the first of the non -drug chains to install pharmacies which are now important adjuncts in the other major Supercenters. For the fiscal year ended February 3, 1996, Target posted annual sales of $23.5 billion. (4) Bradlees, a Regional Northeastern Chain Seeks Bankruptcy Protection In 1995, a Northeastern regional discounter, Bradlees, Inc. filed for Chapter I 1 reorganization protection in the bankruptcy court saying some suppliers refused to ship merchandise because they feared the struggling retailer would be unable to pay them. Since the filing, they have closed 12 stores and in August 1996, Bradlee's received approval to close an additional 14 stores which will leave them with 124 stores in operation. Filing for Chapter 11 protection, Bradlees became the hardest hit of Northeastern regional discounters. These retailers have felt the pinch as the national mega -retail discount chains became stronger factors in their regional markets. In addition to the strong entry of Wal-Mart, Kmart slashed prices in the Bradlees' area and consumers grew more and more price conscious in their buying. "They have a Kmart in basically every one of their backyards. Wal-Mart has moved into their territory in a very big way," said Kurt Barnard, publisher of Barnard's Retail Marketing Report. Bradlees opened 16 stores in the greater Philadelphia area in 1985 and 1986. It's 17th area store, at Franklin Mills in Northeast Philadelphia, opened in 1994. In all, there were 136 Bradlees stores in the Northeast and Mid -Atlantic states. The company announced that its stores would continue normal operations, and that employees` wages, salaries and benefits would not be interrupted. Bradlees also announced the resignation of its President, Samuel Mandell, as well as two key vice presidents. Peter Thorner, vice chairman, was then named to succeed Mandell as President and Chief Operating Officer. Analysts agree that the worries of suppliers and factors - who pay suppliers up front and collect from the retailer - triggered the Bradlees bankruptcy filing. "If not for the factors pulling the plug, the company seemed to be in decent shape," said Jack Hersch, a bankruptcy analyst with Donaldson, Lufkin & Jenrette Securities Corp. "This is the sort of thing that's self fulfilling," according to Kurt Barnard, of Barnard's Retail Marketing. The Bradlees debacle illustrates the point that jobs are being lost and firms are going out of business --not only the small retailers but also the regional chains all are threatened by the formidable financial and buying powers of the mega -retail discount chains. Recently Kmart's decision to close numerous stores and to shake up its management, as well as sharp declines in profits indicate that no firm, large or small, is immune to the results of the feverish desire by mega -retail discount chains to cover every acre in America with a "Big Box." Ultimately as stores get older and populations shift, the nation is left with urban and rural sprawl, boarded up stores and terrain that looks like the "bombed out" area in Italy after the Battle of Cassino in World War IL Rise of Specialty Chains: Home improvement; Drugs; Toys; etc. (1) Home Depot, Inc. Home Depot, Inc. competes with many products that appear in Supercenters and more specifically with Kmart's Builders' Square. Today, Home Depot is the largest and most powerful player in home improvement retail activities. Their sales in fiscal 1995 were over $15 billion. Their staff appears to be much more highly professional than that generally found in most of the mega -retail discount chains, hardware retailers and lumberyards. Home Depot has approximately 300 stores and plans to build a great many more. Its average square foot building runs in excess of 100,000 square feet and many of the newer ones appear to be in the "Big Box" classification of over 150,000 square feet. The home improvement market grows constantly, with a major emphasis on "do it ,yourself." This is resulting in a strong negative impact on the fortunes of the local hardware stores and the regional lumberyards. In the San Diego area, for example, where there was formerly a large number of small hardware retailers, the number has precipitously declined to two since Home Depot has entered the market. Home Depot and a smaller chain competitor, Best Buy, appear to be more dedicated to professional service to meet the needs of the customer. Wages are higher than in the major discount chains and more opportunities are available for full-time positions and promotions; than that what was in the mega -retail discount chains. (2) Walgreen's and Other Drugstore Chains Drugstore chains are growing more powerful and the numbers of independent pharmacists and "Main Street" drugstores are sharply decreasing and may soon appear to be a thing of the past. The leading national chain is Walgreens. Other national and regional chains include Rite Aid, Thrift Drug, Revco, Payless, Eckerd and Osco. A new national pharmaceutical trade association is forming and for the first time is enlisting the aid of both independents and chains to fight the major mail order drug firms now growing strongly through "managed care." 6 In the Philadelphia, Pennsylvania area during the last decade the number of independent neighborhood pharmacists or drugstores has fallen from over 2,000 to less than 1,000. Walgreen's had over $10 billion in sales in 1994-1995 and operated over 1,900 stores. This chain has a long history, having opened its first store in 1901. Walgreen has accepted the latest in management techniques in the planning, building, design and operations of the contemporary pharmacy. Most of the chain stores are very modern. Since 1993, Walgreen's national plan has been to add about 150 stores annually until the year 2000 when they are expected to have between 2,500 and 3,000 drugstores. Needless to say, Walgreen's rapid growth and the rise of many other smaller drug chains have created hostile attitudes on the part of independent pharmacists toward the chains, in some cases leading to litigation. As of Fall 1996, Walgreen's has over 2,100 locations. Rite Aid is. quickly gaining momentum on Walgreen's number 1 position. In late 1996, Rite Aid announced the purchase of the Thrifty Payless drugstores which gave Rite Aid the lead in the number of locations at over 3,500 stores. This purchase was after Rite Aid had abandoned its 5 month pursuit of the Revco drugstore chain amid troubles with the Federal Trade Commission and allegations of antitrust problems due to geographical conflicts. The Thrifty Payless acquisition is free of that concern as the majority of their locations will complement Rite Aid's already existing stores. Recently, such litigation alleging "predatory pricing," under Arkansas State law took place between the independent pharmacists and Wal-Mart in Arkansas, with Wal-Mart eventually becoming the winner at the State Supreme Court level. This litigation will be discussed in greater detail in Chapters IV and V. .(3) Toys "R" Us, Inc. Toys "R" Us, Inc. went public in 1979 and has had phenomenal growth, opening about 100 stores in 1993. There are now over 1,000 stores in the chain principally selling children's toys. Sales volume soared to over $9 billion in 1995. The chain has diversified its product line and several hundred of the newer stores now sell children's clothing as well as children's books. In fact, separate facilities known as Kids "R" Us are often built directly adjacent to the toy store. This firm is exporting its merchandising philosophy internationally having opened up about 175 locations in Asia and Europe in the past few years. The phenomenal growth of Toys "R" Us has stimulated an FTC investigation of the toy industry and according to a recent article in The Wall Street Journal, the FTC is accusing Toys "R" Us, Inc. of illegally boosting prices by pressuring manufacturers into harming other discount retailers' ability to compete. The impact of this anti-trust action should provide precedent for a similar review by the FTC of other alleged influences by mega - retail discount chains on the pricing practices of suppliers and manufacturers. See further discussion of the Toys "R" Us case in Chapter VII -A on Predatory Pricing. The Principal Advantages that Mega -Retail Discount Chains Possess as Compared to the Small Retailers The chains have many advantages and services that are difficult for the small retailers to match, with their limited capital, smaller staffs and other limited resources. The strengths of these mega -retail discount chains may be observed by viewing the following characteristics: (1) Lower prices, resulting in great part, from direct mass purchasing of the manufacturers' or suppliers' products. This is the epitome of direct buying. It ultimately leads to the elimination of the small wholesaler and the consolidation of national wholesalers who traditionally supplied the small retailer. Small wholesalers have been forced out of business or have been purchased by national wholesalers. There appears to be a gradual disappearance in America of the middleman function. Low prices for good products create value in the minds of the shoppers. This is a strong point, indeed.•.. In the short term, the customer wins with lower prices but in the long term, they will lose. While the obvious advantage in the short run is lower prices, this market control can lead toward monopolistic practices, if unregulated, putting the consumer at risk and eliminating price advantages. Quality and selection will decrease because there will be only a few large corporations controlling selection and price. (2) Aggressive pricing policies in which small retailers lack sophistication and information. The major discounters quickly alter prices by lowering or raising them as the circumstances dictate. (3) Strong promotion and advertising budgets managed by professionals that can put the small retailer out of the game. (4) A tremendous line of products, which, of course, widens consumer choices. (S) Constant investments in closing old stores, renovating and enlarging new ones and building challenging and imaginative Supercenters. Aggressive design, both externally and internally, creates curiosity in the mind of the shopper who appreciates "newness." (6) Use of automobile -ease of access and free parking facilities. The mega -retail discount chains choose locations which are close to major highways and generally located away from the traditional "Main Street," where one farads parking meters, regular police review, and expensive garage or lot parking. However, the multi - retail discount chains have created in many cases major traffic problems and congestion in these out of town areas. Also, there have been extensive investments by county and state governments in highways and other required infrastructure improvements. All of these costs are borne by the taxpayer who is also the consumer and who is supposedly benefitting by lower prices. (7) product lines that replicate or expand on product lines that can be found in all the traditional and specialty "Main Street" Stores; i.e. men's, women's, children's and infants clothing; sportswear; fishing and hunting items; pet food; groceries; meats and poultry; frozen foods; electronics; games and hobbies; furniture; paper products; health and beauty products; domestic products, home improvement and building supplies; auto equipment; books; jewelry; optometry; photography; pharmacies and drug stores; hair salons; dry cleaning and many others. (8) Mega -chains are generally open on a 7 day 24 hour basis. More and more Americans are holding more than one job in order to survive and perhaps working for two employers on two different shifts. Shopping style is now different from the old 9 to 5, six day per week old "Main Street" pattern. Drivers now pull into their "mega box," parking lots, day or night, at any hour. The flexibility of the 7- 11 chain is illustrative. Shop, and get a cup of coffee and a doughnut. Even now, one will be able to shop at a chain, and procure a snack while filling up one's gas tanks. (9) Shopping, eating, buying groceries, meat, apparel, drugs, filling prescriptions all offer "one stop" shopping that is convenient. What is often lacking, however, is the long, traditional and harmonious relationships which existed between consumers and owners or full-time sales perkgns. There appears to be a great deal more impersonality and anonymity in shopping in a mega -retail discount chain operation; particularly when employees do not work the traditional full-time 40 hour week. Some chains provide between 20 and 28 hours of work. Having greeters at the front of a large "mega box," such as in Kmart or Wal-Mart is helpful --but that in itself does not make up for the continuity in personal relationships that has been found between shoppers, owners and sales personnel in the traditional "Main Street" retail store. (10) Generally, the inventory policies and mass purchasing of the large chains eliminate back orders. Inventories are purchased on a mass, huge discount basis and items are generally in stock and available. (This has been described as Efficient Customer Response (ECR)). The lack of capital on the part of the small retailer often requires frequent back orders and reorders, and hence delay to the customer. The Supermarket Chains (Kroger) versus Kmart and Wal-Mart On May 26, 1994, newspaper readers in Buffalo, New York were told that Wal-Mart planned to locate its first New York State discount store and Supercenter in Springville, New York, going Bead to head with Erie County's dominant supermarket chain, Tops Friendly Market. 7 Banking on their successful experiences with Supercenter concepts in the Midwest, Wal- Mart appeared ready to apply the same successful concepts in the Northeast according to newsman Rick Stauffer, who reported his interview with Don Spindel, a retail analyst with the national brokerage firm, A.G. Edwards & Son, in St. Louis, who stated: "People on average, shop for food two to four times per week. They (Wal-Mart) use food to drive their general merchandise business, and, unlike a regular supermarket, Wal-Mart does not have to make money on food --but they do." 8 In the same article, Wal-Mart spokesperson Betsy Reithermeyer said: "Most of our Supercenters will be in relocated or expanded in existing Wal -Marts." 9 Stauffer also interviewed Janet J. Mangano, a retail analyst employed at Burnham Securities in New York City who added: "It (the Supercenter) is the most profitable store they have and when a Supercenter replaces a regular Wal-Mart, it does much better (from a sales standpoint)." 10 The Buffalo News also reported that from 1988 to 1994, Wal-Mart had opened 79 such Supercenters and that the company announced in January 1994, that 65 additional Supercenters would be opened during the year. 11 Actually in 1994, one new Supercenter was opened and 37 Wal -Marts were relocated or expanded to Supercenters. In 1995, 6 new Supercenters were opened and 69 were relocated or expanded to Supercenters. In their 1995 Annual Report, Wal-Mart announced their plan to accelerate Supercenter growth, opening 90 to 100 in each year, 1996 and 1997. 12 The major concern these Supercenters, both those of Wal-Mart and Kmart, bring to the traditional grocery chain is the use of an entire industry, food, as a "loss leader." David Rogers, a supermarket consultant with DSR Marketing Systems (Deerfield, IL) stated: "The danger for supermarkets is that Wal-Mart is turning their business virtually :into a loss leader." 13 Rogers questions how traditional supermarkets can compete with Wal- Mart which can sell groceries at close to cost and recoup on general merchandise with higher margins. Wal -Mart's "dominance" strategy certainly applies to the food industry. At the Annual Stockholder's meeting on June 7, 1996, John Menzer, CFO, said that Wal-Mart is aiming to snare a similar market penetration in food as it has already achieved in hard- and soft- line goods. In 1995, Wal -Mart's market share of the retail food industry was 3.16% with $13.5 billion in sales. It is projected to rise to 8.67% by the year 2000. 14 In fact, by 2010, it is believed that nearly all of the currently existing 2,000 stores will carry food. 15 The legal discussion of the "market basket" approach versus the "single product" approach will be discussed in Chapter V in greater detail. In an Arkansas case and the subsequent appeal in a Mart and three local pharmacies, both sides were argued. The dissenting judges argued that the market basket approach could not be used and that a single product approach indicated predatory pricing practices. With the mega -retail discount chains now entering the food industry competitively and indicating that they will use food as a "loss leader," it is believed that this issue will be`contested more than once. Supermarketing and the Kroger Story Paine Webber reviewed Kroger's prospects for continued dominance and continued profits in the food industry in a brochure released in May 1994. 16 The review was for investors and Wail Street and was based upon a companion research report also issued in May 1994 entitled "Supercenters are no big threat." The conclusions in the research reports were that "Alternative format food retailers have consistently fallen short and quasi -Supercenters formats have failed. Supermarkets have proven expert in adapting." 17 The PaineWebber conclusion about expected weaknesses in Supercenters' growth and profits appears faulty to the authors of this study. It is based on part that warehouse "clubs," which in the 1980's appeared at first to threaten core supermarket operations, by late 1993 however, these clubs, according to PaineWebber, had "clearly shaken out as a format and begun leveling off in food share, with supermarkets correspondingly regaining sales momentum." 18 PaineWebber also justified its cautious endorsement of Supercenters, in great part, because of its evaluation of Kmart's performance and activities in the 1960's, as well as in more recent years. PaineWebber's mostly negative report on Supercenters' combining food with non-food items such as apparel and housewares, appeared largely influenced by what their research showed as a failure in "one stop shopping." PaineWebber:stated that the.Chicago Super Kmart's displayed. "tomatoes with tires, lettuce and light bulbs." Further, they displayed food together with non-food in the entry foyer. They apparently did not care for alternative advertising and promotion with an additional example from Kmart's ads such as "We've got juice, jumper cable and jeans" and "Shop here for carrots and car mats." PaineWebber may have mistakenly believed that only a small minority of Supercenters customers would "shop both sides of the store." In the same 1994 study, PaineWebber study described several major disadvantages that Kmart would have with Supercenters. PaineWebber stated; "Kmart's well-known corporate problems give it a negative image among consumers as well as developers." 19 The PaineWebber study also reported that Kmart's decision to use third party food wholesalers saved much needed capital by lowering overhead, but put Super Kmart at a substantial disadvantage in fulfilling Supercenters' low price positioning. If Kmart continues using third party wholesalers, it will put them at a substantial disadvantage to Wal-Mart and Target. The author of this study does not accept the premise that Wal-Mart will have similar problems as did Kmart in executing the Supercenter program. Wal -Mart's national management and store management appears quite strong. Wal-Mart, unlike several major supermarket chains, is unconstrained by corporate problems and appears to be going with 100% self -distribution thus minimizing overhead. Most supermarket chains self -procure and self -distribute. Apparently, when Kmart opened new Super Kmart's, utilization of outside food wholesalers strained Kmart's staff resources in opening new locations, with intense travel required as well as essential staff training requirements. A major advantage for Wal -Mart's Supercenters, generally is its lower labor costs as compared to both the unionized and non -unionized supermarkets. Wal-Mart is presently non-union. Kroger, the dominant supermarket chain, is unionized, but, nevertheless, it, unlike many supermarkets, continues to be strongly managed, effective and highly profitable. The excellent management of Kroger is illustrated by a PaineWebber survey -done during March, 1994 in Rosenberg, Texas, where Kroger's union labor gap would be wide relative to other regions. Nevertheless, Kroger came within 4% of the Super Kmart's pricing which was enough to neutralize price as a shopper issue. This, despite the fact that Kroger was unionized. The total pricing on a 46 item "market basket" was $83.19 or 104 indexed to Super Kmart, where the price was $80.04 indexed at 100.20 Kroger, among all supermarket operators has experienced the heaviest overlap with Supercenters and, normally, would be expected to be most vulnerable because of its mature (seniority) unionized labor force. Kroger is the largest and most powerful U.S. supermarket chain and retains., unusual flexibility to subsidize tough competitive regions with easier ones. Further, PaineWebber reported in March 1994, that; "In total, Kroger's results have not been substantially impacted by Supercenter competition." 21 Kroger combats low price Supercenters in the following manner: 22 (1) "A particularly well-developed private label line, supported by unusually extensive manufacturing and processing facilities." (21 % compared to an average of 15% for the supermarket industry.) (2) "Zone pricing downward, only those stores close to Supercenters." (3) "Cost reduction through changing some perishable to self-service, expanding private label." (4) "Emphasizing its superior perishables and overall assortment." (5) "Jawboning successfully with unions about potential contract adjustments toward parity with Supercenters (generally non-union) labor costs." Kroger's is one of the leading chains in the United States with 1995 sales of $23.9 billion and continues to compete successfully with Meijer, a very private and successful Supercenter and non -Supercenter operator. Meijer's private label line was relatively underdeveloped compared to Kroger. Kroger continues to be successful against A&P, Big Star (Grand Union), Bruno's, Food Lion, Publex, Kmart's Supercenters, etc. This writer believes, however, that Wal -Mart's capitalization and managerial expertise, plus its mass purchasing, advertising and promotion budgets will prove it to be a formidable rival for Kroger and other supermarket chains in the next few years. It appears to be drawing further and further away from its old rival Kmart in terms of profits and volume. Kmart said it will conduct another strategic review of its business, including merchandising, leadership, financial policies and operational execution. That is in addition to the company's recent plan to slice $800 million in expenses. But investors and Standard & Poors, which lowered its ratings on Kmart's $3.7 billion in debt, point out that Kmart is in a defensive position against competitors like industry leader Wal-Mart Stores, Inc. For example, Kmart reduced its original capital spending, while Wal-Mart planned to boost its capital spending. Mr. Antonini, who was removed in March, 1995 as head of Kmart had a relatively unsuccessful tenure, marred by flat -to -down earnings, inventory troubles, and loss of market share. Best known in Kmart's television commercials for his promise, "It's our job to make sure no one has a lower price than Kmart." Mr. Antonini had been criticized by industry experts for failing to stock the right merchandise, improve inventory control systems and adequately cut costs. Until now the small retailer has been threatened by the power of the mega -retail chains -- now it appears that the same thing will be true of the regional and in some cases, mature supermarket chains. What will this mean for joblessness and the U.S. retail employment picture in the next five years? ............... ......... ... .._.... Go To. To of Pa eiTable of Contents; THE PENDING IMPACT OF THE ARRIVAL OF LARGE NATIONAL DISCOUNT CHAINS ON SMALL RETAILERS IN PENNSYLVANIA, CALIFORNIA, ILLINOIS AND NEW YORK STATE WITH RESPECT TO WAGES, EMPLOYMENT, PROFITABILITY, ETC. OF AFFECTED SMALL BUSINESSES In October 1993, the researcher determined to measure the economic and sociological impact of the pending arrival of mega -retail discount chains on small retail businesses in four states: Pennsylvania; California; Illinois and New York. The first study began with the mailing of a questionnaire to retailers in the Greater Philadelphia Metropolitan area. Seventeen of the questions were designed to elicit quantitative results, analyzing opinions as to the economic and sociological impact of the arrival of mega -retail discount chains in the Southeastern Pennsylvania (including Philadelphia). One question, the 18th, was designed to secure subjective detailed opinions in a narrative style (see Chapter IV). The questionnaire itself is available in the Appendix section of this study and is Listed as Appendix 1. After reviewing the results obtained in the Pennsylvania study, the researcher then determined to compare Pennsylvania's (Philadelphia's) results with mailings to retailers in Southern California, in the San Diego area. The respondents were to be retailers in San Diego, Oceanside, Chula Vista, Mira Mesa and Poway. Following this, the study was to add Illinois (including Chicago, Des Plains and Kanakee). Finally, New York State was to be studied, primarily in the Finger Lakes area, including such urban areas as Geneva, Auburn, Syracuse, etc.). In each of the four states, the questions were identical and the results comprise the basis of Chapter Ill. The subjective; narrative data derived from Question 18 forms the basis of the findings in Chapter IV. The Philadelphia or Southeastern Pennsylvania study was preceded by several meetings with selective focus groups of small retailers representing the types of retail products sold by discount chains such as Kmart, Wal-Mart, Home Depot, Target, Pace, Sam's Clubs, etc. The research staff was involved in the computerization of the data from the inception of the study in Pennsylvania in October 1993, through the final analysis of data in the four states by August 1995. Since August 1995, the staff has been involved in further interviews in the four states to confirm the opinions which were quantified from almost 600 responses received where possible. Furthermore, the staff has spent considerable time in the last six months drafting and preparing the report on the survey. The retailers selected for the opinion survey were procured through Dalton Directories and other similar sources for Pennsylvania, California, Illinois and New York State. Selections were made by statistical sampling for various categories of retail businesses, i.e., Men's Apparel; Women's Apparel; Children's Apparel; Pets; Food and Grocery Products; Electronics; Games and Hobbies; Sports Products, Paper Products; Health and Beauty; Furniture; Domestic Products; Home Improvement and Building Supplies; Auto Equipment and Supplies; Jewelry; Books; Professional Activities such as Pharmacy; Optometry; etc. These categories and the statistical responses will be found in Tables and Charts 13A and 13B of this chapter, as well as in Question 15 of Appendix 1. Statistical sampling was based on mailings to approximately 20% to 40% of the universe in the various communities. Copies of the completed questionnaires from each state studied are available in the research files. Not only did the researchers compute opinions from retailers by computerization of the returns from four states; but also the staff visited and interviewed retailers in each state, as well as visiting malls, strip shopping centers and major retailers and discount chains. Data was compiled from the hundreds of interviews which are useful in the presenting of overall opinions by the staff with respect to how small retailers see their future in view of the potential impact of the arrival of mega -retail discount chains. Table f Summary of the Response Rates for All Four States Table 1, which follows, shows that the staff mailed out 6014 questionnaires to prospective retail respondents in Pennsylvania, California, Illinois and New York. Of this total, 570 were returned in completed good order or 9.4 percent. Additionally, 321 were returned by the U.S. Post Office indicating that the addressees were no longer at the designated address. In a side study, the staff learned that the usual reasons generally for the returns were liquidation, bankruptcy or moving to an area away from a threatening mega -retail discount chain. Since Dalton and the other directories are updated annually, it can be presumed that there is a dynamic loss of small retail business firms, owing in great part to the arrival and price competition of the invading mega - discount chains. Tabular data in Chapter III describes the fears and apprehensions of the respondents by means of quantitative data. Chapter IV will describe their fears and concerns in a narrative way detailing specific Quotes made by the respondents. Although it is early in this chapter to reveal the data, the writer points out that concerns and fears of small retailers in America about their inability to survive are almost uniform in the four states surveyed. Completely usable returns, as indicated in Table 1 were 14% for New York State; 11% for Pennsylvania; 10% for California and 7% for Illinois. A return of approximately 10% on a mailing of over 6,000 questionnaires provides substantial data to measure the small retailers' discouraging view of the prospective impact of the mega -discount retail chain upon chances for a business to survive and grow in a healthy fashion. Table and Chart 2A and Table and Chart 2B Distribution of Types of Business Entities From Pennsylvania, California, Illinois and New York Table and Chart 2A, which follow, show clearly that the 570 completed responses came primarily from sole proprietorships. Nationally, there were 465 returns or 86% of all returns who were identified as "sole proprietors." This was.a response to Question 1 in the questionnaires provided as Appendix 1. Seven percent were franchisers; 3% were regional chain units. Three percent represented national chain units and 1% retail concessionaires. In using Dalton's Directories, it was impossible to know in advance whether a given location might turn out to be a chain unit. Table and Chart 2B, which also follow, show graphically that the returns from Pennsylvania, California, Illinois and New York that were sole proprietorships (the essence of small business) represented between 80% and 91% of the respondents from four states. Typically, these were family -operated businesses, with children and other relatives working for decent wages (not near minimum wages). Young persons were able to save monies to prepare for college careers and enriched lifetimes. Table and Chart 3A and Table and Chart 3B Number of Years Respondents Have Been in Business Contrary to the general impression that business "turn -over" among small retailers is frequent and excessive, it appears that the responding retailers who, in the main, consider their companies threatened by the arrival of mega -retail chains in their areas, have been in business a long time and are "solid" business citizens in their communities, regularly paying property, income and sales taxes to the state, county, city, town and school district. They do not receive tax abatements or governmental subsidies, "corporate welfare" of the sort often enjoyed by many of the retail chains who build the "Big Boxes" which eventually lead to the destruction of the traditional "Main Street," bringing on urban, suburban and often rural sprawl. Table and Chart 3A which follow, provide an impressive national picture of longevity. Sixty-two percent of the respondents have been in business for more than 10 years. In fact, 33% of the respondents have been in business more than 20 years. The data also discloses the fact that, all in all, 82% of the respondents have been in business for rnore than 5 years. As their businesses begun to close on account of inability, in great part, to meet the price competition of the mega -chains; an observer can begin to see social as well as economic destruction in cities, towns, villages and in suburban areas. small retail businesses have always served as cornerstones in the neighborhood enclave. Once the grocery store, candy store, bookstore, shoe store and pharmacy close along with the loss of jobs; then social disintegration occurs and ghettoization appears with all the usual costs of crime, violence, drugs, welfare and unemployment. With it arrives the consequent bitterness leading to racial, religious and ethnic disharmony as the unemployed struggle for the fewer remaining job opportunities. Table and Chart 3B provides a more visual presentation of the differences in business longevity among the respondents in each of the four states under study. In Pennsylvania, 58% of the respondents were in business over 20 years. Illinois was in second place, with 40% over 24 years, while New York State was in third position with 30%; and California was in fourth place with only 22% of the respondents in business over 20 years. Much of the data for Pennsylvania and Illinois came from older commercial environments in the Philadelphia and Chicago metropolitan areas. New York's responses came from the "Finger Lakes" region, with more seasonality. California's respondents were from expanding populations in such Southern California locations as Oceanside, Chula Vista, Poway, Mira Mesa and San Diego. In the San Diego area, 26% of the respondents were in business less than 5 years. Compare this with Illinois for the Chicago area, only 8% were in business less than 5 years. The data on "years in business" was compiled from answers to question 2 in Appendix 1. Chart 4 Physical Business Size Much has been written about community social and economic dislocation as the mega - retail discount chains develop their "Big Boxes" and Superstores in areas formerly emphasizing small retail businesses, either in malls or strip malls or in the traditional "Main Street." Overtures have been made by the discount chains to governmental leaders that a redesign of the larger stores could fit into the traditional style and enhance the chances for small firm survival, rather than destroy its longevity. How is it possible to accommodate a "cheek by jowl" relationship between the "Big Boxes" and the small square feet areas reported by respondent small retailers located in the four states studied? Chart 4 shows clearly that the typical retail respondent in all four states under study, California, Illinois, New York and Pennsylvania occupied stores generally, with only between 1,000 and 5,000 square feet. Some retailers, particularly in lumber and home improvement products had footage in excess of 5,000 square feet, because their areas required storage of large inventory items. About 49% of the California respondents were in the 1,000-5,000 square feet category; 48% of the Illinois respondents; 36% of the New York respondents and 33% for Pennsylvania's respondents. The data is derived from Question 3 in Appendix 1. Table and Chart 5A and Table and Chart 5B Anticipated Effect on Economic Health if a Large Mega -Retail Discount Chain Opened Near the Respondent's Present Business Location The data in response to this question was derived from Question 4 in Appendix 1. The research was designed to elicit the attitudes, perspectives and opinions of the respondents about a move in the general area of the respondent's location by a mega -discount chain. While the results in Tables and Charts 5A and 5B have been converted to quantitative data, the subjective comments to be found in Chapter IV embellish the fears and concerns of small retail businesses who see the "writing on the wall" with respect to the viability of their continued business existence. The responses in Table and Chart 5A which follow, are overwhelmingly "very negative" and "negative." Thirty-three percent of the respondents voted "very negative" and an additional 40% as "negative," Thins 73% of the respondents in all four states studied saw a move into their location by a mega -retail discount store as more than threatening, i.e., "negative" or "very negative." Only 8% of the respondents saw the arrival of the mega -retail discount chain as "positive" or "very positive." The writer believes that the 19% of the respondents who answered "no effect," certainly were not inclined to be "positive" but simply as small business persons needing further documentation or data to make a selection. While readers may disagree with the writer's assumptions; it is clear that only 8% of the respondents were strongly inclined to view the arrival of a new "super" competitive chain store as "helping" their own small business to survive. Thus, the writer believes that 92% of the returns indicated fear, indecisiveness or lack of knowledge. Certainly there was little to be positive about in view of the increased vacancy rate of the small retailers in malls resulting in great part because of the competitive dominance of the mega -retail discount chains settling in their areas. Further, in advance of the writer's questionnaires, the small retailer had witnessed the decline or elimination of the traditional wholesaler. Many small grocers were reduced to joining Sam's Clubs or Price Clubs in order to buy products for their retail stores. Table and Chart 5B which follow, show a consistency in "negative" and "very negative" responses in the four states studied. Pennsylvania r6tailers appear to be most discouraged with 41% voting "very negative"; followed by California with 34%; Illinois with 30% and New York State with 27%. When the "very negative" and "negative" opinions are added together; Pennsylvania (Philadelphia area) shows the most discouragement and fear with 81%; followed by California with 736/o; Illinois with 71%; and New York State with 63%. Pennsylvania appeared most threatened and reported "no effect" -in only 14% of the responses; New York State reported 18%, California 18%, with Illinois at 24%, Upper New York State in the Finger Lakes areas reported 18% as being "very positive" or "positive." Possibly this. was due to the relatively small number of returns from New York compared to the other three states. Pennsylvania and Illinois were most discouraged with Pennsylvania reporting only 4% in the combined "positive" area, and Illinois only 5%. California again showed a mixed result with 9% being "very positive" or "positive." The questions addressed to the potential respondents tend to show the need for careful quantitative analysis of the tables and charts in Chapter III. It is therefore suggested that the reader show patience in coming to conclusions until completing a review of the quantitative analyses in Chapter III and then the subjective and narrative comments by small retailers in the four states studied to be found in Chapter IV on a state by state basis. Table and Chart 6A and Table and Chart 6B Responding Firms by Size Of Employment The response to this national attitude survey, with respect to Table and Chart 6A which follow, concerned the impact of the mega -retail discount chains on the destiny and future health of the very small retail businesses. These small businesses generally have less than 20 employees. The answers were derived from responses to Question 5 in Appendix 1. Fifty-two percent of the national respondents employed 5 persons or less. Seventy-four percent of the respondents had 10 employees or less. Only 26% of the respondents had more than 10 employees. Chart 6A shows that 402 employers, representing 74% of the total responses of 540 firms responding to this questionnaire were in the classification of "10 employees or less." r Table and Chart 6B which follow provides a more graphic review of the size of firms reporting in the four states studied; i.e., California, Illinois, New York and Pennsylvania. Almost 60% of the respondents in California and New York had "5 employees or less"; with Illinois showing the average return to be somewhat larger with more returns in the "6-10" category than the other three states. Pennsylvania's returns were about 50% in the "0-5" category while their returns in the "6-10" category were also greater than California and New York. The explanation as to why small retailers in Illinois and Pennsylvania had more employees on the average than California and New York can be clarified somewhat by onceagain reviewing Table.and Chart 3B which showed an overwhelming preponderance of older firms in Pennsylvania (Philadelphia area), and Illinois (Chicago) compared to Southern California (San Diego area) and upper New York State, (the Finger Lakes area, with Syracuse, Auburn and Geneva, etc.) For example, 57% of the respondents from Pennsylvania (the Philadelphia area) were in business over 20 years; and the same was true in Illinois with 40% of the returns. Compare this to Southern California with only 22% of the firms older than 20 years, and upper New York State with 30% in this category. Table and Cham 7A and Table and Chart 7B Pending Impact on Respondent Employment by Virtue of a National Retail Discount Cham Opening Near the Respondent's Location Question 6 in Appendix 1 provided the responses presented in Table and Chart 7A by respondents of estimates of losses or gains in employment by virtue of having a new mega -discount retailer selling similar products in their area. This type of question requires more than an educated guess - - it requires some serious quantitative modeling. Hence, it's not surprising that 37% of the respondents were not able to report an opinion as to a gain or loss in employment. However, again the writer views this indecision as being "negative." Certainly they do not see the arrival of a "Big Box" mega -retail discount chain store as being "positive." Only 4% of the respondents saw their employment rising as a result of a new "chain" neighbor; while 59% predicted serious losses in employment after a mega -chain unit moved in selling similar products. The question resulted in strong negative opinions. Eighteen percent of the respondent firms predicted losing 50% or more of their employees during the battle for survival. Forty percent of the respondents saw their retail ventures losing from 5% to 35% of their employees. Imagine! Ninety-six percent of all respondents predicted losses in employment, while 37% saw no gain, but were unable to predict losses. As indicated only 4% saw benefits in employment by virtue of a new chain becoming a competitive neighbor. Table and Chart 7B which follow, show a respondent breakdown by states. All four states, i.e., California, Illinois, New York and Pennsylvania were quite certain that the gains in employment in their enterprises would be trivial, indeed, with only 4% to 5% responding as to gains in employment. Sixty-two percent of the. Pennsylvania respondents estimated loses in employment, with 18% of those predicting losses that more than 50% would lose their jobs. Sixty percent of the California respondents predicted serious losses in employment, with 21%0 of those predicting losses visualizing 50% or more in job losses. Forty-eight percent of the Illinois respondents predicted job losses with a 13% job loss of 50% or more. Sixty-two percent of the Pennsylvania respondents predicted job losses, with 18% concerned about a 50% or more job loss. In New York, 57% of the respondents predicted job losses with 16% estimating 50% or more. Thirty-five percent of the Pennsylvania respondents anticipated "no effect"; Thirty-six percent was a similar result for California. Thirty-nine percent reported "no effect" for New York and 46% of the Illinois returns predicted "no effect." Again, the authors believe a vote for "no effect" was primarily a lack of ability to make a "judgement." In summary, there appears to be strong concern and worry from small retailers in all four states; California, Illinois, New York and Pennsylvania, that contemplated entry into their neighborhoods by mega -chains will drastically cut their ability to retain employees. Since Tables and Charts 6A and 6B disclosed that retailers are typically small businesses with "less than 10 employees"; one can assume that there is a substantial percentage of family members who are employed by these small retailers. Their firms offer younger family members the opportunity of earning substantially higher wages than the near minimum hourly rates offered by many of the super -mega -chain stores. Hence, retail stores that "go under" prejudice the chances for continued neighborhood social stability and reduce opportunities for the retailers' family members and other local youth employed by small retailers to have the opportunity to attend college either part-time or full time. Weakening of the small business retail structure threatens the social stability of the neighborhoods in urban, suburban and rural areas. Table and Chart 8A and Table and Chart 8B Annual Sales Volume as Reported by Respondents Data here was derived from quantitative answers to Question 7 in Appendix 1. It was necessary to secure sales volume data from respondents in order to have them calculate the "negative" or "positive" impact on sales volume by the new competitive entries of mega -discount retailers near their current locations. Again it is evident that the respondents are essentially small businesses. The four state results disclosed in Table and Chart 8A show 77% of the respondents with sales volumes of $1,000,000 or less. Fourteen percent of the respondents report volume of $1,000,000 to $3,000,000. Five percent reported volumes of $3,000,000 to $ 10,000,000. Only 4% reported volumes of $10,000,000 or over. Approximately 20% are found in the category of $250,000 to $500,000; and finally about 20% are found in the category $500,000 to $1,000,000. Only 38% had sales volumes of $250,000 or less. Table and Chart 8B which follow, reveals a vast majority of the respondent firms; namely 77%, report sales volumes in the 70% categories from $0 to $1,000,000. California has 83% of its returns in this category; Pennsylvania, 71%; New York State, 74% and Illinois, 69%o. In the $1,000,000 to $3,000;000 category, Pennsylvania led with 19.gyo; New York, 18.6%; Illinois 15.2%; and California 11.3%. Illinois had 8% of its respondents with over $10,000,000 compared to an average of only 2% to 4% in the other three states. Table and Chart 9A and Table and Chart 9B Anticipated Effect on Sales Volume by Entry Into The Respondents' Location By a Mega -Retail Discount Chain Selling Competitive Products Generally Sold By The Small Retailers The data in this analysis was secured by virtue to answers to question 8 in Appendix 1. Table and chart 9A provide a dramatic visualization of the pessimistic views of the survey respondents with respect to diminished sales to be expected by incoming competition of the mega -retail discount chains. Seventy-nine percent of the respondents nationally anticipate drastic reductions in sales volume, while only 14% anticipate no changes in sales volume. Nineteen percent anticipate a drastic reduction in sales volume of 50% or more. Only 6% see the possibility of increasing volume by having a superstore in the neighborhood. Again, the writer believes that the 14% voting "no effect" are certainly not "positive" votes about having a new giant neighbor. They simply don't have strong numbers to rely on - - but we can assume that they are more pessimistic than optimistic about their company's future, otherwise they would have reported in a more positive frame of mind. Furthermore, "no effect" means no anticipated growth - which ultimately has a regressive effect. Table and Chart 9B which follow, clearly show the opinion of respondents by states. Eighty-three percent of Pennsylvania's respondents see volume falling sharply. In California, it is 79%; New York, it is 80% and in Illinois, it is 78%. States showing greatest concern are California with 21% of the respondents expecting sales to drop by 50% or more and Pennsylvania with 20% of the respondents expecting a reduction in sales of 50% or more. New York followed with 16% of the respondents predicting a loss in sales of 50% or more; while Illinois was the lowest with only 15% estimating sales to drop by 50% or more. As indicated, Charts 9A and 9B are quite dramatic showing strong pessimism for retaining sales volume. As is noted later, lower volumes means reduced profits and reduced employment. Relationship of Job Loss to Sales Volume Losses to Lower Profits and Lowered Employment There is consistency shown in the data to this point. For example, Tables and Charts 6A and 6B shote the size of firm and number of employees, while Tables and Charts 7A and 7B show the anticipated gains or losses in employment based on the imminence of mega - retail discount chains moving near the proprietor's location. Additionally, Tables and Charts 8A and 8B report on the annual sales volume of the respondents. This may then be compared to Tables 9A and 9B on the predicted impact on sales volume based upon mega -retail discount stores arriving in the area. Both the data on job loss and the data in sales volume loss combine to show overall concern by the respondents with respect to all the questions addressed to them by the research staff. While it is true that the study had a total sample of 6,014 mailings and a 570 return of 9.4%; nevertheless, were these results extrapolated among 50 states and numerous cities rather than four states and a limited number of urban areas, it would appear that both the governmental authorities and the banking segment of the United States should be stunned and look to a serious down sizing of the total economy, affected in great part because of the growing weakness revealed by this study of small retail businesses. The small retailer for a long time has been an integral part of our balanced free market economy and appears about to disappear from the business "landscape." Table and Chart 10A and Table and Chart 14B What Did the Respondents Believe Would Be The Impact on The Profitability Of Their Firms After the Arrival Near Their Location Of A Mega -Retail Discount Chain Store The data discussed here is derived from the responses to Question 9 in Appendix 1 and - disclosed by Tables and Charts 10A and 1013 which follow: Seventy-six percent of the respondents located in the four states studied anticipated serious reductions in profitability. In fact, 24% of the firms believed that they would see their profits reduced by more than 50%. The "no effect" answers (about 16%) to this question were quite small compared to -other questions requiring a lot of external facts to make a judgement. Here the respondents were clearly convinced that profits would be lowered substantially. Many foresaw serious losses as well. Only 8% of the firms saw an increase in profitability were the mega -retail discount chain to arrive. The positive expectations were quite conservative, indeed. The data on reduced profits is quite consistent when compared to predictions on prior questions relating to reduced sales and reduced employment. Table and Chart I OB breaks down the data by states in the study. The "no effect" is consistent among the four states; i.e., approximately 15%-16%. All four states showed substantial majorities reporting imminent reductions in profits. Eighty-two percent of the respondents from Pennsylvania reported a prospective downturn in profits. Similarly the downturn in profits reported in California was 79%; in,, New York, 76% and in Illinois, 69%. Twenty-seven percent of the California respondents expected a downturn of 50% or more, with New York showing 24%; Pennsylvania, 23% and Illinois only 17%. Table and Chart 11A and Table and Chart 11B Rise of the Mega -Retail Discount Chains Has Adversely Affected the Ease with Which Small Retailers were Formerly Able to Buy from Wholesalers Question 10 in Appendix 1 asked the following questions: "There appears to be a trend on the part of the large, national discount retail chains to buy directly from manufacturers. As a result, middlemen or intermediate distributors seers to be disappearing. How will this affect your purchasing practices?" The summary results as noted in Tables and Charts 11A and I IB for the four states collectively were as follows; How are Retailers Affected by the Reduction in the Number of Wholesalers? Description Respondents Very Psitive 2.48%' Positive , _ 1.3.44% No Effect 43.70% Negative 26.34 /o ^': Very Negative 24 OS% 100 00% It should be kept in mind that 50% of the respondents reported that the continuing reduction in the unavailability of wholesalers would affect their business futures adversely. Twenty-six percent saw it as "negative" while an additional 24% viewed it as "very negative." Only 6% of the respondents saw it as "positive" or "very positive." Perhaps this small number of respondents (3 1) for the four states believe that their unique product lines would continue to permit them to buy "direct" from manufacturers or suppliers. Forty-four percent voted "no effect." This vote often reflects the small retailer's lack of knowledge of what is happening in the national market. Chapter IV will quote verbatim the disenchantment of the small retailers who are aggravated by the fact that the giant mega -retail discount chains are generally buying "direct" .from suppliers and manufacturers.. In a number of regions in the United States, small grocers are buying products from Sam's Clubs, Price Clubs/Costco, and this indicates a kind of hopelessness that precedes liquidation or bankruptcy. Table and Chart 11B disclosed that approximately 55% of the fmns reporting from Pennsylvania and Illinois see the reduction in the number of wholesalers as "negative" or "very negative." California appears somewhat less threatened with 48% in the "negative" grouping. New York is the lowest with a combined "negative" response of 45%. Recent Moves by Kmart and Wal-Mart May Further Threaten the Survival of the Neighborhood Grocer or Medium -Sized Independent Supermarket Kmart's recent venture into the "Big Box" grocery and general merchandise field through the introduction of "Super Kmart" stores was intended to gain volume against the number one retailer, Wal-Mart. Kmart is attempting to convince customers that Kmart is not only a great purveyor of women's clothing, but that the "Superstores" are also a good place to buy meat, cold cuts, milk and lettuce. The Super Kmart is Kmart's version of the grocery supercenter and combines a discount merchandise store with a traditional supermarket under one giant roof. In a recent Wall Street Journal article by Christina Duff, the reporter interviewed a Mrs. Brockman who stated she was keen on Kmart's grocery prices. To quote her, "The tenderloin she recently bought there cost $4.99 per pound, compared to $6.99 at the family -awned Acme Super- Center across the street from Super Kmart." 1 Kmart, the nation's second largest retailer, is counting on these newly planned Super Kmarts to help stem the loss of customers to the industry leader, Wal-Mart Stores, Inc. By the end of 1995, Wal-Mart had already opened 143 combination stores - called "Supercenters" and has 90 - 100 planned for both 1996 and 1997. Wal-Mart plans for Supercenters, generally in excess of 180,000 square feet would not only compete against Kmart but also would target all small and medium sized groceries in the market area, and place added pressure on such firms as Price Chopper, Shop 'n Save and Grand Union, particularly in the Northeast. While both Kmart and Wal-Mart earlier were less than successful in efforts to sell groceries and merchandise in the same store, Wall Street and marketing analysts believe that both chains had learned from experience and were ready to take on the local groceries and food markets as well as regional grocery chains. Mass merchandising involves giant warehouses as well as tremendous space to show food products that is not possible for the traditional grocery or grocery chain. Furthermore, buying direct from food processors and suppliers provides better margins than are available to small retailers. Further, wholesalers are disappearing since the giant ,. discount chains with mass merchandising are buying where possible "direct." Wal -Mart's investment in villages and environs appeared to be tailor-made for Wal - Mart's supercenter concept according to an article by Rick Stouffer appearing in the Buffalo News on May 26, 1994. The article contained the following analysis by informed marketers and financial analysts: "Wal-Mart still is in the process of experimenting with the supercenter concept," said Don Spindel, a retail analyst who follows the Bentonville, Arkansas, retailer for A.G. Edwards & Son in St. Louis. "They know they have been very successful in the Midwest, but they want to put a few stores in the Northeast to see how they do. It sounds like the Springville area is ideal." 2 Under the supercenter concept, Spindel said, Wal-Mart uses to food to entice people to its adjacent discount store. "'People on average shop for food two to four times per week,' the analyst said. 'They (Wal-Mart) use food to drive their general merchandise business. And, unlike a regular supermarket, Wal-Mart does not have to make money on food -- but they do'." 3 Wal-Mart certainly is convinced the supercenter concept is a winner. "'I think the Supercenter is the wave of the future for Wal-Mart'," said Janet J. Mangano, a retail analyst for Burnham Securities in New York City. -'It's the most profitable store they have and when a Supercenter replaces a regular Wal-Mart, it does much better (from a sales standpoint)'." 4 Table 12 How Does Small Retail Business Generally Promote Its Products and Its Business? Part of the problem encountered by small retail businesses in their competition with the major retail discount chains is the lack of financial ability to devote substantial sums in their budgets for promotion. Table 12, which follows, is derived from the answers to Question 11 in Appendix I.- "What :"What methods do you use to promote your business?" "Please check off the methods that you rely on most." A review of the question shows there can be more than one response giving a total over 100%. National data for the four states studied follows: Table 12 BUSINESS PROMOTION METHODS Question 11 Table. 13 % of Sample Possible Selecting Each Methodil Answer Choices 51.32%Fly ers/Leaflets/Brochures .21% .89% The research staff asked this question to get an idea as to what methods the sample population utilized to promote their businesses. This question provided an understanding of the type of business establishments the sample represented as well as to demonstrate the means and resources available for promoting their businesses. Of those polled nationally, 95% responded to the question. Upon analysis of the data, the staff realizes that most of the sample were overwhelmingly made up of small businesses with little means and resources to invest in business promotion. One can see that the largest percentages were found in "flyers/leaflets/brochures, telephone books/yellow pages, and local newspapers." These are all low budget methods of business promotion. It will be extremely difficult for these small businesses to compete with mega -retail discount retailers who have extensive staff and financial resources and generally strong budgets for advertising and business promotion. Can the Small Retailer Compete with the Mega -Retail Discount Chain When it Comes to a 24 Hour Day and a 7 Day Per Week Operation? Question 12 in Appendix 1 asked the following question: "Please rate the days of the week as to which are your busiest and which are your slowest; also what days you are closed? Ninety-five percent of the respondents answered this question, which was in the form of a grid based on a 1 to 7 range from "slowest to busiest" as well as the days of the week that the store was closed. The findings were as follows: (1) More than 50% of the respondents closed their businesses on Sunday; 8% closed on Saturday; with 1% on Wednesday and the balance kept their stores open seven, days a week in some fashion or other. (2) interestingly enough, while over 50% closed on Sunday, some 40% of the total papulation selected Sunday as the busiest day of the week. (3) Upon analysis of the responses, it seems that these small businesses are still keeping traditional work hours. They must be aware of the fact, that in order to survive, they will have to compete with the hours that the large mega -retail discount chains follow; namely making themselves available day or night to meet the needs of the local consumer market. Table 13, Table and Chart 13A and Table and Chart 13B A National Summary of Those Products Sold by Small Retailers Which Parallel Products Available in the Mega -Retail Discount Chains Question 15 in Table 13 identifies the variety of trades, products and services of which the sample population is composed ninety-two percent of the respondents returning their data and provided detailed breakdowns of what they sold. Table 13, and Tables and Charts 13A and 13B provide a national total of the data received from the four states and reveal that 570 of the completed returns, which represented 9.4% of the mailing were truly representative of retail business. This question allowed the surveyors to analyze the heterogeneous nature of the variety of businesses evidenced in the respondent returns. When the sample was selected, great efforts were made to make sure there would be no heavy concentration of mailings to a particular sector of retail activities. This was done to keep the results as unbiased_ and objective as possible within the retail industry as a whole. Table 13 and Tables and Charts 13A and 13B shows the heterogenous nature of the responding retail firms. As in the case of the mega -retail chains, smaller retailers also sell more than one product line. For example, a retailer might sell women's, men's and children's apparel. Another retailer might sell sports products as well as electronics, i.e., video/equipment and audio/stereo. Question 15 was designed to procure where possible retail sales in every product line which might be found in a mega -retail chain. Hence the number of responses by categories far outweighed the number of respondents. Table 13 provides product analyses for all four states as a whole, while Table 13A and Chart 13A provides a breakdown of the 570 respondent retailers in each of the four states under study. Table 13A showed total choices amounting to 1341 selections of retail activity by the 570 respondents in the four state study. As might be expected, Table 13A shows heavy concentrations in "food products," 18%; "home improvement products," 15%; "other products," mainly jewelry and related items, 11 %; 'other services," such as Optometry, photography, 9%, and combined apparel, men's, women's and children's, 12%. The nature of these categories are such that the respondents in these businesses may have more serious concerns about survival than the other categories. The subjective answers in Chapter IV which follow indicate concern and fear of the price competition from such chains such as Kmart, Wal-Mart, Home Depot, Target and Sam's Clubs. As noted in Table 13A, the return from food product retailers overall was 18%. However, in Table 13B, the return from New York was 22%; from California, 19%; from Pennsylvania, 17%; and from Illinois, 13%. With respect to home improvements and building supplies; Pennsylvania showed a return of 28%; Illinois 17%, California 11 % and New York only 9% for an overall average of 15%. In apparel with an overall response of 12%, California's combined total for men's, women's and children's was 15%; New York was second with 14%; Illinois was third with 7% and Pennsylvania lagged with 5%. The nature of the area often dictated the characteristics of the responses. For example, Philadelphia and Chicago which are quite metropolitan and urban; and less inclined to buy fashionable "casual wear" appropriate to the warmer climate of the suburban and rural San Diego area. The Finger Lakes region of New York State was more rural than the Pennsylvania and Illinois experiences. Retail Product Categories Selected by Respondents from the Four States The retail product returns from each of the four states are categorized byproduct into subdivisions. There is quite a differentiation between the product mix in one state compared to another, as might be expected based on climate, environment, age of the average residents and style of life. Table 13A covers 799 selections from Southern California (San Diego, Mira Mesa, Poway, Chula Vista and Oceanside. Table 13A covers 186 selections from Illinois which includes Chicago, Kanakee and Des Plaines areas. Table 13A covers 64 selections from the Finger bakes region of New York State including such areas as Geneva, Auburn and Syracuse. Table 13A includes 292 selections from the metropolitan area of Greater Philadelphia, Pennsylvania (South Philadelphia, Center City, Society Hill„ Northeast Philadelphia, Northwest Philadelphia and West Philadelphia). California's response unlike the other three states studied, were numerous in apparel categories. Most of the retail stores selling men's and women's apparel classified as "casual wear" are found in the California returns. There were few returns in these categories from Illinois, New York and Pennsylvania. California, Illinois and Pennsylvania are quite representative on Home Improvement and building supplies. New York and Pennsylvania showed a substantial percentage of food retail responses. California and Pennsylvania. were strong on pets and pet supplies. California was strong in the sports products areas. California and Pennsylvania also had numerous returns in jewelry, watches and related products. Where Do the Customers Come From? The Rise of Multi -Discount Retail Chains has Benefitted Immensely by the Infrastructure Changes Provided by the Taxpayer (Question 16) Data received from all four states studied showed the influence that automobiles have on shopping habits. The retail responses showed that their customers came from different towns and counties depending on convenient highway facilities and parking availability. Obviously the dependence on the automobile tends to favor the mega -retail discount chains. The mega -discount chains and "Big Boxes" have capitalized highways and automobiles to shift the retail center of gravity away from the smaller retailers in the neighborhoods, the enclaves and the traditional "Main Street." The mega centers have huge parking lots, while it has become more and more costly to park in the central city without being "ticketed." Obviously, the "Big Boxes" have benefitted from tremendous investments on the part of federal, state and local governments in highways, egress and access roads and other infrastructure improvements which have not been made available to the traditional retailers. (See section on parking)? Since customers now have to employ their cars to shop, the sense of community is vanishing along with jobs and the tax revenues. Table and Chart 14A and Table and Chart 14B The Retail Respondents Were Queried as to What Methods They Would Employ to Survive in the Face of Imminent Competition by Mega -Retail Discount Chains The data requested was in response to Question 17 in Appendix 1 which follows: "What methods would. you employ in order to compete more effectively with a large retail discount chain that sells similar products/services; or, what decisions would you make to alter, survive or terminate your business? Please check off your alternatives from the list below. It is permissible to check off more than one." Tables 14A and 14B which follow, describe the alternative strategies that small retailers are contemplating in order to survive the competition of the mega -retail discount chains. Question 17 was asked in order to gain an awareness of the strategies (positive or negative) small businesses were planning to implement in order to compete with large, national discount retail chains. Eighty-four percent of those polled responded to this question. While the return was substantial, nevertheless, this was the lowest response rate for any given question on the questionnaire. The writer believes that many of those who answered the total survey were reluctant to deal with the subject of "competitive strategies," or possibly didn't answer because they had no idea how to deal with this issue. Of the alternatives that were given as answer choices, the staff observed a natural . classification of responses; as "positive" or "defensive." "Positive" choices demonstrated survival and aggressive competitive strategies. For example, if the respondents indicated choices such as "Increase Work Hours," "Increase Visibility," "Provide Fuller Service" or "Expand Product Line;" this indicates that the business owner is still in the "battle" and is willing to compete aggressively with the mega -retail discount chains for market share. Data Provides National Results of A Fragmented Nature Into Both "Positive" (More Optimistic) and "Defensive" (More Pessimistic) -- Question 17 "Positive" Strategies % of Total Responses on Each Alternative Strategy; Increase Work Hours 7.30% .......... . Increase Staff 1.68% Increase Visibility, 14 70% Provide Fuller Service T 17 23% _. . Expand Product Line/Services' Consolidate Business Move Business Sub -total "Defensive" Strategies % of Total Responses on Each Alternative Strateyj Raise rices 1.520% t ,ower prices. _... _.. 11.62% ° ?ecrease work hours - 1.12%_...._.__.._.. _.__-...... _. ?ecrease staff 8.08% Jarrow Product level/services ]8.9$% I iquidate business 3.42% 3ankruptcy 1.63% (Sell business 16.40% i (Merge business 11.63% ! Sub -total 144.40% _._.... IITOTAL 1104 The respondents to Question 17 numbered 479 firms on Question 17 or 84% of the 570 total respondents. The 479 firms answering the strategy question selected a total of 1782 alternative choices. Fifty-six percent were "positive" strategies, while 44% were "defensive strategies. The major aggressive "positive" strategies were as follows: "Provide Fuller Service," 17%; "Increase Visibility," 15%; "Expand Product Line and Services," 8%; and "Increase Work Hours," 7%. Obviously, in view of the mega -retail discount chains being open day and night to accommodate the mobile shopper; increasing staff and the work hours would be a forward move for the small retailer. Since the mega -discount chain's large "Boxes" limit salesperson customer contacts; "Providing Fuller Service" creates a retail uniqueness to bring customers into the store. "Increased Visibility" means putting more money into advertising such as hand outs and radio advertising. "Expanding the Product Line and Services" is to create customer interest and provide an innovative solution to the present inability to compete on price alone. "Positive" selections, as stated previously, represented 56% of the choices. According to the author's classifications, 44% of the choices were "defensive," negative or mildly negative. Twelve percent of the choices were to "lower prices." In view of "direct" mass purchasing by chains from suppliers and manufacturers, can a small retailer meet these lower prices? Obviously not, particularly since the number of wholesalers has begun to shrink because of direct "partnering" between mega -discount chains and suppliers. To illustrate, in the Philadelphia area the average monthly number of workers employed by wholesalers dropped from 44,200 in 1987 to 27,200 in 1994 - a reduction of 37%. The number of wholesale business establishments in Philadelphia in 1987 numbered 2,195; by 1995 this had dropped to 1817, a reduction of 20%. These trends are continuing and are matched by the loss encountered in retail employment in Philadelphia. In 1987, there were 103,800 retail employees in Philadelphia in an average month. By 1995, this monthly average had dropped to 87,100 - a reduction of 19%. During the same period, retail business establishments were reduced in number from 8,425 in 1987 to 8,063 in 1991, a reduction of 4%.5 Other discouraging defensive strategies advanced were, "decrease staff, 8%; "narrow product line," 9%; "sell business," 6%; "liquidate the business," 3%; "bankruptcy," 2% and "merge business," 2%. Table 14 Summary of "Positive" and "Defensive" Behavior rCalifornia %! INew York %IPennsylvania "Positive" Decision Making54.8 - 60.0 55.5 49.8F j"Defensive" Decision Making, 45.2 _ 40 0 44.5 _T 50 2 Total 100.0 100.0 100 0 100.0 An earlier national analysis in table 14A showed selections weighing the responses from four states as 55.6% "positive and 44.4% "defensive." However some retailers in each of the four states appear ready to fight for survival, while others are closer to quitting. Illinois had 60% of the selections as "positive," California, 55%; New York, 56%; while Pennsylvania's choices were only 50%. All the data in the preceding charts and tables indicated the potentiality of fragmented decision making, ranging from optimistic to pessimistic. Overall there appears to be great pessimism at this time in the minds of the small retailers in California, Illinois, New York and Pennsylvania. SUMMARY AND CONCLUSIONS (1) Results in four states, Pennsylvania, California, Illinois and New York State indicate that respondents to most questions in the Shils questionnaire,, (see Appendix 1), almost uniformly were pessimistic about their chances for survival when faced competitively by the mega -retail discount chains. (2) Over 6,000 questionnaires were mailed out to small retailers in four states. The 9.4% completed returns provides substantial information and meaningful validity with respect to the fears of small retailers and their concerns and expectations with respect to a possibility of a viable and profitable firm survival. (3) The statistical results would have been well over 10% had it not been for the 321 or 5% of the questionnaires that were returned unopened because the intended recipients had already gone out of business. This was shocking information since the Dalton directory used in the survey is published annually for each region. The staff visited malls in Illinois; New York and California and noted that in dozens of cases, the addressees whose questionnaire had been returned by the United States Post Office, had signs on boarded up properties stating, "Out of Business." These retailers had suffered to a great extent, because normal sized "anchor" stores in the mall had closed down unable to compete with the super "Boxes" built by some of the mega -retail discount chains in the area. (4) President Bill Clinton in an address at the 1.095 White House Conference on Small Business on June 12,1995, stated that while more new small businesses had sprung up in 1993 and 1994 than in any previous year since -World War 11; that, nevertheless, he was concerned about their ability to stay alive. He .expressed concern about the high rate of failures and bankruptcies among small business. Contributing to the increasing failure statistics among small retailers has been their inability to compete with the mega -retail discount -chains. (5) As to the new starts in small business alluded to by President Clinton, the enormous downsizing (millions) of employees working for America's large corporations has contributed to the desire of the redundant employee to become self-employed. Retail employment at near minimum wage cannot satisfy the family requirements of the former corporate employee; hence a desire for self-employment. Retail employment in most of the major chains can usually lead to a wage near the federal minimum or slightly above it. Many of these chains require that the hourly rate employee pay or contribute to his/her own health benefits. Thus, the opportunities in retail ownership appear rosy compared to a low minimum wage job; but the competition of the mega -discount chains makes survival and profit making speculative, indeed. (6) As might have been expected, 86% of the returns were identified as "sole proprietors." (7) Surprisingly, 62% of the respondents had been in business for more than 10 years. Closing a business like this is traumatic and hes terrible social impact on the family and the community. Eighty-two percent of the respondents were in business at least 5 years. (8) To prove that the respondents were in fact "small business," the typical retail respondent occupied only between 1,000 and'5,000 square feet of retail space. Think of the average retailer's inability to stock inventory to compete with the national chains who have stores with 45,000, 90,000 and even 160,000 square feet. (9) When the respondents were queried as to .what the anticipated effect upon the firms's economic health might be if a mega -retail chain were to locate nearby, the answers were overwhelming "negative" and "very negative." Forty percent anticipated the results as "negative" and an additional 33% answered "very negative." Thus, 73%,viewed their futures in a most despondent, negative manner. Even the 19% voting "no effect" were certainly not "positive," but it si possible that *in many cases, they decided not to answer the question positively or affirmatively becau§e of a lack of hard data to make a judgement. (10) To further validate the fact that opinions came from small businesses, it appeared that 74% of the firms employed 10 employees or less. Only 26% of the firms had more than 10 employees. These typical "sole proprietor" retailers were small indeed, with 52% of the respondents employing 5 employees or less. (11) Fifty-eight percent of the respondents visualized serious losses in employment were a major chain to move into the area selling similar products. Forty percent of the respondents saw their retail venture losing from 5% to 35% of their employees. Eighteen percent visualized losing more than 50% of their employees. Only 4% saw a gain in employment. Thirty-seven percent anticipated "no effect." (12) With respect to their current business volume, the retail respondents were characteristically small. Seventy-seven percent had volumes of $1,000,000 or less. Thirty-eight percent had sales volumes of under $250,000; and 20% had volumes of $250,000 to $500,000. Only 23% had sales volumes over $1,000,000. (13) The respondents were then asked to estimate the positive or negative impact on sales volume by the imminent competition of a mega -retail discount chain. Eighty percent of the respondents anticipated "sharp" to "drastic" reductions in sales volume; while only 14% saw "no effect." Only 6% saw a rise in volume by virtue of anew competitive entry of a major retail discount chain. (14) Data appeared consistent as to sales volume loss and unprofitability. As to profitability, 24% of the respondents visualized profits dropping by more than 50%. In fact, 76% anticipated serious reductions in profitability as a result of the imminent competition of the mega -retail discount chains. Only 8% saw an increase in profitability, with these estimates being mostly conservative, i.e., 10% or less. Sixteen percent saw "no effect." (15) Respondent retailers saw the reduction in the number of wholesalers, or those middlemen willing to sell small retailers, as affecting their business negatively. Over 50% saw the direct selling to mega -retail discount chains by suppliers as being "negative" or "very negative." (16) Kmart's and Wal -Mart's recent ventures into the Super Kmarts and supercenters' food and grocery departments are creating new competition for the small grocer and the more traditional supermarket. Small retailers see these ventures as further threatening the survival of countless small food retailers. Many of whom (lacking wholesale resources) are buying now from Sam's Clubs or other clubs to survive. (17) Small retailers do not have the relative financial ability to compete with the mega - discount chains in advertising, promotion, public relations, radio and television. They rely on the small business techniques replete with flyers, leaflets, brochures, the yellow pages of the telephone book and local newspapers. (18) Ninety-five percent of the respondents lack the ability to compete with chains because of limited hours and days worked per week. More than 50% of these respondents close their businesses on Sunday; 8% close on Saturday. Forty percent of the total respondents however, saw Sunday as the "busiest" day worked during the week. Most work traditional work hours and are unable to compete with the mega -retail discount chains, who in many cases are open 7 days per week and 24 hours per day. (19) Small retailers sell most of the products sold by Kmart, Wal-Mart, Target and many other major chains. Each store however is limited with respect to national brands, inventory and product lines. One might specialize in apparel; another in food; another in auto mechanics and supplies and so on. Table 13A showed the percentage of respondents selling each product. To recap: 18% are "food products"; 15% "home improvement 12% "apparel`'; I I% "other" (jewelry, etc.), 9% "other services" (Optometry, photography, etc.). These vary greatly among the four states. For example, California shows heavy responses in "casual apparel"; while this is not as important in Pennsylvania and Illinois. (20) The customer base of these retail respondents depends greatly on highways and parking. Naturally, the major chains locating outside "Main Street" have the advantage of parking lots; ease of access, freedom from parking meters and downtown traffic congestion. Add to that the fear of crime and violence in downtown evening shopping which creates a major disadvantage for the small "Main Street" retailer. (2 1) A major question addressed to the small retailers related to strategies they might apply in competing more effectively with the major discount chains. While the staff :received an 84% response rate; it was lower than the answers to other questions. The respondents appear fragmented in their choices; frustrated, confused and pessimistic. (22) Fifty-six percent selected alternative strategies that could be defined as somewhat "Positive"; such as "increase staff," "increase visibility," "provide fuller service" and "expand product lines." Forty-four percent of the choices were "defensive" strategies; "going from raising or lowering prices," "decreasing staff," "liquidating or selling the business" or "going into bankruptcy." There was not a great. deal of difference among the four states as to "positive" strategies. Illinois was the most positive with 60%; New York with 56%; California 55% and Pennsylvania with 50%. (23) The staff believe that the profile of small retail business as portrayed in Chapter III shows consistency and validity; not only nationally but among the four states studied. Surprisingly, respondents generally have been in business longer than might be the popular notion. Small retailers show concern about their fixture viability, and evidence fear of job loss, liquidation and bankruptcy; they become less competitive when compared to the mega -retail discount chains. Go To Top ofagg Table of ContentsE F 01 ' ._x.51 THE STATE OF MIND OF THE SMALL RETAILER IN AMERICA. HIS FEARS AND CONCERNS ABOUT SURVIVAL (Narrative Statements) As was indicated in Chapters II and III, there was an approximate 10% return of the 5,000 questionn*es mailed to Pennsylvania, California, New York and Illinois. The research staff has categorized these responses which provide comments and suggestions on how to cope and prepare for the survival of the small retailer. The categories are grouped by state returns and indicate the types of product lines or services provided by the respondents. Chapter IV reveals the depth of fear and discouragement of the small retailers, as per their own statements, who are desperately concerned with their chances of survival in the face of mega -retail discount chain competition by the Home Depots, Kmarts, Wal -Marts, Targets and other "Big Box" competitors, as well as competition from other powerful retail chains. The narrative comments and quotes are [resented here in geographical order. Before launching into the comments and suggestions made by the retail respondents which are to be found in Part II of Chapter IV, the author believes it appropriate in Part I of this chapter to review suggestions made by authors, Taylor and Archer, on how the small retailer can survive in the face of mega -chain competition. l This work was published by the American Management Association in 1994. It hoped to provide the small retailer with a strategy for survival. PART I CAN SMALL RETAIL ENTREPRENEURS SURVIVE CHAIN COMPETITION BY UTILIZING UPDATED MARKETING AND MANAGEMENT STRATEGIES? Part I of this chapter is a response to the book, Up Against the Wal -Marts, authored by Taylor and Archer. The author recognizes this serious work as well meaning --but finds the suggested strategies almost impossible to implement at the current stage of retail failure and stagnation. These small firms simply do not have the financial resources, staff or leadership to snap back in the ways suggested by Taylor and Archer. Were there a reason to start a new business with more than adequate management experience and venture capital, their "Ten Strategies to Survive" would be both helpful and essential. It is possible that some individual retailers might survive in the face of the "Big Boxes" by following Taylor and Archer's "Ten Commandments" or strategies. However, for the most part, the dying breed of "Main Street" merchants requires external and formidable help from local, state and federal governments as well as specialized agencies such as zoning boards, planning commissions and community development authorities prepared to provide incentives and subsidies to small retailers, currently available to the mega - retail discount chains who generally build their "Big Boxes" on former agricultural or industrial land. For example, a mega -retail discount chain store is given the right to retain sales taxes collected for a given number of years in order to help finance construction of and debt service for the "Big Box." As small retailers close, the sales taxes they formerly collected are no longer available to local government. These entrepreneurial subsidies and dozens of other incentives as well as tax abatements are generally not available to the small retail merchant. Taylor and Archer are among those writers and journalists who attribute the failures of the traditional "Main Street" retailer to causes other than the price competition of the mega -retail discount chains. Taylor and Archer present a provocative and interesting volume which appears well-meaning in identifying ten survival strategies to enable the small retailer to compete more effectively with a giant Wal-Mart or other mega -chain retailers. The title of their book, published in 1994 is Up Against the Wal -Marts (How Your Business Can Prosper in the Shadow of the Retail Giants), as was listed in Footnote 1. One cannot argue with the time honored principles presented such as "satisfy your customers"; "study the success of others"; "gather and analyze management information regularly"; sharpen your marketing skills"; "increase the customer's perception of value"; "position your business uniquely"; "eliminate waste"; "find something to improve every day" (the Kaizen Japanese method of incremental improvement); "embrace change with a positive attitude"; and "pull the trigger and start the battle." These prescriptions would appear sound if the small retailer were not finding daily vacancies among his neighbors in strip malls; vacancies that result in the "Main Street" or the Mall taking on the appearance of a city ghetto, with boarded up properties and a sharply reduced traffic volume that makes the surviving retailers' look like lonely commercial outposts. If out of every ten stores on "Main Street" or on a strip mall, three to five retailers close because of a neighboring Supercenter's announcing special promotions and discounted sales, what is a staunch "survivor" to do? The small retailer is unable to procure mass purchase discounts from manufacturers. Even in military parlance, if sixty percent of a company is devastated by superior weaponry, can a company commander rally his decimated troops and win? Do the valiant surviving retailers possess unique leadership skills and professional staff of the sort engaged by the mega -retail discount chains? Do they have the logistical support to survive the invasion of the supercenters? The writer has visited many strip centers, "Main Streets" and malls, in a number of states and has interviewed a number of valiant survivors. In Part II of this chapter, the reader will certainly recognize their discouragement and disillusionment about the end of their "American Dream." Taylor and Archer, while truly attempting to encourage small retailers to survive; nevertheless do recognize and observe the present devastation going on in malls, strip malls and the former "Main Streets" of Middle America. Furthermore, it is easy to see observers are shocked by the decline and elimination of most small retail stores in the ethnic and minority enclaves of our very large cities, in the East, Midwest and the West. The elimination of small retail store in the neighborhoods results in job loss and contributes to the ultimate conversion of a formerly socially stable neighborhood into a ghetto, beset by violence, crime, drugs and an underground economy. This view is clearly expressed in the following quote from Taylor and Archer's opening statement in their book: "'Main Street' Is Changing" "'Bowman's Hardware is closing!' The rumor had spread like wildfire through the small Georgia town just weeks ago. Now the store building stands quietly empty. The auction is over and the owner is gone." "The 'for sale or rent' sign dominates the right -side display window. A hand - lettered poster board is taped up in the left hand window. Its message expresses the bitterness of the former store owner and the area's other failed merchants. It reads: YOU WANTED WAL-MART. SOON THEY'LL BE ALL YOU GOT. GOOD LUCK THEN!" "Bowman's is the eighth'Main Street' business to close since Wal-Mart came to town. The owners are quick to blame the giant retailer for the failures. However, signs of neglect, apathy, and decline were evident on 'Main Street' long before the discounter located at the edge of town." "Bowman's had been the only full -line hardware store in town. Its closing is a blow to the remaining independent owners. For the first time in seventy-three years the big corner store is empty." "'Main Street' is changing. "2 While it is true that all of the troubles of the small retailer can not be attributed to mega - retail discount chains; nevertheless, the pricing power of these chains makes recovery on the part of the small retailer well nigh impossible. A lack of foresight on the part of local governmental authority in failing to back downtown improvements; to make parking readily available; to control traffic congestion; and to provide fiscal stability have all contributed t6 the plight of the small retailer in America. After describing the Bowman's Hardware closing (which the authors of this current study find very typical of the fates of hundreds of retailers studied in Pennsylvania, California, New York State and Illinois), Taylor and Archer cited several successful survival instances in New Jersey, Missouri and Arizona. Based upon this writer's experience, these "miracles" are the exception rather than the rule. Taylor and Archer quoted Mr. Jack McNabb of a Trenton, Missouri Hardware Store as saying, "This is a tough business, and these are tough times," he told us. "But I'll soon have it paid off, and then we'll have some fun again."3 Taylor and Archer tell the reader that, in more prosperous times, this store supported the families of five owners. 4 Now it appears that only McNabb manages a living. Like the family farmers that make up his customer base, this independent "Main Street" merchant may be one of a vanishing breed. "'Main Street' is Changing." 5 Taylor and Archer also tell of Casey's in Flagstaff, Arizona that apparently has had the capital to advertise, promote and add'specialized employees. Casey's president, Robert Gondek, attributed his firm's survival in part to watching prices. He stated: "We're watching our prices too. Wal-Mart has 50 or 60 items they advertise pretty hard in this area. We watch those items all the time. If Wal-Mart is at 97 cents on a bag of steer manure, we'll be at 99 cents and load it in your car for you." 6 Admittedly, small retailers must fight back to survive. But how can Casey's continue to match Wal -Mart's prices when Wal-Mart and other mega -retail discounters such as Kmart, Target, and all other "Big Box" retailers who buy through mass purchasing buy ':direct" from manufacturers and suppliers, while McNabb and Casey are apparently unable to secure this type of recognition. As has been indicated in this study, access to wholesalers is disappearing for the small retailers. Numerous retailers are buying from such wholesale clubs as Price/Costco and Sam's Clubs. Price and Costco merged in 1993 and is now the largest factor in the wholesale club industry with over $15 billion in sales. Sam's Clubs is the wholesale/warehouse sales division of Wal-Mart. In 1995, 453 Sam's Clubs had combined sales of $19 billion. Retailers are becoming members of these clubs in order to purchase inventory for resale in their. stores in the short run. How can they match prices with Kmart, Wal-Mart, Home Depot and Target, "over the long run?" Taylor and Archer provide ten survival strategies for small retailers to consider in competing with Target, Kmart, Wal-Mart and other important mega -discount chains. These precepts are: 1. Focus completely on satisfying the customers. 2. Study the success of others. 3. Gather and analyze management information regularly. 4. Sharpen marketing skills. 5. Increase the customer's perception of value. 6. Position the business uniquely. 7. Eliminate waste. 8. Find something to improve every day. 9. Embrace change with a positive attitude. 10. Pull the trigger and start the battle. 7 Their work appears to be more appropriate in helping a retailer in planning a new venture, starting a new business, or selecting a new location. The book provides sound business advice for all retailers, large and small, of every type and description. However, the "generic" type of advice so generously offered cannot help most of the, nation's small retailers who are under -capitalized; possibly deep in debt, unable to afford sophisticated information systems, costly advertising and promotion, and who are presently located in what appears to be "disadvantaged," "ghetto -like" locations. Here, the formerly lovely. "Main Street" is loaded with vacant real estate. The historic neighborhood enclaves in large cities now exhibit abandoned stores and residential decline. Even malls constructed within the past five or ten years now suffer vacancies and reduced traffic as the "Big Boxes" of Target, Kmart or Wal-Mart open, perhaps a half mile to three miles from the former bustling commercial center. The responses to our study show hopelessness, frustration and inability to respond to Taylor and Archer's ten strategies for survival, albeit, the advice is good. At a certain point the small retailer becomes a dying breed, unless the nation and Congress realizes what the impact of these failures will be on communities, joblessness and social disorganization. Generally, wages in the mega -retail discount chains do not match the earnings of employees who worked in family-owned small businesses. Not only has the economic impact of the mega -chains been negative; but also the sociological impact, as communities lose their small stores, the mega -stores will become socially unstable influences, resulting in increases in violence, crime and joblessness. PART H NARRATIVE "QUOTES" FROM RESPONDENTS IN THE FOLLOWING 4 STATES: The surveys offered each respondent an opportunity to make further comments, explain their quantitative answers or to express ideas or opinions on the current state of their businesses and their communities. What follows are those responses. They have been organized by state and city or region within each state. All responses are presented in order for the reader to get a feel for the positive as well as the negative comments of the small business owners. A. California San Diego Oceanside Chula Vista Poway Mira Mesa B. Pennsylvania Philadelphia C. Illinois Chicago Kankakee Des Plaines D. New York (Finger Lakes Region) Geneva Auburn Syracuse PART II -A CALIFORNIA [San Diego Area] SI - Luggage/Bags: "Our store primarily deals with bags and luggage. One block away there is another luggage store. None of them are (including ours) large stores. Yet, there is enough competition to really drive the retail price down, even between two small stores. We can imagine what it will be like if a national chain store is placed near our store. This reminds us of a game of Monopoly®+ But perhaps this is an inevitable trend every one wants to make the most'bang' for the most buck. So, it is only natural there will be the predominance of nation wide chain -stores in which they may bypass wholesalers and purchase goods directly from manufacturers. We are aware of the diminishing wholesalers (from L.A.). We sense economy of scale at work everywhere, but in a more overt form." S27 - Men's and Women's Resort Wear: "The wording of your questionnaire makes an accurate answer difficult. We operate specialty resort wear stores in resorts. A large store opening _ mile away would have no impact but an operation across the street would. Also a large discount store would not offer similar products. It is highly unlikely a discount operation would want to pay $60- $10 0 60- $l00 per square foot rent and could discount the upscale merchandise we offer." S26 - Books and Magazines: "Information regarding publishers and other supr' 'mega stores' would be helpful." offering preferential terms for "Research regarding possible trade violations by mega stores helpful. Also their influence on making 'best sellers' simply by their purchases - what is their influence on a book's success?" "Cultural influence of chain/mega stores purchase pattern (de facto censorship) - less profitability of some books - also their negative impact on small publishers - (high purchase and high return)." S25 - Security Equipment: "In our experience, the large mega -retailers carry the low end of product lines which appeal to 'do-it-yourselfers' and handymen. Therefore we have shifted our emphasis to commercial customers and the Navy. The large retailers buy directly from the manufacturer and eliminate the distributors. We can not compete under those circumstances. If we do not have distributors to supply us with merchandise, and we can not buy from the manufacturers, that doesn't hold much of a fixture for small businesses." S22 - Men's Casual Wear: "I am located in Seaport Village, which is tourist/convention orientated. This may not suit your survey objective, as many of our customers wouldn't have the option of visiting a discounter because of time restraints or wouldn't want to, as they would feel they could do that in their hometown. I currently make a strong effort not to carry same labels -available in the discount stores you named. Many manufacturers use a different label for discounters - same goods, or they manufacture a lighter weight garment (less quality) same look." S20 - "Other": "It seems a little late in the game to be trying to come to terms with the destructive aspects of mega stores. Perhaps some time should be spent anticipating the impact of electronic shopping and other emerging phenomena of our rapidly restructuring economy," "My experience with superstores - Home Depot, etc. - is that they have a broad range of products but lack depth. I find myself patronizing the niche retailers - the specialty bookstore, or'Real Goods' catalog for products I want. My concern with superstores is that they don't just save the customer but they also define what's marketed without concern for origin of product (e.g. Chinese prison labor) or ecological consequences." S19 - Jewelry: "We are in a unique situation, as all our merchandise is hand crafted locally. However, the average person has only so much time to shop and will usually prefer to go to where they can get all their shopping done at once, We can not afford to go into a mall and of course, could not produce/compete in price with the larger volumes necessary for discount sales. We are seriously considering going out of business after 22 years in San Diego." S 18 - Home Improve/Building Supplies: "The old adage in retail that 20% of the items make up 80% of the sales is pretty much true. The big box retailers tend to stock and sell mostly these items. In traditional retailing, these items (the 20% items) subsidize the other slower selling items. Additionally most of these items (the 20% fastest selling items) are purchased on a direct basis from the manufacturers excluding the wholesalers from the picture." "As the 'Big Box' retailers come to dominate the market, traditional retailers are driven out of business because they can no longer survive just selling.the slower selling items. Wholesalers are driven out of business for the same reason (and because of direct selling). Manufacturers cannot find retailers and wholesalers to stock and distribute the slower selling items. The end result is that consumers find that there are fewer and fewer of these slow selling products available. Yet, these slow selling items once represented 80% of total number of manufactured items." "That local governments are doling out tax incentives to the mega -discount chain retailers in exchange for opening stores in their communities shows an incredible lack of understanding of the big picture. These huge businesses operate differently than small and medium size business and do not need help from our government. Instead of providing incentives for big business our governments should relieve small business of the huge burdens that they have imposed. There are an incredible amount of rules, regulations, and paperwork requirements that impact small business and large business differently. Because of economies of scale, each new regulation imposed on business has a minimal impact on large business but a huge and detrimental impact on small business. Governments at all levels need to understand this." SIG - Tobacco Shop: "It should be noted that my store is in an outdoor mall. I have a primary location with innumerable tourists. The S. D. Convention Center is down the boardwalk and I am surrounded by 7,500 hotel rooms. I may not be an ideal candidate for your existing study. I felt you should have this insight for your study. I am primarily a tobacconist selling cigarettes, pipes, tobacco and cigars." S15 - Apparel: "I have personally seen Wal-Mart and other discount stores completely shut down a small town in southern Indiana. Businesses which had been in operation for years were closed and the only opportunities for employment were minimum wage jobs. In addition, clothing and other items are of a low quality, not really quality for price." S14 - Beverages, Snacks: "We are a small coffee vending (retail) operation which enjoys a good location in the business district and long standing track record. Our 'edge' on the market is quality and service and very low overhead. The disadvantage is that we rent our locations; and, if a large company comes into the area, they could well -afford to offer our landlord a deal they couldn't refuse or one that we couldn't match. If we did pay the 'increased market rent' one of our largest advantages would be lost (low overhead)." CALI FORMA [Oceanside Area] 07 - Electric Equipment/Kitchen Equipment: "The large retail stores have nothing but a negative effect on the small business, especially in California. There is only so much business to go around and the increase in the number of stores only means that each one's slice of the economic pie is only that much smaller." 02 - Picture Frames: "Thank you for the opportunity to be included in this survey. As a young small business man I feel that some of the large chain stores do a greater deal of bad than good. If the United States wants to become an unfriendly discount warehouse then so be it. But being a'service' business I don't believe that is what's happening. I honestly feel that someone forgot the most important thing about being a small business -'the customer.' Without service to the customer it is just a matter of time before all the big stores are gone and the smaller 'Mom -and -Pop' shops come back (I hope)." 021- Specialty Shop: "We are a specialty business with very little competition from large chain business. We provide products and customer service on use of products not found in large chain stores." 0105 - Sports Products: "Large discounters will move in with lower prices. Independents will be forced out and then when competition's gone, prices will go up again until the cycle starts again. Service is the only way the small guy can compete. We have just liquidated due to discount competition! " 0101- Bikes/Equipment: "I will close my business by July 1, 1994. No tax concessions were offered to bring my business into town or to keep it in town. Many products which were sold in my store and made available from the manufacturer solely for 'independent' stores now have appeared in the discount stores via gray market trading. My customers were always quick to tell me about the great deals they got." "The American public will always pay in the long run for the services they get and expect and perhaps service and quality are after -thoughts soon forgotten. Many cities have over built re: shopping malls, especially those anchored by discounts firms, only to have the mall become a picture of blight when it cannot be filled with small tenants or the discount firm packs up and leaves." Y 099 - Nutrition Store: "Mega -chain stores buy or discount wholesale, because of high volume then sell or discounts to attract consumers. Schaller margin of profit is offset by higher sales volumes. Tax breaks and other incentives from all levels of government (local, state, federal) favor big business unfairly to the detriment of the small business who gets no break even though small businesses are the national economy's backbone. If this trend continues, small businesses will soon become a thing of the past. Small business should now get the breaks and larger ones should pay their full dues. When small businesses are gone, the larger chains will be able to raise prices without competition from the small entrepreneurs and retailers. Large chains are like sharks scavenging the'fiber of the retail world, swallowing schools of smaller retailers, leaving dead zones within'miles.' They will finally fail themselves and fold, because of over -building and the retail chain wars." 094 - Food Products: "Some California laws need modifying to be more 'small business friendly'." 093 - Eye GlasseslContact Lenses: "Please tell these cities that want these stores the truth about the lower wage jobs, etc. They don't understand that they are putting small business out of business. Unfortunately, here in Oceanside, they don't care! I have spoken to the Chamber of Commerce and it has only got one side of story on these mega stores. There should be a limit as to how close these stores can be to each other. In the San Diego area, we now have 4 Price Clubs all within 6 miles of each other!! And now Wal-Mart wants to have 2 locations in Oceanside with the possibility of a 3rd!! I don't care what anyone says, but it does hurt small business including myself. Thanks for sending me the survey. I'll be happy to do it again." 091- Automotive: "Big chains sell way too low the first year to gain customer base. My main concern is automotive and your survey didn't pertain to this area. Large chains will decrease employment because small businesses will close." 085 - Food Products/Popcorn; "One example: We sell a 3 _ gallon tin of popcorn for $18.95 with butter -cheese -caramel. Wal-Mart has a 3 —gallon tin they sell for $6.95. Their tin doesn't have handles, but it is hard to justify three times the price. We pay $6.36 for an empty tin," 083 - Food Products: "Elimination of small and medium size business would be the result of discount stores moving to an area which eventually will cause the removal of working class and middle income categories. In short term, middle class and probably some low income consumers benefit from these changes but in the long run both will be losers and pay for short term benefits." 081- Furniture/Appliances: "We are so busy trying to keep the doors open,, so I don't have time to make comments. Business is BAD - BAD!" 078 - Computer Equipment: "As a small businessman I recognize it is next to impossible to compete against mega/retailers/discounters on price. But we will continue to strive to beat them on service." "A large part of our business is selling, installing and maintaining networks. I believe (hope!) that this focus will keep us profitable and allow us to compete in the future. We also repair computers quickly, again something that the. mega/retailers/discounters have not adequately provided." 076 - Optometry: "These companies, while they profess to promote jobs and add to the tax base and help the economy: nevertheless, from input I have had from other practitioners, they actually do just the opposite: They run small business 'out of town'; provide inadequate jobs and are only concerned about the bottom line! Prices that they charge for similar products that I have, are at times below my cost or at a level that I cannot compete with. There are only so many tax dollars. By adding another store, how can the tax revenue be increased? This is the big lie of the discount chain stores." 073 - Shoe Store: "I have two views about national discounters. 1) Our town already has 1 Target, 2 Kmarts, 2 Long's and now we are getting a Wal-Mart. All of these retailers sell 'some' similar products to mine and they get them much cheaper than I do - thus this is bad for my business. 2) Our town is in terrible need of businesses who can bring employment opportunities and tax dollars to us. I personally would rather see more upscale larger retailers come." 068 - Food Products: "The big question is what are local merchants and centers doing to compete with the national discount centers. For example, uplifting stores and malls that are looking so worn and are not as attractive to shop in as are new stores." 063 - Audio Stereo: "It is my opinion that the U.S. Government PX's are engaged in unfair business practices which present the most adverse impact on my business. They sell the same product at an average mark up of 20%. They do not charge sales taxes and in addition they now offer financing, I feel this has been a major impact causing about a 40% decline in business for the last 3 years. I feel the Exchange and PX should be limited to selling necessary items such as food only, not luxury items such as car stereos and electronics. We as business people and taxpayers are financing the government to operate at a loss and extending the time of recession." I 061- Furniture: "I am a sales representative in the home furnishings field. I also offer warranty services as an addition to the products I sell. I currently sell to PricelCostco, so I can't say it would be bad for me personally for their expansion. However, the other large discount chain retailers do take away from my customer base on a retail level." 059 - Computer EquipmentlElectronic Equipment: "We are a family business in existence for over 20 years. Two locations (1 - Escondido; 1 - Oceanside). When we opened typewriter shops, we sold typewriters. Now Price Club, Sam's, Wal-Mart, Kmart, Silo, Circuit City, Sears, Montgomery Wards, all sell typewriters, word processors, etc. They sell at prices less than we can purchase from the manufacturer as a dealer. As a dealer we have quotas to meet in order to stay a dealer and be able to buy machines, supplies and parts. We are now a service oriented business." 058 - Optometry: "I am personally against retailers such as Wal-Mart, etc. They do not offer good jobs to the local public and do take away from jobs provided by the smaller business. Thus, their promise to add the 'so called' revenues to the city coffers is untrue, since these big retailers put many others out of business. Then the profits leave the local areas and go to the big corporate guys." 056 - Paper Products: "In 'general' there is already too much retail space now available and the giants are killing off the small retailers. While some of us hope to grow big enough to compete, most of us will not survive. Community planners and local and state governments put too much emphasis on tax revenue and not enough on quality of life, and plan too much commercial and not enough desirable housing, which leads to too many instant slums and not enough family desirable living areas." 054 - Scuba: "Currently I compete with the Federal Government 'MCB Camp Pendleton.' They have already created a mega store environment. You excluded government competition from your study. PX systems are as big as Target. The PX in my area went into competition with me in 1983. My business dropped 30%." 053 - Food Products: "The aspect of mega -retailers which greatly affects me is my ability to buy'a few items' from a local hardware, lumber or business supply store - they're gone. Meanwhile the mega -retailer thrives and I have to buy 10 of something when I only want one, because they only package usually in bulk sizes." "No personal contact, no help with products, limited variety, etc. are all problems with mega -retailers. Everyone can save if you would consider the savings in terms of paper/tree waste, postage (2 ways) and general ecological conservative principles." 052 - Food Products: "I have been in this location for four years. One year ago another stare gust like mine, but four tunes bigger, opened up about _ mile from me and my sales since then have decreased over 50%. They have not gone back up yet." 051- Electronic Equipment: "Some of the products sold by the chains may be factory seconds, refurbished and not clearly stated. Small business must have the same leverage as bigger stores. If a product cost me $200 - the bigger stores should not be able to buy cheaper except in car load lots. I am selling a personal service and products that the big stores have a hard time competing against. Experience and fair competition may be a solution to the problem." 049 - Food Products: "My business is in a center that has a Target store in it. There is a proposal to put a Wal- Mart two blocks away. The tax base will not increase because the people that were shopping at Target will buy at Wal-Mart. Target will be forced to compete more aggressively, prices will come down and less taxes will be collected. The customer base will stay the same." "Within a five mile radius we have two Price Clubs; one was very busy all the time until they opened the second one. Now they are not so busy at both locations. It proves my point that they are splitting their customers, not increasing the customer base." 048 - Beach Snack Shop: "I am very concerned with large chains moving into and eliminating small business. Over a long period of time, there is dramatic damage in the community. We lose the community family." 047 - Food Products: "In Oceanside, proposals are being considered for three Wal -Marts, - one has been okayed! In these economic times the carrot of sales tax revenue is being taken by local government. All the while, the three established Price Clubs (San Marcos, Vista., Carlsbad) have all reported reduced sales (cannibalized each other) and one will have to be closed. We have cities competing against each other for a mega -store and the result is short-sighted irresponsible planning with the small business losing out big time." 038 Building Supplies: "The Home Depot has been here for 10 years. We can offer more for less on a service and personal level. They, on the other hand, can purchase certain goods at a substantial saving usually under my price. They buy direct; we cannot. How can we compete?! The government thinks that these companies are small business. They are wrong we are!" 037 - Lawn and Garden: "When Home Depot opened its doors several years ago, my sales dropped 15-20%. With a slow economy, people assume Home Depot and Home Base are cheaper, therefore my sales have continued to drop." "On a positive note, many customers are returning to the service that we provide. The 'circus' atmosphere is costing them sales as well. Thank you for asking our opinions." 034 - General Store: "Predatory pricing by large retailing chains should be controlled." 030 - Florist: "No one said it would be easy to compete in any venue." 027 - Photo Processing: "We already have a tough time surviving in Oceanside. The city's business has decreased. Businesses in my center have moved or gone out of business, accounting for a 40% vacancy in the center." "Selling my firm is probably out of the question because of Oceanside's reputation for poor business as of late. Wish me luck!" 026 - Doors/Windows/Kitchen Cabinets: "If the manufacturer sells direct to the large chains, then why not sell direct to the small businesses?" 039 - Home Improvement/Lawn & Garden: "I love the big guys - they sell the cheap products that break down, and I repair, or replace with quality products." 024 - Furniture: "Give small business same breaks that are offered to large chains, particularly tax breaks." 023 - Auto Equipment and Services: "There is no question that big chains, who have such buying power, are putting small and medium size business out of business. I did not know that any one out there cared about small businesses going out. These big stores carry everything. The Price Club even has a travel agency inside. I think this is absolutely disgusting." 020 - Women's Work Apparel: "Uniform sales are generally a more service oriented and group sales type of retailing. It requires a more knowledgeable type of selling and marketing. I would only expect a moderate decrease in sales. Most uniform locations require male/female garments in all sizes, ranges and colors. National discount retailers do not have the space nor qualified personnel to handle our type of products." 018 - Meat: "There is nothing positive I can say in regard to having a large discount store locating in our area. 017 - Hearing Aid Sales/Service: "This survey is an excellent idea. I had not considered the impact on my business of the large retail outlets, so I appreciate the opportunity to respond." 065166 - Electronics/Video: "I am totally opposed to the 'corporate-tization' of my community. (store A). We are being run out of business by blockbuster corporate companies who have more buying power, governmental tax breaks and the ability to direct dollars and lobby groups to keep status quo. The 'Mom-and-Pop'video business is in peril! (store B). We compete with everyone from grocery chains to drug stores to McDonald's which are using rental and sell through videos as 'loss leader' .items. No entity is willing to stop this from happening. We cannot compete with below cost or free!" CALI FORMA [Chula Vista Area] C20 - Variety Store: "As a franchisee I rely on my franchisor to constantly be on top of my business needs and changes. We are very limited to what we can do. I feel because of their constant changes and the downsizing of their staff, that these actions have affected my business [ex: advertising, upgrading equipment, new ideas to keep up with the changes of our competitors] I am relying on myself more and more to stay in business. I have gone from being able to have 2 days off and working 8 hour days to working 6-10 hour days and I'm not alone. Marry other franchisees are doing the same thing." C19 - Jewelry: "Cities are strapped for income and have to raise revenues with increased parking fees which affect businesses that cannot afford large areas for free parking. Also, increased business license fees and large mega stores with their 'in-house' credit plans will eventually doom all small businesses. City Councils have not got business 'smarts' and legislate small businesses to death. I have had my own business for 35 years and it just gets worse every day. The fun is gone and the money is gone - only a fool would open a small business today." C15 - Hardware: "The big chains usually sell cheap products which puts the home owner in need of our services. However, quality products prices can't compete with big chains so we end up with a rip off reputation for charging a decent price for quality work and quality material." C13 - Home Improvement: "The best way to compete is service. Our big job is getting customer in the first time." C12 - Home Improvement: "Most small businesses have been hard hit by the economy in last 3 years. Our business is down 35% to 50%. We have used up our savings and other resources. We have cut staff and all the fat from our budget. As owners we spend more time in our stores. There is little left to give, if we lose any more of our business - WE ARE OUT OF BUSINESS! 'Mom -and -Pop' are on death row! Down to the last appeal? Send in the priest not the tax man!" C10 - Ice Cream: "Large businesses can afford lower prices by allocating or prorating profit margins among several different products. Economy of scale." C8 - Office Products: "I do not like the City helping major stores open with tax breaks/land deals, etc., when the effect is to put many small business people out of+business. Unless they are bringing new buyers into the city, they are only moving sales tax dollars from one place in their city to another." C4 - Paper Products: "A large competitor that handled the same or similar services would put me out of business." C2 - Jewelry: "It is necessary to stop irresponsible opening of new businesses in the areas already filled up with similar businesses." C58 - Jewelry: "1) Restrict to some areas all national discount retailer stores. 2) If local government waives taxes five or more years, than obligate the mega -retailer to stay five extra years after the five years waiver. 3) Tax extra for the number of stores they have. 4) Obligate manufacturers to give same prices to small business. 5) Waive some taxes to small business. 6) Lower Workman's Compensation insurance to small business. 7) Special loans to small business at lower rates." C55 - Reuphoisterer of Furniture: "Small business can compete with large business providing government entities do not tax and or regulate us to death and offer incentives to large business that are not available to small. Small business worst problems include above and excessive insurance premiums, especially Workman's Compensation, health care cost of employees, unions. Small business is only surviving now because it gives better service and quality and is accepting less pay or rewards for its efforts." C51- Kitchen Products: "Fedco, military base are 'not for profit.' It's very hard to compete with this type operation. I think if they are not for profit, they should not be allowed to sell the same products I do. People will often come in and see products I sell (and stock) then once they have all the information on the product they will go to a warehouse club or military base and purchase it cheaper." C48 - Food Products: "I have found that the large mega store customers have a negative impact because their business is one stop shopping. After an hour in Wal-Mart, etc. the last thing you want is to stop some place else for ice cream, etc." C47 - Sewing Fabrics: "Chula Vista, CA is unique. The Mexican border is five minutes south, San Diego proper is ten minutes north. There are now 3 and very soon 4 Kmart stores within 8 minutes of my store. There are 3 Home Depot centers, 1 Home Base, 2 Targets, 3 Major Malls, 1 Office Depot as well as a multitude of other strip shopping centers ... all within 8-10 minutes. Drive for 20 minutes and easily triple these figures." . "Originally, these mega stores offered depth and low prices ... very competitive prices. Price/Costco has zero profit prices ... (net) margin. They are selling at cost only .. . deriving their 'profit' from quick selling in volume and 60-90+ day terms from their supplier. Price Club sells the same products as I do at a cost below my wholesale cost ... and I still must pay freight! Competitively, it's not very fair. Will they still sell below my cost after I am gone?" "For the consumer (me too) it is very good. I get selection, depth, low prices ... if I shop around, and quick delivery, no hassle refunds. I travel a lot and observe other small communities (i.e. Eureka, CA; Grants Pass OR ... etc) where the small 'Main Street' has become one-way only and boarded up or vacancy signs proliferated about the 'Main' part of town. Property values declined and 'Main' street moved to the outskirts near the interstate. This is progress?" "I would hate to work all my life for a business that I am committed to, only to find it worthless after 50 years and retire to a Social Security program which may not exist when I am eligible." "Only answer: Change with the times. Technology is moving foreword and so must we. Go back to school ... get smart." "Note: In the interim many new -generation type establishments such as coffee houses, teen related businesses generally run by new business families i.e.; the young and the restless, are popping up in the downtown areas and giving new life to those blighted areas. Small scale, but it's working. The blighted downtown/abandoned dockside in Boston, MA has been and is being rejuvenated with AFL-CIO funding into senior housing ... and it looks pretty nice." C45 - Communication Equipment: "We are not worried about honest competition, because we provide excellent service to the customer. But the real problem begins when they start selling their equipment at cost or making only a very small profit (i.e. Price Club). We need to mark up our merchandise at least 20% over cost so we can pay a decent salary to our employees." C43 - Optometry: "Currently in practice eight years. It has never been necessary for me to see patients more than 2 _ - 3 days per week. Income is supplemented by working- as an independent for other offices. Kmart and Wal-Mart (and Price Club) have moved in recently and that has sent the small patient load that I did have plummeting. Other private practitioners in the area have been impacted similarly. The profit margin was barely enough to justify the existence of my practice. With the current changes in competition; the practice will either have to be moved or sold." C41- Books and Games: "Video Games - The large chain mega -retailers buy direct at cheaper prices and often use the video games (i.e. Nintendo/Sega) as 'loss leaders' and therefore make it extremely difficult or impossible to compete on new video games." "Comic books -'Many comic book publishers are embracing the mega -retailers, but at this time I think it will be a plus for direct market comic stores, But we will see what the future brings." "Trading cards - Many trading card manufacturers offer special products to the mega - retailers which usually are more desirable than the products offered to small hobby shops such as mine. Usually these products are sold by their employees at drastically inflated prices to small stores such as mine and rarely offered to the public." C37 - Food Products: "At the present time it seems to me we have more stores than customers. With more stores all we do is keep dividing business." C36 - Men and Women's Clothing: "We are owned by a corporation (Melville) so I don't know if I should even be releasing these figures. The reason I am is that I am an entrepreneur and currently opening a small business of my own. The hardest thing about this whole business venture is lack of support. Communities need to get together and work together in order to keep the money flowing. I am interested in any ideas on how to pull people together. Please contact me!" C34 - Food Products: "How can a small business compete when my purchasing of some products are more expensive than their retail prices?" C30 - Variety Store: "I feel that the small business managers must somehow make cities that give your Wal - Marts & Kmarts non -tax status for years should be held accountable, as the cities lose revenue whenever the small businesses are forced to close due to the excessive competition. Also one should check-out the methods that Kmarts and Wal -Marts use to keep their cost down as far as employee wages & benefits. Do they give their employees the total package that my company offers?" } C28 - Pipe and Cigarette Shop: "Predatory pricing also affects manufacturers in a negative way. Suppose you manufactured a great quality washing machine and had agreements with lots of independent stores to sell and service your product at reasonable prices. A big discounter moves in and demands that you sell him your product. He discounts the hell out of it, probably offers no service. All of your independent outlets drop your product. Now the discounter wants to buy more but at large discounts. The manufacturer has no choice but to discount to the discounter. He cheapens his product in materials and by possibly moving production to another country. I firmly believe that manufacturers have the right to decide who they will and will not sell to. After all they may have generations invested in their product's good name. We see some of the collective items that we sell and have a lot of our money invested in, being discounted by Costco/Price Club." C25 - Men's Clothing: "If the present trend continues of the mega -stores, numerous small merchants will not be able to survive with such competition; as is already evidenced in many areas. Bankruptcies are and will continue to be a common occurrence amongst small business." "The 'impact' is and will continue to be devastating. It is the strangulation of the small business segment in general." "After 32 years in my business, never have I been more discouraged by trends in the large corporate invasion and the ultimate break up of small business." C22 - Health and Beauty: "It is a difficult environment for small business. Unfair pricing from manufacturers is a major concern. Contract lock outs is another. Changes in those may help lead to a more level playing field." CALIFORNIA [Poway Area] P10 - Men's and Women's Casual Wear: "It is getting more difficult to compete not only with the large retailers, but with garage operations, i.e. screen -printers, etc. If things don't improve soon, I will be forced to make some decisions regarding selling, liquidating or some other option." P7 - Computer Equipment: "The cheaper brands of computer equipment sold in mega -retail stores floods the workplace with inferior products. Purchasers, who do not understand the technical differences between brands and models, base their purchase decision on price alone. As a result, I have been forced to service increasing numbers -of 'junk' computers - that often takes more time, and is less 'fulfilling' (professionally speaking)." P4 - Specialty Sales: "My business is a specialty sales business. This area is difficult for a challenge from mega -marketers. However, my daughter's job as a pharmacy tech for a drug store chain is threatened by Wal -Mart's arrival here, as is my friend, the optometrist, and many others." P2 - Full Service Restaurant: "I have felt the impact of several 'cookie cutter' chain restaurants that have sprouted in recent months. In the last year 13 new restaurants have opened in a 5 mile square area. They are confined enough to offer a variety of choices to customers and are located near Price Club, Home Depot and a few other discount houses nearby. They are not owner/operated and I believe without personality or the 'human' touch. I have to work too hard to please many of my customers only to have them tell me how wonderful this new place is or that.. Chain restaurants seem to have very deep pockets to decorate and send out colorful, slick ads in our local paper. 'I can't afford it; so I have to work harder. I will never offer specials - my quality will not be compromised just to compete." P27 - Auto Parts/I abor: "The largest problem I see with a large retailer moving close would be its ability to buy direct from factory. If I were also able to buy direct, I could compete." P26 - Home Improvement, Building Supplies/Labor: "We are in the construction industry. We provide a full line of glass products and commercial case work. Since the Home Depot and Home Base opened up we have all but lost our glass income. They provide and install all glass related products either direct or through subcontract with area shops. Our suppliers are selling to them at big discounts because of their volume, we can't compete in this market. We've been reduced to a commercial cabinet installation shop - having to move our business." P24 - Food Products: "Wal -Mart's arrival has hurt and helped in our area. It forced Long's Drug Store out of business so that site - the 2nd major business of Poway Town and Country Shopping Center, has been vacant over two years. Several adjacent businesses were forced to close." "Wal -Mart's employees frequent the restaurant improving my lunch business. I lost several employees to Wal-Mart. Several of the merchants in our center have been hurt by Wal -Mart's lower prices." P20 - Flowers/Gifts: "In Poway and surrounding areas, there are too many businesses competing for the same thing. 1) Why does the city allow similar business to open? 2) Population remains same and grocery stores increased from 2 stores to 6 stores in 10 years." P18 - "Other": "Cities should strongly weight the needs of the small business owners, who are solid establishments over the prospects of luring a national chain mega store." P33 - Toys/Games: "We no longer carry a large variety of nationally advertised merchandise. We no longer carry bicycles, only on special order. Wal-Mart opened 2 years ago." P48 - Liquor: "Comments below will be hard to change in my geographic area (10 mile radius). Rancho Bernardo is the best place to own a small business (retail). Why? Because it is a very small business area compared to population." "Poway in comparison is the worst place to own a business because the business area is much too large compared to the population. The City of Poway derives its income from retail dealers. The more small businesses (retail) the more income for the city of Poway." P46 - Retail Auto Sales: "We are a franchised new car dealership. In general, a mega -chain outlet will not harm our business. However, they do provide a threat to our low end automotive service business. We can compete given our name recognition with the factory. An independent garage would have a more difficult time surviving." P40: Art: "Although I am in Poway, my business does not depend on this community for business. I have an art business that deals with a wide range of clients and quality of art work. However, I am impacted by these mega stores because they attract the client with a limited budget and there is no way I can compete with the buying power they have in purchasing low cost art and framing which they then transfer to their pricing. Often a poster framed is sold for less than it costs me wholesale." P37 - Pet Food/Supplies- "I am a small pet store. There is a Petco pet supply store that has been almost directly across the street from us for a number of years. Recently (May '93) a Pet Supply Warehouse opened down the street, several blocks away. As they came in with the aspect of lower prices, Petco dropped theirs (particularly the pet food, which is already a low profit margin). To maintain my customers I had to lower my prices as well. I experienced a 30% drop in sales from a very good year in 1991. The recession hit us in 1992, and the Pet Supply Warehouse opened in 1993; we are hoping for some recovery." "Further, a Wal-Mart and Home Depot opened in or near our community, also Price Club. Theoretically they should bring more business to our community, but Wal-Mart also sells fish and the supplies I carry. Customer service, however remains our real asset as well as the need to keep our prices competitive, if at all possible." P36 - Drug Store: "Give breaks to the individual businessman (taxes, 'signage,' etc)." P32 - Optometry: "Cities give away so much to the big retailers to get the sales tax revenue. All other commercial developers have to pay full fees for sewers, drainage, roads, etc. So since the mega -chains do not have as much costs going into a project so that their'rent' can be significantly lower aiding them in undercutting existing businesses that got no breaks.". P35 - Food Products: "Our business is mainly for India, Pakistan, Afghanistan and other mid -east countries. So, there is no effect from big chain stores. However, we can't compete -with them in fresh produce and soft drinks." P52 - Computer Equipment: "It is impossible for the small business to compete with the national discount retailer. For every one that opens, 10-20 small businesses go under." P50 - Women's Clothing'. "I feel communities should be very careful not to give a deal to the big retailers that hurt the community financially." CALIFORNIA [Mira Mesa Area] M30 Furniture: "I am a distributor for a national specialized product with a high dollar price tag. It is a very small volume customer base. if my manufacturer were to sell to a major chain there would be no more distributors for them any where it took place. It would be impossible to compete even if they purchased at the same price; however, it is usually lower. If it is only for some of the product line, I think today's consumer will settle on a lower price and compromise for it." M2 - Computer Equipment/Stationery: "Small business is being forced out - too many rules and costs and competition. Soon, many people will be on unemployment." M7 - Fitness. Equipment: "In general, mass merchants, at least in the fitness equipment industry, carry lines of equipment that don't measure up to the quality equipment specialty stores sell." M8 - Carpet: "The impact on small companies by the 'Home Depots' of the world with unlimited capital, etc. is causing an erosion of the middle America. In the end the consumer will pay more." M16 - Carpeting/Flooring: "In the flooring business in which I am engaged in retailing carpets, vinyl, wood and ceramic tile, several major carpet mills, i.e., most prominently Shaw Industries are engaged in what I consider anti -small retail store programs. They offer programs, such as Shawmark which require stores to buy in at from $20,000 - $40,000 annually which I can't afford!" "Home Depot is our largest competitor locally in flooring. However, customer perception that Home Depot has better prices (not true) is being discovered. Further, HOME DEPOT does not provide the personal helpfulness, as well as professional installation, that I do." F" M19 - General: "We are a family owned corporation. I have been in retail several years and experienced a decline in business when large chain stores carred the same product line (western wear) at lower prices. It seems customers are willing to give up service and product knowledge for a lower price." M25 - Athletic Equipment: "Unfortunately, at this time the superstores appear to be the future in retailing. In order for small businesses to survive, they must be extremely specialized in their field of profession and offer services that can't be offered by the discount retail giants. Small business can no longer rely on the basic retail sales, but must pursue special services and orders that will enable them to be successful. The impact of the discount superstore will be devastating to most small business that compete directly with the superstores who can not differentiate their business from others," M26 - Flooring/Counters: "Their size (chains) lets them buy for less. They pay their help less money, consequently workmanship is poor. Too late for customer, they have already signed contract. These large companies know exactly how to stop people from backing out. Even when the product quality is bad." M32 - Carpeting/Flooring: "These types of clubs are hazardous to my business because of the margins they work on. We combat them by smart selling and service they can't match." M31 - Home Improvement/Domestic Products: "We are a very service oriented business specializing in designing and coordinating living spaces. Our main mega chain competition would be Home Depot. We cannot buy as well as well although we also buy from manufacturers - therefore we must impress our clients with our personal care and talents as designers." PART II -B PENNSYLVANIA [Philadelphia Area] 4N - Pharmacist: "Part of the biggest problem in our Industry today -is multi -tier pricing by Drug Manufacturers. They sell to different classes of trade at different levels. If they have. one standard price for everyone with volume discounts available to everyone it would place competition on a level playing field. Discriminatory pricing must be eliminated. Once the price factors are gone, then the consumer will look for service and this is where we as small businesses can prevail." IIN - Furniture Importer: "Personally, I resent mega -chains who receive significant tax -breaks. They usually provide no relief to the community's economic dilemma. CARREFOUR was a.primary example. Soon after their 5 -year tax break, they took their profits home. Although I shopped there, I was not impressed with their company and usually went elsewhere for more knowledgeable salespeople. If mega -companies want a parcel of land, they should not be catered to; rather, provide a good community economic plan. I am confident that small towns don't want them - therefore, no tax breaks! 12N - Hardware: "Opening the big chain store, it should assess the customer, but not the small retailer like myself. Currently, my business sales have not increased for S yrs. It means that I already lost or am losing some customers to the chain store. On top of that, if more chain -stores come to town and open up new businesses, I no longer will be able to compete. Because I know I'm the losing one. Don't you think bankruptcy or leaving the town will be better off for me?" 19N - Market: ".... Because they too sell similar products as I do, the competition is high and the sales Low. But undeniably, the major grocery chains that have recently been built right outside of my immediate neighborhood and hurt my business greatly." 20N - Jewelers: "Closed our doors 12/31/93 after 23 years in business!" 21N- 'Office Equipment: "My business is primarily a service business, but I have still felt the impact of large business. KINKO's recently opened a 24 hr. 'mega -center' in my area and the only way I can remain competitive is to spend a great deal of money in advertising. A small business obviously doesn't have the advertising budget of a major franchise and the level of frustration rises with each passing day." 5FG - Lumber/Home Improvement: "The legal system and the federal government have failed the small business people immensely. Family- owned business people, middle class people, who have worked in these businesses, they are the core of people left to carry the burden of supporting the City and the government. What will happen if we are gone? Total collapse is possible. The result of these stores infiltrating a city like Philadelphia will cause the small family business to become extinct." 1S - Video Store: "We have already seen the effect that Blockbuster and CVS, for example, have had on our business. Our video store nearest a Blockbuster (517 S. 4th St.) has the slowest growth rate of all five of our stores - 4% compared to 20%. On the films that both we and larger chains sell, like children's videos, our sales are very low. They often sell these videos at our cost. We have just started a promotion of three free rentals with selected 'Kid Vid' purchases in an attempt to stay competitive. Our major advantage is customer service. We also sell and rent unusual titles, creating a different niche. On the other hand, as a consumer, I think these stores will save me money. I've already seen this with Caldor. My other, non -business thought is a concern about traffic. I have seen other neighborhoods where the increased flow has put a serious strain on existing roadways, making travel for the locals a nightmare," 3S - Hair Salon: "The small business owner has kept service a priority and in a time of poor service that has a unique value." 10S - Wallpaper: "I feel that manufacturers and distributors are helping the chain stores put the smaller businesses in bankruptcy by offering the chain stores better pricing and discounting. " 12S - Jewelers: "Currently have Wal-Mart for anchor store in our S. Jersey location. Has definitely shown to have negative affect on our business volume." 17S - Market: "I think it is very bad for the government to allow these types of businesses to come into areas and operate. Too much burden has already been put on small business without the giant companies coming in and putting a lot of small businesses out." "Small business is the heart of this country employing the majority of the workers. They keep getting knocked down by taxes and now these types of business practices." 21S - Jeweler: "I believe that if you offer good service & quality you will have very little to lose to a discount store." 24S - CIothing: "My company also manufactures men's neckwear, vests, and robelboxer short sets which we sell to retailers. Large discount operations have a deleterious effect on our business on two fronts. They tend to drive small retailers out of business (our main customer base); and, two, they are ruinous to our bottom line by their very nature of being a mass discounter. In other words, it is not profitable business with them. They source the world looking for cheap labor which makes me non-competitive." 26S - Electrical/Home Improvement: "Our main concern is Home Depot, not that we can't compete; but, when a Home Depot comes into an area, we believe that they lower prices below cost to get their foot in the door because consumers are creatures of habit. Then we've heard that when they put everybody out of business they raise their prices," 275- Auto: "The area of South Philadelphia is heavily saturated with auto repair shops and would be hurt,economically with the addition of discount service facilities coming into the area. This would cause a number of shops that are on the verge of closing to do so causing more people on the unemployment lines. The economy is very fragile in this area and should not be subjected to anymore mega -chain business openings until the economy becomes more stable." 29S - Hair Salons: "The large chains should NOT be given any type of tax deferments because the responsibility of paying the taxes and/or increases will again fall upon the small businesses who cannot afford it and who will be forced to close." "With the economy the way it is people want to pay cheaper prices for almost everything even if the community in the main loses jobs. These large chains can do nothing, but hurt .small businesses. If a new business wants to be in an area, then the government and the community should decide whether that chain will help or harm the community." 33S - Jeweler: "Jewelry business is rather personal/individual - consequently, some of your questions were not relative to our particular company. Ours is an 80 year old business and lots of our sales are by word of mouth, our proven honesty, and our employees who continue to enjoy their positions working for a small family type of business." 35S - Pet Store: "I feel it is unconstitutional to stop any retailer from entering an area. 1 do feel the tax breaks and real estate deals are wrong." "Just make the playing field the same and let the competition continue." 37S - Pharmacist: "Wal-Mart just lost a law suit to three pharmacies in the local courts of their home state, Arkansas, for allegedly driving drug stores out of business because of claims of "predatory pricing." I believe that the major mega -retail discount chains are known for taking more out of a community than they put in." 38S - Jeweler: "If a large company moved into our area, I would try to enter into contract work with them to do the repair or special order work my jewelry store deals in. If we could not do the work, we would try to advertise quality work, personal service, and better prices. If we see a drop in overall profit and gross sales, I would then look for other locations to start over; but, it would have to be a large drop in business." 41S - Bookstore: "I own a small independent bookstore. After 2_ years as the only'new' bookstore in my area, a huge Tower Books opened around the comer (about 300 feet away). My sales started to drop slowly as my loyal clientele were wooed away by price cuts of 35%! Tower`'could sell books (because they bought larger quantities and'drop shipped4 to their various locations) at prices that I was buying them for! I have survived 2 more years, now I am closing up." (May 1994) 44S - Optical: "Out of all of the nationals coming in, only Wal-Mart does optical right. Therefore, most will have very little impact on our company. I believe that the customers the deep discounters attract are the customers they bring in for TV's, appliances etc." 49S - Home Improvement/Tile: "Companies such as those Mega companies mentioned, have caused much concern in my field. The impact on product identification is cause for alarm, with most people related in the field of ceramic tile imports. Since the recent opening of Home Depot in the Philadelphia market, I cannot say that I can express the same confidence that I have had 'in pricing products. It is quite obvious that easy product identities are singled out and low -balled so that smaller businesses dealing with some similar products will look bad. This type of tactic has had a negative effect and has caused hype in our industry." PART II - C ILLINOIS [Chicago Area] CH 86 - Plumbing/Kitchen Supplies: "Since large mega -retail chains entered into the retail trade, they have attained tax. benefits not available for the smaller shop. Typically these large scale companies deal directly with the manufacturer and then sell to the consumer. Now if they receive tax credits i.e. Home Depot, they have the best of all worlds. They sell, in some cases, for what the smaller company buys the goods for. We do have a community interest, product selection interest and service (complete) to the end. We want to be here to stay, but with an uneven playing field, why waste the time." CH85 - Women's Casual Clothing: "We started in Des Plaines in 1897 and have never had any special favors or help from our city fathers. Our money has stayed here in town and we have helped hundreds of local people earn a living. Why an established discount retailer has to have help is beyond me. If they can't stand on their own two feet, they should be told to move on. Their profit goes to headquarters, ours pays taxes for the town." CH77 - Stationery: "Events that have hurt our business in the office supply industry are: (a) Predatory pricing and 'loss leaders' items and (b) Manufacturers giving better prices to upstart superstores based on the size of the total business versus actual stationery sales. Then superstores use this to gain market share." CH73�--Health and Beauty/Ra Drugs: "V - "My situation is unique in that I have an ethical pharmacy which is surviving only because I value the quality of my workplace more than I value a large paycheck. Consumers aren't aware of the fact that small businesses are quickly disappearing. The service and personal service given will be a thing of the past unless something is done. It will be like the 'service stations' and no one will even miss having a service attendant pump their gas for them because they weren't from that generation." CH72 - Paint(Wallpaper: . "I'm hopeful that the independent dealer will survive. It takes a lot of people, sales and profit to keep these big chain stores going. Let them fight each other! In the interim, we will continue to offer above par service, and product knowledge with the thought of out living the big store image." CH71 - Optometry: "Tax breaks are given to mass retailers to move into an area. I get no tax breaks - totally unfair." CH68 - Office Supplies: "We have Super Kmart, Wal-Mart and Eagle about 3 blocks apart in Elk Grove. What's the point?? Woodfield is 5 minutes from them and now Office Max is 5 minutes from there. It's not fun anymore. 50% or more of office supply dealers have gone out in Chicago area." CH67 - Snacks, Sodas, Cigarettes: "Low select prices on select items such as sodas hurts the vending business." CH62 - General: "Don't give tax breaks!" CH61 - Restaurant Equipment: "Redevelopment, industrial revenue bonds and tax abatements should only be used for manufacturing or distribution businesses; not retail. Jobs are not created, only transferred by retail." CH59 �- Food: "The large chains run so many 'loss leaders' that it is almost impossible to survive, much less grow your business. They sell many items well below my cost." CH47 - Equipment Rental: "Simplify government regulation and paperwork both nationally and locally to allow more time to focus on the developing business. Anything to level the playing field with larger deep pocket companies." CH40 - Video Equipment: "The commercial property tax is driving small businesses out." CH38 - Food Products: "I just spoke recently with our mayor about the 'tax breaks' that 'Sam's Club' gets. I, as a small business owner, would never get the breaks and concessions that our elected officials give these large retailers. The mayor agreed. This left a feeling of hopelessness in my throat. It is very difficult to compete these days." CH36 - Medical Equipment: "We provide home medical equipment. The majority of our customers receive our products and service via our drivers and service vehicles. The large retailers have had an eroding effect on our business. The result to date has been customers receiving less service with no knowledge of warranty, billing, or adequate follow-up. If compatible tax incentives were made available to existing established small business, long term employment and tax revenue would have a positive impact, long term, on each community." CH35 - "Other": "Tax concessions to large companies should be given to start-up businesses only, not established companies who take advantage of local inducements regularly. Kmart used low rate financing on their leased properties. Wal-Mart as well. On the other hand, these large discounters offer attractive well stocked stores at low prices which benefits all. Many small businesses at retail are mismanaged by their owners." CH32 - Food Products: "Major complaint is these large merchandisers ask for and generally reclaim large tax breaks and incentives to come into a community. This is never offered to small business. We always pay full price and continue to carry a heavy load of the community responsibilities." CH2O - Lighting/Electric (a distributor): "As a distributor, the trend to buy direct is not only with the national discount retail chain, but also smaller, independent family owned business. The problem is, they still can't compete. Their distributor, such as my company, also can't compete. Therefore the middleman and small companies both get destroyed." CH19 - Auto Parts: "This country was founded on freedom and the free enterprise system. This system is in grave danger by both our government and big business. The tax burden on small business is now higher than our profits. A ground swell of small business is needed to stop these current trends. Small business is a major employer, yet government treats us like second class citizens." CH14 - "Other": "At least make it so large retailers must make a profit on items sold and pay their full share of all taxes (sales and real estate)." CH12 - Autot-Body: "We are an auto body repair facility and not really affected by mega -retailers but have seen concerns from local hardware stores and neighborhood drug stores." CH11 - Pharmacy: "Large chain stores are robbing America of its heart. The average person is not capable of perceiving what they will be missing when all the small business people of America are gone. Their children will not find their first jobs, the little leagues and churches and bowling leagues will not have sponsors. Our country is losing its soul - corporate America is like a bad virus!" CH9 - Greeting Cards, Stationery: "My business distributes greeting cards, etc. to non -chain accounts. Our business has been strongly affected in addition to our customers, A significant number of'Mom-and- .Pop' locations have fallen by the wayside, unable to compete. In addition, the number of party outlets has also diminished our sales as well. Our highest year in sales occurred in 1991." CHS - Software: "I certainly agree with what you are surveying, however my answers and survey are probably meaningless as I am in the proprietary software market and the companies you speak of have little or no impact on me other than to possibly pull some of my business if they sell some of the supplies I need." CH91- Auto Equipment: "Big retailers have definitely decreased our sales in tires and exhaust parts and shocks. Difficult to compete with Kmart prices on above items - also tires sold at Sam's Club in area." CH96 - Party Supplies: "The larger discount houses hurt the small retailer. Consumers do not understand that their claims to have lower prices are not always true. They can afford T.V. and radio advertising while we can only rely on reputation and service. Grocery stores are getting out of hand; they should sell groceries and leave the greeting cards, gift items, flowers to i the small retailer. I feel soon there will be no room for the small retailer because of rent, taxes and discount stores." CH98 - Lawn/Gardens: "We handle premium lines of mechanical equipment that have traditionally been marketed through certified independent dealer networks, outlets created by manufacturers to assure the availability of professional expertise in the sales, service and maintenance of their product lines. This 'value added' support cost is rarely provided by mass merchants and thus this savings in their cost of sales plus their buying power, provides them with their retail price advantage. In the long run its the consumer who will suffer overtime as mass merchants force out 'value added' dealers. This type of product eventually needs service. Few manufacturers of top end products provide for service only dealerships. Sales have always been and still are the prime requisites of a dealer franchise. As sales through 'value added' dealers diminish and those dealers become competition victims to the low prices of mass merchants, then sources of professional service and maintenance will become a problem for customers, and too late we will understand that the lowest price was not the best price in the long run." CH97 - Jewelry: "I think the large corporations will dominate our economy. The true craftsmen will sell out or go bankrupt. The jobs created in the large corporate stores are low wage and often part-time. There are not as many management positions in the large corporate stores. The youth in America are not studying the right subjects to compete in our global economy. Technology is also taking jobs away. What took the U.S. 50 years to learn up to World War Il now takes less than 5 years to learn. I think the strongest entrepreneurs will survive. Many less motivated people will work at Kmart and spend their checks hoping to win LOTTO or gamble at the Casinos! Plus, big firms take over other firms and then they scale down help, etc. - laying off many people." ILLINOIS [Kankakee Area] K51- Auto Equipment/Services: "We are an automotive repair/service business with over 32 years experience in this field. We have had mega -retailers entering our area rapidly in the last 2 years. Being able to determine the problem and to determine the cause and effect, and to recognize the solutions would be very difficult. As an example, to lower prices would only be a possible temporary fix. Our local government has waived mega -retailers requirements through tax abatements in the Northfield Square Mall. I am very interested in your study and look forward to receiving additional information." K50 - Florist/Arts and Crafts: "Products you have listed do not pertain to our florist/gift shop retail operation. However, there are national and regional chains that would affect us like Frank's, Michael's, and Christmas chains." K48 - Video EquipmendGames: "There was a time when the video rental business was profitable as a stand alone business. Now it is not, for a number of reasons: 1) Large stores use rentals as a'loss leaders; 2) Purchase price to large stores are much lower; and 3) Major discounts are available from manufacturers not available to small independents." K47 - Food Products: "We are faced with severe competitive pressures. We are truly an independent food operation. Our competition is Jewel, Kroger, Eagle Supercenter (new 180,000 square feet) and Kmart Supercenter (new 160,000 square feet) store. We will probably not survive. We have fight and desire but we don't have the capital or mega dollars to compete with the discount chains. We can't purchase product in many cases for what {, competition is selling at retail. We also lack the buying power that large national and discounters have. As I see it, the large are forcing out the small, with discounts to the consumer, until they secure the market - then they do what they want." K45 - Lighting/Electrical: "Having regional warehouse home centers (Blains, Menard's, Home Base, Builder's Square, Big W) in our areas has sharpened our abilities to survive. We are able to describe the 'enemy' to our team members much more clearly." K44 - Telephone Systems and Lines: "Discount chains are wonderful for products that do not require additional service. The customer ends up with the best price. On the other hand. for products that require any service, you should purchase at a smaller .more personalized store." K43 - Athletic Equipment: "Currently, within a two mile radius, Wal-Mart, Super Kmart, K's Merchandise, and Target compete for the same customers. The only way our retail business survives is through service and quality products. There was a time in the business when large retailers could not buy the high end sporting goods' products. Recently that niche has eluded us - the specialty store. Fortunately for us, we have developed a sporting goods team business which sells and serves the needs of over 300 grade schools, high schools, and colleges. If we had not started a new business and continued to solely concentrate on retail, we would have considered selling the business." K39 - Health and Beauty: "We have already experienced Super Kmart, Wal-Mart and soon Target. When I purchase products for my business I have been forced to look harder at price and quality. Consumers right now are only concerned with price; they are not looking for quality. When in a discussion with clients we try to point out the value, of personalized service and that the mega -retailer really doesn't care, as to what will happen if they spend all their money there in terms of jobs, families, communities, etc." K - 38 Food: "In our local area (Kankakee, Bradley, Bourbonais) TIF[Tax Incentive Funding] Money has been used by Bradley & Bourbonais to develop large retail areas in the last 10 years. They used the TIF money to develop farm ground (not blighted areas as originally proposed). During this time they have raped the tax base of the City of Kankakee. Many Kankakee business have moved from Kankakee to Bradley and Bourbonais." "Now that retail business has left Kankakee, Bradley and Bourbonais and county officials have decided to end TIF money for retail business, Kankakee has lost the weapon (used against them) to recoup retail business. TIF money was misused here and a warning should go out to other communities." K37 - Games, Hobbies, Books: . "I live in Bourbonais, IL and have my radio controlled hobby business in Bradley, IL. When we started seven years ago, we had no help from the village as far as tax incentives; in fact never gave it a thought to inquire. We have worked hard to keep our business intact, but find our taxes going higher each year both personally and business - wise to maintain these large retailers that come in under the TIF Programs and then leave in seven years or less. We little people are getting the shaft." K33 - Optometry: "We need to get rid of the one hour labs that draw people. They don't do the service that they say and prices are high. We need to get back to the old ways. If we have to have them I would try to limit only one per town. In so many towns there just too many of them." K25 -Doors and Windows: "The tax abatements provided chains are an unfair practice; I know that helps mega chain competition. This alone allows them to reduce prices to hurt other small businesses." "A free market to all, giving large and small businesses the same local advantages in taxes, land, etc, is most important to the survival of the small retailer." K24 - Electronic Equipment: "I have experienced several times in my career what happens when a major chain leaves. The buildings are left vacant. Their restrictions to buyers because of competition are contributing to why these large buildings are left empty. In our area TIF increments have led stores to move a mile or two at most to be in another town and receive tax breaks. I have also got to see local schools and police forces suffer through problems because no tax money comes from TIF." K21- Audio Stereo Equipment: "With a lower overhead I have been able to compete favorably with the large discounters; however, if one moves close to me I may lose a handful of customers but the increase in traffic would also increase new customers." K20 - Food: "A Super Kmart opened in February 1994 near our business strip and we have noticed a definite decrease in customer traffic and sales. A Target will be opening in July and we will probably experience another decline." K18 - Auto Mechanical Service: "I have a service business that employs four employees that make a decent living, not minimum wages like mega chain stores. This puts me at a disadvantage even before their tax breaks come into effect. I get no tax breaks. If I need money to remodel, I have to finance it myself at local banks not unlike the national corporations." K17 - Children's Dance Shoes: "We are a small manufacturer of dance shoes, shipping nationwide to retail stores and dance studios. Also we, have a very small local retail business. Local Pickway and Wal- Mart have brought in cheaply made dance shoes from other sources and sell them at almost wholesale prices. We have lost several large retail accounts across the nation. Due to this low pricing, small retailers cannot compete because of the nature of the product and customers who are uninformed about quality." K16 - Lawn and Garden: "It looks like local, state and federal government help the giants who want to take all the sales away from the small merchant who made the American way of life possible, leaving us just to do service work for the giants. They make the easy money and we do the hard physical work for them in the service sector." K15 - Furniture: "The big chain stores are taking advantage of tax breaks. They move from town to town and close smaller stores. They build their stores with out-of-town builders, so nobody local makes a profit on them. They want to make a living in town but don't support the town." K14 - Hunting/Fishing Equipment: "We have four chain discount stores in our area and it is very hard to be competitive and make a living." K12 - Mcats/ Poultry: "We in the Kankakee, IL area are already experiencing the opening of several TIF businesses which are creating problems for the smaller operations due to their discount pricing on certain sale items, In my business we deal with fresh meat products and they are highly perishable, so any drop in business is very critical. In the last year we have experienced the opening of a Super Kmart and the state has been working on the highway for one year. These two factors have created a 10% drop in our total sales." K10 - Optometry: "We are a full service, one hour optical business. We already have experienced a Super Kmart opening (3-6 months ago). Our prices were already competitive - in some cases lower. The only people we lost were a few (approximately 20-40) contact lens patients who wanted a lower price on contacts. The average was $10-$15 lower, however, we don't make our main profits from these patients, so the loss was negligible. Also when these people go back for a new exam they will find it (the exam) $25.00 more!" "Overall the opening hasn't hurt us much; however, we are a franchise with a national name, not just a small local owner. Even though we are not just a single owner,'I do agree that Kmart, etc. do have the advantage, insofar if they have a slow month they can get an infusion of funds, etc. from their corporation, while we have to struggle along!" K7 - Home Improvement/Building Supplies: "There should be some kind of truth in advertising when quoting such as 50%, 60% or 70% off, or'Special Sale.' But what was the original price?" K4 - Foods: "There should be government regulations that super or big business locations be limited to certain areas, because most or almost all of those big businesses get a tax break from the state or city that they go to. Small businesses don't get that privilege." KI - Gift Shop: "We try not to carry the same products you find in discount stores. Our gift shop carries the finer crystal, bronze, pewter and other specialty items. The Railroad Shop, located on the second level, also carries items not found in discount stores." K61- Water Conditioning: "We have to meet a customer on service and personalized greetings since we do not have the buying power to attain the 'best' price as the large chains do. We are able to meet an individual customer's needs personally; they are not just a number." K58 - Jewelry: "I mainly feel that mass merchandisers serve large numbers of people but lack quality merchandise in our field. We, on the other hand, have to present a quality picture or image to attract those who are more discerning. This includes educating the market we go after, while still maintaining an edge on fair competitive prices. We belong to trade groups that help us compete. The Kmarts, Wal -Marts, etc. don't seem to help the communities they do business in." K62 - Home Improvement Supplies: "l. Reduce trading area to 3 mile radius. 2. Advertising locally. 3. Chains steal employees to hurt your effectiveness. 4. Chains steal employees to hurt traditional experience. 5. Chains then release employees after two years to reduce their payroll after competition has been knocked out." PART II - D NEW YORK [Finger Lakes Region (Geneva, Auburn, Syracuse)] t NY48 - Athletic Wear, Toys, Athletic Equipment: "Geneva is an area in need of development, and Geneva already has Kmart and Wal- Mart. The damage from their development was not major at best. There wasn't much available that they created too much competition for. The area that needs to be reviewed here is the definition of what. we have in small businesses and then attempt to attract businesses that are needed and wanted by the people. Geneva is too much duplication which is so counterproductive. Same old -same old doesn't sell." NY44 - Office Products: "We operate an office products business. At the present time we are still not greatly affected by the new Wal-Mart store. What the greatest influence is the prices published by discount stores operating.rout of Syracuse and Rochester and the 'Paper Cutter' (Fays Drugs) in Auburn and the catalogue they distribute. My concern is the fact the discount stores sell, at the same or lower prices what I pay for the same merchandise. The manufacturer offers these products at prices that are not available to me because of a much lower overall volume." NY40 - Marina Supplies: "Wholesale stores have forced me to lower my inventory, reduce the prices of goods sold and reduce my work force, but that's only part of the problem. School and county taxes have doubled. Canal permits have gone up 800%. Cigarette and Alcohol tax has increased. Beer licenses also went up this year, making me think seriously of ending the sales of beer and cigarettes, because the reduction of the profits being made. New York State is forcing the small business man out." NY37 - Jewelry: "Too many stores which are 'Mom -and -Pop' operations will be closed down by these mega stores with their buying power and low prices. Only stores that can provide service and knowledgeable service employees will survive." NY36 - Silver and Crystal: "Factory Outlet Malls and mega -retailers are destroying and will continue to destroy 'Main Street' in small town America. As 'Main Street' disappears, so will the tax base which is so vitally needed for the entire community." NY34 - Furniture and Stationery: "I only hope 1 can make our business last long enough to educate our four children. I will not allow any of them to work for us. I would not wish this on anyone. We have told our children they would be better off working for a large company. My 15 year old says 'You say you have more freedom with owning your own business, but all my friends' parents get days off and vacations and their families don't always discuss work.' I think the way retailing in America has changed is revolutionary. There is no going back, the consumers will not permit it." NY29 - Computer Equipment: "We have responded to the encroachment of large retailer selling computers by specializing in markets that are not the 'retail' consumer." NY28 - Food: "Most open minded small businesses can survive large chain competition by adjusting to their weaknesses such as specializing, offering personal services, delivery, and the list could go on and on depending on the individual situation." "Generally small business cannot be everything to everybody when they are up against the giants. Reduce the areas that you are weak in and concentrate your efforts on the strength of the business." "Our strength is subs, salads and sandwiches. When we opened 12 plus years ago, McDonalds and Burger King were here already. Now there is Arby's, Wendy's, Subway, Denny's, etc. While a dozen or more independent businesses have come and gone, we are surviving." NY10 - Home Improvement: "We have had a Wal-Mart move into our area within the past two years. We lost 35% gross sales and fired all employees. The best thing to do is to provide service and knowledge.". NY7 - Tavern: "I feel the American public welcomes the discount prices offered by large discount houses, as long as it does not affect them personally. My business is a small 'blue collar' tavern. I pay $2,140 every three years for a state license to sell on premise liquor and beer and off premise beer. Large food and discount stores (i.e. Newmans, P&C, Fays Drugs) pay $75 per year for a license to sell off -premise beer. These large stores use beer as a 'loss leader' to get the public in the door. They sell my only product to take out for less than I can purchase it wholesale. In my opinion, N.Y. State requires license fees for the money only." NY6 - Restaurant: "It is extremely difficult at the present time to compete with larger competing restaurants, especially franchises, because in a tourist area, it's the franchises that are the first draw. Taxes and insurance and Workman's Compensation costs continue to rise. Suppliers continue to raise their prices and yet if we do, everyone becomes upset and stays away. It's basically a'no-win' situation." NY5 - Auto Supplies/Service: "The way things are right now, if a chain came here in Geneva it would probably force us out of business." NY4 - Men's Wardrobe: "We are a better men's specialty store. Chances are, a customer who wants a better quality in men's wear will come to us or a similar type store. I feel a Wal-Mart type store hurts a store like us by taking away traffic from our'Main Street.' We lose window shoppers who might stroll in just looking, and possibly make a major purchase. The mega -chains compete with so many types of stores (hardware, electronics, etc.) that people will tend to go there first before checking 'Main Street'." NY2 - Jewelry: "The Geneva market was already affected by introduction of Kmart, Wal-Mart (2 locations), Wegmans and Tops (Superstore). Market surveys for this area do not support this amount of retail space and now three major outlet strip plazas of over 150 stores are planned for Geneva development within 12 months." NY] - Men's Casual Clothing: "One of the biggest negative impacts is the reduced downtown traffic caused by these mega stores. It is hard to draw customers to a downtown location. These chain stores, by being situated on the out -skirt of the city further erode customer traffic. A positive impact is that you have to become a better merchant in order to compete. You cannot remain stagnant." NY54 - Bikes/Equipment: "It's a free enterprise society so they have every right, but these 'mega stores' are putting us small guys out of business and ruining downtowns." NY55 - Bar and Grill: "I don't understand why I was sent this survey. My business is a floundering bar and grill. In the nine years that I've owned it, I have seen business dwindle to nearly nothing because of laws, rules and regulations and the economy." NY57 - Lumber. "We currently have Builders Square locations in Syracuse and Rochester. Although they are approximately 40 miles from us we still realize their impact. Home Depot is currently building and/or planning stores within both of those market areas. To further complicate our rural market, the Depot is developing a strategy to penetrate the rural/smaller market areas. It goes without saying that it is tough as hell out here and getting worse. We are doing everything possible to survive. Our business plan is not designed for 3 to 5 years, it is based on daily survival. Without help, I believe most independents will not survive." Go To Tov of Pastel Table of Contents') CHAPTER V ARE MEGA -RETAIL DISCOUNT CHAINS SUBJECT TO REVIEW BY STATE AND FEDERAL REGULATORY AGENCIES, WITH RESPECT TO ANTITRUST STATUTES ALSO, THE SUBJECT OF PREDATORY PRICING IS EXAMINED? This question will be examined by the.writers with respect to (a) what statutes may conceivably apply to the nations largest retain chains and (b) what in the legal history of the past decade indicates that states and federal agencies may review such questions as: predatory behavior; dominance; availability of supply to smaller retailers; pricing formulae; restraint of trade and other related questions generally reviewable under the Sherman Antitrust Act, the Clayton Act, the Robinson-Patman Act and other applicable federal statutes, as well as comparable state statutes regulating business behavior. Among the more recent flurry of litigation in this area was a suit in October 1993, in an Arkansas Chancery Court claiming that Wal-Mart Stores, Inc. had violated state law by selling some drugs and health and beauty aids below cost in its store in Conway, Arkansas. Judge David Reynolds ordered an end to the practice and awarded the plaintiffs, three independent Arkansas pharmacies, nearly $300,000 in damages. I At the trial, a company official said Wal -Mart's pricing policy was designed to make a profit, not to injure competitors. Wal-Mart, however, admitted in the two day trial that it priced certain items below cost ("loss leaders") as a strategy to draw customers, but not to drive local druggists out of the market. Judge Reynolds based his ruling in part on Wal -Mart's in-store price comparisons of products sold locally by the plaintiffs in Conway, as well as other competitors. The three pharmacies accused Wal-Mart of violating state laws against predatory pricing by selling as many as 200 items --ranging from Crest® toothpaste to over the counter drugs, below cost in its supercenter store in Conway, Arkansas. The plaintiff originally sought $1.1 million in damages. The case was brought under Arkansas' 1937 Unfair Practices Act. The Arkansas statute forbade selling or advertising for sale items below cost "for the purpose of injuring competitors and destroying competition." 2 When this suit was announced antitrust experts pointed out that many state laws provided retailers with a better chance to win a predatory pricing suit than the federal law. States apparently have broader definitions and distinct causes of actions that don't depend on federal precedents. 3 The conclusions at law warranting the decision against Wal-Mart follow: 4 „Conclusions ofLaw” "Act 253 of 1937, 'The Unfair Trade Practices Act,' Ark. Code Ann. §§-75-201 through - 75-211, ('the Act') specifically sets out the legislative intent of 'the Act':" "The General Assembly declares that the purpose of this subsection is to ... foster and encourage competition by prohibiting unfair and discriminatory prices by which fair and honest competition is destroyed or prevented." "The Arkansas Supreme Court recognized'the Act's' purpose in Beam Brothers v. Monsanto [1976-1 Trade Cases ¶60,720]. 259 Ark. 233, 532 S.W. 2d 175 (1976):" "This subsection (of the Act) is intended for the primary benefit of the public by protecting dealers, especially small dealers, from unfair competition by large dealers." "The purpose of 'the Act' is not to protect small business from large business, downtown from malls, or to guarantee any business a share of the market, but to encourage 'fair and honest competition.' The protection afforded by 'the Act' is from 'unfair competition'." "'The Act' makes it unlawful for a business to sell, or advertise for sale 'any article or product' at less than the 'cost thereof.' 'Cost' in this instance is defined as:" "... all costs of doing business incurred in the conduct of the business and must .include without limitation the following items of expense: labor, which includes salaries of the executives and officers, rent, interest on borrowed capital, depreciation, selling cost, maintenance of equipment, delivery cost, credit losses, all types of licenses, taxes, insurance, and advertising. Ark. Code Ann. §4.75.209(2)(b)(3)" "The prohibition against sales below costs does not apply to the sale below cost of seasonal, damaged, deteriorated and perishable items; good faith closing business sales; and court ordered sales." "Wal-Mart contends that the court should look at'market-basket' cost rather than single product or article cost. While the Court can find no Arkansas judicial decision construing this issue the Court finds that Ark. Code Ann. §4.75.209 is clear -- 'the Act' applies to 'any article or product' and not'market-basket' or'overall product line' cost." "The burden of proof is on Plaintiffs to establish three essential elements: that Conway Wal-Mart sold, offered to sell or advertised to sell products (1) at less than the cost to Conway Wal-Mart, (2) for the purpose of injuring competitors, and (3) for the purpose of destroying competition. Ark. Code Ann. §4-75.209 (a)(1)." "The evidence is clear that Conway Wal-Mart advertised and sold pharmaceutical and health and beauty products below invoice or acquired costs (without taking into consideration the 'cost of doing business') on a regular basis. These below cost sales do not fall within the exemptions set out in 'the Act.' "The Court finds that purpose to injure competitors and destroy competition cannot be inferred from below cost advertising and sales alone. There must be other proof of intent of purpose. A person's purpose or intent, being a state of mind, ordinarily cannot be proven by direct evidence, but may be inferred from other circumstances. Alford v. State 34 Ark. App 113. 806 S.W.3d 29 19911." "The court finds from the following circumstances that Conway Wal-Mart advertised and sold pharmaceutical and health and beauty products below cost for the purpose of injuring competitors and destroying competition:" 1. "The number and frequency of below cost sales." 2. "The extent of below costs sales." 3. "Wal -Mart's stated pricing policy --'meet or beat the competition without regard to cost'." 4. "Wal -Mart's stated purpose of below cost sales -- to attract a disproportionate number of customers to Wal-Mart." 5. "The in-store price comparison of products sold by competitors, including Plaintiffs." 6. "The disparity in prices between Faulkner County prices of the relevant product lines and other markets with more and less competition." "ReliefAid Damages" "Plaintiffs' request to enjoin Conway Wal-Mart from selling below cost as defined by the 'Unfair Trade Practices Act is Granted." "Plaintiffs's request for damages is Granted and the Court awards damages as follows:" "American Drug -442,407.00" "Baker Drug --33,767.00" "Family Drug --20,295.00" "Plaintiffs' request for treble damages and costs is Granted." "Plaintiffs' request for attorney's fees is denied due to the lack of statutory authority for such allowance," Wal-Mart immediately announced that it would appeal Judge Reynold's predatory -pricing decision to the Arkansas Supreme Court. Wal-Mart subsequently appealed the decision and had it reversed by the Arkansas Supreme Court; but not without dissent. 5 In Chapter VI on Predatory Pricing, the writer will discuss in more detail some of the data, expressed by the lower court as well as the majority and minority views of the Supreme Court in the appeals case won by Wal-Mart. The tendency to litigate continued to grow when a large number of independent drug store owner/operators, from the traditional proprietorships to small chains, decided that pricing differentials were not fair and decided to take legal action not against the large chains, but against drug manufacturers and.wholesalers. The issue in what was to become a class action suit was whether the price differences for prescription drugs at the retail level were based upon economies of scale present in large drug chains and generally justifiable. The small drug stores saw the enemy as the drug manufacturers, and not always the retail chains. The proposed class action suit wanted the manufacturers to prove not only how they can justify selling at lower prices to higher volume customers, but additionally how they could justify selling at lower prices to lower volume customers, such as buying groups who purchase drugs for hospitals, HMO's, nursing homes and clinics. However, there were a number of these lawsuits involving price discrimination in pharmaceuticals, one of which included large and small drugstore chains that challenged primarily the high discounts offered to HMOs and buying groups. The plaintiffs (pharmacists), numbering in the hundreds, filed a class action suit in federal court in Chicago in November, 1994 6 against at least thirty drug manufacturers and wholesalers. The suit was an antitrust suit, alleging specific violations of the Sherman Antitrust Act and the Clayton Act. The suit related to pricing, variable discounts, combinations and conspiracy in unreasonable restraint of trade and concerted action. Later in this text, the author will detail various cases and precedents which might have relevance with respect to protecting the nation's small retailers against possible monopolization, predatory pricing, restraint of trade and various antitrust activities by the nation's major retail chains as well as the mega -retail discount giants. Nowhere in this text will the author recommend company versus company litigation, but he hopes to make his observations available to Congress, State Legislators and federal and state regulatory agencies with the recommendation that fair trade practice laws be reviewed and where more surveillance is necessary to protect the small retailer, that it be done. In August 1994, Representative John La Falce (D. N.Y.), Chairman of the House Small Business Committee conducted panel hearings with respect to the growing dominance of the natiorn's major retail chains as well as the major retail discount chains, and what appeared to be behavior harming small business and entire communities, such as (alleged) predatory pricing, unfair labor practices and market saturation. A detailed discussion of these meetings and their findings can be found in Chapter VI. The committee indicated that the growing powers of the retail -chains ought to be a continuing review responsibility of the Federal Trade Commission (FTC), and additionally expressed that as of August 1994, two of the five seats on the FTC still remained vacant. 7 Further action by the Committee has not been taken. Since the hearings, Robert Pitofsky was nominated by President Clinton to head the Federal Trade Commission. Wall Street Journal articles heralding his appointment emphasized Pitofsky's belief in the active enforcement of antitrust laws. Pitofsky, a Georgetown University Law Professor had served as a Commissioner of the FTC, 1978- 1981, and was Director of the FTC's Bureau of Consumer Protection from 1970 to 1973. Among the witnesses at the hearings was Thomas Muller, a Fairfax, Virginia economist and the author of a report on the impact that three proposed Wal-Mart stores would have on northeastern Vermont communities. Muller stated, "In a few years, given (that) current trends continue, one corporate entity may have a substantial share of all retail trade in the United States." 8 Antitrust Laws of the United States (his per a study by the Congressional Budget Office) In order to provide a guide to the reader interpreting the behavior of giant retail chains as being dominating, unfair or restraining trade through undesirable practices, the author is presenting in outline form, three statutes which might apply. This material was prepared as part of a Congressional Budget Office (CBO) study by the U.S. Congressional Budget Office and published in September 1994. 9 In addition to citing certain important statutes, the CBO researchers interpreted several sections of the Robinson-Patman Act with respect to predatory pricing. Antitrust Law In the last quarter of the 18th century, the spread of the industrial revolution from Britain to Europe, the United States, Russia, and Japan brought with it the development of large industrial concerns with substantial market power. 10 In some cases, that power was enhanced by the formation of trusts, cartels, and other monopolies. Such market power was subject, or thought to be subject, to various abuses, among which were high prices and predatory pricing. The Sherman Act In the United States, concerns about monopoly abuses resulted in the passage of a series of antitrust laws. The first such law was the Sherman Act, passed in 1890. 11 The Sherman Act prohibited "every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several states, or with foreign nations." 12 It also made it illegal to "monopolize, or attempt to monopolize, or combine to conspire with any other person or persons, to monopolize any part of the trade or commerce among the several states, or with foreign nations." 13 Violations of those provisions were misdemeanors punishable by fines, imprisonment, or both, U.S. attorneys could obtain injunctions to prevent or restrain violations. Furthermore, private parties injured by violations could bring suit against the perpetrators and recover treble damages. 14 However, violations of the Sherman Act are now deemed to be felonies. Furthermore, private parties can now sue for injunctions. The courts have long interpreted the Sherman Act to prohibit predatory pricing. Without a showing of predatory intent, price discrimination and selling below cost are not held to be violations of the law. 15 Predatory intent is an element of proof in some violations of the Sherman Act, i.e., monopolization and attempted monopolization, but not in conspiracy cases. In the past two decades, the courts and the Federal Trade commission have become more skeptical of claims of predatory pricing than they were previously. They tend to look for evidence of such factors as prices below average variable cost (not merely below average total cost), large enough market share and sufficient barriers to other firms' entering the market to make monopoly and subsequent price increases feasible, and local price cutting in particular markets rather than general price cutting in all markets. 16 Mere price discrimination or selling below average total cost are not generally sufficient for demonstrating predatory pricing. The Federal Trade Commission Act and the Clayton Act Dissatisfaction with the courts' interpretation of the Sherman Act led to the passage in 1914 of the Federal Trade Commission Act and the Clayton Act. 17 The Federal Trade Commission Act created the Federal Trade Commission (FTC), and the Act empowered the FTC to proceed against "unfair methods of competition" in interstate or foreign commerce. 18 The general and undefined nature of the latter power resulted from the view that businesses would always find new ways of suppressing competition that did not violate any given list of prohibited behaviors. The act empowered the FTC to proceed against each new form of unfair behavior as it appears and is recognized as a problem. FTC proceedings are administrative and prospective (that is, the FTC can proscribe future behavior, but cannot punish past behavior). When the FTC believes a firm is engaging in unfair competition, it issues a complaint that is heard before an administrative law judge. If the judge agrees there is a violation, he or she issues and order for the firm to cease and desist. That order can be appealed to the courts. Assuming the order either is not appealed or is upheld on appeal, the firm is subject to fines if it continues the behavior.'4n judicial review, a decree to obey the order can be issued„ in which case violations make the firm liable to be held in contempt of court. Section 2 of the Clayton Act was the first law to restrict price discrimination outside the railroad industry. 19 It prohibited charging different prices to different customers when: (1) the price difference did not reflect differences in cost, grade, quality, or quantity; (2) it was not a good faith effort to meet competitive pressures; and (3) "the effect of such discrimination may be to substantially lessen competition or tend to create a monopoly." 20 The Clayton Act authorized the Federal Trade Commission to enforce the act's provisions through the sort of administrative and prospective proceedings described above. 21 It authorized U.S. attorneys to obtain civil injunctions to prevent and restrain violations of the act, and it gave private parties the right to obtain injunctions to protect there from violations of the antitrust laws generally. 22 It also gave parties injured by violations of the antitrust laws the right to sue for treble damages. 23 Finally, it made individual directors, officers, or agents of corporations violating penal provisions of the antitrust laws guilty of misdemeanor violations, if they directed, ordered, or carried out the corporate violation. 24 In addition, it subjected them to punishment by fines and imprisonment. The Robinson-Patman Act In the 1920's and 1930's, the large chain retail stores rose to prominence. The market power of some of these chains enabled them to negotiate lower prices from manufacturers than the traditional small independent retailers could obtain. For that and other reasons, the small retailers found it difficult to compete leading to pressure for the Congress to do something to help them. That pressure and dissatisfaction with the lack of success of the Clayton Act in preventing price discrimination led to passage in 1936 of the Robinson-Patman Act. 25 The Robinson-Patman Act amended the Clayton Act to make it unlawful "to discriminate in price between different purchasers of commodities of like grade and quality" where the effect "may be substantially to lessen competition or tend to create monopoly in any line of commerce, or to injure, destroy, or prevent competition [emphasis added] with any person who either grants or knowingly receives the benefit of such discrimination, or with customers of either of them." 26 Exceptions were made for price differences resulting from differences in cost, charging low prices to meet those of a competitor, disposing of deteriorating perishable goods or obsolete goods, and disposing of goods in a closeout or bankruptcy sale. The act also prohibited buyers from knowingly inducing or receiving a prohibited discrimination in price. The act made some violations criminal offenses punishable by fines and imprisonment. However, the criminal provision of the Robinson Patman Act has not been used in decades and is unlikely to be used. "A key issue relates to the phrase emphasized above: 'or to injure, destroy, or prevent competition.' Does 'competition' refer to competitors of the firm engaging in price discrimination or to the vigor of competition between and among the price -discriminating firm and its competitors? The former could make almost all price discrimination illegal, depending on the standard of injury. The latter is a much more demanding standard. If the price-disdriminating firm takes away 10 percent of the market, each competitor is injured. Yet the loss does not affect the vigor of competition between and among the competitors and the price - discriminating firm." 27 "The courts have decided this question differently depending on the relation of the injured firms to the participants in the low -price sale. The injured firms might be competitors of the price -discriminating firm, competitors of the firm receiving the lower price, or competitors of the customers of the firm receiving the lower price. Injury to the first of these groups --competitors of the price -discriminating firm --is the sort of injury that is at issue in predatory, pricing and dumping cases. In cases of such injury, the courts have generally interpreted "injury to competition" to mean "injury to the vigor of competition." Over the years, the standards for proving such injury have evolved to the point that they are now essentially identical with those for predatory pricing cases under the Sherman Act. Thus, the. sort of price discrimination that is the domestic analog to dumping is illegal only in cases of predatory pricing," 28 A Review of the Antitrust Statutes by the Author and His Consultant Attorneys 29 The consulting attorneys were not asked to recommend any type of litigation against retail chains, but simply to restate the meaning of the various regulatory statutes and their possible relevancy to subsequent enforcement against certain types of behavior by the mega -retail discount chains. The following memorandum to the author is, in a sense, a further analysis and interpretation of the historic and current meaning of the antitrust statutes summarized earlier in this chapter as a result of reviewing Congressional Budget Office reports and analyses. It becomes obvious to the reader that the statutes on antitrust and their interpretation do provide an umbrella for federal governmental agencies to prescribe anti-competitive activities on the part of major retail chains, but only if appropriate evidence is found of such conduct. The purpose of this study is not to stimulate litigation by government against any retail chains or manufacturers, but to alert Congress and the appropriate federal agencies that the laws protecting small business do exist since the 1890's, and if federal agencies snake it known that when anti-competitive misbehavior is noted, and alleged, that surveillance and investigations might suggest to the mega -retailers that they consider putting a stop to the "roller coaster" which is eliminating the small. retailer from the competitive scene. Further, Congress should hold hearings to be alerted to the possible excess of anti- competitive behavior or monopoly power by the huge retail chains; and further to consider legislation to amend the Sherman, Clayton and Robinson-Patman Act (and other statutes), originally designed to maintain a free market and protect small businesses in their rights to enter the market and survive as viable firms. The survival of small business, which was the desired aim of the 1995 President's White House Conference on Small Business is necessary for a balanced economy and for industrial and collective security, both economically and sociologically. In addition to the review of federal statutes on antitrust, the federal government should review the Tax Code as a means of limiting chain abuses. There follows Davis, Cowell & Bowe's memorandum to the author dated August 1, 1994, on the subject of "The Basics of Federal Laws on Monopolization and Predatory Pricing" prepared by Andrew J. Kahn, Esq. and Marjorie M. Alvord, Esq, MEMORANDUM The Basics. of Federal Lawson Monopolization and Predatory Pricing, To: Dr. Edward B. Shils From: Davis, Cowell & Bowe Counselors and Attorneys at Law 100 Van Ness Avenue .San Francisco, CA 94102 Date: August 1, 1994 This memorandum sets out a brief overview of basic federal antitrust law on monopolization and predatory pricing. I. Basic Definition of Monopolization Section 2 of the Sherman Act makes it a crime to monopolize or attempt to monopolize commerce. See 15 U.S.C. §2. Unlawful monopolization is typically defined as the possession of monopoly power plus some element of deliberateness, i.e., conduct intended to acquire, use or preserve that power. As was stated by the Supreme Court: The offense of monopoly under Section 2 of the Sherman Act has two elements: (1) the possession of monopoly power in the relevant market and (2) the willful acquisition or maintenance of that power, as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident. See U.S. v. Grinnell, 384 U.S. 563, 570-71 (1966) [emphasis supplied]. The principal dilemma faced in making the analysis is that the same conduct used to obtain and/or maintain monopoly power (e.g,, low pricing, customer discrimination, integrating into different markets, introducing new products) are also often seen as generally beneficial competitive strategies which ought to be encouraged. See, L. ,, Matsushita Elec. Ind Co. v. Zenith Radio Corp., 475 U.S. 574, 594 (1986). A. The Relevant Market Monopoly power has been generally defined as "the power to control prices or to exclude competition." See American Tobacco Co. v. US.5 328 U.S. 781 (1946). The power to exclude competition may derive from any number of unfair practices that make it difficult for existing competitors to survive or to enter the market, such as predatory pricing. In order to determine whether monopoly power exists (or is dangerously likely), first the relevant market in which to evaluate this power must be defined. See WalkerPro cess Equipment v. Food Mach. &Chem. Corp., 382 U.S. 172, 177 (1965) [ "without a definition of that market there is no way to measure ability to lessen or destroy competition."]. The notion of the relevant market is usually defined in terms of two aspects: The products or services involved ("the relevant product market") and the geographic area involved ("the relevant geographic market"). See Brown Shoe Co. v. U.S.. 370 U.S. 294, 324 (1962). The question of what constitutes the relevant market is one of fact, typically involving complicated concepts from neoclassical economic theory and battles of experts. 11 Relevant market for products or services On the product side, the Supreme Court discussed the notion of the relevant market in U.S. v_. E.I. du Pont de Nemours & Co., 351 U.S. 377 (1956), where the question was whether the relevant market was cellophane (du Pont had a 75% share) or flexible packaging material (du Pont had a less than 20% share). The Court stated: When a product is controlled by one interest, without substitutes available in the market, there is monopoly power ... [W]here there are market alternatives that buyers may readily use for their purposes, illegal monopoly does not exist merely because the product is said to be monopolized differs from others. (351U.S.at 394) The court concluded that the relevant product market consists of products which have reasonable interchangeableness, considering prices, use and quality. In applying the reasonable interchangeableness test, most courts look to measures of the cross -elasticity of demand which represents the responsiveness of one product to price changes of the other. Courts also sometimes look to the reasonable interchangeableness of production (i.e., cross -elasticity of supply). 21 Relevant geographic market On the location side, the relevant geographic market is said to be the area in which the seller operates and in which the buyer can reasonably turn for such products or services. As stated by the Supreme Court: The criteria to be used in determining the appropriate geographic market are essentially similar to those used to determine the relevant product market. Congress prescribed a pragmatic, factual approach to the definition of the relevant market and not a formal legalistic one. The geographic market selected must, therefore, both "correspond to the commercial realities" of the industry and be economically significant. Thus, although the geographic market in some instances may encompass the entire Nation, under other circumstances it may be as small as a single metropolitan area. (Brown Shoe Co. v_United States, 270 U.S. 294, 336- 37 (1962)). In persuading any government agency to investigate antitrust implications of "Big Box" warehouse stores, market definition will be crucial. A more narrow market definition may make it easier to demonstrate a market share large enough to support a monopoly power presumption. However, too narrow a definition will not be seen as credible. For example, in one case the definition of the relevant market as shopping centers with more than 50,000 square feet was rejected as too narrow when sellers of the product regularly operated in smaller centers, strip centers, hardware stores, variety stores and drug stores. See American Key Corp. v. Cole Nat. Cor. 762 F.2d 1569 (11th Cir. 1985). One might be able to get away with a relevant market definition of retail department stores in the semi -rural U.S., southwest or west. It could be argued that such a definition constitutes a "pragmatic, factual approach" necessary for promoting the purposes of antitrust laws. B. Market Share The existence of monopoly power itself is usually defined in terms of market share. Although it is typically conceded that direct proof through use of reconstructed supply and demand curves is best, it is (or should be) recognized that such proof is virtually impossible to establish accurately since data simply does not exist in the farm necessary to match the constraints of necessary neoclassical economic assumptions. Therefore, the notion of market share is used. Although there is no hard and fast rule as to what market share establishes monopoly power, a market share in excess of 70% has almost always been deemed sufficient to support the inference, while a market share of less than 40% virtually precludes a finding of the existence of monopoly power. Market share is not the only determination of the use of market power. Other factors to be considered include consideration of whether market share declines or increases over time, the extent to which the alleged monopolizer is forced to lower prices in response to the pricing practices of competitors, the extent to which new competitors are able to enter the market, the degree of product innovation, and so on. A defendant may have a huge market share but avoid liability by successfully arguing the one or more of these other pro -competitive conditions exists. Again, this analysis would involve a costly battle of experts. Of course, proof of monopoly power is not by itself enough to show an antitrust violation. One must also demonstrate deliberate or intentional anti-competitive conduct. To persuade a government agency to investigate, evidence of such deliberateness would be important. M. PM&INEX Priain� A demonstration of predatory pricing practices may be one way to establish the deliberateness prong of the test. Predatory pricing has been defined as "pricing below an appropriate measure of cost for the purpose of eliminating competitors in the short run and reducing competition in the long run." See Cargill. Inc. v. Monfort of olo., Inc., 479 U.S. 104, 117 (1986). One of the complaints frequently heard about the 'Big Box" warehouse stores is that they aggressively price in order to put the local competition out of business. As the above discussion implies, however, one should bear in mind that aggressive pricing is not per se unlawful under the Sherman Act. it is important to show use and abuse of monopoly power in the relevant market. In addition to Section 2 of the Sherman Act, the Robinson-Patman Act regulates pricing policies. Section 2(a) of the Clayton Act as amended by the Robinson-Patman Act provides: It shall be unlawful for any person engaged in commerce, in the course of such commerce, either directly or indirectly, to discriminate in price between different purchasers of commodities of like grade and quality ... where the effect of such discrimination may be substantially to lessen competition or tend to create a monopoly in any line of commerce, or to injure, destroy or prevent competition with any person who either grants or knowingly receives benefit of such discrimination, or with customers of either of them. See 15 U.S.C. §13(a). Actions for predatory pricing have often involved claims under both provisions. In 1993, the Supreme Court issued its decision entitled Brook Group Ltd v. Brown ctnd Williamson Tobacco Cor. 113 S.Ct. 2578, 61 L.W. 4699 (1993), which substantially undermines the availability of a predatory pricing action based on federal law, either under the Sherman Act or the Robinson-Patman Act. The Supreme Court indicated that the appropriate legal analysis in a predatory pricing case is substantially the same whether the action is brought under the Sherman Act or the Robinson-Patman Act. The Brook Group case is referred to as the "Liggett" decision because that was the former name of the plaintiff cigarette maker. In that action the plaintiff was a struggling cigarette maker which introduced a line of generic cigarettes. The defendant Brown and Williamson responded by coming out with its own generic brand. Liggett alleged that Brown and Williamson was selling its generic cigarettes at a loss with the intent to monopolize and/or injure competition. In essence, Liggett was raising claims both under Section 2 of the Sherman Act and under Section 2(a) of the Clayton Act as amended by the Robinson-Patman Act. The Supreme Court in the Liggett decision indicated that whether a claim alleges predatory pricing under Section 2 of the Sherman Act or primary line price discrimination under Robinson-Patman, the essential prerequisites to recover remain the same. First a plaintiff must establish that the Company is pricing the product below average variable cost. Next the plaintiff must establish that the competitor had a reasonable prospect or (under Section 2 of the Sherman Act) a dangerous probability, of recouping the investment in below cost prices. As the Court noted: Recoupment is the ultimate object of an unlawful predatory pricing scheme; it is the means by which a predator profits from predation. Without it, predatory pricing produces lower aggregate prices in the market, and consumer welfare is enhanced. The Court in essence stated that below cost pricing which isnot ultimately recovered is a "boon to consumers" and therefore can't be found unlawful. Finally, the Court indicated that the cause of action is not available unless the plaintiff establishes injury to competition or use of monopoly power. The decision makes it all but impossible for a private litigant to bring and prove predatory pricing action under federal law. As discussed above, the analysis of the existence of or use of monopoly power is extremely complicated both in terms of defining the relevant market and in establishing that power itself exists. Additionally; information on a competitor's average variable cost is extremely difficult if not impossible to obtain legally. Because these hurdles will almost always prove too costly or otherwise insurmountable for private litigants, it may be especially appropriate to request government investigation if one can produce evidence of abuse of monopoly power and/or predatory pricing activity. III. Price Discrimination Actions under federal law for price discrimination where there are competing buyers, as opposed to competing sellers, may more viable than actions for predatory pricing. To bring a price discrimination claim the purchaser must establish at the outset that: 1] sales in interstate commerce 2] have involved a cognizable difference in price between two or more buyers, of 3] commodities of similar grade and quality, and the 41 such discrimination may substantially injure competition. See Texaco, Inc. v. Hasbrouck, 110 S.Ct. 2535, 58 L.W. 4807, 4810 (1990). Additionally, the action is available only to distributors who are actually damaged by the unlawful price discrimination. In addition, the plaintiff has to establish price discrimination regarding products of the same grade and quality and that the practice tended to injure competition. Although the price discrimination cause of action remains viable, it is far from easy to maintain to victory. The action can be defended by proving various approved justifications for the discounts. For example, Section 2(b) of the Act creates a defense when the seller acts "in good faith to meet an equally low price of a competitor." This "meeting the competition" defense is an absolute defense to other prohibited price discrimination. See Standard Oil. Co. v,. FTC, 340 U.S. 231, 251 (1951). Section 2(a) of the Act permits price differentials that make "due allowance in cost of manufacture, sale or delivery resulting from the differing methods or quantities" in which goods are sold. Thus, there is the so-called "cost justification defense" under which the seller shows that the actual cost savings in dealing with one buyer is equal to or greater than the price reduction offered, based upon the factors enumerated in the statute. See Morton Salt Co. 334 U.S. 37,48 (1948). Pricing differentials are also allowed when they represent functional discounts, that is, when the buyer assumes all the risk, investment and cost involved in connection with actually performing a certain function related to the sale. See Texaco, Inc. v. Hasbrouck, 110 S.Ct. 2535, 58 L.W. 4807, 4811 (1990). In part because the price discrimination action depends upon actual injury to a specific buyer, it makes less sense to seek government investigation of such issues. IV. Other Issues Apart from predatory pricing, one might argue for an investigation to determine whether "leveraging," that is, the use of monopoly power in one market to gain an advantage in another market, has been used in violation of Section 2 of the Sherman Act. This notion sterns from remarks made by the Supreme Court that monopoly power cannot be used "to beget monopoly." See _U.S. v. j2rifflth, 334 U.S. 100, 108 (1948). The notion of illegal "leveraging," however, is an extremely controversial one. The question is whether one violates the Sherman Act when it uses monopoly power in one market to achieve a competitive advantage in another, even though there is no attempt to monopolize the second market. The Second Circuit has said that such a violation exists so long as an actual abuse of monopoly power is shown. See Berkey Photo, Inc,_ v. Eastman Kodak Co., 603 F.2d 263, 275 (2d Cir. 1979). Using this notion, one might argue that "Big Box" warehouse stores violate Section 2 in unfairly "leveraging" monopoly power enjoyed in the Southern U.S. market to gain advantage in the Western U.S. market. However, apart from the difficulties in establishing the existence of monopoly power in the Southem U.S., or the "abuse" of such power to leverage into the Western market, the Ninth Circuit has made such an argument much more difficult by expressly rejecting the leveraging notion. After noting that antitrust laws tolerate monopolies arising from efficiencies, the Court of Appeals in Alaska Airlines v. U.S, 948 F.2d 536 (9th Cir. 199 1) stated: [T]he elements of the established actions for "monopolization" and "attempted" monopolization" are vital to differentiate between efficient and natural monopolies on the one hand, and unlawful monopolies on the other. Berke rkev Photo's monopoly leveraging doctrine fails to differentiate properly among monopolies. The anti-competitive dangers that implicate the Sherman Act are not present when a monopolist has a lawful monopoly in one market and uses its power to gain a competitive advantage in the second market. By definition, the monopolist has failed to gain, or attempt to gain, a monopoly in the second market. Thus, such activity fails to meet the second element necessary to establish a violation of Section 2. (948 F.2d at 548). Thus, the leveraging concept is rejected as far as activities in the Western states (Alaska, Arizona, California, Hawaii, Idaho, Nevada, Oregon, Washington) are concerned. The continued viability of the leveraging concept in other jurisdictions is questionable. Monopolization and predatory pricing issues under federal antitrust laws should not be confused with potential remedies under state unfair trade laws. For an example of the latter, see the attached copy of the lower court decision in American Drys Inc. v. Wal- Mart Stores, the Arkansas predatory pricing case Wal- Mart lost at trial. The matter is now on appeal. It is important to recognize that this lawsuit was brought under Arkansas' own unfair trade statute, not under federal antitrust laws. Thus, the fact that the iudnent was against Wal-Mart in this Dredatory, pricing case does not suggest that there would be a similar result in a federal antitrust lawsuit. There are a number of reasons why the sale -below -cost claim under Arkansas law was easier to maintain than it would be under federal antitrust laws. First, as is true under a similar California statute, See Turnbull _& Turnbull v._ ARA Transp., 219 Cal. App.3d 811, 268 Cal. Rptr. 856 (1990), the Arkansas law uses a "fully allocated cost" measure (i.e., replacement cost plus attributable overhead) on the cost basis. Federal courts generally use "average variable cost" (which does not generally include fixed costs or overhead) as the cost basis. Under federal law, the cost basis against which sales -below -cost will be gauged will necessarily be lower, making it much more difficult to attack predatory prices under federal law. Secondly, the Arkansas court rejected the "market basket" approach to analyzing sales - below -cost (as California courts have, See Western Union Financial Services, Inc. v. First Data Corgi_, Cal. App. 4th, 25 Cal. Rptr.2d 341 (1993)). Rejection of the market basket approach means that an aggrieved plaintiff can recover in a state law sales -below - cost claim as to a particular product even if the retailer overall maintains a healthy profit margin. Finally, in the Arkansas case, (in the lower Chancery Court) the judge determined that the plaintiffs need not show monopoly power or injury to competition (involving complicated expert analysis of relevant markets and so forth). Instead, the plaintiffs only needed to show the company had an intent to injure the competition, which could be inferred more directly from the company's stated policies and purposes. 1. Many states (24) according to the research division of the Library of Congress had state "Below -Cost Sales Statutes." This list included Oklahoma, where Wal-Mart was sued, and additionally such large states as California, Massachusetts, Pennsylvania, Wisconsin and others (See Chapter VI for more details). 2. As a result of the case of American Drugs Inc. v. Wal-Mart Stores Inc., where at least in the lower court the plaintiffs won, there has been engendered an increased interest in the law of predatory pricing, generally with concurrent interest in state below -cost pricing statutes. 3. The reader should understand from the Congressional Budget materials as well as the legal analysis provided the author by the law firm of Davis, Cowell & Bowe of San Francisco, California, that while predatory pricing comes under the purview of the Sherman, Clayton, Federal Trade Commission and Robinson-Patman Acts at the federal level; that nevertheless it should not be construed that any "below cost sales," at least at the federal level are not necessarily to be interpreted in the same way as would be the case of litigating in the twenty-four state jurisdictions having "below -cost" pricing statutes. 4. Nevertheless, the Wal-Mart opinions, both at the Chancery level (when Wal-Mart lost) and at the Arkansas Supreme Court level (when Wal-Mart won) do create interest in the subject of predatory pricing and should stimulate the Federal Trade Commission and possibly the U.S. Justice Department to review appropriate federal regulatory statutes which might result in greater protection for the small retailer. 5. Further, most states have enacted "baby" Sherman Acts which track the federal statute, and the below -costs sales provisions, themselves are often contained in the more general pricing statutes that are similar to the federal Robinson-Patman price discrimination law -- either of which may be used advantageously to challenge truly predatory pricing behavior. 6. Chapter V also mentioned that a group of retailers took a different tack on pricing differentials by suing both manufacturers and wholesalers. The author's study shows that more and more of the chain's ability to lower prices is due to the massive discounts available to them for large volume purchases. Not only are these unit prices not available to small retailers, but wholesalers, who used to sell the small retailer are disappearing as the chains buy "direct" from the manufacturer. 7. In August 1994, the House Small Business Committee met and listened to witnesses who were concerned about the survival of the small retailer in the face of the growing power of the mega -retail discount chains. Although the 1995 and 1996 Small Business Committees of both the House and Senate have continued this type of public hearing, the outcomes or results are minimal with practically no legislation passed to protect the small business. 8. In order to open the question in public forums and elsewhere as to which regulatory statutes available at the federal level might pertain to the behavior and growing power of chain stores, materials obtained from the U.S. Congressional Budget Office were included in this chapter. Their interpretative comments and analyses of the Robinson- Patman Act were particularly valuable. CBO describes "how in the 20's and 30's, large chain retail stores rose to prominence." The market power of some of these chains enabled them to negotiate lower prices from manufacturers than the traditional small independent retailer could obtain. For that and other reasons, the small retailers found it difficult to compete, leading to pressuring Congress to do something to help them. The pressure and dissatisfaction with the lack of success of the Clayton Act to prevent price discrimination led to the passage in 1936 of the Robinson Patman Act.30 .... .. .. . ... ............. . .... .... . .......... ;PGo To-ITo Table -D of Pa of Contents! ......... ........ I -CHAPTER VI PREDATORY PRICING PART I The Arkansas Wal-Mart Cases Chapter V briefly described the initial victory of independent pharmacists in Arkansas over Wal-Mart. l The case was brought under the Arkansas Unfair Trade Practices Act, and resulted in a national discussion on whether or not national discount retail chains might be prosecuted for predatory pricing under the existent laws of 24 states having these laws. The thought was expressed that if the federal government was reluctant to explore relevant clauses under Sherman, Clayton or Robinson-Patman -- that plaintiffs representing small retailers might follow the Arkansas experiment among many national retail chains in many other states, or that the federal agencies might begin to explore their own avenues to study possible predatory pricing activities on the part of chain stores. The decision in favor of the independent pharmacies was overturned in Wal -Mart's favor in the Arkansas Supreme Court. However, of interest to scholars was the fact that in the Chancery proceedings, Wal-Mart did admit selling below cost, but denied the predatory charge. David Glass, Wal -Mart's CEO, said that the Bentonville, Arkansas retailer regularly sells a variety of items below cost, including such standards as Cresto toothpaste and ListerineV mouthwash. But he maintained the selling below cost doesn't violate the law or destroy competition. 2 The Arkansas statutes, which were being tested for the first time since passage in 1937, generally forbade businesses from selling or advertising "any article or product ... at less than the cost to the vendor ... for the purpose of injuring competitors and destroying competition." 3 Wal -Mart's attorneys argued in a pre-trial brief that what the law described as a "product" shouldn't be considered to apply to individual items, but rather to Wal -Mart's "market - basket" or full line of products. If the entire line isn't priced below cost, they contended it wasn't a violation of the statute. 4 It is obvious that to determine a state violation on "predatory pricing" that the court must determine what principle it would accept as "non -predatory" in pricing below cost. This is indeed a gray area and possibly was the issue resulting in Wal -Mart's reversal victory in the Arkansas State Supreme Court. Furthermore, federal surveillance of predatory pricing under the Robinson-Patman Act is based upon a different type of "below cost" formulae and analyses, This will be discussed later. The second element to be considered under state laws is whether there was an "intent" to injure competition, and whether in fact the result of such malice was to injure the competition. The third element was "recoupment." Were the prices ultimately raised, once the competition was put out of business? At issue in the case was whether Wal-Mart, which had built the nation's largest retail chain with its everyday -low -price strategy, went beyond the legally recognized retail practice of promotional pricing and intended to destroy its competition. Although Chancery Court, Judge Reynolds said there was not any direct evidence tying Wal -Mart's pricing policies to such a plot, he did say circumstantial evidence existed. "The court finds that purpose to injure competitors and destroy competition cannot be inferred from below -cost advertising and sales alone. There must be other proof," 5 the judge wrote, citing Wal -Mart's policy of allowing store managers to unilaterally cut prices on goods below that of local competitors as part of the evidence. Attorneys for Wal-Mart in the Chancery Court also argued that "federal antitrust law should pre-empt the Arkansas law ... and seek not to protect businesses from the workings of the market, but to protect the retailer from the failure of the market." 6 This was not the first time that Wal-Mart had been in litigation involving pricing. In 1986, it was found to have violated an Oklahoma state law that required retailers to sell products at least 6.75% above cost, unless the store is having a sale or matching a competitors price. Wal-Mart settled out of court during an appeal and agreed to raise prices at all of its stores in the state. 7 Wal-Mart became the number one major retail discount chain by obviously offering value and the lower prices possible. Pricing is the essential advantage that the mega -stores have over the small retailers who have few options to buy direct and who are attempting to buy merchandise from a reduced number of regional wholesalers. Even the major wholesalers have begun to consolidate their operations as was the case in June 1994, when the number two and number three United States food wholesalers, Fleming Company, Inc. and Scrivners, Inc., began discussions to merge. The contemplated merger would have resulted in combined total sales of $19 billion, making Fleming the nation's largest food distributor. Fleming's rival is Super -value with $16 billion in sales. The trend towards consolidation continued to threaten the ability of the small retailer to survive. In October 1992, Supervalue had acquired Wetterau, Inc. of St. Louis for $1.1 billion. While the continued consolidation of wholesaler and distribution into fewer hands raised possible antitrust concerns; nevertheless the argument employed by the mega -retailers is that distributors would cut their own duplicative operations and hopefully provide cost savings to consumers. 8 But Ortega in a Wall Street Journal article pointed out that Wal-Mart intends to deal with manufacturers directly: "Wal -Mart's sheer size --more that 2,300 stores and warehouse clubs, (August'93) gives it the leverage to demand goods at the lowest possible cost from suppliers. And the company, facing increased competition from other large retailers as it moves into urban areas, has moved aggressively to trim as much cost as possible. In 1991, for example, the retailer told major suppliers it would deal with them directly, cutting out independent sales representatives. A manufacturers group then filed an unfair trade practices complaint with the Federal Trade Commission." 9 Pricing is the name of the game. It has been the issue in previous litigation against major corporations in state cases and will obviously remain a key issue in possible review by federal agencies, such as the Justice Department and the Federal Trade Commission, In May 1994, Wal-Mart had to change its slogan about claiming the lowest prices after a National Advertising Review Board protested against Wal -Mart's format in claiming low prices. An article, which follows, in USA Today from May 1994, reported on Wal -Mart's reaction to competitors' criticism of Wal- Mart's pricing advertising. "Wal-Mart Modifies Its Slogan" "Wal-Mart will change its slogan, which has been criticized as misleading by competitors and an advertising watchdog group." "The Old: 'Always the low price. Always.' The New'Always low prices. Always.' The change will show up in ads next month, says .lane Arend, Wal -Mart's Director of Public Relations." "Wal-Mart made the change after a National Advertising Review Board panel ruled the old slogan 'is communicating to many that its low prices are always the lowest' rather than just competitive." "'We are disappointed that the NARB has interpreted the slogan so technically,' Arend says. 'But they have made their recommendation and we will make the appropriate changes'." "A complaint was filed by a group representing several local Better Business Bureaus and Wal-Mart rivals, including Target Stores and Vision World Inc." "The NARB -- 70 members from advertising and public interest groups -- works with the Better Business Bureau on truth in advertising issues. It has no legal authority to change Wal -Mart's slogan." "This was not the first attack on Wal -Mart's marketing strategy. Early this year, the State of Michigan criticized Wal -Mart's practice of displaying its own prices vs. competitors' prices. The signs sometimes compared items of different sizes and were not fair comparisons, state officials charged." "The old slogan has been in use since 1988." "Retail consultant Alan Millstein says it may have worked for Wal-Mart in its early years, when it frequented smaller markets and easily beat competitor's prices. 'Now they are well into the most competitive metro markets. It's much more difficult for them to make that claim and have it be true,' he says." 10 In a related matter, but in a governmental involvement in Michigan, Wal-Mart agreed to modify its pricing rules after negotiations with Michigan's Attorney General. 11 "Wal-Mart Stores agreed not to use unfair or deceptive practices in comparative price advertising at it Wal-Mart and Sam's Club stores in Michigan." "The agreement with the Michigan state attorney general's office came as response to a complaint filed by Kmart Corp., Troy, Mich.; Target Stores, Minneapolis, and Meijer Inc., Grand Rapids, Mich." "The three retailers claimed Wal -Mart's comparisons were misleading. In signing the agreement, Wal-Mart did not admit to any violations." "Wal-Mart agreed to identify the date on which comparisons were made; not to lower an item's price solely to achieve a favorable price comparison; not to use market -basket comparisons unless the Wal-Mart employees responsible for pricing do not know which items have been selected for the survey; and not to compare multiple -item package prices with individual item prices when the multiple package is not available to others in the market." The growing power of the mega -retail discount chains is in part a matter of mass purchasing at discounts from manufacturers and major wholesalers, which provide merchandise at very low costs to consumers; often below costs as "loss leaders." Also, the reduced overhead per store as the corporations grow in accelerated fashion and introduce formidable powers to confront City Councils, zoning boards, etc. to accomplish their real estate objectives is contributing to their power. Scholars such as Kenneth Stone, Professor of Economics at Iowa State University, a Wal- Mart analytical observer and Thomas Muller, a Fairfax, Virginia economist and the author of a report on the impact that three proposed Wal-Mart stores would have on Northeastern Vermont communities, both previously mentioned, might have a somewhat similar point of view on the major impact resulting from the growth of the Kmarts and Wal -Marts on small retailers, "Main Street" and community stability. The writer will point out Muffler's testimony before the House Small Business Committee in 1994 at a later point in this chapter. Seven years ago, Kenneth Stone, began to study the Wal-Mart phenomenon in his state after he noted the commercial life of many towns being hollowed out by the huge intruder. Few scholars had paid any attention. Now Stone is in demand all over the United States lecturing on the nature of Wal-Mart and how to deal with it. Stone estimates that Wal -Mart's stores -- a combination of general merchandise, groceries and wholesale clubs -- could, if growth in the 1990's equals that of the 1980's, gross $200 billion annually by the end of the decade. "It could be the biggest corporation in the United States," says Stone, and that includes Exxon and General Motors. 12 Wal-Mart is already the largest retailer, smothering Sears and Kmart. "The impact of a corporation of that size and that involvement in the life of this country is immense." 13 Stone advises small-town merchants on how to deal with the arrival of a Wal-Mart in their region. "I don't fight Wal-Mart ... if you believe in the free-market system as I do, then you cannot keep them out of your community. Much of what I tell you will be to emulate them." 14 Stone talks about such ideas as finding special merchandising niches not occupied by Wal-Mart, about improving service and extending store hours. In an earlier chapter the author described the "Ten Commandments" where the American Management Association prescribed how the small retailer could survive the Wal-Mart competition. This author points out the inability of the small retailer to apply the principles of "Management 101 " without professional staff, capital, financial and other resources, to be able to contribute to the revival of downtown "Main Street." Little can be done in this respect without the strong support of the local, state and federal governments. These programs will be discussed in Chapter VIII. Time continued its review of the hopelessness of Stone's prescriptions by the following statement in Sedey's article: "Yet for all the delicacy of Stone's presentations and the litany of stores and communities that have survived Wal-Mart, there is a brooding inevitability about the data in Stone's studies. Small communities of static population sooner or later lose business from their downtowns to Wal-Mart, which sinks its roots at their edges. Surrounding communities with no Wal-Mart are devastated. Independent stores in growing areas generally rise with the tide even with Wal-Mart scooping up a big share." "Some of this was surely inevitable in our boiling capitalism: Wal-Mart, perhaps, has done no more than finish off bad shopkeepers and lazy combines. Its bright, clinic -clean stores are the boondocks miracle that Walton wrought." "But few if any American enterprises, no matter how huge and momentarily successful, have enjoyed uninterrupted bliss. The betting in dozens of tiny stores around the country is that Wal-Mart will reach its own plateau. Despite the superb management team Walton left in place, his death will inevitably mean that the soul of his corporation will change. Conununity irritation at secretive and stand- offish ways of Wal-Mart managers, the "us" (Wal-Mart) against "them" (downtown merchants) attitude, and the modest involvement in public affairs and charities by store officers are building resentment.". 15 Wal -Mast's Successful Appeals from the Faulkner County Chancery Court. Opinion Delivered by Judge Robert _L. Brown of the Arkansas Supreme Court on January 9,1995 Judge David L. Reynolds' earlier decision in the case of American Drugs Inc. v. Wal- Mart Stares, filed on October 12, 199316 was reversed and dismissed by the Arkansas Supreme Court on January 9, 1995. 17 This appeal is classic in that hundreds of lawyers in various states in which mega -retail discount chains are located are reviewing the majority and minority opinions to determine whether additional state litigation on various predatory pricing and selling below cost cases are worth exploring; and whether any of the data provided in both the majority and dissenting opinions might throw light on whether similar predatory pricing cases may be in the purview and plans by either the U.S. Department of Justice and the Federal Trade Commission. "Appellant Wal-Mart Stores, Inc. appealed from an order of the Chancery enjoining it from engaging in below -cost sales and assessing damages against it for violation of the Arkansas Unfair Practices Act. Wal-Mart argued on appeal: (1) that the Chancery Court erred as a matter of law in finding that it sold products below cost for the purpose of injuring competitors and destroying competition; (2) that the Chancery Court erred in considering individual articles to determine cost and profit rather than the entire product lines, or "market basket"; and (3) that the Chancery Court's interpretation of the Arkansas Unfair Trade Practices Act violated the Arkansas Constitution and the United States Constitution." 18 The Supreme Court of Arkansas agreed with Wal-Mart, on their first point and hence reversed the Chancery Court order and dismissed the case. 19 The Chancery Court had earlier ascertained certain findings among others in coming to its decision against Wal-Mart. 20 These findings should be kept in mind when reviewing the successful appeal later in this chapter. "That Wal-Mart determined the 'every day price' for its products at its headquarters in Bentonville, that store managers could not raise the price for a product above that set price, but that store managers could lower prices after monitoring prices charged by competitors in the market area without regard to the cost to Wal-Mart of individual items;" "That the lowered price was frequently below Wal -Mart's cost of acquiring some of these products in highly competitive markets, and that this had occurred at the Conway Wal-Mart;" "That the store had advertised individual items for sale below Wal -Mart's acquisition cost;" "That Wal -Mart's stated policy in this regard was to `meet or beatretail prices of competitors, to maintain 'low -price' leadership in the local marketplace, and to 'attract a disproportionate number of customers into a store to increase traffic';" "That by generating traffic, Wal-Mart could engender sales of other items which would offset losses from sales of below cost items;" and "That Conway Wal -Mart's overall product line for pharmaceuticals and health and beauty aids was sold above cost, and its pharmacy was profitable." The Chancery Court then stated: "There is no direct evidence that the purpose of Wal -Mart's pricing policy or Conway Wal -Mart's implementation of the policy is to injure competitors or to destroy competition. However, such purposes may be inferred from the stated policy, the effects of the stated policy and other circumstantial evidence." The court found that the appellee drug stores had lost sales to Conway Wal-Mart due to the below -cost policy, and that the growth in sales and profits for those drug stores had substantially decreased. This author discussed previously in Chapter V, the major findings of the Chancery Court which ruled in the plaintiffs favor against Wal-Mart. While it may be somewhat repetitious to present these findings again, it is necessary for the reader to understand that the majority opinion in the Arkansas Supreme Court ruling which favored Wal-Mart and reversed the Chancery Court order. It is germane to an overall understanding of the pros and cons in the arguments before the Supreme Court when reviewing Wal -Mart's appeal. The crux of the Chancery Court's order was as follows: The Court found that the purpose to injure competitors and destroy competition cannot be inferred from below cost advertising and sales alone. There must be other proof of intent or purpose. A person's purpose or intent, being a state of mind, ordinarily cannot be proven by direct evidence, but may be inferred from other circumstances. The Court found from the following circumstances the Conway Wal-Mart advertised and sold pharmaceutical and health and beauty products below cost for the purpose of injuring competitors and destroying competition: 1. The number and frequency of below cost sales. 2. The extent of below costs sales. 3. Wal -Mart's stated pricing policy - "meet or beat the competition without regard to cost." 4. Wal -Mart's stated purpose of below cost sales - to attract a disproportionate number of customers to Wal-Mart. 5. The in-store price comparison of products sold by competitors, including Plaintiffs. 6. The disparity in prices between Faulkner County prices of the relevant product - lines and other markets with more and less competition. The Chancery Court then granted the injunction against below -cost sales. The chancellor also assessed treble damages as a penalty. Maiority Opinion of the Court Hearing the Wal-Mart Successful Anneal Several items stand out in the Supreme Court's opinion: "It is clear that mere proof of below -cost sales is not sufficient to prove a violation of the Act. The Chancery Court agreed with this but found an intent to destroy competition based on the extent, frequency, and number of those sales. Despite this finding, the Chancery Court failed to present details of Wal -Mart's practice regarding specific articles which led to the (alleged) violation. The individual items sold below cost, the frequency of those sales, the duration of those sales, and the extent of such sales were not revealed in the Chancery Court's opinion. And that is a critical point in this case." "We discern no proof in the record of this case that Wal-Mart specifically intended to destroy competition with regard to any one article like Crest Toothpaste or Bayer Aspirin or Dilantin by selling below cost for a sustained period of time. What is evidenced is that Wal-Mart regularly would sell varying items below cost as loss leaders to entice people into its store and increase traffic. The loss -leader items would change on a regular basis. That strategy of selling below the competitors' price and even below Wal -Mart's own cost, which Wal- Mart admits to, is markedly different from a sustained effort to destroy competition in one article by selling below cost over a prolonged period of time. Our statute does not make loss leaders illegal, and for that reason the Chancery Court erred in inferring a purpose to destroy competition from a loss -leader strategy." "We observe further that if the Chancery Court's statutory interpretation was correct, any business using the loss -leader approach to attract customers on a regular basis would be in violation of the Act. That kind of expansive interpretation nuns directly counter to our oft -stated policy of strict construction of penal statutes in favor of those upon whom the burden will fall. Our statute plainly does not contemplate a prima facie case of predation based on loss -leader sales, and we are not willing to invalidate, and indeed render illegal, the technique of using loss -leader products or services without a clear directive from the General Assembly that is now the public policy of the State of Arkansas." "Admittedly, there is a point where competitive pricing ends and predatory pricing begins. The Eighth Circuit Court of Appeals has discussed the difficulty in distinguishing the two in the context of the Sherman Act:" "The difficulty, of course, is distinguishing highly competitive pricing from predatory pricing. A firm that cuts its prices or substantially reduces its profit margin is not necessarily engaging in predatory pricing. It may simply be responding to new competition, or to a downturn in market demand. Indeed, there is a real danger in mislabeling such practices as predatory, because consumers generally benefit from the low prices resulting from aggressive price competition." "There is also a distinct danger in inferring, first, specific predatory intent and, secondly, purposeful destruction of competition from sales below cost. That involves a double inference,, as the Eighth Circuit Court of Appeals has recognized. There is no question that double inferences stretch a circumstantial case to. its limits. But the Idaho Supreme Court has also recognized additional problems with too heavy a reliance on inferences to determine specific intent in an antitrust case." "Nevertheless, a finding that a defendant has engaged in a particular predatory or illegal act, such as selling below cost, is not the equivalent of finding specific intent, but is merely a basis from which such intent may be inferred. Isolated or occasional instances of selling below cost, while predatory or illegal in nature, do not necessarily indicate a specific intent to monopolize. To hold otherwise would render the requirement of specific intent a nullity." "In the case before us, the loss -leader strategy employed by Conway Wal-Mart is readily justifiable as a tool to foster competition and to gain a competitive edge as opposed to simply being viewed as a stratagem to eliminate rivals altogether." "If the policy of this State is to render illegal the, loss -leader tactic or to recognize a prima facie case of purposeful intent to destroy competition by below -cost sales in disparate articles that are changed on a regular basis, that policy should be clearly announced by the General Assembly in appropriate legislation. We hold that the Arkansas Unfair Practices Act, and specifically section 4-75-209 (a) (1), does not provide a sufficient statutory basis for the Chancery Court's inference of a specific intent to destroy competition based on the facts before us. We further hold that the Chancery Court erred as a matter of law in concluding that purposeful intent to destroy could be inferred under these facts. Because we decide this matter on the first point, (see case appeal) there is no need to address the other points raised by this appeal." "Reversed and dismissed." Dissenting Opinion Provided by Judea Walter Niblick and Joined in by Colle ial Dissenters Jud es A. Watson Bell and Barbara P. Bonds The appellant appealed the lower courts decision by raising the following questions. The dissenting opinion answers the appellant's issues and questions: 1. The lower court's standard of review. </DD "We (the dissenters) review Chancery cases de Novo and will not reverse a finding of fact, unless it is clearly erroneous. We consider the evidence in the light most favorable to the appellee (the pharmacists). The burden is upon the appellant to show the findings are erroneous." 2. Did the louver court's fuling support an inference of intent to destroy competition? "For its first point of error, Appellant argues that the Chancellor used an improper legal standard to find the inference of intent to destroy competition. The analysis advanced by Appellant required Appellees to establish two factors (a) conduct inconsistent with a lawful purpose; and (b) knowing conduct that creates a dangerous probability of achieving a monopoly. Appellant stated the Appellees did not establish these two factors, and any inference of unlawful purpose by the Trial Court is, therefore, improper and legally erroneous." "Appellees responded to this argument by stating that the Chancellor not only used the proper standard but evaluated the evidence and reached the only permissible conclusion. The evidence showed that up to thirty percent (30%) of Wal -Mart's pharmaceutical sales were below cost; that Wal-Mart posted negative profit margins on their most competitive items in over one-half of the period under examination; and that many of the prices were below invoice or replacement cost without consideration of the additional factors mandated by Arkansas Code Ann." 3. Did the Chancery Court fail to emnlo —the prroper standard? "Appellant's contention is unpersuasive on two points. First Appellant fails to identify the legal standard used and how the legal standard was improperly applied. Appellant also failed to articulate the alleged "proper legal standard" for this Court to use when interpreting the Arkansas Act. Second, Appellant provides this Court with a potential framework for analysis but provides no authority or source for this framework. if Appellant does not like the statute as it is written, its remedy is in the legislature not the courts. However this question ... is not a matter to be addressed by the court but is within the province of the legislature ... This is a matter which must be left to the sound discretion of the General Assembly." 4. Was there intent to destroy competition? "Appellant's second argument concerns the inference of intent to destroy competition and that the enumerated factors identified by the Chancellor could not possibly support an unlawful inference. The burden is upon the appellant to show that the findings are erroneous. Despite their analysis of each factor, Appellants fail to articulate a legal basis to reverse the findings and conclusions of the Chancellor." 5. Was the Chancery Court's ince retation of the Arkansas Act inconsistent with legislative intent? "Appellant argues that the interpretation of the Arkansas Act given by the Chancellor is inconsistent with legislative intent. They cite the Unfair Cigarette Sales Act, Arkansas Code Ann., 4-75-708 (b) (Michie 1991), in which the legislature inserted a provision that below cost sales were 'prima facie evidence of intent to injure competitors and destroy or substantially lessen competition.' Because the legislature failed to insert a comparable provision in the Arkansas Act, Appellant argues that non-inclusion of a similar phrase 'establishes that the General Assembly did not intend for unlawful intent to be inferred from below - cost sales'." "The proper source of legislative intent is the language of the statute. The legislative intent of the Arkansas Act is expressed in Arkansas Code Ann. @ 4- 75-202:" "The General Assembly declares that the purpose of this subchapter is to safeguard the public against the creation or perpetuation of monopolies and to foster and encourage competition by prohibiting unfair and discriminatory practices by which fair and honest competition is destroyed or prevented." "The basic rule of statutory construction, to which all other interpretations must yield, is to give effect to the intent of the General Assembly. (Quoting Roy v. Farmers & Merchants Insurance Compaq, 307 Ark. 213, 819 S.W. 2d 2 (1991)). This court should give effect to the expressed General Assembly intent, and in doing so should reject the argument advanced by the Appellant. This Court adopted this language in Beam v. Monsanto Company. Inc., 259 Ark. 253, 532 S.W. 2d 175 (1976), and should continue to construe the Arkansas Act consistent with the intent of the legislature as expressed in the statute. 6. WLl t price benchmark should be used to determine if the Arkansas Act has been violated? Should the valuation of cost be "Market -basket" or "since, le product?" This section of the dissenting opinion is very important in reviewing possible review of pricing and the Federal Trade Commission, and hence the author provides details of the dissenting opinion. "Appellant's next point of error requires this Court to examine the language of the statute and resolve the question of what price benchmark should be used to determine if the Arkansas Act has been violated. Appellant urges this Court to adopt a'market basket' valuation approach for the cost of goods. Under the 'market basket' approach, a court would be required to consider other factors in addition to the invoice cost of an item allegedly for sale below cost. Appellant's economist, Dr. Leonard White, testified that the cost of an item under the market basket approach would include the product, the atmosphere of the store, the parking lot, air conditioning, and a whole group of services that surround the purchase of the alleged below cost item." "Appellees (American Drugs) urge this Court to adopt a'single product' cost comparison to determine if sales below cost have occurred. Under the individual item approach, the invoice cost of a product becomes the benchmark to determine if sales below cost have occurred." "The Arkansas Act has not been interpreted on this point. The Chancellor found Wal-Mart guilty of Violating @ 4-76-209 (a) (1), which states`." "(a) (1) It shall be unlawful for any person, partnership, firm, corporation, joint- stock company, or other association engaged in business within this state to sell, offer for sale, or advertise for sale any article or product,,or service or output of a service trade, at less than the cost thereof to the vendor, or to give, offer to give, or advertise the intent to give away any article or product, or Service or output of a service trade, for the purpose of injuring competitors and destroying competition." "The first rule in considering the meaning of a statute is to construe it just as it reads, giving the words their ordinary and usually accepted meaning in common language." "When a statute is clear, it is given its plain meaning and we do not search for legislative intent. That intent must be gathered from the plain meaning of the language used." "A literal reading of Arkansas Code Ann. @ 4-75-209 supports the Trial Court's use of a 'single product' cost comparison to determine if Appellant has engaged in below cost sales in violation of the Arkansas Act. The language of @ 4-75-209 refers to any article or product' and does not include consideration of the atmosphere of the store, the parking lot, air conditioning, and a whole group of services that surround the purchase of an item. We should reject Appellant's market basket approach for establishing the price benchmarks." 7. Does the Arkansas Act violate the Arkansas Constitution? "Appellant argues that the Chancery Trial. Court's construction of the Arkansas Act bears no rational relation to legislative purpose and violates the Arkansas Constitution, Article 2, Section 2, which states:" "All men are created equally free and independent, and have certain inherent and inalienable rights, amongst which are those of enjoying and defending life and liberty; of acquiring, possessing and protecting property and reputation, and of pursuing their own happiness. To secure these rights governments are instituted among men, deriving their just powers from the consent of the governed." "Appellant cites Union Carbide d& Carbon CoMorationK. White River Distributors, Inc., 224 Ark. 558, 275 S.W. 2d 455 (1955) in which this Court ruled that the Arkansas Fair Trade Act was unconstitutional, as it established minimum prices. This Court said that 'the right to sell is a valuable property [that] cannot be denied.' Td. At 561. Appellant also cites Noble v. Davis, 204 Ark. 156, 161 S.W. 2d 189 (1942), in which a statute establishing minimum prices, commissions and hours of operations for barbers failed a constitutional challenge. Appellant states that this Court found that 'statute had no rational relation to the public safety, health or welfare.' Id. At 152-63. The same result should attain here. Appellant states 'that these cases establish that the Arkansas Constitution recognizes that each person has a right to sell his property and services at the price at which he chooses. That right should not be abridged except upon a compelling showing of public harm'." "We review challenges to the constitutionality of statutes under the principle that statutes are presumed to be constitutional." "The burden of proving a statute unconstitutional is upon the party challenging it." "On appeal, if it is possible to construe a statute as to meet the test of constitutionality, we will do so. In searching for any rational basis, we ask whether the created classification has a conceivable reasonable relationship to the governmental action." "Our task is merely to consider if any rational basis exists which demonstrates the possibility of a deliberate nexus with state objectives so that the legislation is not the product of a lawful purpose." "The Arkansas Act addresses the creation of and perpetuation of monopolies. Appellees established at trial that Appellant sold goods below invoice cost and presented circumstantial evidence from which the Chancellor made a permissible inference of intent to destroy competition and harm competitors. Once a plaintiff has established that one of the enumerated conditions existed in a given market, this Court and any court under its jurisdiction must follow the dictates of the statute. Appellant merely alleges that the Arkansas Act as applied in this case is unconstitutional. It would require intellectual somersaults to declare that the Arkansas Act does not have any rational basis for its enactment by the Legislature. The task of the court'is merely to consider if any rational basis exists which demonstrates the possibility of a deliberate nexus with state objectives so that the legislation is not the product of utterly arbitrary and capricious government and void of any hint of deliberate and lawful purposes.' The Court should find that the Appellant failed to establish that there was no rational basis for the Arkansas Act as applied in this case." S. Is the Arkansas Act preempted in federal law? "Appellant argues the Arkansas Act is preempted by the Robinson-Patman Amendments to the Clayton Act, which specifically addresses the weapon of predatory pricing by monopolies. The doctrine of federal preemption is based upon the supremacy clause in Article VI, Clause 2, of the United States Constitution. State laws that 'interfere with, or are contrary to the laws of Congress, made in pursuance of the constitution' are invalid." (Gibbonsy. Ogden, 22 U.S.) (9 Wheat).. "The preemption test of Gibbons v. Ogden was expanded in Capital Cities Cable Inc. v. Crisp 467 U.S. 691, 104 S.Ct. 2694, where the Court based preemption on four factors: whether Congress expressed a clear intent to preempt state law; whether Congress occupies the field so as to leave no room for the states to supplement; whether compliance with both the state and federal laws is impossible; and whether the state law stands as an obstacle to Congress' objective or purpose." "The fact that the Arkansas statute is broader in scope than the Robinson-Patman Act does not invalidate the state statute, for in applying the rational basis test, the judiciary will not act as a superlegislature to question the means employed to accomplish the state objective." "We find Appellant has not established that the Arkansas Act is contrary to or in opposition to any federal statute. Further, Appellant has not demonstrated that 'Congress expressed a clear intent to preempt state law; Congress occupies the field so as to leave no room for the states to supplement; [that] compliance with both the state and federal laws is impossible; and [that] the state law stands as an obstacle to Congress' objective or purpose'." Concluding Comments in the Dissent "We would hold that the Appellant has failed to prove that the Chancellor used an improper legal standard with respect to the inference of intent to injure competitors and to destroy or substantially lessen competition. We also find that the Chancellor could have found an intent to injure competitors from the evidence in the record and particularly from the testimony of David Glass, President of Wal-Mart Stores, Inc., who used language such as 'aggressive,' 'do whatever it takes,' 'kill the competition's momentum,' and 'war zones.' Appellant failed to establish that the Arkansas Act violates rights guaranteed by the Arkansas Constitution, Article 2, Section 2. Appellant also failed to establish that the Arkansas Act was preempted by federal law." "For the foregoing reasons, I would affirm the trial judge's decision. Opinion written by Walter Niblock, Special Justice and Special Justices A. Watson Bell and Barbara P. Bonds join." Author's Comment The Supreme Court, despite the strongly worded dissenting opinion reversed the Chancery Court's victory for American Drugs Inc., dismissed the original plaintiffs case and awarded in favor of Wal-Mart, the Appellant. The author has provided great detail in the dissenting opinion because of references to the predatory pricing features of the Robinson-Patman Act; particularly with respect to the several different approaches to calculating below cost sales on (a) the "market -basket" approach or (b) the "single product" approach. The majority opinion in the Supreme Court reversal also acknowledged that: "Admittedly, there is a point where competitive pricing ends and predatory pricing begins." Further, Justice Robert L. Brown's majority decision in favor of Wal-Mart also pointed out that the Eighth U.S. Circuit Court of Appeals had discussed the difficulty in distinguishing the two in the context of the Sherman Act; i.e. "Competitive pricing" vs. "Predatory pricing." Moreover, while a finding that a defendant has engaged in selling below cost is not the equivalent of finding specific predatory intent; nevertheless, it could be a basis from which such intent might be inferred. Go To:°Top of Pale Table of Contents€� CHAPTER 'VII PREDATORY PRICING - PART H THE ARKANSAS WAL-MART APPEAL, AS WELL AS A COMPARISON OF STATE v. FEDERAL ALTERNATIVES The federal courts have interpreted predatory pricing statutes broadly on the grounds that there is insufficient evidence below -cost pricing hurts competition. This non -enforcement has given business more freedom to compete on prices. In response, plaintiffs in predatory pricing lawsuits are increasingly turning to state courts in the hope of drawing upon a different philosophical tradition. In the face of strong federal antitrust laws (see Chapter V), nevertheless, there has been substantial interpretation of antitrust law as discouraging predatory pricing lawsuits. However, recently, both the Justice Department and the Federal Trade Commission have become more active in their reviews of the increasing powers of mega -retail discount chains as well as vertical restraint cases involving manufacturers and retailers. In some quarters, there are anti-trust attorneys who do believe that the U.S. Justice Department has not pressed forcefully on vertical restraint cases. However, it is a fact that both the Justice Department and the FTC have brought resale price maintenance cases against manufacturers in the last five years, and both have had active investigations of other vertical restraints such as exclusive dealing (as in the Toys "R" Us case discussed below). This changed with the recent accusation by the FTC accusing Toys "R" Us of antitrust violation by using its power to keep competitors' prices high and reserving the most popular toys for its own stores. The FTC has accused the chain of- "bullying f "bullying major toy makers onto deals that kept the toys from being sold at low- priced warehouse stores, such as Sam's and Price Clubs, thereby curbing competition." "Toys R Us has used its clout to force Mattel, Hasbro and other toy makers into arrangements that cut out competition and forced consumers to pay more than they otherwise would have for toys,' said William J. Baer, director of the FTC's Bureau of Competition." 1 The plaintiff anti-trust bar was indeed pleased when it appeared that Assistant Attorney General Anne Bingaman would provide new confidence in the antitrust activities in the Justice Department. She and her department seemed to be on the verge of abandoning the Reagan guidelines on several aspects of antitrust activities. Ms. Bingaman was regarded as a tough -talking, pragmatic chief of the antitrust division of the Justice Department. 2 However, Ms. Bingaman suddenly resigned effective November 1996, and for the present it doesn't appear that enforcement policies with regards to the Justice Department are not likely to change in the near future. Had Ms. Bingaman remained she would have been strong company for Robert Pitofsky, a leading antitrust scholar and author of several papers in the early 1990's, which called for the re -invigoration of antitrust law. Pitofsky has been confirmed by the U.S. Senate as Chairman of the Federal Trade Commission. 3 Antitrust lawyers say that Mr. Pitofsky, a former Federal Trade Commission Commissioner and the agency's former Director of the Bureau of Consumer Protection, should be regarded as a powerful chairman. In his writings, Mr. Pitofsky, a former Law Dean at Georgetown University Law Center, has called Federal Trade Commission enforcement of the Robinson-Patman Act, which prohibits price discrimination, as "exceedingly modest, during the Republican years." Mr. Pitofsky was formerly of Counsel to the Washington, DC firm, Arnold and Porter. 4 It is this author's belief that predatory pricing may soon be reviewed in the near future by such an aggressive appointee as Mr. Pitofsky. Recently, Charles P. Kocoras, U.S. District Judge for the Northern District of Illinois has had before him a class action involving manufacturers of brand name prescription drugs. 5 This case, which was referred to in Chapter V, has become very complicated due to the inability to have all plaintiffs agree to be part of the certified class, while others are involved in pending actions as individual plaintiffs. Specifically, the individual plaintiffs argued that the class notice must disclose the following: A. "That the class actions allege only violations of the Sherman Antitrust Act." B. "That there are also pending individual actions alleging price discrimination in violation of the Robinson-Patman Act, as well as violation of the Sherman Act," and C. "That the Robinson-Patman Act claim is not being pursued in the class action and would have to be pursued, if at all, in an individual action." Judge Kocoras, dismissed the individual plaintiffs motions and granted the class plaintiffs proposed motion, "as the best notice practicable under the circumstances." 6 (F.R. Civ. p 23(c)(2)) It may be observed that small drug stores see the enemy as the drug manufacturer, rather than the big retail chains. They may have a compelling case against the manufacturers. In an antitrust case the manufacturers may have to prove not only how they can justify selling at lower prices to higher volume customers, but, even more difficult, is how they can justify selling at lower prices to Sower volume customers -- HMO's, hospitals, etc. Legal victories may come too late or even after -the -fact for many sole proprietor drug stores. Inasmuch as when one observes the inability of plaintiffs to use federal agencies rather than state agencies in predatory pricing disputes, it is interesting to note that in the late 1974's, several faculty members at the Harvard Law School broke new ground with their "average variable costs" (AVC) rule for predatory pricing lawsuits. Their AVC rule would create for the firm that the legal price was its marginal cost, rather than total cost. Critics deemed the AVC rule as a kind of "monopolist's heaven, where wolves are a metaphor for sheep." 7 Predstory_Pricing Predatory pricing is the practice of selling a good or service at a loss in order to drive competitors out of the market, and thereby increase the market power of the predator firm, allowing the firm subsequently to raise prices above the levels that prevailed before the predatory pricing began. Firms engage in predatory pricing in the hope of using the resulting increased market power to ultimately raise prices and thereby increase their profits. On the infrequent occasions when predatory pricing does occur and succeed, it has a pernicious effect on the economy because it leads to the formation of monopolies. 8 While it might appear that it is difficult to create a monopoly in retailing; nevertheless, the recurring sights of destroyed "Main Streets"; the decline of formerly prosperous malls, now loaded with store vacancies; and the elimination of the small retailer in the city neighborhood all attest to the formidable power of the mega -retail discount chains. Over time, the increasing power of the chains and the decline in the number of viable small retailers results in social as well as economic inequities. Price discrimination allows firms to sell products at high prices to customers who are willing to pay them without simultaneously losing sales to customers unwilling to pay the higher prices for them. These discriminating behaviors can take place between manufacturer and mega -discount retailer; between manufacturer and wholesaler; or between manufacturer and small retailer. In retailing, it has often become impossible for a small retailer to obtain a source of supply, let alone at a price that will permit competition with a mega -retail discount chain, Intentional price discrimination is essential to support a charge of predatory pricing. Predatory pricing with malice to eliminate competitors and thus enjoy a subsequent recoupment is indeed difficult to prove. Many people think that selling below cost is somewhat nefarious. Since firms are in business to make a profit, the thinking goes, they could not possibly sell below cost intentionally unless they were engaging in predatory pricing. In fact, selling below cost as a "loss leader" is a form of advertising and not necessarily indicative of predatory conduct. All in all, this is a difficult subject, and one well worthwhile for Congress and the FTC to explore further. Congmsional agearch Service, Library of Congress Report on Predatory Pricing and State Below Coat Statutes 9 After reviewing the Chancery Court opinion favoring the plaintiffs, in American Drugs, Inc, v. Wal- Mart Stores, Inc. 0 and before the eventual reversal in Wal -Mart's favor upon appeal to the Arkansas Supreme Court, the Congressional Research Service(CRS) researched the question of predatory pricing on "the basis for predatory action." Were the standards different on a state basis versus a federal basis? CRS made the distinction very clear between the state objective and the federal objective in the following statement: "That difference in emphasis -- between 'competition! (the Wal-Mart court) and 'competitors' (the other courts cited) reflects precisely the distinction usually made between the federal concept of predatory pricing and state below -cost sales statutes. Whereas the federal antitrust laws are directed at competition and maintaining a competitive marketplace, the state statutes, which are variously denominated as Unfair Sales Acts or Unfair Practices Acts, were for the most part enacted during the Depression in an attempt to stem the tide of small business failures. Federal courts that have construed state law claims have often done so by emphasizing the federal considerations." 11 "As for example, the Wisconsin Unfair Sales Act was enacted in 1939 to prevent large retailers from selling below cost, an 'act of unfair competition' which was seen as one of the primary causes of small business failures .. , [It] is very similar to most unfair sales acts passed in the 193O's." 12 The federal courts when involved in state pricing statistics still emphasize federal consideration. Note the court's statement in the Seventh U.S, Circuit in 1989: "Competition is a ruthless process. A firm that reduces costs and expands sales injures rivals -- sometimes fatally.... 'These injuries to rivals are by-products of vigorous competition, and the antitrust laws are not balm for rivals' wounds." 13 J.E. Rubin, Esq. of the Library of Congress research staff also points out the rationalization behind the state and federal interpretations of predatory pricing: "Another way to differentiate between the federal and state unfair competition emphasis is to recognize that the federal concept of predatory pricing, which is included in the prohibition against monopolization (or attempted monopolization), is analyzed under the "rule of reason"; the state sales below cost provisions are more likely to be per se laws." 14 What Constitutes Predatory Pricing? (Congressional Research Service Analis) 15 The Congressional Research Service in the following memorandum reviews various aspects of predatory conduct and predatory pricing in such a manner that the author believes there is an overlap in alleged predatory pricing conduct that would permit legal review under either state or federal statutes, such as the Sherman, Clayton and/or Robinson-Patman Acts. "The basis for a designation of predatory conduct generally, and predatory pricing specifically, is the conclusion that the alleged predatory conduct allows a market participant to succeed, not on the merits of his product or performance vis-a-vis his competitors (e.g., efficiency), but only by harming his competitors." 16 Courts vary in the standards they apply to pricing practices in order to determine whether pricing is "predatory," but perhaps the most accepted gauge is the courts' assessment of whether the price -cutter could, practically, Iater recoup his losses if he remains in the market as a monopolist: 17 Rubin added: "A firm engaged in predatory pricing bites the bullet and forgoes present reveriues to drive a competitor from the market. Its intent, of course, is to recoup lost revenues through higher profits when it succeeds in making the environment less competitive." 18 "The success of any predatory scheme depends on maintaining monopoly power for long enough to recoup the predator's losses and to harvest some additional gain. "19 "Will the predator recoup? Will the competitor(s) survive?" "If rivals survive or entry [to the market] occurs [thus maintaining or creating competition for the alleged predator/monopolist], not only will predation be unsuccessful, but that very prospect reduces the likelihood that a challenged low price is in fact predatory." 26 It is obvious that pricing on the part of several mega -retail discount chains has contributed to the failures, bankruptcies and disappearance of many competing "Main Street" stores, as well as, the increasing vacancy and abandonment rate in many formerly prosperous and attractive malls and strip centers. It is certainly not the competition of the small retailer that is putting the other small retailers out of business. It is the formidable buying and pricing power of the mega -chains -- that often creates a situation where a legitimate retailer, losing his wholesale resource, has to buy at the lowest price at a warehouse club -- generally associated with a mega -retail discount chain. Can it be inferred that the "Main Street" failures result from the growing power of the mega -chains. Is this power a form of monopolization? Rubin in the CRS Study raises an umbrella over predatory conduct which might fit into the federal jurisdictions, i.e., Sherman, Clayton and/or Robinson-Patman Acts. Rubin states: "The fact that predatory pricing at the federal level is subsumed under the 'monopolization' rubric has one other significant consequence -- inasmuch as there is no 'no fault' monopolization, and legitimately realized monopoly positions r are not punished, market participants must specifically intend that their behavior injure competitors. Intent will not be lightly inferred, and pricing policy is extremely unlikely to produce such an inference in the absence of other, strong evidence. Many state below -cost pricing statutes permit the inference that advertisements to sell below cost, or sales -- even one -- below cost, constitute evidence of an intent to injure competitors or destroy competition."21 Although the court in the lower Arkansas Wal-Mart Chancery Court case stated that it could not infer either a purpose to injure competitors or to destroy competition from the fact that the defendant store 'engaged in below cost advertising and sales,' it did infer such intent from, inter alia, the fact that there was a "disparity in prices between Faulkner County prices of the relevant product lines and other markets with more and less competition." 22 Price variation which is dependent upon market competition is generally considered evidence that markets are functioning properly. Similarly, no inference of harm (injury) flows from even a proven violation of the Robinson-Patman Act, the federal statute that is specifically addressed to price, and which prohibits price discrimination. 23 Payne v. Chrysler cited in Footnote 22 held that the Robinson-Patman Act did not allow for automatic damages upon proof of a violation: A plaintiff must prove the violation damaged him. It appears that were a company prosecuted under the Sherman Act, that monopoly and pricing would be directed against "competition"; but under Robinson- Patman, it might involve damage to the "individual competitor." Should ComBlaints Against Predatarj Pricing Be Filed under State Laws or Federal Laws? Rubin provides a balanced analysis as to the way to go: "Just as there were studies to indicate that state Fair Trade (resale price maintenance) laws did not serve their purported purpose of protecting small retailers against the pricing practices of 'discounters,' there is no evidence to show that state below -cost pricing statutes serve small business positively; the studies found no discernible difference in the number of small business failures between those states which had resale price maintenance laws and those which did not. Most states have enacted 'baby' Sherman Acts which track the federal statute, and the below -cost sales provisions, themselves, are often contained in more general pricing statutes that are similar to the federal Robinson-Patman price discrimination law -- either of which may be used advantageously to challenge truly predatory pricing behavior. Accordingly, states must weigh the purported benefits of below -cost pricing statutes and their emphasis on competitor protection against assessments of the competition policy inherent in the federal antitrust laws," 24 Rubin added further: "State Fair Trade laws were also considered by proponents to be protection for small retailers against predatory pricing; they were rendered ineffective in 1976 when Congress repealed the authority for them by deleting the exception in the Sherman and Federal Trade Commission Act provisions which are used to prohibit price fixing (Consumer Goods Pricing Act of 1975, P.L. 94-145)." 25 This author believes after a review of materials in Chapters VI and VII that it will be extremely difficult, but not impossible, to demonstrate that the "Big Box" warehouse discount chains engage in the types of anti-competitive activities which are proscribed by federal antitrust laws. Although it is possible that government investigators could find appropriate evidence of such conduct, our sense is that such an investigation is unlikely to take place unless some evidence is supplied in the beginning. Any request for investigation ought to come from an appropriate congressional committee concerned with the economic future of the nation and its retail component. Additionally the government ought to look to the Tax Code as a means for limiting some of the alleged "Box Store" abuses which result in a type of "corporate welfare." There will be more specific recommendations made on this approach later in this study. Concerns over benefits provided to these chains, by.the local governments and state governments in California, New York and Illinois have already been revealed by quotations from respondents in Chapter IV. "The appointments of Bingaman in Justice and Pitofsky in the Federal Trade Commission may begin to restore more active enforcement of the antitrust laws that were "more or less abandoned during the Reagan years" stated Robert S. Stein. 26 In the same article, Charles Rull a former Reagan antitrust chief was quoted as saying: "Bingaman comes from the more traditional Democratic school .... They feel that (during the 1980s) antitrust didn't pay enough attention to protecting the little folks and let too many mergers through." 27 Bingaman had testified at her confirmation hearings that the Supreme Court should reverse its 1980s decision involving the Japanese electronic giant Matsushita, a decision that made it very difficult "to prove predatory pricing." 28 As the author pointed out in this chapter and Chapter VI, the Wal-Mart case based on predatory pricing has aroused national interest in the subject and the state cases on predatory pricing may yet stimulate further review of the federal regulatory powers provided in the Sherman, Clayton, Federal Trade Commission and Robinson-Patman Acts. The Stein article also stated that, "Some antitrust experts note that companies can bring predatory pricing suits against others as a means of 'back -door protectionism'." 29 Some economists now endorse recent and relatively expansive theories of price predation, 30 despite the theorists who provide the traditional economic analysis that "predatory pricing schemes are rarely tried, and even more rarely successful." 31 Nevertheless the condition of this nation based upon the disruption of "Main Street" and of the malls and the neighborhood infrastructure, deserves a review and update of what is predatory pricing? Predatory pricing was certainly on the minds of the delegates at the 1995 White House Conference on Small Business when one of the top recommendations addressed this very issue. Small businesspeople were particularly concerned with the large retailers' ability to demand favorable pricing from manufacturers and service providers. They call for stronger laws action by the President in this area. Their recommendation follows: 141. "Small business cannot compete with large businesses who use their economic power to extract unfair competitive pricing from manufacturers and service providers. Antitrust laws should be strengthened and enforced to prohibit abuses including unfair vertical integration, tying of pricing and product purchases, and predatory pricing tactics. The President should appoint a presidential commission on competition to study the enforcement and impact of the federal antitrust laws ensuring the survival and diversity of small businesses." 32</DD< DL> Finally, in the predatory pricing area, the Supreme Court has steadfastly refused to resolve the debate that flourished in the mid -1974's over the proper standard of cost by which to determine whether prices are predatory. 33 Instead, the Court has embraced a model of predation under which the predator expects to lose money during the predatory campaign, drive the competitor from the market, and more than recoup its losses thereafter. The Court has focused on the prospects for recoupment, the "back -end" of the scenario, and if the predator could not expect profit, the prices will be assumed to be nonpredatory.34 Consistent with the analysis, the Court will deem implausible a claim that a firm with a small market share engaged in predatory pricing, relying upon tacit collusion to recoup losses, for such a strategy would not likely be profitable. The court has largely repudiated the suggestion in Utah Pie35 that price discrimination undertaken to injure rivals in a concentrated market that merely contributes to the erosion of price levels is illegal, and it has suggested that the standards for illegality under the Robinson- Patman Act and the Sherman Act are all but identical. 36 The author's references to the U.S. Supreme Court's views on predatory pricing are germane indeed to this study. Perhaps one cannot prove that the several mega - retail discount chains individually lack intent to destroy their competitors or to recoup -- nevertheless it is obvious that with the destruction of the small retailers that a negative result, harmful to the national economy has occurred, regardless of the intent. Then why not have Congress and the federal departments and agencies reviewed the problem as it obviously exists. Further, in the author's previous footnote 34, the Supreme Court suggested that the standards for illegality under the "Sherman Act and the Robinson-Patman Act are all but identical." A Review of Ce „ in Questions Raised „bv the Author in Chapter V 1. In the author's discussion of the Federal Trade Commission Act and the Clayton Act, it was stated that the Federal Trade Commission Act created the FTC - - . to proceed against "unfair methods of competition in interstate or foreign commerce" and that the undefined nature of the laser power resulted from the view that businesses would always find new ways of suppressing competition that did not violate any given list of prohibited behaviors. The act empowered the FTC to proceed against each new form of unfair behavior as it appears and is recognized as a problem. 37 in lay language it looks like the FTC can and should look for new behaviors, which may or may not have been previously prohibited, but nevertheless raise serious questions about the economic welfare of the United States. 2. In Chapter V, the author pointed out that in the 1920's and 1930's the large chain retail stores rose to prominence and the market power of these firms entitled them to negotiate lower prices from manufacturers than the traditional small independent retailers could obtain. This led to pressure on Congress to help the small retailer and it was generally argued that the Clayton Act had failed to prevent price discrimination; so that pressure led to the passage of the Robinson- Patman Act in 193 6.3 8 Hence, Robinson-Patman was to correct the failure in the Clayton Act and is a vehicle for reviewing possible predatory pricing cases. 3. There appears to be some doubt legally as to whether "location based" price discrimination is or is not prohibited by the Robinson-Patman Act. There is some legal thought that price discrimination is unlawful as Robinson-Patman makes price discrimination unlawful as between different purchasers of same commodity (i.e. chain X has one price in Atlanta and a lower price for the same product in Atlantic City) ... does this justify the charge of "discrimination! "? Under the Robinson-Patman Act, the illegality is a purpose to "injure, destroy or prevent competition. Do the failures of hundreds of small businesses in the United States warrant a review under Robinson-Patman? Are we discussing a "competitor's" failure or "competitions"' failure? How much of a market, say in groceries or home improvements, must a discount chain have to be reviewed by FTC and Robinson-Patman? First, the plaintiff must establish that the company is pricing below average variable cost, and second, that the company has a reasonable prospect to recoup the investment below cost prices. It's tougher, therefore, for a private litigant to bring and prove predatory action under the federal law, but a government agency has the staff and resources to make these complex investigations possible. On the other hand, there are legal theorists who believe Robinson-Patman does not require a market share floor as a monopolization charge does, and the predatory pricing issues apply only to charges by a seller that its competitor has harmed the plaintiff by discriminating among the competitors' customers, The issue here is who is the consumer that is being discriminated against. Is it the mega -retail discount chain that is discriminating against buyers in one location or another? Or, is it the manufacturer or food distributors that is discriminating against such competing chains as Wal-Mart, Target, Kmart or other smaller retailers. 4. In persuading any government agency to investigate antitrust implications of "Big Box" warehouse operations, a market definition is very important (see advice from Davis, Cowell & Bowe) in Chapter V. A more narrow market definition is easier to support a monopoly power presumption. Certainly a market share of 60% or 70% should be a strong indicator that the market is no longer free for small retailer viability, particularly when large chains buy "direct" from manufacturers and small retailers are unable to do so. Can a new businesses enter the market strongly under the influence of a mega -retail discount chain? Could he survive? Could he buy merchandise from a wholesaler or manufacturer? 5. Chapter V also pointed out that aggressive pricing was not necessarily indicative of monopoly power. It is the abuse of power that should be reviewed. 6. In Chapter V, the author reviewed the Brook Group Ltd. cases and the Supreme Court indicated that whether a claim alleges predatory pricing under Section 2 of the Sherman Act or price discrimination under Robinson-Patrnan, the essential prerequisites to recover remain the same. This is correct where the discrimination charge is brought by the seller's competitor rather than its customer. 7. Manufacturers can also be targets of pricing suits. Increasingly there have been charges that pricing arrangements between manufacturers and distributors have been unchallenged. For example, while vertical price fixing has not been a significant problem in the grocery industry with regard to food items, it could have an effect on stores that have been stocking more non-food items to compete on a basis of "one-stop" shopping offered by the nation's mega -retail discount chains. Increasingly, courts have been demanding more than demonstrations of market concentration as antitrust violations. They want broader economic analysis with proof of harm to consumers. Most federal price discrimination suits have been brought against manufacturers. Suits Are Now Being Filed Against Manufacturers As an illustration of actions against manufacturers, a suit filed on March 10, 1993, in Arkansas by 135 independent Arkansas pharmacists in the U.S. District Court claimed that 42 of the world's largest prescription drugmakers were illegally setting prices on their products. The suit, according to Tyler Treadway39 is one of hundreds filed on behalf of more than 50,000 pharmacists throughout the nation. Most of the lawsuits eventually will be consolidated by the Judicial Panel in Multi -District Litigation and sent to U.S. District Judge, Charles Kocoras in Chicago, Illinois. The trial is scheduled to begin on January 5, 1996, and Judge Kocoras already denied a motion by the manufacturers to dismiss the suits. The Arkansas part of the federal case charged drug manufacturers with violating: (1) The Federal Clayton and Robinson- Patman Acts; (2) The Federal Sherman Act; and (3) alleged violations of state laws. The Arkansas federal suit followed one in California filed in August 1993, where 680 independent pharmacists went out of business that year and a second lawsuit filed in October 1994, in Pennsylvania where hundreds of pharmacists had closed doors in recent years. The Arkansas attorney noted that the federal cases were quite different from the recent state case where a group of Conroy, Arkansas pharmacists had sued Wal-Mart in the Faulkner County Chancery Court. Booksellers File Suit Against Publishers Just as the pharmacists filed a federal suit against manufacturers and distributors, so did members of the American Booksellers Association(ABA) file an antitrust lawsuit. On May 27, 1994, the ABA filed a suit against five publishers in the U.S. District Court in Philadelphia. The suit, which followed a year-long investigation on the part of the ABA alleged that the ability of ABA member bookstores to compete had been "increasingly harmed by unlawfully favorable deals, prices, and promotional allowances" that these publishers have given to a limited number of large bookstore chains and discount outlets. 40 The plaintiff, the ABA, on behalf of its members, requested that the Court provide declaratory and injunctive relief and restrain defendants Houghton Mifflin Company, Inc., Penguin USA, Inc., St. Martin's Press, Inc., Hugh Lauter Levin Associates, Inc., and Rutledge Hill Press, Inc. from continued unlawful discrimination in prices and promotional allowances in violation of the Robinson- Patman Act. 41 According to the Plaintiff, the ABA brought this Lawsuit on behalf of its membership, comprised of over 4,500 separate members operating general interest bookstores across the country. The vast majority of ABA's members were independently owned businesses operating individual bookstores. As they have done for generations, these bookstores provide books and services to meet the needs of the general reading public in communities where they were located. Many of these independent bookstores offer broad or specialized selection and services that are :not generally available in larger chains of bookstores. According to American Booksellers: "The ability of these bookstores to compete had been increasingly harmed by unlawfully favorable deals, prices, and promotional allowances that certain book publishers, including defendants, had given to a limited number of large chains of bookstores and discount outlets in the country. By depriving independent bookstores of discounts and promotions made available to large chains and discount outlets, defendants damaged independent bookstores and threatened their capacity to compete in the marketplace. These threats to independent bookstores in turn threatened the richness and selection of reading material that was available to the American reading public. Through the complaint, plaintiff ABA sought to obtain for its members the level playing field required by antitrust laws of the United States." 42 Specifically mentioned in the lawsuit were major retail book chains as well as warehouse clubs; "The two largest chains of retail bookstores in the country are WaldenbookBorders and Barnes & Noble, which together operate over 2,000 retail bookstores under various trade names (collectively referred to herein as 'the Chains')." 43 "The two largest chains of discount outlets known as 'membership warehouse clubs' or 'buying clubs' are Price Club/Costco and Sam's Club (collectively referred to herein as 'the Buying Clubs')." 44 The complaint also alleged among other things, that the defendants routinely made payments to bookstore chains so that the chains would advertise the defendants' books; would place the defendants' books in favorable places within the stores; and would aggressively promote the sale of defendants' books, without making such payments proportionally available to all booksellers. 45 The complaint also alleged that the defendants sold certain books to "warehouse buying clubs" or their suppliers at wholesale discounts far beyond those offered to retail bookstores. The discriminatory discount granted by defendants enabled warehouse clubs to sell the books to the public at prices lower than the lowest wholesale prices defendants offered to retail bookstores. 46 While admittedly the Booksellers case is under Robinson-Patman and does not involve the section of the act having to do with predatory pricing and recoupment; nevertheless, the attention now given to arrangements between manufacturers (or publishers) and chain customers reflects a serious plight on the part of the independent bookseller, not too different from the plight of the small merchandise retailer who can't receive the huge discounts from the manufacturer for mass purchases, and who often can't find a supplier to sell to him. Hence, many retailers have to buy in Sam's Clubs, owned by Wal-Mart or in other warehouse clubs. Further the warehouse discount chains are also involved in the American Booksellers case as well. The warehouse buying clubs, Price Club/Costco and Sam's Club have been mentioned prominently in this study and while they are not a principal legal target of the lawsuit, it does provide some relevancy to an overall discussion of Robinson-Patman. According to the Plaintiffs, because of price discrimination and disproportionately favorable promotional allowances, payment, and programs, and the advantages and extra profits that these allowances, payments, and programs provided to the Chains and Buying Clubs, some smaller and independent bookstores, including current and former ABA Members, have been harmed. The Plaintiffs indicated that the discrimination in favor of the Chains and Buying Clubs had caused, and will continue to cause unless enjoined, irreparable injury to the business and property of ABA's members and had lessened competition in the book retailing marketplace and threatened to reduce the selection of books available to consumers. 47 The dismissal by the FTC of its lawsuits against major publishers years after the FTC staff negotiated consent decree illustrates how difficult these price discrimination cases are. Has Home De not Utilized Predatory Pricing Techniques? In March 1995, a story by Chris Roush, staff writer with the Atlanta Journal and Constitution48 quoted critics of Home Depot's pricing policies. He quotes a John Connolly of J&S Paint and Stein in Mableton, Georgia, who paints houses throughout the state and buys his supplies from Home Depot. Recently, Connolly claimed that he noticed price differences between Home Depot locations in Atlanta, where the chain dominated the home improvement market, and stares in Augusta and Savannah, where it competed with other chains. "Paint prices in Atlanta are higher, he claimed. Which means he's forking out $2,500 more per year when he buys supplies in the metro area." (This is Roush quoting Connolly) "When they control the market, they gouge the prices" claimed Connolly, "I don't want to get into a fight, but it's predatory pricing in action." 49 According to the writer, Chris Roush, "It's not the first time Atlanta-based Home Depot has been accused of unfair pricing. As it enters new markets - and increases its domination in the Southeast - competitors have accused the nation`s largest home improvement retailer of so-called predatory pricing designed to put them out of business." 50 On the other hand, Home Depot defended its pricing practices, saying its policy was to compete based on price. "It's not a very complicated policy," said Home Depot spokesman, Jerry Shields. "We have the lowest prices in every market we do business in. Or we'll beat someone's prices if it comes to our attention. We're not saying you won't find a lower price; we'll just have to adjust our prices." 51 Shields also said that prices may also vary between markets because of fluctuations in transportation and other overhead costs. Roush further stated in his article that in November 1994, Home Depot was accused of violating Utah's Unfair Trade Practice Act. Standard Plumbing company Inc., which operated 14 stores, filed two suits alleging that Home Depot was selling supplies below its cost. Roush further reported that Home Depot quickly settled the lawsuit in an out-of-court agreement in which it admitted no wrongdoing. And, according to Roush, the chain agreed to stop selling plumbing supplies in Utah below its invoice price. 52 The Atlanta Journal also quoted Kenneth Smith, an analyst from Interstate/Johnson Lane, who had conducted a study in 1994 comparing prices of 35 products at a Home Depot in Atlanta with those at a store in Greensboro, NC, where it competed head-to-head with Lowe's, another chain. Smith, pointed out that in Atlanta, the 35 items totaled $625.37, or were 9.7% higher than the $568.96 they cost in Greensboro. "They don't have uniform prices," said Kenneth Smith. He believed that it was not Home Depot's intention to kill competitors; however, he was convinced that Home Depot could buy in a lot bigger volume than the small firms. 53 Big Customers' Late Bulls Choke SmaU Suppliers Previous comments by the author in this study indicated that small retailers were having trouble buying from national or regional wholesalers and manufacturers because of the mass discounts offered to the mega -chains by both large and small suppliers. If, as reported, wholesalers and manufacturers were in fact being paid later than traditionally, it would contribute to having a negative impact upon the small retailer. Eventually there will be less suppliers available to sell to small retailers. A Dun and Bradstreet Corporation Survey 54 released in 1994 indicated trends portraying continued weaknesses in the bili paying capacity of small retailers. Dun and Bradstreet has been tracking such behavior for over four years. The survey canvassed mostly small suppliers -- recipients of late payments and the firms that can least afford delays. Lawrence Winters, a Dun and Bradstreet assistant vice president, stated that some large companies were routinely paying their bills as much as 94 days after receiving invoices routinely due in 30 days. Smaller suppliers typically accept such terms "out of desperation to get business," Mr. Winters said, "They don't realize the implication of the decision until it hits them.." 55 Blinded by the prospect of a big new customer, many entrepreneurs forget "a sale is not a sale until you collect the money," 56 adds Paul Mignini, Jr., President of the National Association of Credit Management. Most of its 35,000 members are credit managers at small firms. Does the Size the Retailer permit a Mega Discount Chain Retailer the Right to Cancel a Previously Booked Order at Any Time Prior Lo Shi meat? As the power of the mega -chains continues to be more formidable, manufacturers and suppliers are bound to become weaker. As these suppliers turn their attention to the larger customer, they begin to lose the autonomy and sense of independence that a manufacturer possesses when it has a diversified list of many customers both large and small. As "partnering" of sorts continues to interest the largest American corporations, small retailers continue to weaken in terms of their ability to buy from many resources formerly available to them. A clause in Wal-Mart Stores' standard purchase contract that gives the discounter the right to cancel an order anytime prior to shipment, was found "substantively unconscionable," in a recent decision in New York State Supreme Court. 57 In a decision denying Wal -Mart's motion to dismiss a suit by Jonathan Cass, Ltd., a women's apparel manufacturer and seeking damages for cancellation of orders for some 150,000 items of merchandise, Justice Beatrice Shainswit said that among other defenses, Wal-Mart claimed that because of the clause, it had "the absolute right to cancel." 5858 The Court stated: "On its face, this provision which gives Wal-Mart the right to unilaterally and arbitrarily cancel its orders at any stage of production prior to shipment regardless of the expense its vendor has incurred, is so grossly unfair as to be substantively unconscionable, that is, unconscionable by its terms." 59 The court continued: "Given Wal -Mart's size and buying potential versus the relative size of its vendors, the contract formation process must be examined as well to determine whether the procedural elements of unconscionability (i.e., unequal bargaining position) are sufficiently present so as to bar enforcement of this clause for unconscionability." 60 This issue, the court said would have to be determined at trial. Merchandise involved in the action was ordered from June through October 1990, and later refused for various reasons including late deliveries and failure of the merchandise to conform with specifications. (Kenneth A. Schulman of Kreindler & Relkin represents the plaintiff.) The author of this study has not yet seen the results of the trial ordered by Judge Shainswit. Obviously Wal-Mart may have had strong reasons for refusing shipment of the merchandise from Cass, such as lateness in delivery or lack of conformity to requisite specifications. Nevertheless, the Judge in the pre-trial activity in the Cass v. Wal-Mart case was concerned about whether or not unequal bargaining power may be sufficiently present to bar enforcement of a cancellation clause for "unconscionability." In this case the buyer is possibly one of the largest corporations in the United States in terms of volume and number of employees. Wal -Mart's motion for summary judgement was denied by the court (J. Shainswit). Wal-Mart appealed almost immediately to the appellate Division of the New York Supreme Court. On June 6, 1995, the five judge panel unanimously affirmed the lower court's decision in denying the defendant's motion for summary judgement discussing the complaint, the case will therefore go back to trial. In the August 1994, U.S. House of Representatives Small Business Committee Public Rearms, the Committee Lashed out at the Mega -Discount Super Store for Hurtina Small Businesses and Entire Communities with Predatory Pricing, Unfair Labor Practices and Market Saturation In Joyce Barrett's article on August 11, 1994, in Women's Wear Daily 61, she reported on the first Congressional probe of the retailing phenomenon that was changing local markets nationwide. The mega -stores were derided of everything from crushing local competition to altering the traditional product distribution. chain. As the largest retailer in the nation, according to Barrett, Wal-Mart Stores, Inc. drew most of the criticism, although Rep. John LaFalce (D., NY), Chairman of the House Small Business Committee, said he had hoped the discussion would not target specific retailers. Wal -Mart's actual volume for 1995 was $81 billion, but currently it projected to be over $146 billion in 1996. Representative LaFalce said he aimed to explore three ways of protecting small business from the super -chains: • Increase publicity about expansion of the mega -stores. • Curb federal money, such as industrial revenue bonds, that goes toward retail development. • Insure that federal antitrust and banking laws are tough enough and are enforced. 62 LaFalce acknowledged that the federal government can do little to affect the recent course of retailing, but said he was concerned that superstore development was coning at the expense of smaller merchants. Unfortunately no tangible actions were taken by LaFalce's committee or subsequent ones except to hold the hearings and to provide publicity on the need for action to assist in the survival of "Main Street" businesses. At the hearings, according to Barrett, there was a litany of complaints about the superstores edited by other panel members. Thomas Muller, previously mentioned, said Wal-Mart charged higher prices in communities where it has eliminated the competition. Also, Wal-Mart and other mega -stores don't increase the dollar volume of sales, but instead redistribute sales. Further, he pointed out that the claim that Wal-Mart creates jobs also is wrong. Muller added, noting that in communities with a Wal-Mart, the results could be fewer retail jobs. He also said that full-time jobs in the mega -stores were often based on a 28 -hour work week, instead of the usual 40 hours and he observed that based on its current marketing strategy, Wal-Mart could open another 5,000 stores within the next 10 to 15 years. Muller estimated in the Daily News Record: "...that Wal-Mart had reached 'optimum penetration levels' in Arkansas, Mississippi and Oklahoma, and now appears to be targeting urban and rural areas in other states. The new Wal-Mart approach for areas close to saturation, as well as others, is to revamp the older stores as supercenters," Muller said. "These combine the general merchandise store with a full -line grocery store, using the same checkout counters." 63 Muller continued: "The experience of Wal-Mart has been that these superstores have increased per- ,5quare-foot general merchandise sales. With its superstores, Wal-Mart sales could easily double, even in states where current stores are close to saturation. In a few years, given current trends continue, one corporate entity may have a substantial share of all retail trade in the United States." 64 The Honorable Jean Ankeny, a Vermont State Senator, expressed similar concerns about jobs but also highlighted the sociological impact these large stores can have on a community in a letter written from her home in Williston, Vermont: "The anxiety about Wal -Mart's aggressive tactics continues. Williston, St. Johnsbury and St. Albans are all feeling the hot breath on their necks, and opinion is divided over whether or not Wal-Mart will be a benefit. Many of us feel sure that this megalith will not only wipe out small stores for miles around, but also drain our communities of much needed leadership." "The owner of the hardware stone is the coach of Little League. Members of the school boards, supporters of local arts, etc. live here and have their businesses here. Wal-Mart will not replace these local leaders." 65 These are the effects that can not be put into numbers; but are at the basis of the concern raised in many communities when a large corporate chain is entering the market. Jonathan Laing, in a May 1996 article in Barron's, confirmed the growth strategy of Wal-Mart by reporting on CEO David Glass's predictions for the future. Laing accepts Glass's projections that by the year 2000, the grocery business to be enjoyed by Wal -Mart's new Supercenters will blow past the $24 Billion business volume of,the Kroger supermarket chain. By adding groceries to the stores and often using the lower prices to entice shoppers, the overall business of the Krnarts and Wal -Marts are increased. Laing goes on to say: "The synergy of the supercenter concept is best grasped by a simple calculus. By merely adding 35% - 40% to the floor space of a traditional discount store to create a supercenter, sales essentially double once the supercenter reaches maturity in four to five years. Profits won't rise quite as sharply because of the inclusion of lower -profit food items. Maybe they'll jump only 80%. Nonetheless, the supercenters will yield a higher return on investment than most of Wal -Mot's existing discount stores and provide a substantial boost to sales and earnings down the road." 66 This is indeed substantial growth, both in sales and profits. Examples of this are evident from Muller where he cites expansion already occurring in New York State. Muller pointed to Wal -Mart's expansion in upstate New York as an example of its growth potential. A few years ago there were essentially no Wal -Marts in the region. As of 1993, there were 28 Wal -Marts and 14 Sam's Clubs. Because the economy of the region is not growing or growing slowly, virtually all sales M represent losses to existing merchants. Also, the evolution of Wal-Mart supercenters means that its new stores, with about 175,000 or more square feet of retail space, will be equal to more than 100 typical small businesses. 67 In fairness, it should be mentioned that there were only few proponents of the mega -retail discount chain present at the La Falce committee hearings. Morrison Cain, Vice President of the International Mass Retail Association, was the sole voice testifying in defense of the burgeoning mass industry. After the hearings, in a telephone interview from Kmart's Troy, Michigan headquarters, Don Morford, Director of Employee Benefits, said he could understand smaller retailers complaining that the bigger stores hurt their business. He noted, however, that smaller retailers liked the increased traffic the big stores generate. Cain said the mass stores provide greater choices for consumers, employment and income growth and an improved economy. Mass retailers can offer the low prices that have made them famous because, early on, they embraced technological advances in distribution and logistics, such as checkout scanning, sophisticated inventory processing systems, direct store -to -warehouse and store -to -vendor communications and Just -In -Time delivery. Cain stated: "These operating efficiencies can spell the difference between success or failure in this fast-moving business. The sheer volume of merchandise they sell also leads mass retailers to put growing emphasis on greater consultation and communication with their suppliers, not just in traditional areas, such as price and availability, but also in a broader range of concerns, including product design or customization or joint promotional efforts." 68 Cain offered a menu of adjustments small businesses could make to survive superstore competition; find a niche, sell items not carried by the giant discounters, refocus on upscale merchandise, improve store marketing and image, price competitively and emphasize services that discounters do not. 69 Cain's comments remind. one of the Ten Commandments prescribed by Taylor and Archer, in their book, Up Against the Wal -Marts and the usual management prescriptions taught in Management 101 in schools of business throughout the country. As already discussed, in reality, these suggestions are impossible for the small business to finance and implement. Concluding Comment It is recommended that the current Committees on Small Business in both the U.S. House of Representatives and the U.S. Senate continue to hold hearings on the applicability of such regulatory statutes as the Sherman, Clayton, Federal Trade,Commission and Robinson-Patman Acts relevant to the weakening condition of small retailers in the United States, in part because of the ever increasing power of the chains to procure the lowest of prices from manufacturers and suppliers. While predatory pricing might have to be viewed differently in the federal area compared to state litigation, nevertheless the increasing power of the chains requires federal review in terms of applicable statutes and regulations designed to protect small business and to provide free market opportunities. Further, the opportunities of the large chains to secure "corporate welfare" in terms of financial assistance for building their huge stores should be re-examined by Congress since many of the grants are basically part of federal funding. The author has given some thought to the possibility of federal review by either the Justice Department or the FTC of the overwhelming power of the mega -retail discount chains and their impact upon the opportunities of small businesses to survive. Obviously, one can be skeptical that either agency would be likely to undertake an across -the -board review of the subject that has been under study in this document. One reason, the author believes, is that both agencies have internalized some basic lessons of "Chicago School' economics, primarily that the antitrust laws are concerned properly only with questions. of economic efficiency. Also, the Antitrust Division appears to be reluctant to use the Robinson-Patman Act because of the difficulty of reconciling its effect with other antitrust laws. However, both the Antitrust Division and the FTC have been conducting some fairly aggressive investigations of predatory pricing and related issues. This initiative represents a significant change in enforcement over the last few years. Enforcement policies depend so much on who is formulating them, but one should hope that investigation of anticompetitive activity by dominant firms is likely to continue. Ga To: �op of Page; Table of Contents; 1-0 RETAIL CORPORATE WELFARE More and more the news out of Washington, D.C. are statements that America's corporations are often permitted tax incentives, subsidies, financial and other types of encouragement that are generally not available to small businesses. This has been termed as "corporate welfare." Generally speaking, "corporate welfare" programs are products of local, state and federal initiatives and are supposed to be directed to community redevelopment. The question that must be resolved is, "Jobs at what price?" The author of this study has surveyed this dilemma from east coast to west coast -- with particular interest in local, state and federal benefits offered to mega -retail discount chains, and only occasionally provided small business or specifically, small retailers. What is responsible versus irresponsible economic development? The Clinton Administration is attempting to persuade pension plans to invest their vast resources in projects that offer benefits to low income communities. On June 23, 1994, the U.S. Department of Labor released Interpretive Bulletin 94-1 to encourage pension plan investments in ETI's, or "Economically Targeted Investment." An ETI is purported to be an investment that seeks to furnish a benefit to a pension plan's community, at the same time it seeks to provide the pension plan with a competitive risk-adjusted rate of return.I Recently, they have been tabled. VVhile the objectives of the ETI program may be fair and worthwhile, the federal government should first see what is happening with similar financing projects, using public funds that appear to be directed to firms which receive favorable treatment far beyond the benefits received by the communities in terms of job creation and economic vitality. Secretary of Labor Reich recently, through administrative decree, has suggested 5% of the Taft -Hartley Pension Fund assets could be invested in ETIs. It is true and sad indeed that, in the new world of trade and declining jobs, local and state governments are finding themselves trapped in bidding wars for private investment. They've been offering a "candy store" of tax abatements, credits and loan subsidies in the hope of keeping existing jobs or getting new jobs. More often than not, they're left. holding the bag. Examples of incentives offered large corporations are presented for each of the states studied with particular detail on California examples. One can see that although the particular details for each city are slightly different, the overriding long-term effect on the community is similar. California's Experience with Respect to Incentives Provide_ d_Developers and Mega- RetaV Discount Chains ("Big Boxes" and Redevelopment) California, a state which characteristically is one of first to start new initiatives has had considerable experience in offering a "candy store" of incentives for the mega -retail discount chains. Redevelopment agencies in California gained substantial strength and influence during the 1980's. Their power was created because Proposition 13 (Jarvis Amendment) in California froze property values, thereby, making it exceedingly difficult for municipalities to generate revenues. Due to this short -fall, redevelopment agencies became the new economic engine. The original intent was simply the revitalization of areas blighted by economic and social decay. Cities and local townships were literally coming apart at the seams; redevelopment was the thread used for resurgence, needed repair and necessary economic stimulus. Historically, the last couple of decades have witnessed a myriad of cities and townships designating large sections of real estate into redevelopment zones. Some of these locations had little chance of recovery without the proper financial incentives needed to "push-start" their dying economies. The redevelopment agencies were established to ameliorate this problem; however, either through clever design or total disregard for original intent, large portions of redevelopment zones are now simply raw land. This contamination of original intent, having positive value on the one hand, exacerbated the problem relating to urban blight and economic decay. As interest increased, the criteria for Redevelopment Agencies' (RDA's) zones gave little concern to proximity or economic merit within the parameters of any given municipality. Simply stated, RDA zones were spread throughout entire communities and, in many cities created several redevelopment sites. This resulted in an interesting paradox, competition now existed not only between cities but within the same cities. The most salient aspect of the paradox was the competition created within separate RDA's in a given city. The developers, seeing an absolute "win-win" formula, took on Darwinian characteristics in their demands and "natural selection" became rule of thumb. The least attractive zones (economically and downtown areas) were now in direct competition with raw land with all its inherent advantages. Original intent was now a document for historians and considered innocuous by modern municipal standards. Underdeveloped land being more attractive due to economic realties and propinquity to freeways, throughways, interstates, et. al, were now the major objective. Social decay and blighted downtown sections constituted an anathema to new construction. The very structure of RDA's was going through a complete metamorphosis; what would finally spin out would be complete absolute change and direction. Downtowns were left to cascade into an economic "black hole" paradigm; like most major cities throughout America, economically blighted sections were a secondary consideration while raw land attained primacy. Small downtown emporiums were becoming an endangered species! All would agree this was never a redevelopment objective. Revitaaatrion In the past few decades, the destruction of our downtown urban areas across America have unquestionably become one of the major concerns of modem society. It has bred social disorganization, crime, violence, poverty, and rates of illegitimacy to unbelievable proportions. By not addressing these problems in earnest, one can expect that in the next several years, America will become a cauldron of racial fervor, discontent, anger and hatred. Many pundits believe the process has already started. Our 16th President, Abraham Lincoln, stated, "We cannot live for long in a house divided." Whatever the reason may be, the problem of the institutionalization of urban decay is simply pushed aside by politicians, distantly involved. Moreover, to think that inner city blight is a manifestation of the welfare state is pure sophistry. It is through the recognition of urban blight that certain enlightened individuals on both sides of the political spectrum have embraced concepts like economically targeted areas (ETI's - Economic Targeted Investments), described earlier. By creating certain tax and economic incentives it was thought industry would find it feasible, more importantly, profitable to construct new facilities within ETI parameters. Additionally, the revitalization paradigm conceivably could parent quality jobs, opportunities and needed hope, thereby starting a process which would diminish residential flight from urban communities. The economic dynamics could be far reaching by giving cities once again a tax base where today only a vestige of traditional business appears and poverty permanently resides. .In the beginning, RDA's did their job rather effectively, but as a myriad of loopholes became available and no enforcement agency was created to monitor or correct abuses, :city developers and corporations manipulated the process with impunity. Who could blame them? City attorneys simply felt they would never be challenged because the RDA had no state enforcement arm. Moreover, RDA's were so esoteric and complicated that 98% of the population knew nothing about their existence or the methods they incorporated to consummate a deal. Responsibility was so fragmented in a RDA's decision making process that there were possible abuses of power. For example: Hemet, California, basically a farming or agriculture community approximately 70 miles northeast of Los Angeles, attempted to make 11,000 acres of raw land, a redevelopment zone. (That's over 1/3 the size of San Francisco). "The lament over uncontrolled growth is virtually California's state anthem. The signature method of planning -- or failing to plan -- development has always been simple sprawl."2 This illustration shows that the new dynamics of redevelopment zones have had little or nothing to do with urban blight or revitalization. It simply became a tool in which cities participated while others negotiated hundreds of millions of dollars in construction costs, infrastructure improvements, incremental financing and future tax revenues. In light of all this, the interesting question is who ultimately pays the bill? The answer is -- the taxpayer. Concern over chaotic planning and deal -making by municipal authorities using redevelopment governmental authority and financing led to the establishment of the Bergeson Committee, chaired by Senator Marian Bergeson, Chairman of the California Senate Committee on Local Government. The 1989 Bergeson Report spread a great deal of light on the mission of "Redeveloping California; Funding the Legislative Agenda for the 1990's"3 A blatant case history of abuse stimulated California Republican State Senator Bergeson to cry foul. In the early $0's, car franchisors were building multi -faceted car dealerships (i.e. Mercury, Ford, Lincoln, Cadillac, Chevrolet, Honda and Toyota) on a single block within redevelopment zones and getting enormous financial consideration as the "carrot" to finalize the deal. Ostensibly this was okay in the beginning; however, once the dealership's incentives ran out, or came close to expiration, dealers began renegotiating with the municipalities to extend the deal (RDA can "roll over" any deal for approximately 50 years without interference). Furthermore, while negotiating with one city to extend the contract, some dealerships actually negotiated'with other cities for the same economic package, thereby, putting enormous economic leverage on both cities to capitulate to demands. To State Senator Bergeson's credit, she saw this for what it was - a blatant tax shelter structured for perpetuity benefiting no one except the avarice of a few. The economic dynamism relating to this type of behavior is interesting. The question is: how does a municipality regain the economic and moral authority within its own RDA agency - if the pre-existing tenant can renegotiate a new contract once the economic incentives expire? This could become a Pandora's Box with societal implications which are profound and which require detailed examination. Tax Incentives A major component of RDA projects are their abilities to orchestrate the distribution of taxes. This is a very effective tool and in many instances can be used to ameliorate economic and social dislocation. An important application that tax incentives have within agencies is their ability to use tax dollars to lure new business into communities. The original objective was a mutually ideal investment in which both parties (city and corporate partners) create prosperity for community and business. Tax incentives grant cities a considerable ability to negotiate or structure very attractive deals in order to entice future partners. Incorporated into redevelopment agencies are a series of powerful inducements which coalesce into a catalyst to promote business. Their power is unprecedented with taxes and condemnation topping the list. It is apparent that because of this power, many restrictions have been established ostensibly to monitor and maintain control over the agencies. However, the attempts at constraint through legal measures have been weak and reluctant. According to testimony at the Bergeson Hearings, most agencies proceed with impunity and quite a few knowledgeable critics allege that these RDA's frankly, disregarded the rules with little concern since they are rarely challenged. The mega -retail discount chains, such as Kmart and Wal-Mart and others, have also been the recipients of generous treatments, both with respect to tax incentives and other financial benefits or tax abatements in California, as well as in other states studied by the author; such as Illinois and New York (see respondent comments in Chapter IV). . Schools and Tax Distribution and Redistribution Within Redevelopment Agencies there is a little known fact that had a "Leviathan impact" on how schools received needed tax dollars. The RDA has had almost complete power to circumvent the normal distributions of taxes. It could actually stop the tax dollars generated by sales revenues within a city from ever going back to the schools. The school's only recourse is "pass-through" agreements or lawsuits. If the school fails to challenge the RDA within 60 days of approval it has theoretically lost revenues forever. By way of "pass-through" agreements, school districts can negotiate with redevelopment agencies for the right to obtain revenues for any new commercial enterprise. In California, a school district may be mandated a certain percentage of income through commercial development based on the square footage or the calculated profit. Via this relationship, needed monies are available to schools for new teachers, books, school repairs, athletics and new construction, Despite this, a redevelopment agency has a legal avenue to thwart this entire process, and since the early 80's, as has been documented in the Bergeson RDA studies 4; at least 80-90% of all schools have failed to receive proper "pass-through" agreements in relation to redevelopment agencies and their projects. Effects on School Finance The allocation of sales tax and property tax revenues from the counties to the Redevelopment Agencies, and their further use of these funds to support the financing of developments which include the mega. "Big Boxes" or Supercenters, created strong concerns in the report of the Bergeson Committee. Little has been rectified or corrected since the Bergeson public hearings. According to Dave Rabousky 5 who testified at the Bergeson Hearings: "The state is a silent partner' in redevelopment finance through its financial support for K-14 schools. The diversion from the State General Fund is probably $400 million, but that is not the net cost." Rabousky then explained to the senators that there are four factors that temper the Legislative Analyst's estimate: (1) there is already some underlying growth in assessed value in project areas; (2) some projects capture growth that would have occurred anyway; (3) redevelopment affects the location but not the level of retail activity; and (4) some redevelopment spending is not always directed against blight. Rabousky continued by explaining how redevelopment finance interacts with State General Fund's obligations to schools under Proposition 98 which the voters approved in November 1988. Questioned by Senator Bergeson, Rabousky told the senator that when the state operates under "Test 1 " redevelopment does not cause a net increase in state school apportionments to specific school districts. If Rabousky's estimates on the shortfall in revenues to schools were $400 million b in 1989, it could probably have accumulated to between $840 million and $1.2 billion by 1995. RDA apparently has not only forestalled taxes being normally distributed via state or local governments to the schools, but additionally these vast funds have all gone into a myriad of redevelopment agencies throughout California. It is apparent that "counties must be concerned by the cumulative fiscal efforts of redevelopment, incorporation, annexation and unfunded state mandates;" according to Dan Wall, who also testified at the Bergeson Hearings. "But everything is not right with the world (inasmuch) as the counties' fiscal stake in redevelopment is growing and growing rapidly."7 A number of specific agreements between developers and mega -retail discount chains will follow shortly. However, it does appear to informed observers that RDA's have legally been open to direct monies to developers, who in turn are then legally able to redistribute such funds to reimburse these national firms for capital outlay and construction. Such firms as Super Kmarts, Target, Costco, Sam's Clubs, Price Clubs, and Wal-Mart have been the recipients of RDA funds. Short -falls in school revenues take place where a mega -retail discount chain receives an RDA agreement which permits it to retain sales taxes to pay for construction and debt service. If as a result of the new mega -retail chain activities in the area, the "Main Street" stores have their business volume decline, or they go out of business altogether, then their former collection of sales taxes is reduced substantially as is revenues to the schools. One example is an RDA deal between the City Council of Chula Vista, California and Wal-Mart, reported on August 26, 1994.8 The Wal-Mart was proposed to open in late 1995. "Wal-Mart Offered $1.9 Million Deal - Chula Vista" "Wal-Mart would get $1.9 million over 15 years from the city as an inducement to build a store in a proposed shopping center at the northwest intersection of Fifth Avenue and C Street under a plan approved by the City Council, this week, The money would come from sales taxes the city collects from Wal-Mart and other stores in the 21 -acre shopping center, planned by Chula Vista Center Associates, said Community Development Director Salomone. As part of the deal, the developer would build a $1.2 million bridge over the Sweetwater River to connect the shopping center to Broadway. The developer would also install traffic signals at Fifth Avenue and C Street and on Fourth Avenue and Dixieline Lumber Co. The store is projected to open in late 1995."9 Subsequently, the award of $1.9 million was disallowed by the appeal of several citizens to the Superior Court of the County of San Diego. (See discussion later in this chapter.) IyoW A Deals Which are Pending or Have Been F' allCo ted with Dev rs and Men -Retail Discount Chains in Recent Years in California The following RDA "packages" are entirely legal but are typical of advantages that are provided in California to large retail firms and developers and which are generally not available to small businesses. The information has been voluntarily provided by a prominent California law firm. 10 SumpM of California Taxpayer Aid to Box Store Development (The author does not take responsibility for the complete details of the narrated "packages," but believes that essentially they do describe a picture of what has been made available by the RDA's to developers and chains in recent years.) Anaheim Plaza. California Redevelopment Agency to borrow about $6.3 million from owner to use for improving roads and other infrastructure for the project at 7% interest. In addition, Agency to pay 50% of costs of relocating existing residents. Being done to assist in procuring a mega - discount retail chain. Cathedral City, California Redevelopment Agency reimbursing owner for 90% of owner's acquisition costs by giving owner 75% of City's sales tax receipts. Estimated acquisition costs of $.1-2 million. Chino Hills California ftntative a eement on!yJ It involves a complicated land swap, plus developer receiving refund of $1 million from sales taxes supposedly generated by project. City of Industry, California Redevelopment Agency was to give, in effect, a $2.5 million subsidy by purchasing land for $7.6 million and then reselling it to a mega -chain for $5.1 million. If the deal completed, the chain has a saving of $2.5 million against the true value of the property, Covina California Redevelopment Agency to buy land and resell to a discount chain for $5 million. Agency to make various public infrastructure improvements. Developer to advance funds for acquisition, capped at $9.8 million. Agency must fund any short fall, with agency to repay at 2% above, prime rate, with a maximum of 12%. La Habra _ California Redevelopment Agency purchased land for $8.2 million and sold it for $5.3 million. Agency to borrow $4 million from developer to make improvements. _Oxnard, California A mega -retail discount chain received a deferral of $1.4 million in city's infrastructure impact fees, plus $1 million in "reimbursements" from city. Paramount. California Redevelopment Agency purchases land for $10.7 million and sells it to developer for $6.4 million. Paso Robles, California Redevelopment Agency pays cost of $537,000 in box culvert of creek, with a mega - discount retail chain to repay only 83% of costs. Agency also pays $1.6 million for offsite improvements, primarily roads. City supports creation of a "community facilities district" in area to snake road improvements which is to be funded by property tax increment. Agency to receive a portion of any "net" proceeds from sale or refinancing of land. Porterville, California In 1991, Wal-Mart built a Warehouse Center initially to employ 300 workers in a building of 1.2 million square feet. By locating in Porterville's Enterprise Zone the company was able to slice $19,000 per worker off in tax payments over 5 years. The tax waivers were estimated to amount to between $5 and $9 million over the period. 11 Chula Vista California Redevelopment Agency buys land for $8.50 per square foot (cap $4.98 million) and to sell to a major chain for $6.50 per square foot (cap $3.8 million). Agency to assist the chain in getting a community facilities district formed which would use the taxes received for $9 million worth of infrastructure improvements in the area.. Impact on Small Businesses by These Pendine Real Estate Packages Arranged by RDA's in California A number of the nation's largest corporations, both retail and non -retail with annual gross revenues of almost $100 billion and upward are in effect being subsidized by municipalities, school districts and taxpayers with the employment of millions in redevelopment funds to build their stores in California and in other states with similar programs. What chance does the small retailer have for survival? Has he or she been given the opportunity to improve their downtown facilities with a similar use of funds? This is certainly "corporate welfare" at the retail level. Return to the Bergeson Committee Report of 1989 At the Bergeson Hearing on Redevelopment, Mr. Chris Norby of Fullington, California, Co -Chairman of the Municipal Agenda for Redevelopment Reform in his continents which follow, made clear his disillusionment with the abuses in redevelopment powers. He also made certain constructive recommendations which should be enacted. StateMent of Chris Norby12 1. "Purpose of Redevelopment is to alleviate serious urban blight and originally a good one. In doing so, however, the Legislature granted to cities extraordinary powers that have now become subject to such widespread abuse that they must be curtailed." H. Redevelopment Powers Abused: A. "Eminent Domain: Property rights are abused when cities condemn the property of one private interest for the benefit of another." B. "Tax Increment Financing: In theory the tax increment is created by redevelopment efforts themselves. In reality, most of it is due to inflation and development that would have occurred even without redevelopment. All of this tax increment is funneled back into redevelopment projects and is denied to the counties, school and special districts. The State General Fund is left holding the bag. C. "Flawed Decision -Making, Redevelopment gives cities vast powers to subsidize and acquire property on behalf of private development. City Councils and staff must make economic and development decisions for which they are not capable. Redevelopment puts cities in the development business which is the responsibility of the private sector, not a proper role for government." D. "Anti -Competitive: Redevelopment decisions require cities to grant special favors (subsidies, land grants, etc.) to certain select businesses at the expense of others enjoying no such benefits!" E. "Distortion of Free Market: Using redevelopment, cities often raid each other's tax basis by luring businesses to relocate through offers of redevelopment goodies.' Redevelopment -subsidized auto malls are a prime example of this. Some cities do benefit, but at the expanse of others who have used redevelopment less aggressively. Business owners make location decisions based not on traditional free enterprise considerations, but on which city offers them the highest financial incentives." F. "Zero -Sum Game: Since redevelopment does not facilitate industrial growth but only a redistribution of sales tax revenue, there is no overall benefit to the state. Redevelopment cannot increase statewide economic activity, but only shifts it around. The state General Fund is spending huge sums under the guise of economic development that is, in fact, only an elaborate shell game." Mr. Norby made the following strong recommendation, which if followed should end "corporate welfare" in California. 13 III. "Recommended Actions: The State Legislature created Redevelopment, and only the State can reform it. Individual cities cannot be expected to control their own abuses. The Legislature must restore a level playing field for all cities so the rules for redevelopment -- if it must remain -- are clearly defined." "Possible courses of action:" A. "Forced Phase-out of all Redevelopment Projects: The state should intervene to be sure that redevelopment districts are speedily phased out and no new ones be created." B. "Limits on Land Acquisitions: The Legislature should prohibit cities frorn becoming land acquisition agents for private developers. The power to condemn property for private development should be ended, as well as land write-downs' at public expense." C. "Sales Tax Apportionment: Sales tax to city government should be apportioned on a per -capita basis, rather than on how much is actually raised in specific cities. This would end ruinous inner-city competition for sales tax dollars." It is obvious from Norby's remarks at the Bergeson public hearings that the unchecked powers in development have become subject to widespread abuse and that favoring certain projects has created an anti-competitive environment "granting favors to select businesses at the expense of others enjoying no such benefits." Further, that "redevelopment does not increase statewide economic activity, but only shifts it around. It becomes, as Norby states "a -shell ga;pe." It is also clear from the foregoing discussion that when Redevelopment Agencies divert property (and other tax revenues) from school districts and community college districts, the state must ultimately replace the diverted revenue. The Bergeson Report made a strong statement on Competition for Business. 14 "We have found situations in which cities are using their redevelopment agency's funds (and other revenues such as sales tax) for subsidies to influence the location of businesses that serve a regional market but generate significant local revenues. Auto dealers and warehouse type retailers such as Price Club are typical beneficiaries of these subsidies because of the large amounts of local sales tax revenues that they generate. We doubt that these subsidies provide any net economic benefit to the state because they merely change the location of businesses within a region, sometimes to the detriment of neighboring communities." Statement at the Ser eson Hearings by Los Angeles CountyTestimony of Amanda SussWnd and Diane Shamhart)15 While the County has supported numerous redevelopment projects over the years, speakers from Los Angeles evidenced frustration that present redevelopment attitudes had ignored the original purpose of the statutes, namely to redevelop "blighted areas," so that the blighted area would have a healthier economic base. Instead, "blight" and the dying "Main Street" have been ignored and developers are creating a new kind of sprawl outside the traditional business areas. Disturbing Trends The Los Angeles delegation at the December 7, 1989 hearing saw certain "disturbing trends. "16 "Whenever a redevelopment project approaches the end of the project, near its bonded debt limit, annual tax increments limit, or it's maximum tax increment limit, the agency amends the plan to take advantage of additional tax increment." "Agencies set bonded debt limits and tax increments far beyond what the project is estimated to generate. Limits are established not by what the project intends to do, but by what agencies estimate the project will generate in tax increment." "Redevelopment law was never intended to permanently divert funds from various taxing entities, such as the County of Los Angeles. It was to provide a mechanism for eliminating blight so that communities could become economically viable and productive. At the end of any given redevelopment project, the revitalized area would provide numerous benefits to taxing entities serving the community." h.. "The growing number of redevelopment projects and the extension of the terms of these projects (ranging from 25 to 50 years), raise serious doubts as to the realization by taxing entities of the benefits of redevelopment. In addition, redevelopment law was established at a time when limitations on taxing entities were not as stringent as they are today. It was adopted in a time when the decay of cities was at its worst and revenues sources were more abundant." California Law AB 1290 (Health and Safety Code 033426.5) Provides That an Agency May Not Give Away Tax Dollars to Retail Pro iects of More Than 5 Acres on Land Not Previously Developed for Urban Uses (Citizens of Chula Vista California v. Redevelopment Agency, et al., March 31,1995) Previously mentioned in this chapter was a $1.9 million grant to finance a Wal-Mart in Chula Vista. On March 31,1995, the law firm of Davis, Cowell and Bowe of San Francisco, California filed a suit on behalf of Bozek and Gonzales, Petitioners against Respondents -Defendants; the Redevelopment Agency of the City of Chula Vista; City Council of Chula Vista; Wal-Mart Stores; Town Center Associates; the Gatlin Development Co. Inc.; and KRB Enterprises. 17 The plaintiffs wanted to enjoin the real estate project because they claimed that AB 1290 passed by the California Legislature in 1993 was enacted to restrict financial support for certain redevelopment projects by redevelopment agencies. Specifically targeted were developments on a parcel of land, 5 acres or more, which had not been previously developed for urban use (with certain exceptions noted in the case). The suit is reproduced here because the arguments used by the plaintiffs pin -point the concerns expressed by witnesses in the Bergeson Hearings of 1989, when the purpose of RDA activities was fully explored. Also fully presented is the final judgment which gives a fairly full account of the results. The petitioners not only wanted an injunction against Wal -Mart's building a new store on the particular site in question; but also wanted the $1.9 million subsidy to Wal-Mart reviewed as being possibly in conflict with the California AB 1290 statute, codified as Health and Safety Code 33426.5. Details of the suit and final judgment follow: Andrew J. Kahn # 129776 Marjorie M. Alvord #135868 DAVIS, COWELL & BOWE 100 Van Ness Avenue, 20th Floor San Francisco, California 94102 (415) 626-1880 Fern Steiner GEORGIOU, TOSDAL, LEVINE & SMITH 600 B Street #2300 San Diego, California 92101 (619) 239-7200 Attorneys for Petitioners -Plaintiffs SUPERIOR COURT OF CALIFORNIA COUNTY OF SAN DIEGO WALLY BOZEK; HENRY GONZALES; CASE NO. 684525 FIRST AMENDED PETITION FOR Petitioners -Plaintiffs, WRIT OF MANDATE; COMPLAINT V. FOR INJUNCTIVE AND DECLARATORY RELIEF 'REDEVELOPMENT AGENCY OF CITY OF [Cal. Code Civ. Pro. CHULA VISTA; CITY COUNCIL OF 526a, 1085; Cal. Health & THE CITY OF CHULA VISTA and the Safety Code 33426.5] members thereof, in their official capacity; Respondents -Defendants. WAL-MART STORES, INC; CHULA VISTA TOWN CENTER ASSOCIATES, L.P., a California Limited Partnership; GATLIN DEVELOPMENT COMPANY, INC.; KRB ENTERPRISES, INC., Real Parties in Interest Petitioners -Plaintiffs (hereinafter "Petitioners") allege: 1. Petitioners are residents and taxpayers of the City of Chula Vista. On November 15, 1994, the Redevelopment Agency of the City of Chula Vista approved a government subsidy of $1.9 million to Wal-Mart Stores, Inc. for putting up a new store. This subsidy will violate the Legislature's recent enactment designed to prevent redevelopment agencies from giving away tax dollars to new retail developments, AB 1290, now codified at Health & Safety Code 033426.5. This provides that an agency may not give away tax dollars to retail projects of more than 5 acres on land not previously developed for urban uses (with exceptions not applicable here). Respondents' financial assistance to the Wal-Mart project violates AB 1290. Accordingly, the court must prevent the loss to taxpayers and the community. JURISDICTION 2. This court has jurisdiction under California Code of Civil Procedure sections 526a (taxpayers' suits), and/or 1085 (writ of mandate). GENERAL ALLEGATIONS 3. Respondent -Defendant Redevelopment Agency for the City of Chula Vista (hereafter "the Agency") is a redevelopment agency governed by the California Redevelopment Law, contained in Cal. Health and Safety Code 33000 et seq. The agency's members are. the members of Respondent -Defendant City Council of the City of Chula Vista, who are sued in their official capacity (hereafter collectively "respondents"). 4. Petitioners are residents and taxpayers of the City of Chula Vista. 5. Petitioners will be affected by the tax subsidy and by the construction and operation of a Wal-Mart store in their city, including effects on traffic, air quality and environmental values. 6. On or about August 23, 1994, Respondents voted to authorize their staff to enter into a Disposition and Development Agreement ("DDA") with Wal-Mart Stores, Inc. And Chula Vista Town Center Associates, L.P., concerning construction of a Wal-Mart store in Chula Vista. (A "true and correct" copy of the DDA was attached to the filing as Exhibit A.) 7. Section 2 of the DDA provided that the DDA was not effective until the City Council and Agency later decided to approve the construction project via plan amendments and conditional use permit. This entailed complying with the California Environmental Quality Act, which gave Respondents discretion to disapprove the project. 8. Prior to Respondents' vote on August 23, Petitioners' representatives urged Respondents not to offer this project a subsidy, relying on AB 1290. 9. On September 2, 1994, Petitioners' counsel telecopied a letter to Respondents' counsel enclosing a copy of public testimony against the subsidy, urging a prompt reply and requesting "an expeditious answer because I will not expose my clients to the risk of being told they are suing too late." A "true and correct" copy of this letter and enclosure was apparently attached hereto as Exhibit B. 10.4n September 7, 1994, Respondents' counsel wrote back directing the attention of Petitioners' counsel to section 2.1 through 2.3 of the DDA, stating: "These provisions clearly provide that the DDA will not be legally effective and the Agency will have no obligation to provide any assistance, unless and until all necessary CEQA review has been completed, a Final EIR has been certified by the City and all other required entitlements have been approved. Section 2.3 expressly retains for the City its full and independent discretion to disapprove, if it so chooses, the Final EIR or any other of the proposed entitlements for the proposed Wal-Mart Project. * * * We encourage you, Mr. McMahon, and any other interested party to continue to present any and all legal and practical concerns that you may have with respect to the proposed project. It is my understanding that most of the required land use permits for the Wal-Mart project, including certification of the final EK are likely to be presented to the city/Agency for consideration within the next few months. Notice of these proceedings will also be published and forwarded to Mr. McMahon (and you if you so desire) in order that all interested persons are given full opportunity to express any objections or" (A "true and correct" copy of this letter was attached as Exhibit C.) 11. Petitioners' counsel relied on Respondents' letter in believing that the statute of limitations on any challenge to the subsidy would not begin to run until Respondents had decided after public hearings whether the project to be subsidized would go forward at all. 12. Petitioners' counsel acted reasonably in so relying on Respondents' letter. 13. Respondents' letter equitably estops Respondents from asserting a statute of limitations defense. 14. Petitioners' counsel timely pursued an administrative remedy against the subsidy by urging Respondents not to approve the project due to its unmitigated effects on the environment, which were admitted to be significant. (A true and correct copy of the letter sent by Petitioners' counsel as Exhibit D.) 15. Respondents did not certify the environmental impact report or approve the necessary plan amendments until November 15, 1994. 16. Prior to November 15, 1994, Respondents had not committed themselves to extending a subsidy to retail development at this site. 17. The statute of limitations on Petitioners bringing this action was tolled until November 15, 1994. 18. Real Parties in Interest Chula Vista Town Center Associates, Gatlin Development Co., Inc. And KRB Enterprises, Inc. Are the owners of an unimproved parcel of approximately 12.94 acres of property at the northwest quadrant of Fifth and C Streets in their City of Chula Vista, County of San Diego, State of California which was formerly owned by Metropolitan Shopping Square Ltd. And others ("Metropolitan property"). 19. The Wal-Mart development requires use of the Metropolitan property. 20. Prior to the filing of this action, there were never any improvements on the Metropolitan property. 21. Immediately adjacent to the Metropolitan property is an unimproved parcel of approximately 17.22 acres owned in the past by Dixieline Lumber Company ("Dixieline property"), but now owned by the Real Parties -In -Interest other than Wal-Mart. 22. The Wal-Mart development requires use of the Dixieline property. 23. Prior to the filing of this action, there were never any improvements on the Dixieline property. FIRST CAUSE OF ACTION: VIOLATION OF CAL. HEALTH & SAFETY CODE 33426.5 24. Petitioners reallege as though fully set forth paragraphs 1 through 23 of the foregoing. 25. In 1993, the California Legislature enacted A.B. 1290, legislation intended to restrict financial support for certain redevelopment projects by redevelopment agencies. That statute became effective January 1, 1994, and was codified at California Health and Safety Code ❑33426.5. This provides, in relevant part: "Notwithstanding the provisions of sections 33391, 33430, 33433, and 33445, or any other provision of this party, an agency shall not provide any form of direct assistance to: (b) (1) A development that will be or is on a parcel of land of five acres or more which has not been previously developed for urban use and that will, when developed, generate sales or use tax pursuant to Part 1.5 (commencing with Section 7200) of Division 2 of the Revenue and Taxation Code, unless the principal permitted use of the development is office, hot_ el, manufacturing or industrial or unless, prior to the effective date of the act that adds this section, the agency either owns the land or has entered, into an enforceable agreement, for the purchase of the land or of an interest in the land including. but not limited to a lease or an agreement containing covenants affecting real prole , , that requires the lanai to be developed." 26. Section 3.3 of the DDA provides for direct assistance from the Agency within the meaning of Health & Safety Code 033426.5. 27. The DDA provides for Wal-Mart to receive approximately $1.9 million in subsidies from the Agency. 28. The project will include at least one parcel of land of five acres or more which has not previously been developed for urban use. 29. The direct assistance to Wal-Mart found in the DDA violates Health & Safety Code ❑33426.5. 30. Respondents are under a mandatory duty to comply with Health and Safety Code ❑33426.5. 31. Respondents are violating that duty. 32. No award of damages could make Petitioners whole for the intangible injuries caused by the loss of public revenues. Petitioners' pecuniary losses are difficult or impossible to calculate. 33. The balance of hardships and the public interest favor the issuance of injunctive relief here. 34. In seeking to enforce the laws at issue here, Petitioners are conferring a significant benefit upon the public at large, in that they seek both to enforce a law of public benefit and to protect fiscal values. The costs of pursuing this action are considerable. This combination of public benefit and the considerable burden of private enforcement makes recovery of attorneys fees by Petitioners appropriate. 35. There is currently a live dispute between Petitioners and Respondents, in that Petitioners claim that the Agency's subsidy of the Wal-Mart project violates the Health and Safety Code, while Respondents and real parties in interest contend the subsidy is lawful. WHEREFORE, Petitioners pray: 1. For a temporary restraining order and/or preliminary injunction during the pendency of this action barring Respondents -Defendants from providing any direct assistance towards a development on the subject properties of a store selling taxable items, absent the recipient(s) providing sufficient security to reimburse such assistance if it is subsequently found unlawful. 3. For a judicial declaration that Respondents' financial assistance to a development at this site of a store selling taxable items is void, invalid and unenforceable as violative of Health & Safety Code 33426.5. 4. For a writ of mandate and/or permanent injunction compelling Respondents not to provide any financial assistance to any development of this land of a store selling taxable item. 5. For Petitioners' reasonable attorneys' fees, pursuant to Cal. Code Civ. Pro. 1021.5. 6. For costs of suit herein; 111 111 111 7. For such other and further relief as the Court deems just and proper Dated: March 27, 1995 DAVIS, COWELL & BOWE By: Andrew J. Kahn #129776 Marjorie M. Alvord #135868 Attorneys for Petitioners -Plaintiffs SUPERIOR COURT OF CALIFORNIA COUNTY OF SAN DIEGO WALLY BOZEK; HENRY GONZALES; CASE NO. 684525 FINAL JUDGMENT FOR PETITIONERS and Petitioners -Plaintiffs, ORDER GRANTING V. PETITIONERS' MOTION FOR PEREMPTORY WRIT OF MANDATE REDEVELOPMENT AGENCY OF CITY OF [CCP 526a, 863 1085 CHULA VISTA; CITY COUNCIL OF H & S 33426.5 THE CITY OF CHULA VISTA and the members thereof, in their official capacity; Respondents -Defendants. WAL-MART STORES, INC; CHULA VISTA TOWN CENTER ASSOCIATES, L.P., a California Limited Partnership; GATLIN DEVELOPMENT a COMPANY, INC.; KRB ENTERPRISES, INC.,. Real Parties in Interest Petitioners having moved for issuance of a writ of mandate, this cause came on regularly for hearing on the papers on October 20, 1995, in the Courtroom of the Honorable Richard J. Haden, Department 37 of the above entitled court. The Court considered the arguments and evidence from all parties, and issued a telephonic ruling in Petitioners' favor directing that a peremptory writ of mandate should issue. Oral argument was requested by Respondents. Oral argument was heard by the Court on November 3, 1995, at which time additional briefing was permitted by the Court. The Court considered an amicus brief from the Chula Vista Firefighters' Association.The Court considered the arguments and evidence from all parties and issued a ruling dated December 8, 1995 confirming its ruling on October 20, 1995 that: 1. A peremptory writ of mandate shall issue to prevent Respondents from financially assisting Real Party in Interest Wal-Mart. Such assistance is prohibited by California Health and Safety Code section 333426.5(b)(1). This statute is applicable and no exemption applies. 2. Petitioners are taxpayers with standing to bring this action. 3. Petitioners did not personally need to exhaust any available administrative remedies because there were no administrative procedures in place to address claims of illegal subsidy under H & S 333426.5. There is nothing requiring findings on any subject in the statutes concerning Disposition and Development Agreements (H & S 334433), let alone findings on whether the Disposition and Development Agreement is extending direct assistance to a retail development on land not previously developed for urban use. Since there was no administrative procedure to address claims of illegal subsidy under H & S 33426.5, there was no exhaustion requirement. 4. Even if there were administrative procedures in place to address claims of illegal subsidy under H & S 33426.5, Petitioners could rely on the efforts of William McMahon (McMahon) before the Agency since a public interest claim was involved. Friends of Mammoth v. Board Supervisors County of Mono (1972) 8 Cal.3d 247. 5. The sixty (60) day statute of limitations in California Cod of Civil Procedure section 860 et seq was also equitably tolled as McMahon, a member of the public, pursued a remedy in front of the City Council by arguing the whole project should be denied for failure to comply with CEQA concerns. 6. Even if no equitable tolling exists based on the efforts before the City Council, Respondents are estopped from arguing the statute of limitations in light of the letter from the Chula Vista City Attorney to Petitioners' counsel dated September 7, 1994. Estoppel requires knowledge of the facts by the party to be estopped, intent his conduct be ac -ted upon, or so act that the party asserting the estoppel has a right to believe it was so intended. The other. party must be ignorant of the true facts, and must rely on the conduct to his detriment. Strong v. City of Santa Cruz (1975) 15 Ca1.3d 720, 725. The letter reasonably implies Petitioners would not be precluded by CCP 863 while the City Council considered the CEQA issues prior to authorizing the whole project. 7. The Semi -Exclusive Negotiating and Covenants Agreement (SENA) between Respondents and Real Party in Interest did not "grandfather" this project for purposes of H & S 33426.5 (b)(1). The SENA did not grant the City an interest in these parcels and it did not require their development. The financial assistance would improperly go to a parcel over five (5) acres not previously developed for urban use. IT IS ORDERED, ADJUDGED AND DECREED 1. That a peremptory writ of mandate issue preventing Respondent from providing financial assistance to Wal-Mart as described in Disposition and Development Agreement by and between Redevelopment Agency of the City of Chula Vista, Wal-Mart Stores, Inc. and Chula Vista Town Center Associates, L.P. dated August, 1994. (Exhibit A to Judgment) 2, That Petitioners shall recover their costs herein. Dated - Hon. Richard J. Haden Superior Court Judge Submitted By: DAVIS, COWELL & BOWE By Andrew Kahn, Attorney for Petitioners APPROVED AS TO FORM AND CONFORMITY WITH COURT'S RULING: Dated: BRUCE M. BOOGAARD Attorney for Redevelopment Agency of the City of Chula Vista and City Council of the City of Chula Vista Dated: GRESHAM, VARNER, SAVAGE, NOLAN & TILDEN By: - John C. Nolan, Attorneys for Wal-Mart Stores, Inc.; Chula Vista Town Center Associates, L.P. A. C"wrate Welfare State in the Makin. The term "welfare state" is a familiar one when the taxpaying public hears of public assistance; aid to dependent mothers, food stamps, Medicaid and public housing subsidies; but what is involved in this type of aid is a fight against poverty, and a recognition of personal need. Of course, there are excesses in the administration of these "Great Society" programs and they need to be analyzed and corrections executed to save vast funds wasted in many instances. Now, however, the term "corporate welfare" has come to the fore with giant corporations who are financially powerful and eminently successful, being treated to subsidies through redevelopment agencies -- not available in most instances to help small businesses. The great debate in the current Congress is therefore about the "welfare state." However, most of the debate relates to the individual and not to the corporation or small business. Many Republicans and Democrats are convinced the "welfare state" is bankrupt, morally vanquished, and in need of a complete overhaul. Social disorganization, inner city deday and the institutionalization of welfare should no longer be tolerated in the minds of many members of Congress because such aid is alleged to destroy the very lives it was intrusted to protect. The institutionalization of welfare makes it nearly impossible to wean its recipients when one generation after another joins the welfare rolls. The creation of a sub -culture is born with little or no hope of success. These arguments are not only powerful, but painful in their applications for renewal or revision. Well! If welfare is bad for the individual, what happens, as discussed earlier, when major corporations become corporate welfare recipients? Interestingly enough, major corporations are among the largest recipients of welfare or taxpayer money in America. They do it without compunction and fail to see themselves "feeding at the public trough" since their joint applications with developers are entirely legal. Together, the mega -retail discount chains which may be interested in "corporate welfare" may include Wal-Mart, Kmart, Target, Sam's Clubs, Price/Costco, among many others, and collectively have annual operating revenues between $100 and $200 billion. Yet they continue to apply for Disposition Development Agreement {DDA} funds in California and similar funding in other states, despite the negative impact of their grants on the health of school districts and state finance. As was mentioned previously, Porterville, California built a distribution center for Wal- Mart in which the government was committed to give away $19,500 in tax reductions per job or possibly up to $7 to $9 million for jobs estimated to be paying between $8,000- $12,500 a year. Lake Elsinore, California, in supporting a major chain's development was to give away approximately $7 million in infrastructure improvements and sales tax rebates for jobs that pay between $6,00048,000 a year. These average earnings appear to be below the poverty line. The City of Lake Elsinore may not see any substantial revenue generated for the City for 10-20 years. Why did they do it? The simple answer, apparently, is fear. Officials were afraid the neighboring cities would negotiate a better deal and kill their opportunity for future revenues. Moreover, elected officials often are untrained in . corporate and public finance and simply believe they may be doing the right thing with respect to creating jobs It becomes obvious that during the past several years Wal -Mari, Kmart and other major chains, through their business plans, have been committed to expanding market shares within California and particularly, Southern California. These decisions have been . arrived at through careful planning and analysis. Through their analysis, real estate and construction costs have been a major consideration, as well as the demographic planning. In a sense, professionals on the staffs of these mega -retail discount chains have been doing their jobs well; while City Council personnel, RDA officials and other public sector personnel have not been able to cope with the ever increasing sophisticated challenges of public and private finance. As a result: the expected job creation often fails to materialize; sales taxes are lost to schools; traffic congestion, pollution and other environmental problems occur; and projects get renewed with final termination many years later than visualized in the original projects. The Bergeson Hearings of 1989 have not been followed up with conscientiousness by public officials and RDA personnel - What About Meetina the Needs of AlreadY Established Stores? In February 1995, incentives offered by Chula Vista, California to Wal-Mart were challenged by air important competitor -- Target. The San Diego Union story stated: Target Stores say this City (Chula Vista) is offering big incentives to lure its competitor, Wal-Mart, to town while overlooking the needs here of Target's two established stores. Some of the incentives could hurt Target's store on Fourth Avenue which stands to lose business by having Wal-Mart open next door,' Mark Johnson, a Target administrator stated to City officials." 18 Community Development Director, Chris Salomone responded by saying: "Target has a point. If the roles were reversed and Target were coming to town, we would help thein. Chula Vista is eager to attract Wal-Mart as a source of sales and property taxes while Target, as an established business, already pays such taxes and, therefore, gets less attention from the City. It is not fair, and there's no pretense that it's fair," Salomon said. "We're all in the competitive mode to generate business." 19 However, as pointed out previously, new business is not "generated," a shift in retail dollars merely occurs from the small "Main Street" retailers in many communities to a single "Big Box" mega -store in one "lucky" community. In fact, Mark Johnson, of Target, also stated that 25-30% of Target's business would be lost.20 According to the articles, the development package was to have included an almost $2.0 million dollar give away in sales tax rebates that could last for fifteen years, to simply build a bridge connecting Wal-Mart with Broadway.21 Previously discussed in this chapter was the fact that Chula Vista was being sued because the public believed their city has acted in violation of AB 1290 - a new law passed in 1994. What Do the. Meea-Retail Discount Chains Bring to the Community? Is it jobs? In a Lake Placid, New York study by a group of local citizens, "Residents for Responsible Growth," it was reported that for every part time job established in a new mega -discount chain facility, such as Wal-Mart, that one and ane -half jobs will be lost by a decline in sales or bankruptcies and closing of the traditional "Main Street" stores.22 This startling comparison is even mild as against the reality described in July 1993 Inc. magazine article (quoted in the Lake Placid study) that: a. Don Shinkle of Wal-Mart contends that the company's work force is at least 60% full-time. b. That Wal-Mart defines full time as only 28 hours or more than the traditional 40 hours in retailing.23 In discussions with retailers in California, city planners, San Diego Council persons and San Diego city financial officials, it appeared to this writer that Wal - Mart's objective might be to build over 200 stores in California alone. This is not confirmed, but based upon the RDA subsidy record for mega -retail discount chain construction to date, cities with their numerous programs through RDA projects might contribute over $100 million in tax dollars, highway improvements, sales tax rebates to these ventures to help corporate giants such as Wal-Mart, Kmart and others establish a market in California, while pre-existing small businesses have to compete with these mega -chains with no offered incentives. Even though Wal -Mart's experiences in California have been the scenario for this exercise, Wal-Mart itself is not the issue. What it obtains from RDA grants are legal, indeed. The problem is corporate America, which through this new type of subsidy program is also feeding, as are the poorest welfare recipients, from the public trough at the expense of the taxpayers. Further, the original purpose of the RDA objectives was to rehabilitate and upgrade the downtown areas of aging urban areas and not to provide dollars for large corporations. "Comorate Welfare" Is Beginning to Have National IM21ications: When Will It §ft What is happening in retail is also noted in other mega -corporate endeavors. In a December 1994 article in the St. Louis Past-Dispatch2,4 it was reported that the Commonwealth of Virginia had authorized a subsidy package for the then pending Disney development worth $163 million to create the equivalent of 2,700 full time jobs. However, residents soon found out that 73% of these jobs were "part-time or seasonal." Further wage data from Walt Disney World and Disneyland suggested that most of the Virginia jobs would have paid only $3,700 to $6,200 a year, with no health care provisions.25 In other words, at the $6,200 level, based on the subsidy package, Disney would not have paid a single dime in salary to its employees for 10 years; at the $3,700 level, Disney would have been freed of labor cost for approximately 16 years. The article continued, "Virginia taxpayers were actually looking at a much bigger subsidy package for Disney. There would have been massive hidden costs' of a poverty level work force, including Medicaid, unemployment compensation, food stamps and earned income tax credit."26 In the Disney example, in retrospect, if the employment created were truly full-time and paid $30,000 per year with benefits, a salient economic argument could have been made for strong subsidies. The economic dynamism for Disney, community and employees would have existed and been beneficial in a myriad of applications. However, subsidies for low paying, high turnover employees are a losing proposition and the taxpayers realized it. The billions of dollars given away to financially sound, healthy corporations in terms of subsidies, both nationally and state by state are staggering. The comments by respondents in Chapter IV from businesses in Illinois and New York support the California view. Small business respondents resist the use of state and federal funds to remove traffic from the traditional downtown area and to subsidize the "Big Boxes" on the interstate highways. Relatively few taxpayers know they are subsidizing some of the wealthiest corporations in America, but the competitive small retailer is very well informed about these inequities. The Role of Redevelopment Law in "Boz Store" Egaansion Commercial development has received millions of dollars in taxpayer subsidies frorn redevelopment agencies in California and in such states as Illinois, New York and in some instances in Pennsylvania. Typically these redevelopment agencies are set up by an individual city and influenced by members of its City Council. While intended to cure urban "blight," these agencies have often been set up in growing areas - hence the subsidies offered may not have been necessary to attract business to locate there. Moreover, these agencies often have simply attracted businesses which by their nature strip clients'and customers from other businesses nearby, such as retail stores and hotels. These subsidies are generally obtained by means of "tax -increment" financing -- meaning that the agency is allowed to step in and siphon off the taxes from an area which heretofore would have been paid to the City, County, School District and State. This gives the agency the funds to buy land and then sell or rent it at a discount to developers and end-users. To illustrate the concerns about "corporate welfare," the following case discussion is set forth. Re,ew v. City of Baldwin, Park, -California (1977)27 A major legal precedent for instructing Redevelopment Agencies that they should stay away from "commercialism" and concentrate on eliminating "urban blight" was the case of•Regus v. City of Baldwin Park, California in 1977. Kmart was involved ip this case. The precepts and principles set forth in this case have largely been ignored by RDA's and city and state officials as was borne out by a review of the 1989 Bergeson Hearings, described earlier in the chapter. More and more community and societal interest must be induced to save "Main Street" traditions and retail stores and to conserve the scarce assets of schools districts, cities, states and taxpayers. The agencies' abuse of their powers is summarized well by a California appellate court in Regus v. City of Baldwin Park, California. "Under the law, blight must be found before redevelopment can be authorized, because, first, without evidence of blight there is no solid justification for compelling taxpayers in one section of the community, for example to those in the county, the school district, and in Baldwin Park outside the Project area, to subsidize the cost of development of another section of the community by carrying a disproportionate share of the cost of local government." "Second, unrestricted use of redevelopment powers fosters speculative competition between municipalities in their attempts to attract private enterprise, speculation which they can finance in part with other people's money." "When the extraordinary powers of urban areas are used as a fiscal device to promote industrial, commercial, and business development in a project area that is merely underdeveloped rather than blighted, competitive speculation may be turned loose. By misemploying the extraordinary powers of urban renewal, a redevelopment agency captures pending tax revenues which it can then use as a grubstake to subsidize commercial development within the project area in the hope of striking it rich, Such schemes contemplate borrowing money by issuing bonds on the strength of assured future tax revenues, money which is then used to acquire, improve, and resell property within the project area at a loss as an inducement to business enterprises such as Kmart to locate within the project area rather than in neighboring communities. In essence, tax revenues are used as subsidies to attract new business. The immediate gainers are the subsidized businesses. The immediate losers are the taxpayers and government entities outside the project area, who are required to pay the normal running expenses of government operation without the assistance of new tax revenues from the project area." "The promoters of such projects promise that in time everyone will benefit, taxpayers, government entities, other property owners, bondholders; all will profit from increased development of property and increased future assessments on the tax rolls, for with the baking of a bigger pie, bigger shares will come to all. But the landscape is littered with speculative real estate developments whose profits turned into pie in the sky; particularly where a number of communities have competed with one another to attract the same regional businesses. Undoubtedly, it was for these reasons that the Legislature restricted urban renewal to blighted areas, and when faced with abuses in 1976, further tightened its restrictions." "At best, City's projected redevelopment plan possesses a particularly speculative cast in that the businesses it hopes to attract through redevelopment are primarily those of consumption rather than production, businesses such as hotels and shopping centers whose acquisition does not increase the total wealth of a region as a whole but merely redistributes the existing supply by capturing business from rival communities. The success of such strategy assumes the absence of effective counter -measurers by rival communities targeted for displacement."28 In summary, the author concludes that there is little in the redevelopment law to stop agencies from currently abusing their powers. First, as a practical matter, there appears to be no one to enforce these California laws. The tax burden these agencies (RDA's) redistribute to other taxpayers does not hit any one taxpayer hard enough to justify him or her spending tens of thousands on litigation to challenge the subsidy. Apparently, state administrative agencies fail to monitor what the local redevelopment agencies are doing. City attorneys are not aggressive in telling the city council which employs them that they may be acting either unlawfully or immorally in grabbing added revenues. Second, the agencies succeeded in convincing the California Legislature to impose a short statute of limitations (60 days) on many redevelopment law claims by citizens -- meaning that by the time most citizens learned about what the agency was up to and hired counsel competent to deal with the matter, it was too late. Third, the standards governing these agencies have historically been loose. Courts generally have applied their usual rules of complete deference to "legislative" decisions and extreme deference to "administrative" decisions. Comments from Illinois, New York and Pennsylvania Previous chapters indicated both quantitative and narrative comments from Illinois, New York State and Pennsylvania as well as California. California has been treated in great detail and the subsidy program there with its apparent abuse became quite clear. A word about other states in the survey follows: Illinois Chapter IV described many critical comments from small retailers about Illinois' subsidy program for the major chains. Apparently this resentment has reached the governor's office and the following statement by Jim Edgar, Governor of Illinois in 1993, admits damage to resident retailers by favoring the imeoming "giants." In a State Government News article entitled, "Are Economic Development Incentives Smart?"29 he summarizes his concern about oversupport of the "giants" and undersupport of the small businesses in Illinois: "State leaders have no' greater charge than to promote and preserve the economic security of those they serve and the generations that will follow; yet, I am convinced that we can meet that responsibility more responsibly and more effectively by calling a truce to the bidding wars that became the centerpiece of economic development efforts in the 1980's." "The battles have been intense and well-publicized. State after state has tried to outdo its competitors in wooing new commerce by fashioning glittery giveaways that feature tax breaks and other allurements. All of us can point to success stories -- to creation of new jobs, both direct and spinoff." "But at what cost? Businesses that have bolstered a state's economy and have helped support vital government services for decades have been neglected -- and worse yet, imperiled -- as competitors receive handsome subsidies to locate a few miles away. Moreover, policies and projects that promise to enhance a state's economic viability in the long term are detoured and perhaps even ditched in favor of the instant gratification, not to mention political credit, that can accrue from a short -terns gain." "In Illinois, we are not disengaging unilaterally. To do so would be just as unrealistic as it would be for the United States to have withdrawn unilaterally from the nuclear arms race. However, we have retooled our economic development efforts." "We are shifting the emphasis away from luring new businesses with company - specific incentives and toward providing the basics that will help businesses in our state survive and thrive in a global economy that is becoming increasingly competitive." New York Developments The respondent comments in Chapter IV were quite critical of the unfairness of the New York state subsidy program with respect to resident small retailers. It was the California and Illinois resentment, disclosed once again. Edward Regan, former Comptroller of New York State, was a crusader for subsidy accountability and wanted to disclose "hidden costs." In his 1988 booklet, Government, Inc., he argued that politicians were remiss in their duty to watch the public till because they would rather out ribbons than scrutinize the total impact of their giveaways. (Government Inc. was published by the 14,000 -member Government Finance Officers Association.) Regan's points follow:30 "State economists generally agree that it is in the hidden tax expenditures' of abatements and credits that corporations often get the largest subsidies. Because they are not paid in the form of outright government checks, and because they fade from public attention over many years' duration, they attract little attention. However, the cost to taxpayers is the same as if the government wrote a check." "But governors and mayors do know about these hidden values, and they are often quite touchy about the subject. Indeed, one governor summarily fired a state economist because he had dared to make, a conference talk that questioned whether the state would ever break even on a lavish auto -plant deal," Regan pointed out a pending New York State Senate Bill (text follows) which simply required that each program resulting in forgone tax revenue be reported on annually, as any other government expenditure would be, at the state, city, town, village, and county levels. Beside actual dollar costs, the bill would require an evaluation of the expenditure's effectiveness, and whether or not the program has caused jobs to shift from one part of the state to another, resulting in dislocation. The Senate Bill in New York which began to list requirements for the behavior of subsidy recipients follows: New York Senate Assembly Bill A. 6068-A, 1993-1994 Session 31 "163-B Recoupment of Financial Incentives to Certain Businesses." "1.... Each contract, agreement or understanding by which a person, firm, partnership, company, association or corporation within the State receives an award, grant, loan, tax abatement or other business incentive from the state, any of its political subdivisions, or any department, bureau, board, commission, authority, or other agency or instrumentality of the State or its political subdivisions ... shall contain the following provisions:" "(a) A stated period of time within which the terms of the contract, agreement or understanding are to be fully executed and completed." "(b) A stated purpose and the amount of the award, grant, loan, tax abatement or other business incentive." "(c) Where applicable, the number of persons to be trained pursuant to the terms of the contract, agreement or understanding." "(d) Where applicable, the number of jobs to be created or retained pursuant to the terms of the contract, agreement or understanding." "(e) Where applicable, the extent of the operations or facilities to be developed pursuant to the terms of the contract, agreement or understanding." "(f) Notice to the recipient that the full amount of the award, grant, loan, tax abatement or other business incentive awarded shall be payable with interest, upon a finding that the recipient has not executed or completed the stated purpose of the project within the stated time period." The New York Economic Development Zone Law passed in 1990 further provides restrictions on the behavior of recipients. "Section 959; Responsibilities of the Commissioner."32 "The Commissioner shall:" "(1)(a) ... promulgate regulations governing (1) criteria of eligibility for economic development zone designation ... (iv) ... so as to revoke the certification of business enterprises for benefits ... upon a finding that ... (2) the business enterprise has failed to construct, expand, rehabilitate or operate its facility substantially in accordance with the representations contained in its application for certification; (3) the business enterprise has failed to create new employment or prevent a loss of employment in the economic development zone provided; however, that such failure was not due to economic circumstances or conditions which such business could not anticipate or which were beyond its control; ... (A) the date determined to be the earliest event constituting grounds for revoking certification shall be the effective date of decertification; ... the commissioner shall notify the commissioner of taxation and finance that such decertification has occurred ..." Also a New York Senate Assembly Bill 33 sought to add strict "clawbaek" language to contracts let by every single State development program. The contracts would specify how many people were to be trained or how many jobs were to be created or retained or which physical developments were to occur. They would also specify the timetable for achieving the numbers, and if a company failed to deliver, the value of the subsidy would be payable with interest back to the relevant State agency. Pennsylvania Tax Abatements In the Pennsylvania study reported in earlier chapters, there was resentment discerned in tax abatements provided by local governments to large discounters. For example, Carrefour, a French discount retailer, was to pay no property taxes to the City of Philadelphia for five years. After receiving all the tax abatement advantages, Carrefour left the city after 4 years. The following bill was introduced in 1993 to correct this abuse: Pennsylvania House Bill 19.9334 "Section 1. Standards for financial aid." "Persons, firms and corporations seeking to construct or expand commercial or industrial facilities within this Commonwealth and who are applying for financial assistance from the Commonwealth or any of its development agencies or authorities are subject to the following standards:" "(1) Applicants are required to prove a need for financial aid." "(2) Applicants will be held to promises made relating to the type and nature of facilities; the type and nature of the products produced; the type, nature, number and wages of any jobs promised to be created; and whether or not such jobs are truly new jobs or merely transfers of jobs from other in -State locations. Any such promise shall be legally enforceable as provisions of contracts are enforceable." "(3) If an applicant has had operations within this Commonwealth within the past ten years, it shall be required to prepare a preferential hiring list and offer new jobs to former employees wishing to relocate and to assist financially in their relocation within a radius of 500 miles." "(5)(ii) There shall be,no discrimination in hiring based on previous union membership." "(6) Wage rates and minimum job levels shall be negotiated in advance and shall be enforced," As described earlier there are varying types of corporate welfare found in the sates under study. One unique example took place in Philadelphia where mega - retail discount chains such as Home Depot, Sam's Clubs and Wal-Mart wanted to,-. open their "Big Box" stores on land abutting the Delaware River, to create a "Power Center." An influential interstate government authority, the Delaware River Port Authority (DRPA), with jurisdiction over bridges, piers, marine and related facilities was involved. This authority in 1993 was requested by real estate developers to consider financing the purchase of water front land for the mega - retail discount chains to build upon. The land was to be. purchased by the DRPA rezoned and sold for development. The land in question is now occupied by Home Depot and Wal-Mart. The unique characteristics of this form of corporate welfare is that the package was created by a port authority and not a local municipality. A New Civil War is Brewing According to Greg LeRoy, author of No More Candy Store:35 "Whether or not the federal government ought to practice industrial policy is a much -debated issue. Industrial policy critics often characterize the debate as whether or not government can or should pick winners and losers'." LeRoy states further: "The fact is, however, the federal government's laissez-faire attitude towards the ruinous civil war over jobs is actively contributing to the problem of capital mobility and thereby producing lots of losers'." "The biggest job subsidy programs such as Industrial Revenue Bonds (enabled under the federal tax code) and Community Development Block Grants (Department of Housing and Urban Development) and other Department of Commerce titles, have no anti -relocation rules at all." '"Only two current federal job subsidy programs have anti -relocation regulations: the Job Training Partnership Act (DTPA), (Department of Labor) and the Public Works title of the Economic Development." "ln any case, states routinely evade the JTPA and EDA anti -relocation rules by simply substituting state funds for the training and infrastructure purposes served by the federal funds." "But it's all a shell' game, because state budgets rely heavily upon federal grants. The money is fungible' or interchangeable, and many of the non-regulated state programs could not really exist but for big annual federal grants." "By allowing companies to play states against each other with federal money, the U.S. government is aiding and abetting the jobs civil war. Little regulation plus the shell game means that federal subsidies in effect subsidize runaway shops all the time. Therefore, only strict, broad federal rules plus aggressive state punishments can stop runaway subsidies." This competition among communities and states is rightfully described by LeRoy as a "ruinous civil war." A similar accusation is made in a recent Time article describing various deals made by cities and states to lure industry. The article _ - mentions a theory by Barry Rubin, a professor of public and environmental affairs at Indiana University, that the tax breaks that everyone competes on are not the real deal makers: "The dirty little secret in the incentives game is that the real criteria for site selection are skill and cost of labor, proximity to customers and price of real estate. Tax breaks are rarely the deal maker.... a firm's variable costs - charges that come on top of fixed expenses like lease payments - state and local taxes make up at most 3%. Giveaways are likely to have little impact unless other factors are virtually equal."36 However, cities and states are still afraid to not offer these incentives. Examples can be found daily in the news of deals and counter deals among states competing for industry. As was mentioned earlier, some governments are establishing controls to keep these fights from getting completely out of hand. "Connecticut, for example, has created clawback' agreements that require corporations that fail to meet job targets to repay tax subsidies. Minnesota scaled back $620 million in aid to Northwest Airlines after it delivered fewer than 1,000 of 1,500 promised jobs, Washington has also grown concerned. Senator Jeff Bingaman, a New Mexico Democrat, wants the Commerce Department to decide whether companies that receive tax benefits should be required to file cost -benefit analyses and stand behind their job pledges."37 Small Businesses Join the Rally At the 1995 White House Conference on Small Business, delegates identified the 60 most important recommendations which They felt would further the economy, protect their position in the economy and society and promote growth in the social and economic welfare of the United States. Two of these recommendations highlighted the concent of these small business owners and advocates on this "civil war" and the victims (the displaced small business) of the bloody battle. "44. State -to -State Competition for Jobs and Business: Efforts of an individual state or municipality to benefit its local economy should not be made at the expense of other states or municipalities and at the peril of the strength of the entire economy. It should be the interest of the Congress to benefit the economic security of all the citizens of the United States by working to provide the resources to expand the economy nationwide. Therefore, Congress should ban the direct or indirect utilization of federal funds of any kind, including subsidies, grants bonds or tax exempt financing that €ands, in whole or in part, any special tax, infrastructure improvement and/or financing incentive by any state or municipality to lure existing jobs and businesses from one location to another."38 "139. Small Business Relief Fund: Congress should legislate the creation of a Small Business Relief Fund to economically assist small businesses that are displaced by the establishment of a big business in their localities where the big business will contribute an annual fee for the fund."39 Interestingly neither of these recommendations were in the leading recommendations of the two previous White House Conferences on Small Business in 1980 and 1986. This speaks to the growing concern of small businesses. about the impact of mega -retail discount chains and the corporate welfare' they receive. Unfortunately, no action has been taken by the Administration or Congress on either recommendation at this time. Recommendations to Congress for Federal Legislation to Combat and Restrict "Big Box" Abuses - The following recommendations, hopefully would restrict "Big Box" abuses by mega -retail discount chains, developers and Redevelopment Authorities operating under existing state redevelopment laws, by taking away state and local tax giveaways; and provide a vehicle for Congressional Hearings. The idea is to attach strings to federal monies given states and localities: for example, such strings are often attached to highway monies. This would make sense here because these "Big Box" stores create additional burdens on federal highways, as they are often built in areas accessible only by federal highways. The legislation would say that highway money would be reduced to any state which allowed these stores to go up in any of the following circumstances: (1) if the development received state or local tax incentives; (2) if it was within x miles of a federal highway; (3) if the developer/retailer did not pay the government for the full social costs of building such a store (not just for repairing highways more often, but also cleanup of air pollution) (a study to determine those costs should be required); or (4) if a required "small business impact report" showed existing small businesses would be injured significantly. Ideas for titles could be: Small Business Survival Act; Retail Overdevelopment Act; Tax Financing Restraint Act (or any combination of these). Further, since the internal Revenue Code is filled with provisions which aid, help or restrict the activities of certain industries; it is a natural place to consider to curtail the redevelopment agency, developers and "Big Box" abuses. The idea might be to impose an excise or penalty tax on any state or local tax giveaways these "Big Boxes" wangle out of state and local governments. The legislation could possibly apply only to retailers with an income over x billion dollars or upon those with facilities over a certain size. Our logic is this: the federal agencies and Congress are the only people who can stop the states and cities from cannibalizing each other as each gives away more and more in the form of tax breaks to win these mega -retail discount stores; only to rob their neighboring town or state of tax revenues (and jobs) from the existing retailers. Again, in total, sales revenues are not increased, they are merely shifted. Only states or the federal government can step in to stop the current warfare; warfare which makes local governments more dependent on Washington, D.C. No new net jobs are created, and because the mega -retail chains pay their employees less and eliminate jobs at others retailers, they cause the federal government to receive less in income taxes. This should certainly interest Congress and the U.S. Treasury Department. It is obvious that there are also incidental costs to the federal government for "Big Box" store development. They tend to expand near interstate highways adding additional traffic which certainly this costs the federal government more. The mega -retail discount chains generally don't provide health insurance to employees, adding these people to the governments' burden. These chains are quite profitable, so an excise tax would not put them out of business. Further, the environmentalists and preservationists should see the need to reduce the tax incentives for "Big Box" development. Finally, those in favor of reducing the federal deficit should be eager to embrace new sources of revenue. ........... Go To IT—o --o-f- Ag Table of Contents CHAPTER IX THE EMPLOYMENT PICTURE OF THE UNITED STATES Expected job loss in -the traditional retail sector creates serious concern when these losses are coupled with corporate downsizing and the negative impact to date on American employment by NAFTA and GATT as well as American trade policy. While the newly elected Clinton administration has an optimistic view on employment and the stability of employment, nevertheless, there continues to be significant downsizing strategies employed by major corporations. These actions and plans have adversely affected the career paths of tens of thousands of middle and upper middle class employees. Many of the "new" jobs that the Clinton Administration claims to have created in recent years may in fact simply be former career employees who now occupy two to three retail jobs to take home, hopefully, a living wage. L The major metropolitan areas of the United States are in deep trouble. These centers formally had diversified manufacturing employment with hundreds of thousands of stable tenure jobs from the blue collar level to middle and executive levels. Manufacturing jobs have been disappearing steadily though mergers, consolidations and movements of the manufacturing operations to low labor cost locations, such as Mexico, the Caribbean, Portugal, Spain, India, parts of the Far Fast and Africa. NAFTA and GATT and government policy have contributed to a steady export of jobs. I 1l. The elimination of quality jobs through downsizing by major corporations has hit epidemic proportions. Corporate philosophy to run a leaner, meaner ship delivered a shock wave throughout this country in the 1980's�;and in the 1990's. The big three auto manufacturers, General Motors, Chrysler, and Ford, reduced workforces considerably from 1978 to 1995. The manufacturing sector in the United States lost approidmately 2.8 million jobs over the same period. In 1996, AT&T announced that they would eliminate an additional 44,000 workers (they subsequently lowered the figure to 31,000) while defense contractors lost 500,000 jobs over the last decade. The effects of downsizing, according to Lester Thurow in his new book The Future of Capitalism illustrates empirically his opinion of the downsizing effect. In the first downsizing wave, 12% of the outplaced workers left the workforce completely, 171/o remained unemployed after two years. Of those finding new employment, 31 % took a wage reduction of 25% or more and 32% of worker's wages were reduced by one to twenty-five percent while only 3711/o found no wage loss. What are the economic dynamics when 63% of people finding replacement jobs are taking such drastic reductions in their standard of living? Moreover, what are the consequences of social services, health care or even defense when diminishing taxes are collected? An extreme example is cited by Thurow, that in studying RJ Reynolds Nabisco's hostile takeover and subsequent layoffs, one discovers 721/o of the workers found new positions at an average of only 47% of their old wages. Corporations now have started their own out sourcing networks. These out sourcing workers are paid at a much lower wage with little or no health benefits. I In the past, full time employees working for major corporations had health cue benefits and pension funds, by out sourcing, corporations free up these costs, thereby, improving earnings per share and stock prices. A number of the mega -retail discount chains as well fail to provide the usual health and other fringe benefit packages provided by the displaced "Main Stmt" retailers. The societal implications bf America with a large percentage of its workforce going part-time is unthinkable in its impact. Ultimately these costs for family security will have to be faced by the general taxpaying public. file://A:\Chapter%209-bc.htm 2/11/2003 vw.wtr w: .f Ravi Botra, author of The Myth of Free Trade, stated that the watershed year for the American standard of living was 1973. It was the year when real wages started its long decline, family poverty rates increased and.-rising.inequality between rich and poor materialized. Batra clearly stated that "economists concede that -GNP and per capita income are not ideal measures of national prosperity. "2 The President's Economic Report for 1992, for instance, makes the statement that growth in real GNP or GDP cannot assure.an increase in ,the level of living. This is especially true when applied to real wages. A truer measurement, Mr. Batra states; is the weekly earnings. paradigm which is applicable to production and non -supervisory workers, who according to the United States Bureau of Labor Statistics, constitute 80% of all employees. Therefore the GDP and per capita figures fall flat or distort the real picture. These statistics exclude executives, managers and professionals such as lawyers, doctors, etc. According to Batra's calculations, real wages increased by 15% between 1954-55; 7% between 1955-60; and only 6% between 1970-73. Since 19.73, real wages have fallen steadily. More importantly, this decline has impacted at least 84% of the work force even before increases in Social Security and taxes are calculated into the equation. Thus take home pay is seriously impacted in an adverse way thus requiring families to have multiple wage earners. During the period between 1975-1995, the inflation rats rose 183%, while blue collar and white collar workers earnings across all private industry increased a mere 142%. Average salaries in 1995 were $20,559 dollars. This average earnings unfortunately will buy $3,500 less than could have been purchased in 1975. Real wages for most workers in America are falling rapidly.3 The change in lesser buying power is not bringing the Third World closer to our standard of living but in fact is reducing our standard of living in the direction of Second and Third World levels. Extensive competition among underdeveloped countries guarantees future cheap labor markets. Many of these Second and Third World nations disregard constructive environmental regulations and utilize child and prison labor, as well as paying wages which can be as low as $1.00 per day. As the quality jobs continue to decline at such giants as Ford, General Motors, Chrysler and AT&T, new jobs are being created by the tens of thousands by mega -retail discount chains. However, when you do a comparative analysis on the employment picture (GM vs. Wal-Mart), the facts become obvious and startling. In a three week series in The Philadelphia Inquirer on "The American Dream," which ran in September 1996, a clear picture of the future of American jobs was presented. From 1978 to 1995, the big three (GM, Ford, Chrysler) had reductions from 667,000 to 398,000 hourly employees. Not to worry, as Washington and many economic pundits point out, new jobs are being created to replace the old ones. Employment by Wal-Mart alone accounted for a 2890% increase over the past 20 years. In 1978, Wal-Mart had 21,000 workers and revenues had reached the $100 million dollar plateau; by 1995, it had over 628,000 workers and revenues were approaching the $100 billion mark. According to the data, apparently, one out of every 200 American civilian jobs is being created at Wal-Mart. The Inquirer series explains a qualitative analysis is important. For example, 30%u of Wal-Mart workers are part-time (full-time is 28 hrs., therefore, the 30% is exceedingly conservative figure by traditional standards). Positions at major corporations such as the big three are full-time, i.e. 35 - 40 hrs/week and overtime pay is not unusual. As for pay, a GM assembler earns a minimum $18.81/hour in wages; a tool and die maker $21.99/hour. Most Wal-Mart workers earn a dollar or two above the former minimum wage of $4.25 an hour. Then there's the matter of benefits. The auto workers have a guaranteed annual pension. The Wal-Mart employees do not. The auto workers receive fully paid health benefits. Wal-Mart part- timers receive no company paid benefits and "full timers" must pay for part of their health insurance. The Inquirer series also states that new jobs should have been created replacing the old by new technologies, such as in cellular phones; however, manufacturers in those high technology industries seem to prefer lower cost overseas production.4 file://A:1Chapter%209-bc.htm 2/11/2003 ♦.ra..,wY wa LoaiQng at the quantitative and qualitative analysis in Chapters III and IV of this report, one can clearly see that small businesses throughout the United States are deeply concerned about their futtire abilityto survive the dramatic increase in competitive power of the mega-re#ail discount chains. Sixty percent of the Californians responding predicted losses in employment with 21% predicting those losses to total 50% or more. Illinois showed 4$% predicting job losses with 13%6 estimating losses of 50'/6 or more. Sixty-two percent of -Pennsylvanians responding predicted job losses, with 18%6 concerned about job losses of Yr/.or more. New York showed 57°/a predicting job losses with 160/9 estimating losses of 54°/a or more. These small business are also looking at lost profitability, reduced sales volume and lower employment. Small business owners have been the major backbone of the U.S. economy providing necessary goods and services while transferring sales tax benefits toward public schools, libraries, fire and police and- a myriad of the municipal functions. Many of these small business are suffering attacks by the mega -retail chain stores, with their large volume buying power, and seemingly unlimited resources. Globalization and free trade may be a panacea for the transnational corporation; but small businesses, with their limited buying power and potential loss of wholesalers, are at the mercy of the very business with which they are in Competition. Polling national opinion in the 1950's and 1960'x, one would find that approximately 29% of Americans thought the country was managed specifically to help rich Americans. In 1992, 800/a of Americans believed this to be true. Whether these ideas are factual or not is irrelevant, the impression or. perception created is becoming a mind set in America. The lead article in The Philadelphia Inquirer series mentioned earlier does support the 80% point of view. The middle class in America, according to the Inquirerjournaiists, is under attack. In 1970, just 26 years ago, 570% of the population was considered middle class - by 1993 only 47% was in that category. While the middle class has been shrinking, two other segments of society have been increasing. The poor category increased from 390/0 to 450/0, while the affluent (very rich) class doubled in size from 4% to 8%. Moreover, the top 1% of households controlled over 1/3 of the nation's net worth, and the next 9% holds 36.8%. Summarizing these statistics, 10% of the population controls over two-thirds of the wealth, while 90% holds the .remaining one-third.5 The following quotation from a recent article in The Wall Street Journal, "Retail's Shrinking Middle," confirms through consumer behavior what the Inquirer stated earlier in its series: "Traditionally, the middle' was the power position in America business. They perfected the one -size fits all' business model, offering moderate service, prices and information to customers who had fairly similar demands."6 The major theme of the article points out that over the past 10 years consumers are moving to both extremes. Businesses such as Price Club, Wal-Mart, Sam's, Dell Computer and discount brokerage firms have flourished, satisfying consumers looking for no frills at low cost. At the other extreme, companies like. Saks' 5th Avenue and Nordstroms thrive satisfying the affluent consumers for whom cost is not an issue. It is the middle of the road corporations like J. C. Penneys, Broadway (now bankrupt), Sears, and Montgomery Ward which have stagnated. The success of the mega -retail discount chains, such as is a direct manifestation of the "shrinking middle." Thurow states in his book, The Future of Capitalism, that "When the distribution of income is altered, who sells what to whom quickly adjusts. Marketing and production shift to focus on the groups that have been gaining purchasing power."7 The others simply lose market share and eventually fade away. In Mr. Thurow s opinion, the shifts have been occurring due to fewer numbers of customers with middle class incomes. It would follow that the success of the mega -retail discount chains might possibly contribute to the destruction of the middle class. file://A:1Chaptee/6209-bc.htm .2/11/2003 in Thurow s c Kampley stores like Sears, J.C. Penney's et al. were locked into a fixed formula _ concentrating on middle class buyers; thus they exhibited an inability to adapt either upward or downward which created economic problems and hardship for those companies. Thurow hypothesized that in the future such mega -retail discount chains as Target, Kmart and Wal-Mart might have problems because their market is the bottom Wle of families. With real eamings now falling for these families, their purchasing power will also decline.8 In the Inquirer series on "The American Dream," it was noted that from 1980-1995 the United States has compiled a perfect record -16 straight deficits in 16 years. It is without equal ... the worst performance in the world. During the same period Germany achieved a $658 billion dollar surplus while Japan's surplus exceeded $1 trillion dollars. Reiterating an earlier figure, the American trade balance with Mexico prior to NAFTA acceptance wag a surplus of $1.7 billion. Since the agreement incorporating lower tariffs with less restrictions, the surplus has turned red to the tune of $15.4 billion. China's trade deficit was a mere $1.6 billion in 1986, today it has catapulted to a $33.8 billion surplus - an increase of over 2000%.9 In the past several decades, every President from Johnson to Clinton has made the claim that for every billion dollars worth of exports, 20,000 jobs are created at home. To follow this logic, for every billion dollars in imports, 20,000 jobs should never materialize or would be lost to foreign countries. During the years 1980 - 1995, the United States amassed a trade deficit of $1.7 trillion, while during the same period, Japan was able to create a surplus in trade of $1.1 trillion. Using the formula of job loss of 20,000 employees to $1 billion in trade deficit - it is obvious why American jobs in manufacturing and other industries have disappeared. Add to this the threat of retail job loss stimulated by the mega -retail discount chains - what is the future for American employment? Is our government realistically concerned with the future? If it is agreed that a favorable trade balance of $1 billion is equal to a gain of 20,000 jobs, then an unfavorable trade balance of $1 billion would mean a loss of 20,000 jobs and result in a negative impact on the nation's GDP. In a given situation, if 20,000 jobs are gained, the net gain to the economy could be much larger than 20,000 jobs because of the regenerative purchasing power of the 20,000 employed. For example, in addition to the gain of 20,000 jobs there could be an additional 20,000 jobs generated between secondary and tertiary economic activity. Basic payroll generates additional payroll due to the respending patterns. The multiplier can also be applied to the situation of a loss of jobs and secondary and tertiary respending. The greater impact could be as much as three to one. In other words, the loss of jobs and payroll resulting from the displacement of small retailers by mega -retail discount chains, not only affects the retail employment picture but also all others employment companies in the area. The loss of jobs because of the multiplier effect is staggering when one looks at the raw numbers of jobs disappearing but to consider double to triple the amount is unthinkable. Yet this is the impact of these policies. TV� r.' : !t '3- r - KV $71 rr it , TT 11 M I 17111t a_ii Ir...d__ — As a nation we complain continuously about the moral crisis in America; where character is diminished, children are having children, and crime increases with few exceptions. Our inner cities, as explained in Chapter VIII on corporate welfare, are under economic attack with no jobs available. When- the United States, viewed by some as the moral light for the free world, signs agreements and gives "most favored nation" status to nations that use child labor, political prisoners and slave labor in order to manufacture goods which compete directly with American workers, and one fails to note a voice of indignation or file://A-kChapter*/o209bc.htm 2/11/2003 disapproval, one must examine the contradiction.. Our "conditioning" or "blindness" to these situations is shameful. When it is publicized that mega -retail discount chains are allegedly using child labor either directly or through surrogates in Honduras or in other Second and Third world countries, the listener simply listens for a few minutes returns to business as usual. In New York and Los Angeles sweat shops are discovered using illegally smuggled children to manufacture goods for American corporations - and little is done. 17 11 t f 3 I I 1 .ti I I i' A 1,1 7 I In the last twenty five years, America's trade deficit has ballooned to $1.9 trillion dollars. Every foreign country on the Pacific Rim has used the United States as its stepping stone economically into the 21st century. Japan, Taiwan, China, Indonesia, Singapore, Korea, and Bangladesh among others. The one significant economic commonality, with the exception of Japan, is cheap labor with few political and economic restrictions_ How does the Ametican worker compete? In the last twenty years attributable to American trade policy., millions of manufacturing jobs have vanished. In 1970 along the Mexican border there were sixty-five employers (Maguiladoras) with 22,000 workers; in 1991 more than 1,700 employers hired over 500,000 workers. The incorporation of NAFTA in 1994 was supposed to produce new jobs and to be a gateway to the future with the vehicle being free trade.l© An October 1996 article in U.S. News and World Report reported upon earlier showed that the trade balance with Mexico before NAFTA was a positive $1.7 billion and after NAFTA, a negative $15.4 billion with a negative trade balance continuing at one billion per month. Imports from Mexico before NAFTA were $40 billion; after the agreement $61.7 billion.I 1. While the United States Trade Office estimates that NAFTA has cost only 44,000 jobs, the number appears to be ridiculously low based on the writer's own experiences with reports from American corporations going to Mexico after downsizing in the United States. According to the article, the average starting hourly wage in Mexico is 69) compared to an average Dourly wage in similar plants in the United States of $15 or even the minimum wage of $4.3 5. Two contradictory schools of thought have developed in America over the last 25 years. One school of thought continues to argue for free trade, globalization, NAFTA, GATT and the World Trade Organization, while the opposing school of thought cites a decline in real wages, downsizing by corporations, greed, elimination of manufacturing jobs and the eventual extinction of the middle class. With a disappearing middle class there will be a widening gap between two separate distinctive societies (the very rich and the very poor). What complicates the debate is a political process that has been completely polarized due to inherent differences in political philosophy. In today's political arena, ideas are no longer analyzed but destroyed, along with its messenger. These politicians and statesmen who warned of the dangers of NAFTA, GATT and the loss of American jobs have been accused of backward thinking and put in the historical position of advocating a Hawley - Smoot manifest picture going back to the Great Depression. Republicans and Democrats alike often respond by killing the message with the messenger. The 1996 presidential campaign never again revisited or brought to light the argument of how contemporary trade policies affect the American worker. Furthermore, with political contributions coming from abroad by the millions, both parties seem to view any discourse on the subject pure sophistry. file://AAChapW/6209-bc.htm 2/11/2003 The nation is not only losing jobs because of "free trade policies" which cmtainly do not result in a level playing field but also lose the prospective economic dividends which come from innovation and entrepraaeuxship. Helene Cooper, a staff reporter for The Wall Street Journal stated that: "for the first time U.S. defense related subcontractors can quantify how much money they are losing when foreign governments demand trade concessions and technology transfers in exchange for contracts." The United ::States -Department of Commerce reported: "U.S. defense contractors have entered into 49 offset transactions valued at $2 billion dollars." 12 In May of 1996, The Nall Street -Journal broughtattentionto the fact that dozens of.deals had been completed involving billions of dollars in technological transfer to foreign manufacturers. It was reported that McDonald Douglas and Lockheed Martin Corporation had allegedly been engaged in transfer deals with foreign entities. These companies, and businesses like them, built F-16 and F-.15 fighters for the Air Force and the Navy. Importantly, the research and development for these aircraft has been paid for by U.S. taxpayers. Incomprehensible as it may seem, U.S. proprietary technologies possibly are now being used to develop a new aerospace industry in foreign countries, competing directly with American corporations and destroying many of our remaining aerospace jobs. What has the United States Department of Commerce determined the long term effect to be on the aviation industry? Have they even considered it? Never mind the moral dilemma which will faced when U.S. service personnel encounter our own advanced technologies in armed conflict. What is the motivation for America's transnational corporations and corporate executives to sell proprietary American technology? The United States Department of Commerce apparently condones the aforementioned policy, according to Ms. Cooper. In the coming decade we will enter a new millennium and important economic, political and philosophical decisions will have to be made affecting the direction this nation will travel. Trade agreements (i.e., GATT, NAFTA) have been made in concert with the government's orthodox free trade policy which appears to be operating to the disadvantage of the United States. Moreover this appears to be a recognition of the validity of statistical data indicating that the American middle class is disappearing. Yes, lower paying jobs, somewhat menial in nature in the service sector are being created, but quantity is no substitute for quality. With the average weekly earnings rate falling by 19% over the last twenty five years, trade deficits approaching $2 trillion dollars and domestic manufacturing employment dropping sharply; it appears that the United States Congress is abdicating our sovereign rights on the altar of "free trade." As we approach this new century and before "two roads diverge in a yellow wood" it is time to evaluate our future plans regarding trade, jobs and corporate policy by constituting a bipartisan commission. If in fact free trade, as defined by contemporary standards, is damaging the American workers, should the. country know the truth? Economists like Ravi Batra have unequivocally stated "free trade has done to America what even the Great Depression could not do. Even during the economic cataclysm of the 1930's, earnings rose with productivity because the United States was still a closed economy with high tariffs. But since 1973, weekly earnings have declined, while productivity has continued to rise. Eventually, free trade could be more devastating than even the Great Depression."13 Mr. Batra clearly blames the shrinking middle class squarely on the shoulders of free trade. The whole idea behind free trade is the creation of quality jobs, and that simply hasn't happened when a comparative analysis is, done. More disturbing is that any disagreement launched at free trade brings on file)/AAChapter%209-bc.htm 2/11/2003 the economic spin masters who attemptt_to-distort the issues and destroy the mess;w r. Moreover, if in fact free trade is diminishing the middle class and jobs being created are just above the poverty line, what are the societal implications? Hypothetically, what if American corporations become fond of exploiting cheap labor worldwide? Would the next step be domestically? Many believe this is already happening and. to some degree statistical data agrees. The corporate response will be rather predictable, . , it will go something like this: "As a corporation we can no longer compete successfully in a global economy when domestic wages are 30-60% an hour higher." The Free Trade Economist (a powerful -special interest group) and companies will contrive the argument by postulating and clearly demonstrating how through free trade the.global..standard of living is rising, in fact they are (as Adam Smith "Invisible Hand" states) actually humanitarian in their efforts. American Corporations are entitled to make billions in profits for shareholders, but if capital is going overseas for the building of new facilities, and. jobs are being created for foreign workers, while the American middle is shrinldng, we have a serious national problem. Up to this time there is a scarcity of reliable positive data showing that America will gain in jobs by NAFTA and GATT. Free trade as it exists is of the sort that leaves American producers operating on an unlevel playing field. What are the real ramifications of free trade and what sector of society is truly the winner? What is the future of small business when multi nationals have all the advantages economically? This is not a contest between political philosophies, but a pragmatic decision about the future. Let's NOT continue to posture, spin, and destroy; for once let's examine the issues. Economists are constantly discredited for theories that crumbled in the face of reality. To go down a path led by dogmatism with individuals that have no accountability for their decisions is a prescription for disaster. To: o f P Table of Gontetits file://A:kChapter°/,6209-bc.htm 2/11/2003 % u,"Gwwa i v ,.� ..- CHAPTER X CONCLUSIONS AND RECOMMENDATIONS The writer has devoted almost three years to this study. He has sent out approximately 6,000 questionnaires to small retailers asking their views on strategies for survival in the face of the formidable gains of the mega -retail discount chains. The questionnaire returns have been analyzed statistically and data has presented a picture of fear, sadness and disillusionment about the chance for small retailers to survive the impact of the mass discounters. This data is available in Chapter III. Most of the returns included essay type answers explaining concerns about the survival of small business and the lack of serious efforts on the part of the federal, state and local governments to save their family businesses as well as the jobs and investments created over many years of hard work and sacrifice. Much of the resentment was focused on redevelopment agency plans in many states where tax.funds have been made available to the mega -retailers to pay for capital outlay and debt service for these "Big Boxes" which have destroyed the viability of the "Main Street" merchant, while denying the small business merchant the use of development funds to end center city blight. This type of subsidy for the mega -retail discount chains has been described as "corporate welfare." In many instances the retention of sales taxes for 10-15 years has deprived school and other local governments of needed revenues. It is clear that there is only so much demand in a given area, and where a supercenter opens, the result is often the closing of the smaller competitors. While the chain retains the sales taxes, the ultimate closure of the small retailers eliminates a traditional flow of revenue to the schools, counties and state governments. The writer also visited and studied the commercial activities of the "Main Streets" and malls in California, Illinois, New York, and Pennsylvania. in the urban areas, the closing of apparel stores, drug stores, shoe stores, sportswear stores and hardware stores has destroyed the economic balance of the enclave or neighborhood. These stores have been unable to compete with the mega chains, such as Wal- Mart, mart, Target and others; and jobs have been lost within the enclave and neighborhoods. A lack of jobs in small family type businesses reduces the purchasing power of the neighborhood and eventually affects even the prosperity of regional chains such as Bradlees and Caldor, both having declared bankruptcy within the past few years. Moreover, Kmart has recently reported serious losses which have been noted on Wall Street. Problems have also been reported at Charming Shoppes and other regional and national chains. The author also visited malls which 5 or 10 years ago were clean, bright, prosperous and bustling with customers. In many of these malls, the appearance in past five years has changed radically for the worst. There now could be a 30% to 40% vacancy rate. The traffic flow has become weak. The boarded, closed stores are loaded with graffiti and the malls have a slum -like appearance. I: f.T Suppose a Kmart or a Target was an anchor store opening in the mall 5-10 years before. The square footage of the store ranged from 30,000 to 60,000 feet. Suppose several years later a Supercenter, such as Wal-Mart, with perhaps 200,000 plus square feet were to be constructed one-half mile away, soon, the auto traffic in the older mall lessened. The Target or Kmart with only 45,000 sq. feet closed and file://A:1Chapter%2010-bc.htm 2/11/2003 surrendered. The anchor stare then remained vacant and the decline of the mall accelerated. Throughout the United States, formerly prosperous malls or strip centers have given up. The areas have become desolate and look abandoned and the customers depart for the newest supercenters and their parking areas. Previously mentioned and described in this study is the new phenomena of the "Power Center" which has been gaining momentum in the -mid 1990'x. The Power Centers have been described as "Big Box" farms where there are a half-dozen or more mega -stores and smaller superstores set around vast (upwards of 1200 spaces) parking lots with total retailing space nearing one-half million square feet. The effect of the centers multiplies that of the single mega- or super -store. These stores and centers draw customers from a radius of 10 - to 15- miles in maj o? inetropolitan areas and even larger areas in rural ones. By increasing their drawing range, these mega -retail discount chains are also increasing their negative impact on "Main Street" retailers as well as the smaller retail discount chains that during the past year have been plummeting into bankruptcy or dissolution. In California, we have begun to see another approach. Wal-Mart, who has received opposition in some communities to building new structures has begun to renovate empty mall department stores or attach their new buildings to an existing mall. They are easily able to accomplish this since the community infrastructure is already in place - parking, roadways, water, and sewers. Their economic argument is that they will enhance the traffic to the mall; hence increasing overall business and the local GDP. But how is this constructive result possible when Wal-Mart provides direct competition to at least 50% of the small businesses already in the mall. Look at the example of the Huntington Beach mall (stores listed below in Table 15) where there are 31 relatively small stores in addition to three larger ones (anchors). Table 15 Huntington Beach Mall Spencer Crifts�I Wet_Seal Musicland Cheat Faith Lechters Sunglass Hut GNC Mon Ami Claires See's Can urlin on Coat Factory JHudson Goodman Jewelers Diamond Jewelershers ClothKinn Shoes a Bee To salden Books GTE -Phones__ R s Hairstyle LF.ane Bryant Radio Shack Hallmark ard's D artment Store Silver Lace Athletic Press JAshley Jewelers I Intri e Shoe Witz ost Office �� Ex rens Enivorium Sizes Unlimited General Store Mervyn's Department Store ofizon Beauty Su lies It is reasonable to assume that since Wal-Mart does present strong direct competition and a major challenge to many of the current mall tenants, that many of these tenants may not continue in business. file://A:1Chapter%o2010-bc.htm 2/11/2003 vaia�wa au i The argument or assumption that Wal-Mart will increase traffic must be questioned. The reverse is more likely to be true. A consumer, who traditionally shops at the mall in some of the smaller businesses or chains may be now more inclined to visit Wal-Mart while in the mall. However, the traditional Wal- Mart shoppers will not leave the store to see what else is available. They are drawn to Wal-Mart in the first place because their needs are met from a selection and price standpoint. Therefore, those traditional .mail,stores,offering:the .same or similar merchandise as Wal-Mart will lose traffic and eventually close. .Their closing -may have a ripple effect on other non -competing malt stores as the "traffic" flow weakens. Let us presume that as a result of a mega -retail discount "Big Box". moving. into a mall, it created a loss of 250 full time equivalent jobs. A calculation of the average salary expense including salary and fringe benefit expense per employee would total $6,250,000. However this estimate is based upon direct wages and benefits paid to mall employees. If one were to then consider the multiplier effect of these wages using a conservative multiplier of 2, the result on the regional GDP would be $12,500,000 without income gains in GDP brought by the new mega-retailerv`Obviously the gains would not match the losses here. Moreover, the "Main Street" impact of these small businesses which will close can be seen in the facts presented by the House Committee on Small Business: "The establishment of a small business has a large, positive effect on the local economy. A small business with 100 employees in a town adds: 351 more people; 79 more school children; 97 more families; $490,000 more bank deposits; one more retail establishment; $565,000 more retail sales per year and $1,036,000 more personal income per year."! These figures attest to the power of the multiplier, an issue which is seldom raised when describing the impact of the "Big Box" upon the mall or the community. Now, if 50o/a of the mall's stores were to close as a result of a mega -retail discount chain's opening, there would be a negative impact of GDP. It is true that the new mega -retail discount chain such as Wal-Mart or Kmart will bring jobs to the area; however, as it has been discussed, an average mega -retail discount chain job is not full-time with full benefits. The multiplier effect or buying power generated by a "Big Box" job can not fully compensate for the loss of a traditional retail job. There will be a net effect on regional GDP from the competition presented by this mega -retail discount chain and it believed that it will be negative for the reasons presented above. The "new" gobs created by the mega -retail discount chain will not compensate for the jobs lost from the traditional retailers who will close from direct competition. Added to this is the effect on the non-competitive mall stores and the surrounding restaurants and businesses to the mall. � 901177ffr I ,. 1?. l.:_ The 1994 publication of the National Trust for historic Preservation, entitled How Superstore Sprawl Can Harm Communities....., (and what citizens can do about it) describes the fact that rosy promises of increased revenues for cities, more jobs, affordable prices and good products don't always arrive as promised. Were it true, there would not be the hundreds of citizen groups throughout the nation attempting to hang on to the "land we love." Gene. Davidson, a resident of Berea, Ohio wrote the following in a letter to the National Trust for 11istoric Preservation: "I believe that the land that we love is literally vanishing before our eyes. The present new construction rate of Wal-Mart, Super Kmarts, Meijers, and others of superstore' breed guarantees file`ilA:lChaptera/o2010-bc.htm 2/11/2003 others an inevitable destruction of much of wba# we. hold.dear. Add to the new construction starts of the superstores all of the franchise operations, such as Sub Way, McDonalds, Taco Bell, etc., and you can project ten years down the road an intolerable situation. This country would eventually be virtually unrecognizable from what we knew as the United States just one generation ago. "Z While the sixties and seventies were replete with new regional shopping malls in the suburbs, the eighties: and-riineties ushered in the "Big Boxes" of Wal-Mart and Kmart, Home Depot and other sprawling discount stores -located near -the -intersections of major highways. The new discount stores were in many cases funded by redevelopment funds that were denied to "Main Street" merchants struggling to survive the exodus from downtown. The economic vitality of the downtown oozed out as the highway interchanges were the place to go. As the downtown businesses closed, there was a desecration of civic and cultural life affecting families, education, crime and violence. The new megastore required municipal and state investments in roads, water and sewer lines, police and fire protection and other governmental services. As one travels through the towns and cities of America, it is easy to note negative change with abandoned buildings, unsightly parks, declining majesty of public buildings and general malaise. Interviews with surviving owners of retail stores disclose a hopelessness. They say "the traffic is gone"; the "future is bleak" --- "I may have to close." In the four states the author visited, he saw numerous instances of community groups fighting supercenter sprawl. Often they resented the financial packages (RDA) funds offered to developers and chains. They feared the increase in pollution and traffic congestion that would affect school crossings. They deplored a lack of downtown planning that permitted illogical zoning changes. They feared the new chain stores would not add to the size of the consumer market — but only cause commercial glut until the small retailer was eliminated. They were concerned about the negative impact upon the environment as well as the cultural, scenic, fiscal and economic impacts. The National Trust for Historic Preservation designated the state of Vermont as "endangered." They wanted to make the nation more aware of the destructive phases of urban sprawl. The Trust's report was a "wake-up call" to communities to evaluate prospective changes in their way of life. Was it always necessary to create huge sprawling developments or rezone farm land and industrial land several miles from a compact and traditional "Main Street" set of enterprises? Since many of the meWretaii discount chains have built their supercenters with federal and state redevelopment funds; would it not be possible to apply RDA funds to rehabilitate old strip shopping centers and old malls? Could they not be given financial and physical "face lifts" -- to continue their desirability, both commercially and aesthetically? Sprawl is not synonymous with planned growth development. If for example, a new Supercenter employs one worker for 20 hours and the impact on a small competitor is to create the loss of 1« full time jobs -- is there a benefit to the community? Development that exceeds a community's ability to absorb it will ultimately result in abandonment of prior and public investments — and possibly the new supercenter will also close as the joblessness in the town increases. Lastly, the major discount chain may close because of losses in the town's purchasing file://A:1Chaptee/e2410-bc.htm 2/11/2003 power. The chain then opens in the next county, leafing the town desolate and abandoned. This is more and more becoming true in the United States as newlarge chains open stores not realizing the demographics and other limits of the market. News of Caldoes and Bradlees' bankruptcies put to bed the belief that small retailers can survive the retail policies of the Wal -Marts. Certainly, it would appear that Caldor and Bradlees, each with several hundred stores and -professional ,staffs,- have the resources to compete -successfully with a Wal-Mart or Kmart. Yet they have begun to flounder. Moreover, Kmart, Wal -Mart's major discount competition has suffered a series of operating losses for the better part of the last two fiscal years. After a 1995 fourth quarter loss of $420 million, the company seems to be rebounding. Much of the loss was due to the write off of their subsidiary, Builders Square. Company executives contend that these write-offs and divestments are a necessary step in their turnaround_ This was guardedly confirmed by Kurt Barnard, president of Barnard's Marketing Report: "They are not out of the woods, but their strategy is starting to take hold."3 A 1994 study co-authored by David T. Kresge of Dun and Bradstreet Information Services and retail consultant Gary A. Wright of Denver stated: "Despite predictions that small retailers are doomed, specialty stores are thriving in some important niches, says a new study of retailing. In those retail sectors where personal service, location or expertise are valued such as the women's fashion, accessories and gins, smaller retailers are doing very well, said co-authors Kresge and Wright."4. The study discounts predictions that at least half of all retailers in business in 1990 will be gone by 2000. In the same Philadelphia Inquirer article the opposite position was taken by a Wall Street investment expert following the retail chain picture: "Senior retail analyst Walter Loeb of Loeb and Associates says the larger firms such as Wal- Mart are gaining increasing sway, with enormous control over pricing, the competitive environment and suppliers." "When Wal-Mart is growing at 18-20 percent a year with the (economy) growing only about 3 percent, somebody is giving up business," he added." _5 The study discussed in the article recommended personalized service as means by which small retailers could survive. On the other hand, the authors warned that powerful chains such as Home Depot were also offering personalized service. The future of the small, retailer is growing desperate, despite recommendations about personalized service, unique product differentiation, and a move from the destroyed "Main Street" of America to more appropriate locations. How can those small retailers, with less than a million in sales, finance a lease termination and the expense of a move to a more desirable location? The proof of the pudding that the major discounters will sooner or later eliminate most of the small retailers is the fact that even the medium size firms are in trouble. In their study, Kresge and Wright state that medium size firms with sales from $20 to $50 million annually could suffer the most (in the next century.) "They neither have the buying power of large firms file://AAChapter%2010-bc.htm 2/11/2003 nor the personalized approach of the small firms. "b - .- The bankruptcy of Bradlees and Caldor are perfect illustrations of which way the wind is blowing. Someday a Wal-Mart may possibly have the entire retail market. As Mr. Loeb says, "if Wal-Mart grows at 200/a a year and the economy only at 35/o, somebody's giving up business." Ifwe-examine the "Main Street" malls and the strip centers we can note the devastation of former prosperous retailers. There's only so much demand in a community and hence there may be only one or two powerful survivorsfleft. Where will the jobs come from to provide the purchasing power to keep the "Big Boxes" viable? Soon they will leave for another town or county, and the same cycle begins once again. Susan Dentzer in a May 1995 article in US News & World Report, entitled "Death of the Middleman?" poitrts out the growing centralization of power between manufacturers, suppliers and discount retailers. As was stated many times in this study, small retailers have lost the wholesalers that sold to them. Many now buy from Sam's Clubs and other club stores. Dintzer states:7 "The rising competition has prompted consolidation among the largest wholesale and distribution fimas; creating giants like Fleming Cos. an Oklahoma City based grocery wholesaler with sales of $16 billion." Further, after tax profit margins (for some wholesalers) now average 0.5% to 2% and a survey by the National Association of Wholesale Distributors shows that most players think that these razor -thin margins will fall further.8 In addition to the problems of obtaining wholesale resources, small retailers have been hit by the information revolution. This has not only affected small retailers but also substantial companies like supermarkets. Just collecting data is only part of the new power equation, though. Supermarkets have been capturing scanner data for years. But it has been mass -merchandising chains that figured out how to use such data most effectively. Between 1985 and 1992, notes J. Mark Haman, a senior vice president at Kraft General Foods Inc., outlets such as club stores, mass merchandisers and deep -discount drug chains took seven to eight points of food sales away from traditional supermarket -- a massive shift in such a slow -growth business.9 A major edge was information with Wal-Mart Stores, Inc. being the trend setter, using computers to take the guess work out of wholesale buying, to slash inventory cycles and to keep popular items in stock. Wal-Mart turned the tables on the suppliers, telling them what products it wanted, where and when, and driving them harder than ever on prices. Now supermarket chains are hoping to emulate Wal -Mart's efficiency. Early last year, consulting firm., Kurt Salmon Associates Inc., released a study concluding that grocers could cut their costs -•- and prices -- by 11 percent or more than $30 billion a year, by moving toward "paperless" links with their suppliers. The scheme, dubbed Efficient Consumer Response (ECR), would mean more effective merchandise assortment and store promotions and eventually a continuous replenishment of shelves based on what's actually sold each day. However, it won't be an easy transition. The big players in the grocery business -- particularly wholesalers — make much of their money by stocking up on discount merchandise that the file://AAChapter%2010-bc.htm 2/11/2003 manufacturers ofr. Fleming Cos., for instance, a $13 billion food wholesaler, makes roughly a third of its profits through such forward buying. The big discount deals would be cut sharply under ECR And even if ECR eventually brings Wal -Mart -like efficiency, nobody wants to give up today's profits first. That's a major reason why progress toward this much needed streamlining has been slow. Yes, the middleman is an endangered species because of the EDI hookups between manufacturers and large,Jiscounters. But here again, the small retailers may become a thing of the past, lacking funds and information to survive. In a study several years ago, the following forecast was provided: "By the end of this decade, more than half of today's retailers will be out of business." They explained: "there is too much retail space for the market,'too much "copy cat" sameness among retailers, and far too much leverage on the books. These conditions leave no room for marginal performers." They further predicted: "that by the end of the century, some lines of trade will virtually be owned' by only four or five major players."1�0 It now appears that this prediction made in 1990, is being corroborated by the retailing change of power in the mid -nineties. In the retail discount field such performers as Wal-Mart, Kmart and Home Depot, among other discount chain leaders, have set the pace which ultimately will eliminate thousands of smaller retailers in drug stores, family clothing, general merchandising, hardware and lumber stores. According to studies by consultants, G.A. Wright, Inc. of Denver Colorado, there at first glance "does appear to be evidence to support the contention that the retail industry is consolidating.' The largest firms are in fact controlling a larger and larger share of the industry. Large retail firms (those with sales over $100 million) increased their share of industry employment from 35% in 1985 to 39% in 1989 and to 45% in 1993." 11 "In 1985, small firms (sales under $1 million) employed 21% more workers than the large firms; but by 1993 the small firms employed 220/a fewer workers than the large firms." 12 ".....it does indeed appear that the (retail) industry is increasingly falling under the control of a relatively small number of very large firms." 13 As an example of the domination of the large retail firms, The Wright report cited that employment growth in retail women's clothing and apparel in large firms increased by 18,000 employees between 1989 and 1993, while small firms cut employment by 19,000 and medium size firms cut by 16,000 employees. The only light at the end of the tunnel was shown by small retailers in women's apparel with concentration on selling accessories and specialized apparel, It is clear that large retail discount chains like Wal-Mart, Toy "R" Us and Home Depot will continue to extend their lead in sales and growth, unless small firms can perform miracles in providing specialized services. Given the ghetto -like influences on the dying "Main Streets," the specialized successes appear realistically impossible in a substantial way in the near future. Data supplied by G.A.. Wright, Inc. based upon U.S. Government SICs show the steady successive gains in chain store employment and declines in small retail employment when comparing 1985 with 1993. able 16 U.S. RETAIL EMPLOYMENT SHARE L e vs. Small BetaNers 1985-199314 r-----7 fiIe://A:\Chapter%2010-bc.htm 2/11/2003 Sails Volume 1 -HIM $1 million or less37.4% 5.51/* $1-10 mullion14.9'/ 13.1° $10-100 million .1% 5.7% $100 million and ov 0.9'/a 3.4% Sales not available 10.7% .3% TOTAL Ifli#'Yo 1U0'/e It is easy to see from Federal SIC data where employment grew in the years 1989 to 1993 and where employment fell. t In men's and boy's apparel retail chains with sales near $100 million, employment grew by 32%whlle in similar stores with sales of $1 million or less, employment felt by 9.1%. In women's wear, the over $100 million chains had employment increases of 16.4% over the 1989 to 1993 period, while smaller retailers with $1 million or less in sales saw employment fall by 12.4%. In drugs, the larger chains with sales over $100 million had an employment increase in the years, 1983 to 1993 by 30.2%; while the independent drug stores, with sales of $1 million or less saw employment drop by 28.7'%. According to the Wright studies, the consistent losers in sales, growth and employment are retailers in the sales classes of $1 million and $100 million. Thus, the concerns about the survival of the small retailer, must be added to the concerns of the survival of retailers in the $100 million sales class. The national retail discount chains by year 2000 and beyond will have a major negative impact on retail employment: The Wright study examined the closure or termination rate of retailers during the nineties. They provide great concern with the following: If the company closure rate for the industry of 2.9% per year for the first four years of the 90's were extrapolated to the year 2000, it would yield a closure rate of 29% for the 10 -year period of the 90's. It is important to note that this is not 290/cof the retail companies that start the decade, since many of the closures are likely to be businesses that were start-ups during the 90's." "The major group of companies with the greatest closure rate is apparel stores. The 90's is experiencing a 5.4% per year closure rate in this group that compares to an 8.0% rate for the 80's. Extrapolating the 5.4% rate to the year 2000 would yield a 54.011/6 closure rate for the decade. Again, this is not 54% of those starting the decade." 15 Not only are the small and medium sized retailers being hammered by the major retail discount chains but the medium sized discount chains are falling by the wayside as attested to the bankruptcy applications of Caldor and Bradlees, and now even the giant Kmart appears to be suffering. Charming Shoppes with over 1400 retail stores is reported to be in real trouble, while Silo's has closed all stores. In retailing, analysts say, discount is no longer synonymous with success. "The days are gone when a discounter could be unique or alone in any market," says Allan L. Pennington, a Chicago retail consultant with McMillan/Doolittle. "It's become a difficult business to be in." Analysts trace the trend to a redrawing of battle lines. Until recently, discounters of every stripe sought file://A:IChapter%2010-bc.htm 2/1 V2003 { to.steal customers from frill price independent, mass merchan* such as J.C. Penney Co. and department stares such as KH. Macy & Co. But the expansion into nearly every market of the so-called Big Three — Wal-Mart Stores, Inc., Kmart Corp. and Dayton Hudson Corp's Target chain — has pitted discounter against discounter in a competition that.favors size. Wal-Mart and Target, in, particular are thriving. "The smaller chains are getting caught in a battle between the Bigs." says Linda Kristiansen, a New York retail analyst with Wertheim Schroder. -L6 _ ti Wt i Il t : t _y. t i The author has endeavored to assess the contributions of the mega -retail discount chains as well as the negative implications of teir unprecedented growth. It's important at this time as the writer comes to the end of his study to once again review the role of the National Trust for Historic Preservation and the challenge it sets forth to governments, citizens, planners, developers and local and national economists and sociologists. The Trust sees the mega -retail discount chains as inputting such negatives as: 1. Sapping the economic vitality of downtowns and "Main Street" by shifting the retail center of gravity out to highway interchanges on the edge of town. 2. Displacing existing businesses, especially independently owned small businesses that contribute significantly to local civic life, by building stores vastly out of scale with town's ability to absorb them. 3. Setting the stage for higher property and state income taxes by creating developments that are costly to serve and require new roads, water and sewer lines, police protection and other public services. 4_ Causing the waste or abandonment of previous public and private investments in existing buildings, streets, parks and other community assets_ 5. Homogenizing, America by building stores that have no relation to their surroundings. While these points have been made in Chapter 1 of this study, they must be reemphasized as part of the conclusions of this work. What other challenges did the Trust provide in its formidable 1994 study? 17 The National Trust for Historic Preservation asks the mega -retail discount chains to answer the following challenge: "Can the consumer benefits provided by the superstore be achieved only through the creation of more urban sprawl and all the sprawl brings: traffic congestion, automobile dependence, air pollution, dispirited or dead downtowns, despoiled country sides and weakened community ties? Or could some of the benefits be provided without so much damage to the environment and local communities? We think these are questions that should be asked."19 The Trust also poses an equally important challenge to the many communities facing the invasion of the super "boxes: "And communities have choices. They can encourage or discourage certain types of file:!/AAChapte&/*2010-bc.htm 2/11/2003 development. If a community doesn't want superstore Vnr%4, it can take steps to prevent it. If a community wants a superstore, it faces a whole host of other questions relating to whether the store comes in on the communities terms. Where should the stare be located? How big should it be? How much new retail space can the local economy absorb without suffering fiscal and economic created by a commercial glut? Can the store be designed to help preserve the communities .livability and attractiveness? Haw can the store minimize negative environmental, cultural,, scenic, fiscal and economic effects? Above all, what is the long term impact of the decision?" 19 Earlier in this study, PaineWebber was quoted as having a negative opinion of "one stop" shopping. They apparently. did not cane for alternative advertising and promotion with an additional example from Kmart's ads as "We've got juice, jumper cables and jeans" and "Shop here for carrots and car mats." PaineWebber may have mistakenly believed that only a small minority of Supercenter customers would "shop both sides of the store." PaineWebber earlier suspected that Kmart would have financial and management problems which have tonne to the fore prior to the completion of this study. As the writer indicated in Chapter II, PaineWebber had stated: "Kmares well-known corporate problems give it a negative image among consumers as well as developers." As of late 1995, Kmart's per share price on the New York Stock Exchange appeared to be dropping sharply while Wal -Mart's securities prices appeared to be relatively stable. The PaineWebber study also reported that Kmart's decision to use third party food wholesalers saved much needed capital, but put Super Kmart at a substantial disadvantage in fulfilling the Supercenters' low price positioning. Furthermore, this author indicated in Chapter II that he did not accept the premise that Wal-Mart would have similar problems to Kmart's in executing the supercenter program. Wal Mart's national management and store management appears quite strong. Wal-Mart, unlike several major supermarket chains, is unconstrained by corporate problems and appears to be going with 100% self -distribution. Most supermarket chains self -procure and self -distribute. Apparently, when Kmart opened new Super Kmarts, utilization of outside food wholesalers strained KmarNs staff resources in opening new locations with the intense travel required as well as essential staff training requirements. A major advantage for Wal -Mart's Supercenter, generally, is its lower labor costs as compared to both the unionized and non -unionized supermarkets. Wal -Matt is presently nonunion. Kroger, the dominant supermarket chain, is unionized; nevertheless, it, unlike many supermarkets, continues to be strongly managed, effective and highly profitable. Wal -Mart's low labor costs, high productivity and control of its managerial and inventory processes have weakened not only Kmart, but many regional discount chains as well as supermarkets. Both investors and Standard & Poors, which lowered its ratings on Kmarfs $3.7 billion in debt, point out that Kmart is in a defensive position against competitors like industry leader Wal-Mart Stores, Inc. For example, Kmart plans to pare its 1995 capital spending by an as yet undetermined amour from a previously projected $1 billion, while Wal-Mart plans to boost its spending to $4.5 billion from $4 billion. file://A:lChapWlo2010-bc.htm 2/11/2003 Up to now the small retailer has been wed by the power of the mega -retail cbmn -- now it appears that the same. thing will be true of national as well as regional, and in some cases, mature supermarket chains. What will this mean for joblessness and the U.S. retail employment picture in the next five yam? The American food industry is -the finest in the world. Its distribution of goods, and quality of service are the shining example world wide. Its products, from produce to paper towels, are available night and day for everyone's convenience. Primary locations make shopping easily accessible for all concaved customers. Different types of stores service all the needs of customers culturally, aesthetically, and most importantly, economically. And now, this industry is in jeopardy. :F For example, in Southern California, 90% of the market share in the food industry is under a collective bargaining agreement Labor contracts between the United Food and Commercial Workers and food employers such as Ralphs, Food -4 -Less, Hughes, Vons, Albertsons and Luckys have been negotiated through collective bargaining over the past several decades. The end result of these deliberations, as one might expect, has been a livable wage plus important benefits. Here the community is truly the beneficiary with healthy, independent tax paying residents who contribute to the tax base rather than drain it. A full -tune wage earner working at Ralphs, paid at top scale, will earn a more than livable salary with health costs and dental coverage paid additionally. WIL-Affini and Other e it Chains EnP-Oxerful W As we discussed earlier in this report, recently a number of mega -retail discount chains (Wal-Mart, Kmart and Target) have decided to enter the food business. However, financial analyst opinions conclude that Wal Mart will become the largest player. According to industry estimates, Wal -Mart's 239 Supercenters (combination food/retail stores) account for sates of about $13.5 billion or about 14.5 % of the company's fiscal 1996 sales of $93.6 billion. Supercenters are spread over 23 states with approximately 110 new stores planned for 1996. Most stock analysts believe Wal-Mart will become the largest food company in America with sales exceeding $30 billion dollars a year. Wal-Mart has been evaluating the potential of Supercenters at both ends of the spectrum from a 109,000 square foot center in Arkansas to a 220,000 square foot center in Tennessee. A 136,000 square foot model has all the same departments as a larger Supercenter, but it is laid out in a smaller box and has a more compressed variety. Wal-Mart officials told Supermarket News, "the decision to grow with a smaller size prototype is a clear indication that Wal-Mart plans to expand Supercenters into smaller towns of 10,000 to 12,000 people where there is less population density and less competition. " 21 In the near future Wal-Mart will probably enter the food business in California and several ether states and what may be at stake will be the additional loss of many quality high paying jobs now found in supermarkets. Wal -Mart's increasing assimilation into the food industry is apparently motivated by the drive to increase total retail sales. According to company statements, total retail sales should increase some 30% due to the synergies established at combination stores. Furthermore, it has been suggested that Wal-Mart might use food as a loss leader in order to increase store traffic. There will be a positive transfer effect in the sale of general merchandise by having more visitors to the store, particularly if the sales of food are in the "loss leader" category. The impact that this will have on the food industry will parallel the effect it has had on the traditional retail industry. The problems created for employees within the traditional food industry could be nothing short of catastrophic. Supermarkets work on very thin file:/IAAChapter%2010-bc.htm 2/11/2003 margins, and their shrinking market share resulting from the combinatim_of chesrp labor and low prices will have murderous impact on the Mditional food stores, large or small. The fallout could be compared to that of GK Chrysler and Ford; not in overall job loss, but in weekly earnings, while company paid health benefits and retirement plans now prevalent in supermarkets might disappear. The shift in health benefits costs will go directly to the taxpayer while desperate worker who caWtget jobs and retirees without -pension funds may be adversely impacted and may have to be taken care of by federal, local and state 1 vernments. With a Social Security system already in jeopardy, increased drains will only shorten its -lifespan. The elderly will certainly become more dependent on government subsidies as the shrinking "middle" will be further demonstrated. The Supercenters impact on the food industry will not be transparent to the causal observer. The entry of mega -retail discount chains like Wal-Mart, Kmart and Target into the food business is to increase their retail sales possibly by as much as an estimated 30% - in the case of Wal-Mart. However, there will be a further negative impact upon the local, state and federal economies as jobs=go from fish time to part- time and as wages drop and fringe benefits disappear. Effect on the Community The Midwest Center for Labor Research(MCLR) studied the tax revenues now generated at existing supermarkets in San Jose, California which might well be lost if three super stores (combination retail/food) were to locate in the city. According to the MCLR: "The presence of three such non-union super stores would take away work from supermarket workers already employed throughout the city. The grocery sections of the new super stores would employ the equivalent of three hundred sixty supermarket workers. Their presence would result in a decline in the hours of work of existing supermarket workers. (MCLR) examined three areas of impact: (1) The higher wages of existing supermarket workers, almost all of whom are unionized, and the wages of other workers whose jobs are supported by the multiplier effect,' which result in increased consumption in the area; (2) Higher employment attributable to this increased consumer expenditure; and (3) The increased taxes paid to the government as a consequence of the higher wages." 22 The study estimated that there is a $2.7 million dollar additional consumption in Santa Clara County, California because of the higher level of prevailing wages paid by the existing supermarkets compared to the average wages that will be paid by the new Supercenters which generally might only amount to one to two dollars above the minimum wage. Of this additional consumption(GDP), 82.7% comes from the higher prevailing wages of the supermarket workers, while the remaining 17.3% comes from the "multiplier effect," previously described, and the wages of workers who benefit by the secondary and tertiary respending of higher supermarket salaries.23. When a group of workers are paid more they consume more, thereby raising the overall consumption of goods and services in an area, in ether words an increase in GDP. This consequently augments the number of jobs in the community. The MCLR study found that in Santa Clara County, for every 100 supermarket jobs where the prevalent wage rate was paid, nine additional jobs were created. Of course, there is then a multiplier effect from the wages of these newly created jobs and the taxes paid by these ciiizens.24 In another study concerning San Jose, California, the Sidway Kotin Mouchly Group estimated $350,000 file://AAChapter%2010.bc.htm 2/11/2403 %,LLCLFVWL I — IW_ _— __ __ in new sales taxes would be derived from each of the new superstores locating in the county. However, they failed to measure the overall economic dynamics, i.e., declining tax revenues for pre-adsting supermarkets and a net loss of jobs. The MCLR study predicted a loss of $1.3 million because of the difference in wages between prevailing (traditional supermarkets) and non -prevailing (mega -retail discount chains) wages. The taxes created by the new super stores will be offset by the failure of pre- existing supermarkets, the loss of jobs and revenues. 'N. r!7 71. lea ,«: ' TT1 iU7TTrW4nC,77M II Mr,: I i , 'i { .7.=7M ! 1: UW30 ' y11 I I It I , :•:11 11 1 it 1 dll 11 .1 it 11 i Fyl { 11 i I% i .! �. yyl I II_1.�" The pessimism is shared by none other than our own President Bill Clinton who, in an address at the 1995 White House Conference on Small Business, on June 12,1995, stated that while more small businedies had sprung up in 1993 and 1994 than in any previous year since World, War II, he was concerned about their ability to stay alive. He expressed concern about the high rate of failure and bankruptcies among small business. Chapter III disclosed that when the respndents were queried as to what the anticipated effect upon the firm's economic health might be if a mega -retail chain were to relocate nearby, the answers were overwhelmingly, "negative" and "very negative." Forty percent anticipated the results as "negative" and an additional 33% answered "very negative." Thus 73% viewed their future in a most despondent, negative manner. The respondents generally mixed pessimism with facts. Fifty-eight percent of the respondents visualized serious losses in employment were a major chain to move into the area selling similar products. Forty percent of the respondents saw their retail venture losing 5% to 35% of their employees. Eighteen percent visualized losing more than 50% of their employees. Only 40/osaw a gain in employment. Thirty-seven percent anticipated "no effect." The author believes that the "no effect" data stemmed from a lack of hard data on the part of the respondents -- but in no way expressed optimism about the future. The respondents were then asked to rate the negative or positive impact on sales volume by the imminent competition of a mega -retail discount chain. Eighty percent of the respondents anticipated "sharp" to "drastic" reductions in sales volume; while only 14% saw "no effect." Only 6% saw a rise by virtue of a new competitive entry of a major retail discount chain. Data appeared consistent as to the expected reduction in sales volume as well as serious estimates of future profitability. Twenty-four percent of the respondents visualized profits dropping by more than 50%. In fact, 76% anticipated serious reductions in profitability as a result of the imminent competition of the mega -retail discount chains. Only 8% saw an increase in profitability, with these estimates being mostly conservative i.e., 10% or less. Sixteen percent saw "no effect." Despondent retailers saw the reduction in the number of wholesalers, or those middlemen willing to sell to small retailers, as affecting their business negatively. Over 50% saw the direct selling to mega -retail discount chains by suppliers as being "negative" of "very negative." Kmart's and Wal -Mart's recent ventures into the Super Kmarts and Supercenters' food and grocery departments are creating new competition for the small grocer and the more traditional supermarket. Small retailers see these ventures as further threatening the survival of countless small food retailers, Many of whom (lacking wholesale resources) are now buying from Sam's Clubs or other clubs. Small retailers anxious to survive do not have the relative financial ability to compete with the mega- file://A:1Chapter%2010-be.htm 2/11/2003 dikeunt chains in advertising, promotion, public relations or radio and tele�OgL .They rely. on the small business. techniques replete with flyers, leaflets, brochures, using the yellow pages of the telephone book and the local newspaper. This, despite the fact that many proponents for the mega -retail discount chain movement believe that small retailers can survive by employing specialization, improved marketing, utilization of information and computerized systems and other MBA driven techniques. The average "Main Street" .retailer in general, fails to have these resources or capabilities. Small Mailers sell most of the products sold by Kmart, Wal-Mart, Target and many other major chains. Each store, however, was limited with respect to national brands, inventory and product lines; one might specialize in apparel; another in food; another in auto mechanics and supplies and so on. In his 1993 study, Kenneth E. Stone, Professor of Economics at Iowa State University, stated that "businesses that sell the same goods as Wal-Mart sells tend to experience some reduction in sales after Wal-M�opens." The study used sales talc data to document changes in trade area size in 32 Iowa towns with populations between 5,000 and 300,000 over a five year period. Stone described a state with a "static population, resulting in a fixed size "retail pie." He stated, "in this situation when a large well-known retail store enters a town, it captures a significant slice of the pie, thus leaving less sales for the other businesses." He also indicated that in smaller towns, with less than. 5,000 in population, sales were lost even more rapidly. Professor Stone's early studies (1992) anticipated the result of Wal -Mart's national growth into the east and west. There is simply not enough customer demand for smaller retailers to survive the competition of Wal-Mart, Kmart, Target and other discount chains where the retailers essentially sell the same products as are found in the major retail discount chains. In his earlier paper, "Strategies for Co -existing in a Mass Merchandising Environment,." Professor Stone was very direct in his admonition to small retailers, "Try not to handle the exact same merchandise .. . (or if it's a similar product) then sell another brand. "26 Both Chapters III and IV presented the ever increasing concerns of small retailers for survival. The data in Chapter III was quantitative, while the narrative explanations as to why some 500 to 600 respondents were fearful about survival, was indeed qualitative. When one mixes the anger of not having adequate and free downtown parking with the tax abatements and other grants provided the large chains — yet generally denied to rehabilitate downtown businesses — the reason for the anger comes through loud and clear. The customer base of the retail respondents, described in Chapter III, depends greatly on highways and parking, Naturally the major chains locating outside of "Main Street" have the advantage of parking lots; ease of access; .freedom from parking meters and downtown traffic congestion. Added to that, the fear of crime and violence in downtown evening shopping creates major disadvantages for the small "Main Street" retailer. A major question addressed to the small retailer related to strategies they might apply in competing more effectively with the major discount chains. While the staff received an 84% response rate, it was lower than the answers to other questions. The respondents appear fragmented in their choices as well as frustrated, confused, pessimistic and having trouble concentrating on how to answers this question. Fifty-six percent selected alternative strategies that could be defined as somewhat "positive"'; such as to "increase staff'; "increase visibility"; "provide fuller service" and "expand product lines." Forty-four percent of the choices were "defensive" strategies, going from "raising or lowering prices'; "decreasing file://AAChapter%o201O-bc.htm 2/11/2003 staff; "liquidating or selling the business" or "going into bankruptcy." There was not a great deal of difference among the four states' as to "positive" strategies. Illinois was the most positive with 60.10; New York with 560%; California 55% and Pennsylvania with 50%. The author is confident that the profile of small retail business as portrayed in Chapter M showed consistency and validity, not only nationally but also as among the four states studied. Surprisingly, respondents have generally been in business longer than might be the popular notion with a large proportion having been in business for more than .10 years. Small retailers, on the whole, showed serious concern about their future viability and evidence of job loss, liquidation and bankruptcy. 771717M. -VI - I 1 As was indidted in Chapters II and III, there was approximately a 10% return of questionnaires mailed to Pennsylvania, California, New York and Illinois. The research staff had categorized these responses which provide comments and suggestions on how to cope and prepare for the survival of the small retailer. The categories were grouped by state returns and indicated the types of product lines or services provided by the respondents. Chapter IV revealed the depths of fear and discouragement of the small retailers who were desperately concerned ,with their chances of survival in the face of mega -retail discount chain competition of other powerful retail chains. The narrative comments and quotes in Chapter IV have been compiled from retailers responding to the 6,000 questionnaires sent by the author in 1994 to firms in Pennsylvania, California, New York, and Illinois. They represented all of the subjective responses to the completed questionnaires returned which were about 10% of the original addressees. Part I of Chapter IV was a response to the excellent book authored by Taylor and Archer. Our staff recognizes this serious work as well meaning -- but finds the "Ten Suggested Strategies to Survive" almost impossible to implement at the current stage of frustration, retail failure and stagnation. These small firms simply do not have the financial resources, staff or leadership to snap back in the ways suggested by Taylor and .Archer. Were there a reason to start a new business with more than adequate management experience and venture capital, their "Ten Strategies to Survive" would be both helpful and essential. It is possible that some individual retailers might survive in the face of "Big Boxes" by following Taylor and Archer's "Ten Commandments" or strategies. However, for the most part, the dying breed of "Main Street" merchants require external and enormous help from their local, state and federal governments as well as specialized agencies such as zoning boards„ planning commissions and community development authorities who are prepared to provide incentives and subsidies to small retailers currently available to the mega -retail discount chains who generally build their "Big Boxes" on former agricultural or industrial land. For example, a mega -retail discount chain store is given the right to retain sales taxes collected for a given number of years in order to help finance construction of and debt service for the "Big Box." As small retailers close, the sales taxes they formerly collected are no longer available to local government. These entrepreneurial subsidies and dozens of other incentives as well as tax abatements are not generally available to the small retail merchant. Taylor and Archer are among those writers and journalists who attribute the failure of the traditional "Main Street" retailer to other causes than the price competition of the mega -retail discount chains. Taylor and Archer authored a provocative and interesting volume which appears well meaning in identifying ten survival strategies to enable the small retailer to compete more effectively with a giant file://A:IChapter%z010-bc.htm 2/11/2003 --- Wal-Mwt.or other mega -chain retailers. Their book, published in 1994, Up Against�The Wal -Marta (How Your Business Can Prosper in the Shadow of the Retail Giants, was first cited in Chapter N. One cannot argue with time honored principles taught at the nation's illustrious business schools, i.e., Wharton, Harvard, Stanford - but these schools prescriptions are far away from the financial constraints of small businesses. Those principles being such as "satisfy your customers"; "study the success of others"; "gather and analyze management information regularly"; "sharpen your marketing skills"; "increase the customers perception of value"; "position .your business uniquely% "eliminate waste'; "find something to improve every day," for example, the Kaizen,. Japanese method of incremental improvement; "embrace change with a positive attitude"; and pull the trigger and start the battle." The writer has visited many strip centers, "Main Streets" and malls, in number of states and has interviewed a number of valiant survivors. In Part II of Chapter IV, the reader certainly has to recognize the discourageihent and disillusionment of the respondent retailers about the end of their -"American . Dream." Taylor and Archer, while truly attempting to encourage small retailers to survive, nevertheless did recognize the present devastation going on in malls, strip centers and the former "Main Streets" of middle America. Furthermore, it is easy to see that observers are shocked by the decline and elimination of most small retail stores in the ethnic and minority enclaves of our very large cities in the East, Midwest and the West. The elimination of small retail stores in the neighborhoods results in job loss and contributes to the ultimate conversion of a formerly socially stable neighborhood into a ghetto, beset by violence, crimes, drugs and an underground economy, Chapter V introduced the subject of legal review of mega -retail discount chain behavior in the pricing area. In the case of American Drugs, Inc. v. Wal-Mart Stores, Inc., an Arkansas predatory pricing case, Wal-Mart lost in the lower Chancery Court. This introduced the subject of "sales below cost" claims, and whether or not anything could be learned that might provide reviews of below cost pricing under the Sherman, Clayton, Robinson Patman or Federal Trade Commission Acts. Up to this point, it appears that "sales -below -cost" claims appear easier to maintain under state laws rather than under federal antitrust laws. The subject is tremendously complicated. Also, monopolization and predatory pricing under federal antitrust laws should not be confused with potential remedies under state unfair trade laws. In Arkansas, the Chancery Court rejected the "market basket" approach to analyzing "sales below cost." Rejection of the "market basket" approach means that an aggrieved plaintiff can: recover in a state "sales below cost" claim regarding a particular product overall even if the retailer maintains a healthy profit margin. Additionally, in the Arkansas case (in the lower Chancery Court), the judge determined that the plaintiffs need not show monopoly power to do damage to competition (involving complicated expert analysis of relevant markets and so forth). Instead the plaintiffs only needed to show the company had an intent to injure the competition, which could be inferred more directly from the company's stated policies and purposes. However, Wal-Mart won its appeal at the Arkansas Supreme Court level. Both the majority decision and the dissenting opinion in the Supreme Court case did create interest in the subject of predatory pricing and should stimulate the Federal Trade Commission and possibly the U.S. Justice Department to review appropriate federal regulatory statutes which might result in greater file://AXhapte&/,D20l0bc.htm 2/11/2003 VAAMr�'VA i v V protectiev for the small retailer. Further, most states have enacted "baby" Sherman,.Acts which track the federal statute and the below -cost sales provisions. These are often contained in more general pricing statutes which are similar to the federal Robinson Patman price discrimination law — either of which may be used advantageously to challenge truly predatory pricing behavior. Chapter V, also mentioned that a group of retailers took a different tack on pricing differentials by suing both manufacturers and wholesalers. This study shows that more and more of the chain's ability to lower prices is due to the massive discounts available to them for large volume purchases. Not only are these unit prices not available to small retailers, but wholesalers, who used to sell the small retailer are disappearing, as the chains buy "direct" from the manufacturer. In August 1994, the House Small Business Committee met and listened to witnesses who were concerned about the survival of the small retailer in the face of growing power of the mega -retail discount chains. Should not the 1995 and 1996 Small Business Committee of both the House and Senate continue this typelof public hearing? :y: Materials from the U.S. Congressional Budget Office (CBO) were included in Chapter V for the purpose of opening the question (in public forums) as to which regulatory statutes are available at the federal level that might pertain to the behavior and growing power of chain stores. Their interpretative comments and analyses of the Robinson-Patman Act were particularly valuable. CBO describes "how in the 20's and 30's, large chain retail stores rose to prominence. The market power of some of these chains enabled them to negotiate lower prices from manufacturers than could be obtained by the traditional small independent retailer. For that and other reasons, the small retailer found it difficult to compete, leading to pressure on Congress to do something to help them. The dissatisfaction with the lack of success of the Clayton Act in preventing price discrimination, led to the passage in 1936 of the Robinson-Patman Act." There appears to be many similarities in the retail market today as was noted by CBO for the period of the 20's and 30's. Then it was the large chain that threatened the small retailer, today it is the mega -retail discount chain. Predatory Pricing and What Was Learned from the Majority An-dDisaen ing Opinionsinn Lval- Mgt's Victorious Appeal to the Arkansas Supreme Court Chapter VT analyzed in some detail Wal -Mart's arguments to set aside the Chancery Court's decision against it. Wal-Mart believed that there was no rational basis for the Arkansas Court to have ruled against the company. Further, in the appeal, Wal-Mart believed the Arkansas Act was preempted by federal law by the Robinson-Patman Amendments to the Clayton Act which specifically addressed the weapon of predatory pricing by monopolies. The discussions in Chapter V and Chapter VI do suggest that it would be appropriate for the Small Business Committees of the House of Representatives and the U.S. Senate to hold hearings on the growing power of the mega -retail discount chains. The Court's concluding comment in the dissent is reproduced here: "We would hold that the Appellant has failed to prove that the Chancellor used an improper legal standard with respect to the inference of intent to injure competitors and to destroy or substantially lessen competition. We also find that the Chancellor could have found an intent to injure competitors from the evidence in the record and particularly from the testimony of David Glass, President of Wal-Mart Stores, Inc. who used language such as aggressive,' to do whatever file://A:1Chapter'/o2010-bc.htm 2/11/2003 it taloa,.'. kill tine competition's momentum,' and war zc3nes.' Appellant failed tq a tablish that the Arkansas Act violates rights guaranteed by the Arkansas Constitution, Article 2, Vection 2. Appellant also failed to establish that the Arkansas Act was preempted by federal law.28 The Supreme Court, despite a strongly worded dissenting opinion by three justices, reversed the Chancery Court's victory for American Drup Inc. and dismissed the original plaintiff's case and -awarded in favor of Wal-Mart, the Appellant. in Chapter VI, the author provided great detail in the dissenting opinion because of references to the predatory pricing features of Robinson-Patman Act; particularly with respect to the several different approaches to calculating below cost sales on the "market basket" approach or the "single product" approach. The majority opinion in the Supreme Court reversal also acknowledged that, "Admittedly, there is point where competitive pricing ends and predatory pricing begins." Further, Justice Robert L. Brown's majority decision in favor of Wal-Mart also pointed out that the Eighth U.S. -Circuit Court of Appeals had discussed the difficulty in distinguishing the two in the context of the Sherman Act; i.e. "Competitive pricing" vs. "Predatory pricing." Moreover, while a finding that a defendant has engaged in selling below cost, is not the equivalent of finding specific predatory intent; nevertheless, it could be a basis from which such intent might be inferred. • L — �— -—..--I-- i --•—— � _ — — �L— Uff—__ T1,2— — do—`----- ----- P-- t O'_Tr WT _ In Joyce Barrett's article on August 11, 1994 in Women's Wear Daily she reported on the first Congressional probe of the retailing phenomenon that was changing local markets nationwide. The mega -stores were blamed for everything from crushing local competition to altering the product distribution chain. As the largest retailer in the nation, according to Barrett, Wal-Mart Stores Inc. drew most of the criticism, although Representative John LaFalce (D.., NI), Chairman of the House Small Business Committee said he had hoped the discussion would not target specific retailers. Wal -Mart's projected volume for this year was $85 billion. Representative LaFalce said he aimed to explore three ways of protecting small business from the super - chains. 1. Increase publicity about expansion of the mega -stores. < 2. Curb federal money, such as industrial revenue bonds, that goes toward retail development. 3 . Insure that federal antitrust and banking laws are tough enough and are enforced. LaFalce acknowledged that the federal government can do little to affect the recent course of retailing, but said he was concerned that superstore development was coming at the expense of smaller merchants. At the hearings, which were commented on in Chapter VII., there was a litany of complaints about the superstores. Thomas Muller, a Fairfax, VA, economist and the author of a report on the impact that three proposed Wal-Mart stores would have on northeastern Vermont communities, said Wal-Mart charged higher prices in communities where it has eliminated the competition. Also, Wal-Mart and other mega- stores don't increase the dollar volume of sales, but instead redistribute sales. Further he pointed out that the claim that Wal-Mart creates jobs also is wrong. Muller added that in communities with .a Wal-Mart file://A:IChapter1/*2010-bc.htm 2/11/2003 unapter IV --� . rage I Y vi zJ the result could be fewer retail jobs. He also said that full-time jobs in the mega -retail were often baser on a 2&hour work week, instead of the usual 40 hours. He also observed that based on its current marketing strategy, Wal-Mart could open another 5,000 stores within the next 10 to 15 years. Muller further estimated: "...that Wal-Mart had reached optimum penetration levels' in Arkansas, Mississippi and Oklahoma, and now appears to be targeting urban and rural areas in other states. The new Wal- -Mart approach for areas close to saturation, as well as others, is to revamp the older stores as supercenters," Muller said. "These combine the general merchandise store with a full -line grocery store, using the checkout counters."31 Muller continued, "The experience of Wal-Mart has been that these superstores have increased per -square -foot general merchandise sales. With its superstores Wal-Mart sales could easily double, even in states where current stores are close to saturation. In a few years, given that current trends will continue, one corporate entity may have a substantial shave of all retail trade in the United States."32 The author recommends that the current Committees on Small Business in both the U.S. House of Representatives and the U.S. Senate continue to hold hearings on the applicability of such regulatory statutes as the Sherman, Clayton, Federal Trade Commission and Robinson-Patman Acts upon these mega -retail discount chains and their effect on the weakening condition of small retailers in the United States, due in part to the ever increasing power of the chains to procure the lowest of prices from manufacturers and suppliers. While predatory pricing might have to be viewed differently in the federal area compared to state litigation, nevef'theless the increasing power of the chains requires federal review in terms of applicable statutes and regulations designated to protect small business and to provide free market opportunities. Further, the opportunities of the large chains to secure "corporate welfare" in terms of financial assistance for building their huge stores should be re-examined by Congress, since many of the grants are basically part of federal funding. An End IQ " H CQngress for Federal C-mbat and Rashid "ft Box" Abusca The following recommendations set forth in Chapter VIII, hopefully would restrict "Big Box" abuses by mega -retail discount chains, developers and redevelopment authorities operating under existing state redevelopment laws by taking away state and local tax giveaways and providing a vehicle for Congressional Hearings. The idea is to attach strings to federal monies given states and localities: for example, such strings are often attached to highway monies. This would make sense here because these "Big Box" stores create additional burdens on federal highways as they are often built in areas accessible only by federal highway. The legislation would say that highway money would be reduced to any state which allowed these stores to go up in any of the following circ umsumces: (1) If the development received state or local tax incentives; file://A:1Chapter'/*2010-bc.htm 2/11/2003 chapter 10 -- Page 2U of 23 (2) If it was within x miles of a federal highway; (3) If the developerlrenailer did not pay the government for the full social costs of building such a store (not just for repairing highways more often, but also cleanup of air pollution) (a study to determine those costs should be required); or (4) if a required "small business impact repore' showed existing small businesses would be injured significantly. Ideas for titles such as Small Business Survival Act; Retail Overdevelopment Act; Tax Financing Restraint Act (or any combination of these). Further since the Internal Revenue Code is filled with provisions which aid, help or restrict the activities of certain industries, it is a natural place to consider curtailing the redevelopment agency, developers and "Big Box" abuses. The idea might be to impose an excise or penalty tax on any state or local tax giveaways these "Big Boxes" wangle out of state and local government. The legislation possibly could apply only to retailers -with an income over x billion dollars or a minimum of square foot. Our logic is this: The federal agencies and Congress are the only people who can stop the states and cities from cannibalizing each other as each gives away more and more in the form of tax breaks to win these mega -retail discount stores, only to rob their neighboring town or state of tax revenues (and jobs) from the existing retailers. Only states or the federal government can step in to stop the current warfare; warfare which makes local governments more dependent on Washington D.C. No new jobs are created, and because the mega -retail chains pay their employees less and kill jobs at other retailers, they cause the federal government to receive less in income taxes. This should certainly interest Congress and the U.S. Treasury Department. It is also obvious that there are incidental costs to the federal government for "Big Box" store development. They tend to expand near interstate highways, adding additional traffic which certainly costs the federal government more. The mega -retail discount chains generally don't provide health insurance to employees, adding these people to the governments' burden. These chains are quite profitable, so an excise tax would not put them out of business. Further, the environmentalists and preservationists should see the need to reduce the tax incentives for "Big Box" development. Finally, those in favor of reducing the federal deficit should be eager to embrace new sources of revenue. Greg LeRoy, previously cited in Chapter VII, made it very clear that the state and federal governments have been wasting large suers on "corporate welfare" for enormously powerful and rich retail corporations. Whether it is a tax abatement or the right to retain sales tax revenues to pay for capital outlay or debt service; these are funds, which based upon earlier objectives, should have been applied in great part to rehabilitation of the "Main Streets" of the United States. Further, as Greg LeRoy pointed out, the grants help build structures which are often abandoned while the companies receiving the financial assistance move elsewhere. 11111 117111111111111 Jill 771111.771, = --vir KINT1477774-771M.1 It is clear that the cities and towns of America, are gradually succumbing to urban sprawl. Moreover as described in many places in this study, the same type of sprawl is taking place in malls and strip centers file://AXhapter%2010-bc.htm 2/11/2003 Chapter 10 --• rage z i or zs away %yarn the downtown areas. All of the abandonments of stores that were a delight to see ten years ago have talo place in great part due to the restless mobility of such competing giants as Kmart, Target, Wal-Mart and other mega -retail discount chains,. as they feverishly move from area to area building larger and larger superboxes in a desire to kill off their competition. Soon the nation will appear to be scenes of desecrated malls looking like ravaged cemeteries, abandoned, looted, boarded up and loaded with graffiti. Can better planning on national, state and local levels help with respect to zoning and involving the community and their citizenry? The following long term strategy for combating sprawl may be found in the work of the National Trust for FEstoric Preservation released in 1994.33 "One of the best long term strategies for combating sprawl is to revitalize the downtown, the community's traditional center of commercial, cultural, and social activity. Making downtown "the place to be" helps to attract businesses, shoppers, and appropriate development to Main Street'." "Sometimes a downtown's problems seem overwhelming to local citizens. By flooding the community with more commercial space than can reasonably be supported and by diluting the downtown's economic vitality, sprawl can add to those problems. Yet downtown's problems are not insurmountable. Rebuilding the historic commercial district's economic strength simply requires persistence, collaboration, and a clear vision of what you hope to achieve." "By identifying the downtown's major problems, then breaking large tasks down into smaller, achievable steps that gradually bring about positive, incremental change, a community can restore the downtown's economic vitality and make downtown, an exciting place to shop, conduct business, dine, live, and visit." A f n RffkdiLzatm Pronam WW Usuaft Han Then ChamcWistks 1 _ A clear focus on a historic or traditional commercial district (either a downtown or a neighborhood commercial district). 2. Comprehensive and coordinated design, promotion, organization and economic development activities. 3. Strong support from both public and private sectors. 4. Broad-based community involvement and support. 5. A strong historic preservation ethic and a commitment to preserve the district's historic commercial buildings. 6. Willingness to take risks and try new approaches. 7. Trained, professional staff, whose primary function is to coordinate the activities of committed volunteers. 8. An active and effective board of directors and committees. 9. An evolving track record of individual and overall successes in preservation based commercial file://AAChapter'/o2010-bc.htm 2/11/2003 Chapter 10 Small businesses must suvas the idea that fighting sprawl or rebuilding the "Main Street" is anti- competitive. The superstores spend a great deal of money to secure rezoning, win referenda and influence local decisions. Small business has to collectively make a decision to invest in its own future. Key actions proposed by Beaumont which were taken from the Sierra Club Guide on this issue are as follows:37 "1.Obtain a copy of the developer's proposal and analyze it. 2. Find out if the proposed development complies with relevant federal, state and local laws. 3. Make a flow chart of the development review process and include time deadlines. 4. Think your objectives through carefully set priorities. S. Organize a committee and delegate responsibility. 6. Develop a well -reasoned position on the proposed development and back up your position with careful research. 7. Develop grass-roots organizing and media strategies. 8. Generate letters to the editor and opinion pieces in the local paper early. 9. Meet with local officials and opinion leaders. Draw their attention to facts they need to know. 10. Turn out and speak out at public hearings. 11. Ask the city council to analyze the development's probable fiscal, economic, environmental, traffic and other impacts. Make sure long-term impacts are considered. 12. Circulate petitions. 13. Distribute similar fliers clearly summarizing your position and the reasons for it. 14. Raise money to pay for radio spots, newspaper ads, bumper stickers, and other ways of getting your message across. 15. Above all, build inroad public support for your position. Work to reach different segments of the community, especially local business and civic leaders. The author concludes this extensive review of the impact of the mega -retail discount chains on the economics and sociology of urban, suburban, "Turban" and rural areas with strong concern for the future of Young Americans. Where will they work? Where will they live? Will we live in an economy of hopelessness or one of opportunities and entrepreneurial growth? While intelligent government policy is creative; nevertheless, the spirit of entrepreneurship should be enacted into our enterprises, from a private as well as a public point of view. Go To: Tof P e T a of Con e file://AAChapter%2010-bc.htm 2/1112003 HERLAM GR,A TR Attorneys At L a w Steven A. Herum sherum®herumcrabtree.com January 19, 2005 Lodi City Council City of Lodi City Hall 21 West Pine Street P.Q. Box 3006 Lodi, California 95241 Re: Reewal of John Beckman Dear Honorable Members of the Lodi City Council: For the reasons stated in the attached declaration and the accompanying Appellate Court opinion, Lodi First respectfully demands that Mr. John Beckman be recused from hearing the matter concerning the Lodi Shopping Center scheduled for January 19, 2005. Very truly yours, STEVEN A. RUM Attorney -at -Law 6=AMT Enc. \\nt_oas\prolaw\documents\2146-002\SAH\41841. doc 2291 West A4cwck .Lane Smite 8100 .Stockton, CA 95207 •`Cel 209.472.7700 • Fax 209.472.7986 •]VioclestoTel. 209525.8444 professional Corporation DECLARATION OF STEVEN A. HERUM IN FAVOR OF DISQUALIFYING JOHN BECKMAN FROM PARTICIPATING IN THE LODI SHOPPING C��►IIY �I "�� : � C� I �T;��1�C� I, STEVEN A. HERUM, declare, 1. I am an attorney at the law firm of Herum Crabtree Brown. I am one of the attorneys representing Lodi First, an unincorporated association of residents, voters and taxpayers of the City of Lodi who oppose the Lodi Shopping center. 2. On December 21, 2004 I attended a farewell event for Stockton Mayor Gary Podesto at the Stockton Civic Auditorium. During the event Mr. John Beckman, who I know to be the mayor of Lodi, approached me. 3. Mr. Beckman stated that he "looked forward to the January hearing on Wal-Mart so he could vote against me and vote for Wal-Mart." He also asked in a disparaging manner, "how did it feel to be on the same side as Ann Cerney?" 4. On December 29, 2004, the Appellate Court issued a decision entitled, Nasha, L. L. C. v. City of Los Angeles. A true and correct copy of this opinion is attached as Exhibit "A". Noting that bias or prejudice on the part of a decision maker must "never be implied and must be established by clear averments", the Appellate Court found that a planning commissioner's undisclosed authorship of a newsletter article attacking Nasha's project "gave rise to an unacceptable probability of actual bias and was sufficient to preclude (the planning commissioner) from serving." The planning commissioner "clearly should have recused himself from hearing this matter." Executed at Stockton, San Joaquin County, California on this 1 day of January, 2005, . r�_M3*&A STEVEN A. RUM Steve Hum From: Brett S. Jolley Sent: Friday, January 07, 2005 4:06 PM To: Steve Herum; Natalie M. Weber; Amanda Payne (E-mail); Jesse McKnight (E-mail) Subject: Recent Case on Decision -Maker Bias DAILY JOURNAL SUMMARY 2nd District California Court of Appeal, Division 3 Nasha LLC sought to develop five single fam4 residences near Mulholland Highway. Environmental groups and neighboring residents opposed the plan, arguing that it would hinder wildlife movement. The matter was scheduled for a hearing before the South Valley Area Planning Commission. Prior to the hearing, one of the Commission members, Commissioner Lucente, wrote a newsletter article criticizing the project. Lucente also attended a meeting where he introduced one of the neighbors opposing the project. Lucente participated in the hearing and encouraged the Commission to reject the project. The Commission rejected it. Nasha petitioned for writ of mandate, contending that Lucente was biased. A trial court denied the petition, finding that Nasha failed to prove bias. Reversed. Procedural due process in an administrative setting requires a reasonably impartial, noninvolved reviewer. A person claiming partiality must show an unacceptable probability of actual bias. Lucente wrote an article that attacked the project as a "threat to wildlife corridor." Such a statement is not merely informational, as Lucente later claimed. Further, he denied having contact with any of the parties. In fact, he had contact with one of the neighbors involved in the case. Lucente's conduct gave rise to an unacceptable probability of actual bias. He clearly should have recused himself from hearing this matter. His participation in the hearing requires the decision to be vacated. OPINION NASHA L.L.C., Plaintiff and Appellant, V. CITY OF LOS ANGELES et al., Defendants and Respondents. No. B167071 (Los Angeles County Super, Ct. No. BC258585) California Court of Appeal Second Appellate District Division Three Filed December 29, 2004 APPEAL from a judgment of the Superior Court of Los Angeles County, David P. Yaffe, Judge. Reversed with directions. Luna & Glushon and Robert L. Glushon for Plaintiff and Appellant. Rockard J. Delgadillo, City Attorney, ,seri L. Burge, Assistant City Attorney, and Steven N. Blau, Deputy City Attorney, for Defendants and Respondents. Plaintiff and appellant Nasha L. L.C. (Nasha) appeals a judgment denying its petition for writ of mandate (Code Civ. Proc., § 1094.5),' wherein Nasha sought to overturn an adverse decision by the South Valley Area Planning Commission (Planning Commission). Z The essential issue presented is whether the Planning Commission's decision should be set aside due to an unacceptable probability of actual bias on the part of one of the decisionmakers. While this matter was pending before the Planning Commission, one of its members authored an article attacking the project under consideration. Accordingly, Nasha's claim of bias is well founded. The judgment is reversed with directions. FACTUAL AND PROCEDURAL BACKGROUND Nasha owns five legal lots on Multiview Drive, north of Mulholland Highway and east of laurel Canyon. The lots, which are surrounded by single family residences, range in size from 22,675 square feet to 46,244 square feet. Nasha seeks to develop the property with five new three-story single-family homes, with a maximum height of 36 feet and square footage ranging from 5,173 square feet to 6,648 square feet, including garages, decks and balconies. Each home also would have an outdoor pool. The site of the project is located within an area subject to the Mulholland Scenic Parkway Specific Plan (Mulholland Plan). The stated purposes of the Mulholland Plan include preservation of the area's scenic features as well as preservation of the existing ecological balance and biologic features. Although it is asserted the site of the proposed project is not visible from Mulholland Highway, due to its geographic location within the boundaries of the Mulholland Plan, Nasha was required to file an application to determine the proposed development's compliance with the Mulholland Plan. 1. Administrative proceedings. a. The mitigated negative declaration (MND). 3 In November 2000, in accordance with the California Environmental Quality Act (CEQA) (Pub. Resources Code, § 21000 et seq.), the City Planning Department issued a proposed MND for the project. The Planning Department proposed an MND be adapted on the ground the mitigation measures which it outlined would reduce any potential significant adverse effects to a level of insignificance. Thereafter, the Santa Monica Mountains Conservancy (Conservancy) submitted written comments. The Conservancy argued the proposed MND was deficient for inadequately addressing potential impacts to the wildlife movement corridor which connects Griffith Park to Fryman Canyon. Various neighbors, including one Mark Hennessy (Hennessy), also submitted comments. Hennessy likewise contended the MND was deficient and complained the project would substantially interfere with deer and wildlife habitat, and would degrade wildlife migration. In December 2000, based on comments submitted pertaining to the wildlife corridor, the Planning Department amended the proposed MND to include the following mitigation measure. "Provision of escape routes or wildlife corridors to allow resident wildlife access to uninhabited areas where they dwell, and monitoring of animal use of these escapes or corridors; [¶] Consultation with the Department of Animal Regulation, Wildlife Specialist or Supervisor, regarding animal relocation, design standards and management guidelines for escape routes or wildlife corridors; [9l Mapping of these escape routes or wildlife corridors with regards to their location, topography, and vegetation; and M Post -construction landscape treatment to insure preservation of habitat for wildlife. Where habitat has been preserved, use of native plant materials is required." b. The Mulholland Design Review Board (DRB) recommends disapproval. Nasha's application also was considered by the DRB, which is an advisory body. On December 14, 2000, the DRB recommended disapproval on the grounds that the size and massing were incompatible with the Mulholland Parkway environment, the fiat roofs were incompatible, the retaining walls were too tall and long, and the development did not conform to the site. The DRB also recommended that an environmental impact report (EIR) be prepared for the project. c. The City Director of Planning (Director) approves the project. On March 23, 2001, the Director, as the decisionmaker, conditionally approved Nasha's application and certified the MND. The Director determined that as conditioned, there were "no significant adverse impacts which have not been mitigated to a level of insignificance." d. The appeal to the Planning Commission. In April 2001, the Conservancy and Hennessy, for himself and other neighborhood residents, appealed the Director's decision to the Planning Commission. The Conservancy contended the project would result in significant unavoidable adverse impacts to wildlife movement in the eastern Santa Monica Mountains and habitat resources, the MND was inadequate, an EIR was required, and the proposed buildings were incompatible with the terrain. Similarly, Hennessy asserted, inter alia, the Director's decision "creates a disastrous effect not only to the property itself, including the numerous wildlife species within this wildlife corridor canyon contained within this property, but also to the properties immediately adjacent ...." The public hearing on the appeal was scheduled for .lune 28, 2001. e. Shortly before the Planning Commission hearing on the appeal, Commissioner Lucente authors an article hostile to the project. In advance of the Planning Commission hearing, the June 2001 issue of the Studio City Residents Association newsletter contained the following news update: "MULTIVIEW DRIVE PROJECT TH1%_AT TO WILDLIFE CORRIDOR [J[j A prop, -ad project taking five legal lots totaling 3.8 acres for five proposed large homes with swimming pools served by a common driveway off Multiview Drive is winding its way through the Planning process. The Mulholland Design Review Board denied it unanimously. However, the Deputy LA City Planning Director overrode that denial. The Santa Monica Mountains Conservancy and the neighbors both appealed it to the South Valley Area Planning Commission. The Appeal hearing is set for June 28th after 4:30 pm in Van Nuys. (Please see Hearings/Meetings, Page Two.) [1[] After wildlife leaves Briar Summit heading eastward they must either head south towards Mt. Olympus or north to the slopes above Universal City. The Multiview Drive site is an absolutely crucial habitat corridor. Please contact Paul Edelman with the Conservancy at 3101 ... or Mark Hennessy who lives adjacent to the project at 3231... if you have any questions." (Italics added.) The newsletter article was unsigned. Lucente later admitted in deposition he was the author. f. While the appeal to the Planning Commission was pending, Lucente introduced Hennessy to speak against the project at a neighborhood association meeting. In addition to serving on the Planning Commission, Lucente also was president of the Studio City Residents Association. In June 2001, during the pendency of the appeal to the Planning Commission, Lucente introduced Hennessy at the Association's monthly meeting. At that meeting, Hennessy proceeded to speak against the project and in support of his appeal. 4 g. The June 28, 2001 hearing before the Planning Commission; no disclosure by Lucente of his authorship of the article or of his contact with Hennessy. On June 28, 2001, the matter came on for hearing before the Planning Commission. At the outset, Lucente made the following statement: "I did want to state that in another capacity, as president of the Studio City Residents Association, we have included information on this matter in our monthly newsletter at the request of one of our members, which is a routine thing that we do. And I have not, however, had any direct contact with the appellants, nor have I discussed this project in any substantive way with anyone involved in this. So, therefore, I feel 1 can make a fair and impartial decision regarding this matter." An unidentified speaker then stated: "It doesn't impact you financially in any way." Lucente responded: "And there is no financial impact in any way. Therefore, I will be hearing this matter. Thank you." Thus, in Lucente's opening remarks, he did not disclose he in fact had authored the article which appeared in the Association's June 2001 newsletter. Also, contrary to Lucente's characterization thereof, the newsletter article was not merely informational. The article advocated a position against the project, which it characterized as a "threat to wildlife corridor," and sought to rally residents to support the appeal to the Planning Commission. Lucente's assertion he had not "had any direct contact" with any of the appellants likewise was inaccurate. As noted, earlier that month, Lucente had introduced Hennessy at an Association meeting to speak against the project. h. At the conclusion of the hearing, Lucente brings a motion to grant the appeal. At the hearing, the Planning Commission heard from various speakers, including representatives of Nasha, the Conservancy, and various area residents, including Hennessy. Nasha took the position that the MND adequately addressed the issue of the wildlife corridor, a position which the Conservancy and neighboring homeowners disputed. At the conclusion of the hearing, Lucente made a motion "to grant the appeal and find that the Director of Planning erred in the determination regarding this project and that the findings could not be made to ... deny the appeal based on the testimony that we had here tonight." The motion was carried by a three -to -one vote. i. Nasha's unsuccessful requests for reconsideration. On July 5, 2001, one week after the hearing, Nasha filed a request for reconsideration based on new facts relating to bias by Lucente. First, contrary to Lucente's statement at the June 28, 2001 Planning Commission hearing, Lucente did have ex parte contact with Hennessy, one of the appellants, whom Lucente had introduced at a June 12, 2001 meeting of the Studio City Residents Association. Further, at the Planning Commission hearing, Lucente had failed to disclose his role in the newsletter article opposing the project. On July 12, 2001, Nasha reiterated its request for reconsideration in another letter to the Planning Commission, stating: "in order to protect even the perception of bias and conflict, the Commission should vote for reconsideration of this case, either for the purpose of allowing Commissioner Lucente to recuse himself or to request an opinion from the City Attorney pursuant to Charter Section 222." The Planning Commission did not reconsider its decision. j. The Planning Commission's findings. Four months after the hearing, the Planning Commission issued findings setting forth the basis for its decision overturning the Director's conditional approval of the project. The Planning Commission's decision indicated: "I. The Commission arrived at its determination based upon its review of available records and evidence contained in the subject and related files and upon testimony and evidence provided at the Commission hearing on the subject matter. "a. Based on a review of the building plans, landscape plans, and color palette, the five proposed buildings and associated landscaping are not compatible with the surrounding buildings and parkway environment for the following reasons: The Specific Pian states, per Section I I.►._.d., that the building or structure should co,..jrm to the surrounding buildings and parkway environment. In this case, the proposed houses are'box like' with little articulation or stepping back. Furthermore the visual massing and appearance resulting from the cumulative size of the homes and their retaining wall structures would not be compatible with the appearance of existing houses in this neighborhood. "b. On December 14, 2000, the City Planning Department Environmental Staff Advisory Committee issued a proposed Mitigated Negative Declaration (MND) No. 2000 -3622 -DRB (Article V -City CEQA Guidelines) and determined that by imposing conditions, the potential impacts resulting from the project would not have a significant impact on the environment. At the June 28, 2001, South Valley Area Planning Commission appeal hearing for this case, the Santa Monica Mountains Conservancy presented evidence that potentially significant impacts to the wildlife corridor would result from project implementation and that the proposed mitigation measures identified in the proposed Mitigated Negative Declaration No. 2000 -3622 -DRB were insufficient to reduce impacts to less than significant levels. The project, as proposed, would not preserve the natural vegetation, existing ecological balance and environmentally sensitive areas and the biologic features in conformance with Section 2.K. and L. of the Specific Pian. The potential impacts to the wildlife and the corridors were not adequately analyzed by the proposed Mitigated Negative Declaration No. 2000 -3622 -DRB and therefore it was determined to be inadequate. "c. Project Permit Compliance Finding. The proposed project does not comply with the regulations, standards, and provisions of the Mulholland Scenic Parkway Specific Plan." 2. Tical court proceedings. a. Pleadings. On October 25, 2001, Nasha filed a first amended verified petition for writ of mandate to overturn the Planning Commission's decision (§ 1094.5), joined with causes of action for declaratory relief and temporary taking without just compensation. 5 Nasha named as defendants the City, the Planning Commission, and Lucente in his capacity as a planning commissioner. Nasha pled, inter alia, the Planning Commission's reversal of the Director's approval of the project was arbitrary, capricious, an abuse of discretion, a denial of Nasha's fundamental right to a fair and impartial decision, and unsupported by substantial evidence. With respect to Lucente's conduct, Nasha alleged his role in introducing Hennessy as a speaker against the project at a neighborhood association meeting, and his role in allowing publication of the newsletter article attacking the project while the matter was pending before the Planning Commission, reflected, at a minimum, a reasonable appearance of bias which required his recusal from hearing the matter. Further, to ensure that quasi-judicial decisionmaking is not tainted by even the reasonable appearance of bias and unfairness, Lucente's vote and the Planning Commission's decision should be set aside. Additionally, Nasha alleged the Planning Commission failed to act in the manner required by law in various respects, including failing to make certain necessary findings and in misinterpreting the Mulholland Plan; and the Planning Commission's decision was not supported by substantial evidence, in that, inter alia, the MND was adequate to protect wildlife access. b. Lucente's deposition. On January 18, 2002, during the pendency of the mandamus proceedings, Nasha took Lucente's deposition. In the deposition, Lucente admitted he authored the newsletter article, that he had spoken to Hennessy before the Association meeting and that he introduced Hennessy at that meeting. s c. The City's opposition. The City filed opposition papers, asserting substantial evidence supported the Planning Commission's findings, the decision was principled and followed a clear analytical path, the Planning Commission duly relied on applicable provisions of the Mulholland Plan, and the attack on Lucente was spurious. The City emphasized Lucente had no financial interest, he was not the sole decisionmaker, and the standard for disqualification was not an appearance of bias but a probability of actual bias, a standard which was not met here. d. Trial court's rulings and judgment. On July 26, 2002, the matter came on for hearing. The trial court rejected Nasha's claim of bias arising out of Lucente's pre -hearing involvement attacking the project, stating: "I am going to reject [Nasha's] argument .... I think that [Nasha] either knew or had reason to believe at the administrative level that this guy had something to do with that, with the writing of that article, and therefore should -has not shown sufficiently that this argument could not have been made in the exercise of due diligence at the administrative level and therefore is precluded from urging disqualification for the first time here in court on the basis that he wrote that. And 1 don't think there's enough to show that he must be disqualified if he did not write it. So I'm not going to permit any further briefing or argument with respect to that." (italics added.) 7 The trial court then continued the matter to allow supplemental briefing on the sole issue of whether the Mulholland Plan applies to development projects that are not visible from Mulholland Drive, On September 26, 2002, the trial court denied Nasha's petition for writ of mandate, ruling that the Mulholland Plan is applicable irrespective of whether a project is visible from Mulholland Drive, and that substantial evidence supported the administrative decision "that the large homes that [Nasha] intended to construct upon the 5 lots were out of scale and e - character with, and incompatible with, oe surrounding neighborhood." On April 11, 2003, the trial court entered judgment in favor of the City, the Planning Commission and Lucente. Nasha filed a timely appeal from the judgment denying its petition for writ of mandate. CONTENTIONS Nasha contends: the Planning Commission's decision should be set aside because Commissioner Lucente's pre -hearing actions attacking the project constituted actual bias; the Planning Commission's decision is not supported by substantial evidence; the Planning Commission failed to make any of the required findings to support its decision; the stated purpose for a design review process in the Mulholland Plan is to review projects that are visible from Mulholland Drive; and the Planning Commission's decision reversing the Director's approval of the MND was unsupported by substantial evidence. DISCUSSION 1. Standard of review. The petition for superior court review of the final administrative decision by the Planning Commission was brought pursuant to section 1094.5. "The inquiry in such a case shall extend to the questions whether the respondent has proceeded without, or in excess of jurisdiction; whether there was a fair trial; and whether there was any prejudicial abuse of discretion." (§ 1094.5, subd, (b), italics added.) A challenge to the procedural fairness of the administrative hearing is reviewed de nova on appeal because the ultimate determination of procedural fairness amounts to a question of law. (Clark v. City of Hermosa Beach (1996) 48 Cal.AppAth 1152, 1169-1170; Ansery Ins. Services, Inc. v. Kelso (2000) 83 Cal.App.4th 197, 205.) 2. Nasha has shown an unacceptable probability of actual bias. a. Procedural due process principles apply to quasi-judicial decisionmaking. As explained in Beck Development Co. v. Southern Pathic Transportation Co. (1996) 44 Cal.App.4th 1160, 1888, "In considering the applicability of due process principles, we must distinguish between actions that are legislative in character and actions that are adjudicatory. In the case of an administrative agency, the terms 'quasi -legislative' and 'quasi-judicial' are used to denote these differing types of action. Quasi -legislative acts involve the adoption of rules of general application on the basis of broad public policy, while quasi-judicial acts involve the determination and application of facts peculiar to an individual case. [Citations.] Quasi -legislative acts are not subject to procedural due process requirements while those requirements apply to quasi-judicial acts regardless of the guise they may take. [Citations.]" Here, the proceeding before the Planning Commission was quasi-judicial in nature, rather than quasi -legislative, because the matter involved the determination and application of facts peculiar to an individual case, rather than the adoption of rules of general application on the basis of broad public policy. (Beck Development Co., supra, 44 Cal.AppAth at p. 1188.) Accordingly, procedural due process principles are applicable. (Ibid.) b. Procedural. due process requires a reasonably impartial, noninvolved decisionmaker. Procedural due process in the administrative setting requires that the hearing be conducted "' "before a reasonably impartial, noninvolved reviewer." ' " (Gai v. City of Selma (1998) 68 Cal.App.4th 213, 219, italics added.) As this court observed in Nightft Partners, Ltd. v. City of Beverly Hills (2003) 108 Cal.AppAth 81, "the broad applicability of administrative hearings to the various rights and responsibilities of citizens and businesses, and the undeniable public interest in fair hearings in the administrative adjudication arena, militate in favor of assuring that such hearings are fair." (ld., at p. 90.) c. The nature of the required showing: an unacceptable probability of actual bias. The "standard of impartiality required at an administrative hearing is less exacting than that required in judicial proceedings." (Gai v. City of Selma, supra, 68 Cal.App.4th at p. 219.) It is recognized that "administrative decision makers are drawn from the community at large. Especially in a small town setting they are likely to have knowledge of and contact or dealings with parties to the proceeding. Holding them to the same standard as judges, without a showing of actual bias or the probability of actual bias, may discourage persons willing to serve and may deprive the administrative process of capable decision makers." (ld., at p. 233.) Therefore, in order to prevail on a claim of bias violating fair hearing requirements, Nasha must establish "'an unacceptable probability of actual bias on the part of those who have actual decisionmaking power over their claims.' (BreakZone Billiards v. City of Torrance (2000) 81 Cal.App.4th 1205, 1236.) A party seeking to show bias or prejudice on the part of an administrative decisionmaker is required to prove the same "with concrete facts: "'[b]ias and prejudice are never implied and must be established by clear averments." "' (Id., at P. 1237; accord Hongsathavij v. Queen of Angels etc. Medical Center (1998) 62 CaI-App.4th 1123, 1142.) d. Nasha has shown an unacceptable probability of actual bias based on Lucente's authorship of the newsletter article attacking the project. The newsletter article by Lucente, attacking the project as a "threat to wildlife corridor," gives rise to an unacceptable probability of actual bias. We reiterate portions of the offending article for emphasis: "MULTIVIEW DRIVE PROJECT THREAT TO WILDLIFE CORRIDOR MI A proposed project taking five legal lots totaling 3.8 acres for five proposed large homes with swimming pools served by a common driveway off Multiview Drive is winding its way through the Planning process.... [J[] After wildlife leaves Briar Summit heading eastward they must either head south towards Mt. Olympus or north to the slopes above Universal City. The Multiview Drive site is an absolutely crucial habitat corridor. Please contact Paul Edelman with the Conservancy at 3101... or Mark Hennessy who lives adjacent to the project at 3231.. , if you have any questions." (Italics added.) Contrary to the position taken by Lucente, the newsletter article was not merely informational. The article clearly advocated a position against the project, which it characterized as a "threat to wildlife corridor." Lucente's authorship of the newsletter article gave rise to an unacceptable probability of actual bias and was sufficient to preclude Lucente from serving as a " ' "reasonably impartial, noninvolved reviewer." ' " (Gai v. City of Selma, supra, 68 Cal.AppAth at p. 219.) Lucente clearly should have recused himself from hearing this matter. His participation in the appeal to the Planning Commission requires the Commission's decision be vacated. 8 9 e. Theme was no waiver by Nasha. In an attempt to salvage the Planning Commission's decision, respondents contend Nasha waived the issue of Lucente's bias by failing to raise the issue at the administrative level. (NBS Imaging Systems, Inc. v. State Sd of Control (1997) 60 Cal.AppAth 328, 337 [superior court erred in granting relief based on legal theory not presented during administrative proceedings].) The trial court was persuaded by this position, finding Nasha was precluded from raising the issue of Lucente's bias for the first time at the superior court level. The trial court's finding of waiver is erroneous, both factually and legally. (1) Nasha initially challenged Lucente's bias at the administrative level. The record establishes that Nasha in fact did raise the issue of bias at the administrative level. As indicated, on July 5, 2001, one week after the Planning Commission hearing, Nasha filed a request for reconsideration based on new facts relating to bias by Lucente, specifically, Lucente's undisclosed ex parte contact with Hennessy, and Lucente's undisclosed authorship of the newsletter article attacking the project. Thereafter, on July 12, 2001, Nasha reiterated its request for reconsideration in another letter to the Planning Commission, stating: "in order to protect even the perception of bias and conflict, the Commission should vote for reconsideration of this case, either for the purpose of allowing Commissioner Lucente to recuse himself or to request an opinion from the City Attorney pursuant to Charter Section 222." In view of the above, the trial court's ruling that Nasha raised the issue of Lucente's bias for the first time at the superior court level is contrary to the record. (2) Superior court may consider evidence not presented at administrative level relating to procedural faimess. Where the issue on administrative mandamus is whether the administrative hearing was procedurally fair, "the trial court may consider evidence not presented at the administrative hearing if the evidence addresses the petitioner's claim that he or she was denied due process or a fair hearing at that hearing. [Citations.]" (Nightlife Partners, Ltd. v. City of Beverly Hills, supra, 108 Cal.AppAth at pp. 89-90.) Section 1094.5, subdivision (e), enables the trial court to admit relevant evidence that, in the exercise of reasonable diligence, could not have been produced at the administrative hearing. Here, it was only in the course of the superior court action that Nasha had the opportunity to take Lucente's deposition to fully develop the issue of bias. Therefore, such evidence properly was before the trial court in the mandamus proceeding and is entitled to due consideration. 3. Remaining issues not reached. Because the Planning Commission's decision was tainted by bias and must be vacated, it is unnecessary to address Nasha's other contentions. DISPOSITION The judgment is reversed with directions to issue a writ of mandate vacating the Planning Commission's decision and directing the Planning Commission to conduct a new hearing on the appeal from the Director's decision, before an impartial panel. Nasha shall recover its costs on appeal. KLEIN, P.J. We concur: CROSKEY, J. KITCHING, J. All further statutory references are to the Code of Civil Procedure, unless otherwise indicated. 2 In addition to the Planning Commission, Nasha named as defendants the City of Los Angeles (the City) and Tony Lucente (Lucente), in his capacity as a member of the Planning Commission. The Planning Commission, the City and Lucente are the respondents in this appeal. 3 "'Mitigated negative declaration' means a negative declaration prepared for a project when the initial study has identified potentially significant effects on the environment, but (1) revisions in the project plans or proposals made by, or agreed to by, the applicant before the proposed negative declaration and initial study are released for public review would avoid the effects or mitigate the effects to a point where clearly no significant effect on the environment would occur, and (2) there is no substantial evidence in light of the whole record before the public agency that the project, as revised, may have a significant effect on the environment." (Pub. Resources Code, § 21064.5.) 4 According to Lucente, he left the room for the duration of Hennessy's remarks. 5 Nasha later filed a request for dismissal without prejudice of its declaratory relief and taking claims. 6 The deposition transcript includes the following colloquy: "Q And you didn't know what [Hennessy] was going to say? "A I knew that he was going to speak about this project. "Q And you told Mr. Hennessy that you would introduce him to speak? "A Yes. "Q And did you introduce Mr. Hennessy to speak? "A Yes, I did." Lucente then added that he left the room and did not listen to Hennessy's remarks. 7 As indicated, Lucente admitted he wrote the article. Therefore, the trial court's comment "I don't think there's enough to show that he must be disqualified if he did not write it" did not speak to the issue. Further, the trial court faulted Nasha for raising the issue of Lucente's bias for the first time at the superior court level. However, as set forth above, the record reflects Nasha did raise the issue of bias at the administrative level - Nasha promptly requested reconsideration on that basis before the Planning Commission, twice, to no avail. B Respondents have emphasized that Lucente was not the sole decisionmaker. However, any attempt to characterize Lucente's participation as somehow harmless is meritless. Lucente's vote was decisive. The Planning Commission's vote was 3 to 1 in favor of overturning the Director's approval of the project, with Lucente voting with the majority. Had Lucente duly recused himself, there would have been only two votes to overturn the Director's decision. Because the votes of three commissioners were required to overturn the Directors decision (L.A. City Charter, § 503(c)), absent Lucente, the administrative appeal would have failed. Therefore, Lucente's involvement clearly affected the outcome of the administrative appeal. 9 Because Lucente's authorship of the newsletter article, standing alone, is sufficient to give rise to an unacceptable probability of actual bias, it is unnecessary to address Nasha's arguments relating to Lucente's undisclosed ex parte contact with Hennessy. BRETT S. JOLLEY Herum Crabtree Brown (209) 472-7700 bjoiley@herumcrabtree.com www.herumcrabtree.com This message is confidential in nature and is intended to be protected by all applicable privileges including attorney-client and attorney wait product. F 0-0 -a Transportation Planning - Traffic Engineering Intelligent Transportation Systems - Air Quality Planning/Analysis Technologies, Inc. January 18, 2005 Brett S. Jolley, Attorney -at -Law Herum Crabtree Brown Attorneys At Law 2291 West March Lane, Ste. B100 Stockton, CA 95207 Re: Proposed Wal-Mart Supercenter (Project) — Lodi, California, Environmental Impact Report (EIR) Traffic Impact Study (TIS) Peer Review Dear Mr. Jolley: VRPA Technologies, as requested, has reviewed the Draft Environmental Impact Report (EIR) prepared for the proposed Wal-Mart Supercenter shopping center (Project) located at SR 12NV. Kettleman Lane and Lower Sacramento Road. Fehr & Peers Associates (consultant) prepared the Traffic Impact Study (TIS) in July 2004, which has been included in the Draft EIR. Based upon our peer review of the TIS, VRPA Technologies has prepared the following detailed comments. 1 Study Area/Street and Road Network: The intersection analysis for the TIS does not appear to be extensive enough, especially given the trip distribution developed by the consultant for the Project TIS. This means that some critical intersections east of the Project site such as the ramps at SR 99 (only 2 miles away), the intersection of Ham Lane and Kettleman Lane (SR 12), and Hutchins St. at Kettleman Lane (SR 12) were not studied. Each of these intersections should have been studied given the estimated 27% of Project traffic that the TIS consultant estimates will be originating from east of the site. Thus, the intersection analysis does not correspond to the trip distribution pattern. Failing to correspond the intersection analysis to trip distribution patterns results in affected intersections being omitted from the analysis. By omitting these intersections the EIR fails to provide important information concerning the impact of traffic and fails to address meaningful mitigation measures. Based on the above, a significant amount of traffic is expected to utilize SR 99 to gain access to the proposed Project. Mr. Brett Jolley January 18, 2005 Page 2 of 9 In addition, there is a considerable amount of existing development located north of the Project site, which will be attracted to the proposed Project (25%) from north of SR 12 to W. Lodi Avenue or beyond along Lower Sacramento Road. As a result, the intersections of Vine and Lower Sacramento Road and W. Lodi Avenue and Lower Sacramento Road should have been included in the TIS. Further, 17% of the traffic generated by the proposed Project is expected, according to the TIS consultant, to be attracted from south of the Project site along Lower Sacramento Road. As a result, intersections along Lower Sacramento Road located south of Harney lane should have been included. Finally, 17% of the traffic generated by the Project is expected to be attracted to the site along SR 12 west of Westgate Drive, however; no intersections along SR 12 west of the site were included in the TIS. For example, 27%, 25%, and 17% of Project PM peak hour trips generated by the TIS consultant and distributed along the facilities referenced above translates into 403, 373, 253 PM peak hour trips. Standard engineering practice indicates that an additional 50 peak hour trips at an intersection can cause the level of service to change to a lower service level. Lowering the LOS at an intersection is regarded as a significant impact from a CEQA context and a significant event by standard traffic evaluation practices. As a result, additional analysis at each of the critical intersections identified above should be undertaken to assess the potential and probable impacts of the proposed Project. ♦ Traffic Counts/Projections: The Draft EIR does indicate that the traffic counts were taken on March 10, 2004. It should be noted however, that Caltrans TIS Guidelines require that the counts be adjusted to reflect seasonal and weekend variations in traffic. The TIS does not indicate that such adjustments were made to the existing counts. The peak season for traffic in the San Joaquin Valley is during the summer months; therefore it would have been appropriate, if not critical, for the TIS consultant to increase the volumes to reflect this predictable seasonal variation. As a result, the one day study, conducted on a Wednesday during the Spring omits relevant information and grossly under predicts the traffic volume. This is precisely why the Caltrans TIS Guideline requires the seasonal adjustment. Future traffic projections were applied for the Year 2020 based upon output from the San Joaquin COG Regional Traffic Model. Trip Generation - Project: Based upon review of the TIS, the development consists of a Wal-Mart Supercenter (226,868 square feet), a fast food restaurant (9,690 square feet), a high turnover restaurant (7,500 square feet), a pharmacy (14,788 square feet), and a bank (5,160 square feet). In most recent traffic impact studies conducted for Wal-Mart Supercenters, the ITE Trip Generation Handbook rate per 1,000 square feet for a free-standing discount store (FSDS) is applied or that of a shopping center is applied to the entire Mr. Brett Jolley January 18, 2005 Page 3 of 9 development. In the case of this development, the TIS consultant used a rate from the ITE trip generation program of 5.06. During the summer of 2003, VRPA Technologies conducted a study of five free standing discount superstores (FSDS) to identify if that currently utilized ITE Trip Generation Handbook Rate was an accurate rate given the specifications of the typical free standing discount superstore being proposed and built today. VRPA Technologies' study considered freestanding Wal-Mart superstores in the states of Oklahoma and Texas. Trip generation analysis conducted by VRPA Technologies for the Supercenter sites utilized the average peak hour (4:30 — 5:30 PM) counts and the square footage of each Supercenter to determine the trips per 1,000 square feet during the PM Peak Hour. Traffic counts at each driveway for each Wal-Mart Supercenter were conducted on two typical weekdays (Tuesday, Wednesday and/or Thursday) from 4:00 PM — 6:00 PM. The first weekday count was taken in July 2003 and the second in October 2003. It should be noted that no inclement weather occurred during either count period and that the counts were not taken during a holiday week or season. The study concluded that of the free standing discount superstores studied, the average trip generation rate was 5.80 in the PM Peak Hour and 73,75 daily and the average square footage of the free standing discount superstores was 202,000. The study did not include the gas station square footage and assumed that with or without a gas station, the average PM Peak Hour trip generation rate was 5.80. Based upon the VRPA Technologies study, all sites surveyed concluded higher trip generation rates for the PM Peak Hour (between 4.26 and 7.58 per 1,000 square feet); therefore the study rate displayed in Table 1 of 5.80 should be the preferred choice of agencies when calculating trip generation for a Wal-Mart superstore. Since the Wal -Mark Supercenter proposed in the City of Lodi fits the characteristics of the Supercenters studied in 2003, VRPA Technologies believes the 5.80 rate for the 226,868 square feet designated as the Wal-Mart Supercenter is more accurate for traffic impact analysis. In the case of Lodi's TIS, the ITE average rate of 5.06 was used for the Wal-Mart Supercenter. This rate significantly underestimates the actual number of trips that will generated by the Project considering the results of the surveys described above. This underestimate is significant. First, it results in the EIR omitting relevant information concerning the nature, scope and severity of the traffic impact. Second, it precludes the EIR for addressing mitigation measures to minimize the magnitude of the impact. A key consideration for developments such as the proposed Project is the impact of weekend traffic on the access points to the development. The TIA Consultant did 5a Mr. Brett Jolley January 18, 2005 Page 4 of 9 nat consider weekend trip generation or impacts as part of its analysis. Referencing Table 1, most of the trip generation for a Supercenter or any type of superstore occurs during the weekend. As mentioned below the trip rates for Saturdays and Sundays are higher than the weekday trip rate. This is important because the turning lanes into the proposed Center must be of an appropriate length to accommodate vehicles desiring to access the center. During holidays, the need to estimate pocket length becomes even more critical if the trips that occur during that time or on a typical weekend day begin to stack into the through lanes of traffic causing a safety concern. Based upon a survey of a Supercenter in Carson City, Nevada conducted by MRO Engineers, the trip generation rate for Saturdays is 6.62 per 1,000 square feet, and 6.44 for Sundays. These rates are 12.4% and 9.9% higher than the weekday trip rate (5.80 per 1,000 square feet) developed by VRPA for Wal-Mart Supercenters. Table 1 therefore, also includes the increased weekend (Saturday) trips that would be generated by the proposed center. ➢ Pass by Trips The consultant utilized pass -by rates from recent versions of the ITE Trip Generation Handbook. VRPA Technologies has also applied these rates to Table 1. Captured Trips The TIS did not apply a captured or multi -use trip rate since the shopping center rate already considers total trip generation within a typical center including those trips that visit more than one center tenant. ➢ Results As seen in Table 1, the use of the VRPA Technologies' free standing discount superstores rate of 5.80 results in 1,678 PM Peak Hour trips compared to the TIS generated trips of 1,493, or 185 additional PM Peak Hour trips. For Saturday and Sunday, the difference between the TIS generated trips of 1493 and the Saturday (higher of the Saturday and Sunday survey rate) generated trips of 1,895, is 402 peak hour trips that have not been considered for purposes of the TIS analysis. Mr. Brett Jolley January 18, 2005 Page 5 of 9 Table 7 PROJECT TRIP GENERATION COMPARISON Lodi Shopping Center Use of ITE Trip Generation Rates VS VRPA Rata for Wal-Mart Superstores & Saturday rates applied using results of survey conducted by MRO Consultants, '2 Walk -In Bank - Lowest Range of Rate applied by Fehr & Pears instead of the average. Since the average Sq. ft of a Walk in bank is 5,000 Sq, ft., and this bank is 5,160, the average trip generation rate should be applied instead of the lowest rate in the range of rates developed by ITE- Results indicate that trip generation for the project is signincantly greater during PM (f 85 trips) and Daily (4023) conditions when applying appropriate trip generation rates as noted above. o#— Mr. Mr. Brett Jolley January 18, 2005 Page 5 of 9 ➢ Conclusion Referencing Table 1, the VRPA Technologies weekday trip rate for the Wal-Mart Supercenter is 14.6% higher than the rate applied by the TIS consultant from ITE. This percentage difference is considered significant and clearly indicates that using the ITE trip generation rate for a free standing discount store severely underestimates the number of trips that will be generated by proposed Wal-Mart Supercenters. Further, weekend trips should have been considered given the potential constraints with the turn lanes that would provide access to the proposed site. Finally, the actual traffic impacts and required mitigation measures that should be applied to the proposed development will be understated if the ITE rate continues to be applied. The ITE rate for Free Standing Discount Stores is based upon discount stores with up to 154,000 square feet. Stores of this size are not comparable to today's superstores or Supercenters, which average 200,000 square feet or larger. VRPA Technologies has conducted a factual study of trip generation associated with Supercenter stores averaging 200,000 square feet or larger. Therefore, the ITE rate is inapt for a proposed Supercenter of this size. Indeed the ITE has not yet established a category and trip generation calculation factors for these types of retail uses. The information contained in the ITE Manual was prepared years ago and for stores that do not share the characteristics similar if not identical to the proposed project. Wal-Mart must know that its Supercenters are generating greater numbers of trips than those generated using the ITE Trip Generation Manual given the numbers of Supercenters that it has developed and continues to operate nationwide. This potential is acknowledged indirectly by Wal-Mart in its calculation of parking spaces, which far exceed the minimum required spaces identified by the City of Lodi's development standards. ➢ Trip Generation — Cumulative Projects: The consultant considered trip impacts from nineteen (19) approved but not built projects. Cumulative projects include by definition in the California Environmental Quality Act (CEQA) "probable future projects which may be limited to those projects requiring agency approval for an application which has been received at the time the Notice of Preparation (NOP) is released, unless a project has been abandoned by the applicant." Further, CEQA also states that "probable future projects also include projects for which money has been budgeted or included in an adopted capital improvement program, general plan, regional transportation plan, or other similar plan. As a result of the above, the most critical cumulative projects were assessed to address near-term impacts. Mr. Brett Jolley January 18, 2005 Page 7 of 9 However, the list excluded approved projects (see the list of omitted projects listed in the September 20, 2004 Herum Crabtree letter) makes the cumulative traffic impact analysis unreliable and substantially inaccurate. ➢ Trip Distribution/Assignment to Adjacent Street and Road System and Project Driveways/Access Points: Project trips were distributed using existing traffic flow patterns, location of the project site, and model results provided by San Joaquin COG, VRPA Technologies was able to fully identify how the trips were distributed based upon the percentages and trips provided in the TIS since there is more than one driveway to the site. ♦ Level of Service Results - Intersections: The TIS traffic level of service (LOS) analysis is based upon the Year 2000 Highway Capacity Manual (HCM). The HCM methodology is the most appropriate LOS methodology that can be applied to determine levels of service at critical intersections. Even though HCM was applied appropriately, the analysis conducted by the consultant may not be sufficient to address the LOS deficiencies at each of the intersections studied given the additional trip generation that should have been applied. Further, additional intersections should be studied given the amounts of peak hour traffic that will be attracted to the site from further away than the intersections that contained in the TIS. ♦ Level of Service Results - Segment Analysis: Based upon the information provided in the TIS, segment analysis was not conducted. The lack of such analysis prevents decision -makers and the public from evaluating whether or not additional travel lanes would be required between intersections within the Project study area. To determine whether additional lanes would be required, the TIS consultant can apply the HCM-Based Arterial Level of Service Tables (Florida Tables), which have been widely accepted and applied throughout the San Joaquin Valley using Valley default values. Without the required analysis this remains an unaddressed significant effect. ♦ Street and Signal Improvements: Based upon the results of the intersection analysis and signal warrant analysis referenced in the TIS, street improvements were identified. Signal warrants were included in the TIS. The street improvements will likely change once the appropriate signalized intersection analysis considering increased trips is conducted by the consultant. ♦ Left Turn Pocket Length Analysis: As referenced earlier, it is important to assess the left turn pocket length requirements for vehicles entering the proposed shopping center to determine if enough storage is available. 7 Mr. Brett Jolley January 18, 2005 Page 8 of 9 Referencing the Consultant's TIS, the left turn pocket storage analysis provided to determine what the pocket lengths must be to accommodate trips generated by the proposed project appears appropriate. Even so, VRPA Technologies must stress that when the additional trips that will likely be generated by the Project as calculated by VRPA, are added to the volumes assigned to the left turn pockets in the TIS, storage length cannot be accommodated over the long-term. When Saturday trips are considered, the problem will become even more significant resulting in significant queuing along SR 12 and Lower Sacramento Road. ♦ Mitigation/Fee Assessment Analysis: Fair share percentages associated with the Project were not calculated by the consultant even though such a calculation is required by the Caltrans TIS Guidelines. The Draft EIR and TIS do identify that the Project shall pay its Fare Share for traffic signal improvements at the Lower Sacramento Road and Harney intersection. It should be noted however, that the TIS and the EIR do not identify when such improvements will be financed to coincide with the mitigation that is required by the proposed development. Other fair share percentages for required mitigation were not identified or even referenced in the TIS. Flndi ni us/Conclusions ♦ Trip generation rates that are more appropriate for the major anchor proposed on the project site (Wal-Mart Supercenter) should be applied for purposes of the EIR and the appended TIS versus the rates applied for a free standing discount store. The ITE PM Peak Hour trip generation rate of 5.06 applied by the TIS consultant is significantly lower than the actual trip generation rate identified by VRPA Technologies (5.80) through its study of five (5) Wal-Mart superstores in Oklahoma and Texas. As a result, the trip generation estimated for the proposed project could potentially result in impacts that will not be expected until the proposed project is operating. This will further result in the inability of the City to require appropriate mitigation measures to address such impacts. ♦ Segment analysis must be conducted to determine whether additional lane improvements will be required between the major intersections affected by the project. ♦ The Left Tum Lane (LTL) requirements for all intersections affected by project trips will change significantly once the VRPA trip generation is applied for purposes of calculating left turn storage lengths. Furthermore, when Saturday trip generation is applied, the left turn storage lanes will become even more constrained and will result in the need for longer turn lanes or dual left turn lanes in some locations. Mr. Brett Jolley January 18, 2005 Page 9 of 9 ♦ The TIS should state that the required mitigation can be funded through the mitigation fee program established by the City of Lodi; e.g.: that the improvements were considered during the impact fee study and that the collected fees will fund the required improvements for this proposed project as they are warranted. Further, the EIR should state how the Fare Share contributions will be collected by the City necessary to finance and improve the intersections studied. Based upon our firm's peer review, the TIS should be revised and the Draft and Final EIRs should not be approved until the items listed above are corrected or incorporated into the TIS. Should you have any further questions or need further information, please contact me at 559 271-1200 (office) or 559 259-9257 (cellular). Sincerely, FIV Georgiena M. Vivian, Vice President VRPA TECHNOLOGIES GV/hg I". + ferb Hoek r%vx,9's WDYIZs 23755 N. DeVrles RAGid, troth, CA -95242 (209) 470-5528 January 5, 2005 Lodi City Council Lodi City Hall 21 West Pine Street P.O. Box 3006 Lodi, California Re: Lodi Shopping Center Dear Members of the City Council: I am it licensed agricultural sprayer and own an agricultural spraying business. My Pest Control Business License number is 03168 and my Qualified Applicator License is QL30317. In the course of a typical agricultural season I supervise or directly operate agricultural spraying for approximately 600 acres of agrieuhural land, primarily in the Lodi area. I also actively farm wine grapes in the Lodi area. Based upon my actual experience as a licensed and active agricultural sprayer said as a wine grape grower, I disagree with the conclusions found at Impact 82 of the EIR I was also unable to find any evidence in the EIR to support a conclusion that this impact was not significant. Essentially the EIR states there will be various horizontal and vertical buffers between the shopping center and agricultural lands. Depending upon location, horizontal buffers will be between 72 feet and 600 feet. There will be a vertical buffer in the form of masonry walls at a height of either eight or ten feet. The EIR concludes that these buffers minimize the potential for agricultural dust, pesticide drift and other conflicts with urban uses. Based upon my actual experience as a wine grape grower and commercial agricultural sprayer, I disagree and predict that there will be complaints about customary farming and spraying activities. Even if the entire site was surrounded by a 600 foot buffer with a 10 foot high masonry fence there would still be significant conflicts between the shopping center and agricultural operations. Furthermore while the prevailing winds are from the northwest, the wind pattern is very unpredictable and the likelihood of an event of conflict is extremely high. In fact, it is typical for the prevailing wind pattern to change during a single application of a pesticide or during a single plowing event. It is therefore a serious mistake to assume that prevailing winds are sufficiently constant to operate as a factor in reducing potential events of conflict. I reviewed the EIR to located evidence to support the EIR's conclusions. However, I did not find a scientific study or a qualified statement of opinion to support the conclusion of Impact B2 that the various sized buffers minimize the conflict between the urban use and customary agricultural activities. Nor did I find a statement that prevailing winds were sufficiently constant and stable to meaningfidly minimizing the likelihood of an event of conflict. As a result, I believe this EIR does not accurately evaluate this impact or supply evidence tisat I can evaluate and consider. The City should take another look at this issue. The impact is significant rather than less than significant. Rest HER 1-4 California Economic Research Associates Economic Analysis of a Proposed Wal-Mart Supercenter in Lodi, California Prepared by: Philip G. King, Ph.D. Chair, Economics Department, San Francisco State University Sharmila King, Ph.D. Economics Department, University of the Pacific January 18, 2005 Signature Date fflpll� 10"N EXECUTIVE SUMMARY • ADE's analysis is incomplete. It fails to analyze the full build out of both the Lodi and Vintner's square mall. The new Wal-Mart Supercenter, along with the build out of Lowe's and Vintner's Plaza will create over 600,000 square feet of new retail space and CEQA requires all of this new space be part of their analysis. • ADE fails to examine new developments in the market area (as they define it), in particular the Power Center in Stockton which will have over one million square feet of retail and the new Wal-Mart Supercenter in Stockton as well as the planned second Supercenter in Stockton. CEQA requires a full analysis of all cumulative impacts and this ADE has failed to meet this test. • ADE's analysis of grocery sales is flawed. They underestimate current sales in Lodi and fail to provide sales data on individual stores. Without such data, no analysis of subsequent sales (and store closings) is possible. • Our analysis uses the same basic methodology as ADE, but corrects serious flaws and omissions in their data. We conclude that a substantial overcapacity in retail space, equal to 24% of current retail sales, will exist in Lodi, resulting in a large number of store closings including downtown Lodi. • We conclude that the proposed Supercenter will displace the current Safeway, Albertson's and Grocery Outlet and place the Apple and Rancho San Miguel markets under severe pressure. We also conclude one major pharmacy store in Lodi will close, most likely the Long's near downtown. We also anticipate that the build out of the Vinter's square and Lodi shopping area will close many other stores throughout the City—the most likely candidates. numerous small downtown stores including one pharmacy, numerous restaurants downtown, the ACE hardware, the Orchard supply hardware, and other discount retailers such as K -Mart. ADE examines retail sales leakage in the City of Lodi and surrounding region and claims that new retailers could be found to fill this leakage. However, they ignore Lodi's high capture of sales in other retail categories. While it is possible for some leakage in specialty retailing and furniture to occupy retail space in Lodi, ADE fails to point out that this leakage would generate only a small amount of retail space when compared to the new development. • At current growth rates, it will take over 10 years for Lodi to generate sufficient sales to fill the excess retail created by the Lodi shopping plaza Report by California Economic Research Associates 2 January 18, 2005 00� 10-%A and the new Vintner's square. In the meantime, many shopping centers in Lodi will deteriorate, creating urban decay. • ADE asserts that the Supercenter will have little effect on downtown Lodi, but they fail to provide any analysis for this assertion. Our own analysis indicates that key anchor stores in or near downtown (e.g., Long's and Albertson's) will close leading to substantially lower sales downtown. Our analysis of sales in the downtown also indicates that the average business is struggling, generating just over $100 per square ft in sales, far below national averages. • Urban decay and physical deterioration is an environmental impact which must be addressed. While Lodi is currently healthy, the store closings stemming from the Lodi shopping plaza, which significantly increases retail space in the City will lead to urban decay and physical deterioration. Report by California Economic Research Associates 3 January 18, 2005 INTRODUCTION We have been asked by Brett Jolley, of Herum Crabtree and Brown, to review and comment on the Environmental Impact Report ("EIR") prepared for the proposed 226, 868 sq. ft. Wal-Mart Supercenter in Lodi, CA as well as the subsequent closing of the current Wal-Mart, also in Lodi, which is approximately 120,000 square feet. In particular, we have examined the economic analysis provided by Applied Development Economics (ADE). According to the State of California's Resource Agency: "The basic goal of the California Environmental Quality Act (CEQA) (Pub. Res. Code §21000 et seg,) is to develop and maintain a high-quality environment now and in the future, while the specific goals of CEQA are for California's public agencies to: 1) identify the significant environmental effects of their actions; and, either: 2) avoid those significant environmental effects, where feasible; or 3) mitigate those significant environmental effects, where feasible." It is our professional opinion that there will be significant negative environmental effects to the City of Lodi stemming from the approval of this project. In this report, we have corrected several of ADE's oversights and added new data where ADE failed to provide sufficient data for a full analysis. Further, the conclusions ADE reaches are not consistent with the data they do present. ADE's data is also mostly from 2002, before the Lowe's was built and their analysis, though it discusses these events, does not fully account for the build out of the Vintner's square center where Lowe's is situated. Our report demonstrates that the creation of the Supercenter will generate over -capacity in both grocery and GAFO retail space. Consequently, the proposed project will close other local businesses, leading to physical deterioration and physical decay conditions, adversely affecting public safety and orderly development of the city. This physical deterioration, sometimes referred to as "urban decay", can impair the physical and social environment, create conditions that foster and exacerbate crime and poverty, and create an environment, which is not conducive to economic development. Evidence Upo© Which This Report is Based. Dr. King visited Lodi in November, 2004. The visit included the following: • An examination of the proposed site; • An examination of retail space near the proposed center; • An examination of the downtown Lodi area; • An examination of competing supermarkets as well as other related retail stores in the City of Lodi including interviews with a number of local managers; • An examination of other retail stores and proposed retail projects including the new Lowe's and the build out of Vintner's square. Report by California Economic Research Associates 4 January 18, 2005 • Interviews with managers in the grocery industry. Dr. King took several photographs of the proposed site and of the shopping areas near the proposed site. These photos are in the appendix. In addition, we examined the following materials: • The Draft EIR, in particular the Economic Analysis (prepared by Applied Development Economics, hereafter referred to as ADE); • Various other data from the U.S. Census, the California Board of Equalization, the City of Lodi, data and analysis from Claritas, and other public documents. Project Description The proposed Lodi Wal-Mart Supercenter would create 226, 868 square feet of retail space plus accompanying parking. In addition, the plan specifies an additional 113 thousand square ft. of space for retail, restaurants and a gas station. A typical Wal-Mart Supercenter includes the following items: • General merchandise (including apparel, toys, gifts, consumer electronics, appliances and household items) • Groceries • Pharmacy goods • Vision care • Photo center and developing film • Banking services • Tires and lube; auto supplies • Outdoor sales • Garden tools, nursery supplies and plants; garden center. IMPACTS TO EXISTING RETAILERS AND POTENTIAL URBAN DECAY The Grocery Market in Lodi We visited all of the major Supermarkets in Lodi, estimated the total square footage and sales and interviewed managers to assess sales as well. Our general assessment of sales and square footage is in line with that presented in ADE's report, however ADE's report fails to specify sales at particular stores or sales at smaller grocers (and mom and pop stores). We believe this data is essential for a proper analysis of the grocery market in Lodi. Table 1 below presents our analysis of grocery sales in Lodi. ADE provides no estimate of sales at individual stores. Without this type of data, their analysis is incomplete and it is impossible to provide a meaningful analysis of the grocery market. Our Report by California Economic Research Associates 5 January 18, 2005 estimate of total sales is consistent with ADE's.1 Our estimates for square footage are similar, however some managers gave us slightly different estimates of square footage than ADE reported, and we assume that the managers know their stores. Table 1: Supermarkets in Lodi with Estimated 2004 Sales Grocery Store §quare ) leaN. ft. % Avg 2004 SaWwk. ( ) Annual Sales ( ) lets 64 $ 375 96% $ 462 $ 24,000 Ranch San Miguel 29 $ 286 73% $ 160 $ 8,300 Albertson's 55 $ 245 63% $ 260 $ 13,500 S -Mart 43 $ 465 119% $ 385 $ 20,000 Safeway 55 $ 309 79% $ 327 $ 17,000 Food 4 Less 54 $ 795 204% $ 827 $ 43,000 Apple 29 $ 286 73% $ 160 $ 8,300 Lodi has a number of significant supermarkets including Raley's, Albertson's and Safeway. However, the Food 4 Less comprises about 30% of total supermarket sales in Lodi. Our analysis also indicates that a number of other supermarkets in Lodi are struggling. Column 4 in Table 1 indicates how sales per square feet compare to the national median grocery sales of $390.25.2A supermarket with sales substantially below median sales is not likely to stay in business—indeed ADE has used this same comparison in their analysis of other projects (such as grocery retail in Selma). As one can see in the table, the Grocery Outlet, at $189 per square feet, and the Albertson's, at $245 per square feet, are struggling. While we do not know their precise breakeven point, it is likely that the Grocery outlet is already losing money. Building a Supercenter will substantially reduce sales of both these stores. We also estimate that the Apple, Rancho San Miguel, and Safeway are marginal stores and would be significantly harmed by the Supercenter opening. Impact of opening a Wal-Mart Supercenter Table 2 amends Table 1 to include our estimate of grocery sales at the new Wal-Mart Supercenter. We estimate that the new Wal-Mart Supercenter would generate at least $44.5 million in grocery sales per year, and quite possibly a substantially higher figure. In October 2003, Progressive Grocer estimated the average Supercenter had annual sales of Supermarket Type Merchandise of $44.5 million.3 The proposed Supercenter will devote 70,000 square feet of space to grocery sales, somewhat higher than the typical 60,000, so we anticipate strong sales. 1 Our estimate of $137,000 is slightly higher than ADE's, however our estimates are for 2004 rather than 2002. 2 See Dollars and Cents of Shopping Centers: 2004, the Urban Land Institute, 2004. 'Progressive Grocer, "Wal-Mart vs the World," October 15, 2003 Report by California Economic Research Associates January 18, 2005 If we subtract our estimate for grocery sales at the existing Wal-Mart, our estimate of excess sales is $34 million per year. Our estimate of the net increase in Wal-Mart Superstore grocery sales ($34 million) is roughly equal to the combined sales of the Lodi Safeway, Albertson's and Grocery Outlet markets ($33 million). Many of these grocery stores are anchor tenants and the closing of the anchor tenant will place severe pressure on the adjacent smaller tenants --urban decay will occur subsequently. We will analyze this possibility later. Table 2: The Effect of a Supercenter on Grocery Sales in Lodi C*rocery Store Square ) ainN. ft. % Avg 200.4 Sales/wk. ) Annual Sales (ML lea 's 64 $ 375 96% $ 462 $ 24,000 Ranch San Miguel 29 $ 286 73% $ 160 $ 8,300 Albertson's 55 $ 245 63% $ 260 $ 13,500 S -Mart 43 $ 465 119% $ 385 $ 20,000 Safeway 55 $ 309 79% $ 327 $ 17,000 Food 4 Less 54 $ 796 204% $ 827 $ 43,000 Apple 29 $ 286 73% $ 160 $ 8,300 Current Wal-Mart 18 $ 594 206 $ (10,692) otallAvg. 856 $ 175,508 Excess Retail Capacity $ 33,808 % Excess Capacity 24% Table 3 presents our estimate of grocery store sales approximately one year after the opening of the Supercenter. We assume that all stores would initially lose sales, however stores located closer to the Supercenter (i.e., Safeway, Food 4 Less) would lose proportionately more sales, and grocery stores which compete more closely with Wal - Mart's product mix (e.g., Grocery Outlet, Food 4 Less) will lose more sales relative to grocers who compete in slightly different market segments. Table 3: Analysis of Grocery Sales Post Supercenter Ranch San Miguel 29 $ 234 60% $ 131 $ 6,800 Albertson's 55 $ 191 49% $ 202 $ 10,500 S -Mart 43 $ 349 89% $ 288 $ 15,000 Safeway 55 $ 218 56% $ 231 $ 12,000 Food 4 less 54 $ 500 128% $ 519 $ 27,000 Apple 29 $ 241 62% $ 135 $ 7,000 Grocery Outlet 19 $ 147 38% $ 54 $ 2,800 Report by California Economic Research Associates 7 January 18, 2005 Our total grocery sales of $144,880 is slightly higher than the earlier $141.7 million we estimated to allow for some growth in grocery sales. (If we used a lower total sales estimate our prediction would be even more dire.) Even allowing for growth, it is clear that after the Supercenter has been built, the grocery stores already struggling will suffer significant losses. In particular, both the Albertson's near downtown and the Grocery Outlet will have sales per square ft. less than half the national median. The Ranch San Miguel, Safeway and Apple market will have sales just over half of the median. We conclude from our analysis that the Albertson's and Grocery Outlet market will close, along with one other significant store. Given the close proximity of Safeway and their low post -Supercenter sales, we believe it is the most likely candidate. Potential for Increased Grocery Sales in Lodi The ADE report asserts at several points in their report that a Supercenter will likely increase total sales. Unfortunately, they fail to account for recent developments in the market area (as they define it), in particular the opening of new Wal-Mart Supercenter in Stockton. We discuss non -grocery retail later in this report. ADE estimates that the demand for grocer stores sales in Lodi is $65.3 million; they estimates grocery sales in 2002 at $137.4. These estimates indicate that over half of sales in Lodi already go to people who live outside the City. This estimate is contrary to widely accepted estimates. In particular, Claritas estimates a total grocery demand in Lodi of $122 million. We are concerned about this underestimate in ADE's analysis. ADE provides no analysis for their assertion that grocery sales will increase in the City of Lodi, post Supercenter. With the arrival of a Supercenter in Stockton, it is unrealistic to assume that the new Supercenter will substantially increase grocery sales outside of Lodi. Instead, one should expect that shoppers who would have purchased groceries elsewhere in Lodi will switch to the Supercenter. Retail Saks in Lodi ADE also conducted an analysis of other retail in Lodi and the surrounding trade region. Their sales data relies on sales tax data from the California State Board of Equalization. However, ADE's analysis focuses on areas where Lodi appears to have sales leakage while ignoring the fact that Lodi also draws retail sales from outside. For the residents of Lodi this excess sales generates substantial sales tax revenue, which is generally good for the City. Table 3 presents a brief overview of the data ADE presents, however we have filled in a couple of missing spaces. In particular ADE fails to point out that, according to their own data, over half of all retail demand in Lodi is generated by residents from outside the City. In their analysis ADE emphasizes the relatively minor 4 See "Socio -Economic Impact Analysis of the Proposed Lodi Shopping Center", July 2004, Table 4, p. 5. We should note that we believe the demand for groceries in Lodi is significantly higher, though we generally concur with ADE's estimate of sales. In either case though one can conclude that Lodi's grocers serve the market outside the city. Report by California Economic Research Associates 8 January 18, 2005 opportunities for retailers in Lodi to capture local demand, while completely ignoring the most salient fact—that Lodi already serves as a regional center and that the build out of retail opportunities in Stockton and elsewhere is likely to diminish Lodi's role as a regional retail area. Why should the City worry about this? Because the Supercenter (along with the Lowe's and the build out of other retail already planned) will compete directly within retail categories where Lodi already draws customers from outside city limits—it is completely unrealistic to believe that Lodi's regional capture can increase substantially-- if retail fails to grow as ADE asserts it will, Lodi will be left with excess retail capacity that cannot be leased. We discuss this issue in more detail later. Table 4: ADE's Analysis of Retail in Lod Total Household Total Sales Regional Capture % Regional Demand CapturelTotal Sales $ 362,146, 720 $ 733,572,361 $ 371,425,641 51% ADE's Analysis of Retail Subject to Sales Leakage As noted above, while ADE's own estimates indicate that Lodi already captures a large share of the regional market. Instead, they focus only on the areas of retail where Lodi is deficient. While we believe this type of cherry -picking represents poor analysis, we will respond to ADE's analysis in this section by examining the retail sectors ADE has indicated have sales leakage. Apparel ADE indicates that apparel stores suffer from a leakage of $$.9 million. The largest category here is represented by women's apparel ($2 million). ADE suggests that leakage of apparel can be counteracted by the build out of retail near the Supercenter. We disagree. In particular many specialty retail stores (e.g., Ann Taylor, GAP) tend to locate in retail malls anchored by conventional department stores such as Macy's. Thus the Supercenter would not be an appropriate venue for these types of stores. Indeed we believe it is the absence of this type of retail in Lodi that accounts for the leakage in apparel. 5 See "Socio -Economic Impact Analysis of the Proposed Lodi Shopping Center", July 2004, Table 4, p. 5. Report by California Economic Research Associates 9 January 18, 2005 Superstores ADE estimates that Lodi suffers from $13 million in "leakage" from the lack of a Superstore and they mention Costco in particular. Their analysis is flawed since this $13 million leakage is already accounted for by the fact that Lodi generates $71 million in regional capture in "discount and superstore" category (ADE estimate) and $84 million in the "discount store" subcategory. To separate the superstore category out and claim that a market is underserved is specious. ADE also asserts that the new Wal-Mart Supercenter will draw customers who live in Lodi but shop at Costco back to Lodi. They offer no evidence for this assertion. Our own research indicates that Costco and Wal-Mart Supercenters are poor substitutes, particularly when a Wal-Mart already exists. According to Forrester research: "A majority of BYs, Costco, and Sam's Club shoppers say they are loyal to their discount club. The unique structure of discount clubs; where shoppers pay for access to discounted prices; means that more than 80% of these loyal shoppers say they are loyal to their club .... Membership fees prove an effective means of locking in loyalty, as discount club shoppers are also infrequent cross -shoppers. "6 Their research also indicates that the typical Costco shopper only goes to a Costco 13 times a year. Given this infrequency it is less realistic to assume that Costco customers would go to a slightly closer Supercenter. Jewelry ADE's analysis indicates some leakage ($444 thousand) in jewelry as well. As with apparel, we believe that the deficit is due to the lack of a regional shopping mall. Further, if the Supercenter reduces business in the downtown, as we expect (see later section), than it is quite likely that jewelry sales will fall since much of the jewelry sales in Lodi are downtown. Furniture and Home Furnishings ADE's analysis indicates leakage in home furnishings and furniture. It is important to note that their analysis is based on 2002 data, before the Lowe's was built. We anticipate that the Lowe's will provide for a substantial amount in this category, though sales of furniture will still have some leakage. Total Demand for Retail Space from Leakage While we believe that ADE's analysis of the demand for retail where leakages occur overestimates actual demand for the reasons outlined above, we believe it is useful to see 6 Forrester Research, 2003. Report by California Economic Research Associates 10 January 18, 2005 if this retail would, in fact, generate enough sales to offset the Lodi shopping center. Table 5 summarizes our findings, using median values for sales per square foot estimated by the Urban Land Institute (ULI). We estimate that, even using ADE's optimistic analysis, only 81,400 of retail space would be demanded. This is far smaller than the 339,966 sq ft generated by the Lodi shopping mall or the new space generated by the new Lowe's and the build out of Vintner's square. Indeed it is smaller than the Wal-Mart slated to be closed. ADE's report emphasizes the possibilities for these sales, yet fails to mention that even if these sales occurred they would generate little additional retail space in comparison to the new retail space. Table 5: Retail Space generated by ADE's Est. Leakage in Lodi Jewelry $ 444,484 300 Fumiture/Fumishing $ 7,940,609 225 New Retail in Adjacent Areas 1,4$2 ADE's report fails to account for the additional sales that will be generated by the new planned and proposed projects in adjacent areas. In particular, ADE fails to account for the Park West Power Center in Stockton at I-5 and Eight Mile road, just south of Lodi (which is anchored by a Target Supercenter). This center currently is 600,000 square feet and another 400,000 square feet is planned nearby. Without a proper analysis of the effect of this center on retail in Lodi, ADE's analysis is incomplete. Re -Leasing of Wal-Mart ADE also asserts that it would be fairly simple to lease the current Wal-Mart after it closes, however, their own analysis indicates otherwise. It is not easy to lease a 120,000 square ft. building as other cities have found out. A recent report in the Wall Street Journalg indicates that 152 closed Wal -Marts exist throughout the U.S, representing 13 million square feet of retail space. Many of these stores have been closed for years. Since most retail demand in Lodi is already being served, we are skeptical that this space can be leased. If it is, there will be pressure on other retailers. We used estimates from Dollars and Cents of Shopping Centers: 2004, the Urban Land Institute, 2004, where available. No estimate for jewelry was available, so we used $300 per sq ft. B "Wall Mart's Surge leaves Dead Stores Behind," WSJ, September 15, 2004. Report by California Economic Research Associates 11 January 18, 2005 Downtown Lodi Downtown Lodi is attractive and has a large number of businesses. A cursory view indicates that the downtown is fairly healthy, however we have serious concerns about the future health of the downtown. In particular, we estimate that the downtown contains approximately 100 businesses excluding banks, auto related stores and hardware stores. According to ADE, these stores generated $36 million is sales in 2002. Assuming that the average store is 3500 square ft, a conservative estimate based on our visit and national averages, we estimate that sales per square ft. in the downtown area at $102. This estimate is well below the median for most small specialty retailers (e.g., the national median figures are: $300 for restaurants, $200 for women's specialty, $136 for cards and gifts.9) We admit that these estimates are based on limited data; however ADE should have provided the City with a better picture of the health of its downtown in its analysis prepared for the City. ADE also estimates that only a few percent of downtown sales will be lost. This analysis is grossly optimistic. Without knowing precisely what stores will be built in the new centers it is difficult to make any estimate, however, it is reasonable to make several inferences: 1. The pharmacies in the downtown area will be placed under further pressure from the new pharmacy ADE states will be part of the Lodi center as well as from increased pharmacy sales at the Supercenter (9% of Wal -Mart's sales are in drugs and a new pharmacy is planned on the Lodi center). A typical Long's is 25,000 square ft. 2. The three jewelry stores downtown may face competition if a retail jewelry store opens outside downtown. 3. Approximately 30 restaurants downtown will face competition from the build out of restaurants in the Lodi center or Vintner's square. Numerous fast food places downtown such as Long John Silvers, McDonalds, pizza but will all face further competition. 4. Specialty retailers such as Burton's shoes face competition. 5. Approximately 10 beauty stores and barbers face potential competition from the build out of Lodi center or Vintner's square if it includes (as is likely) beauty stores and barbers. 6. The 6 appliance stores downtown compete directly with Wal-Mart and other discount retailers. In short, ADE has failed to analyze any of these possibilities. Given the above, it is unreasonable to claim that a build out will not significantly impact the downtown. More importantly, given the marginal nature of downtown sales, it is our professional opinion that any significant reduction in sales can have a cascading effect. We believe that the Long's downtown will close following the opening of a new drug store in the proposed 9 See Dollars and Cents of Shopping Centers: 2004, the Urban Land Institute, 2004. Report by California Economic Research Associates 12 January 18, 2005 build out. As mentioned above, the Albertson's, which is not fair from downtown, is also likely to close. As traffic moves away from downtown more businesses will close, leading to a tipping point where the downtown starts to decay. The City of Lodi has spent a great deal of effort to keep the downtown vital. We believe this project will lead to the destruction of a vital downtown. Other Retail in Danger We have also identified a number of other stores and malls which are currently marginal and likely. to close: • The Vineyard Shopping center on Kettlemen Lanea few minutes drive from the proposed Supercenter and the new Lowe's will face severe difficulties. One of the anchors, Ace Hardware, will compete directly with the new Lowe's. We anticipate it will close within two years. The Wherehouse and Long's also may become marginal and close. • The Orchard Supply Hardware Store (approximately 50,000 square feet) will face sever competition from the new Lowe's and may close. • The (60,000 square feet) K -Mart will face competition from the Supercenter and may close. • The stores adjacent all of these stores will all face additional pressure and some are likely to close. We believe a careful analysis of the retail market in Lodi indicates that the City already has a number of marginal retailers and shopping centers and that, particularly given the fact that Lodi already draws shoppers from outside the City, Wal -Mart's increase -in sales will be at the expense of these marginal retailers. Excess, Retail Space in Lodi ADE's analysis is based on 2002 sales tax data and fails to address the recent build out of retail in the City in its report. An objective analysis must account for the additional space represented by the Lodi shopping center and Vintner's Square. Table 6 presents the total amount of retail generated by the already approved build out of Vintner's square plus the sales generated at $250 sq. ft. which is a conservative estimate of sales needed to maintain healthy commerce. Report by California Economic Research Associates 13 January 18, 2005 Table 6: Retail Space generated by approved Lodi build out plus Supercenterl© Item Square Footage $ 733,572,361 Sales 2_ 250/sq. ft. yr. Closed Wal-Mart � 120,000 $ 30,000,000 Additional Non-Gocery Wal-Mart Space 35,000 $ 8,750,000 Closed Grocery Stores 129,000 $ 32,250,000 Additional Retail Space at Lodi Shopping Center 113,098 $ 28,274,500 Lowe's/Vintner's square bailout — - 297r 403 $ 74,350,750 Total 694,501 $ 173,625,250 Our analysis indicates that Lodi will have an excess of retail space equal to 24% of 2002 sales—and approximately 700,000 square feet. This translates into many store closing including the already mentioned grocery stores, pharmacy, hardware stores, discount stores and adjacent small retail stores. It is our professional opinion that the downtown will face urban decay as retail stores and restaurant's lose business and shut. Growth in Lodi The City and region is expected to grow by 2% per year over the next 5 years.I 1 Consequently it is reasonable to ask if this growth will offset the planned build out. Unfortunately, as Table 7 illustrates, it will take 11 years for this excess retail space to be filled, assuming (optimistically, we believe) that Lodi continues to draw over half its sales from outside the City. Table 7: Excess Retail Space generated bl approved Lodi build out plus Supercenter x Total Sales Lodi 2002 $ 733,572,361 Sales from Excess Retail $ 173,625,250 Excess Retail as % Total 24% Lodi Growth 2002-2009 15% Est Years to fill Excess Capacity 10.8 Urban Decay and Physical deterioration This pattern has been observed in many other cities. Numerous studies of the impacts of retail superstore development have been conducted. The Shils Report (Edward B. Shils, Measuring the Economic and Sociological Impact of the Mega -Retail Discount Chains on Small Enterprise in Urban, Suburban and Rural Communities, The Wharton School, ` We used estimates from Dollars and Cents of Shopping Centers: 2004, the Urban Land institute, 2004, where available. No estimate for jewelry was available, so we used $300 per sq ft. " From Claritas 2004 data, www.claritas.com. Their data is based on Census reports and data. 12 We used estimates from Dollars and Cents of Shopping Centers: 2004, the Urban Land Institute, 2004, where available. No estimate for jewelrywas available, so we used $300 per sq ft. Report by California Economic Research Associates 14 January 18, 2005 University of Pennsylvania, 1997) cites predatory pricing and overall economic decline among the possible impacts. Kenneth E. Stone studied superstore development in a large sample of Iowa cities and found that the location of a superstore can have delayed impacts on the viability of commerce in the surrounding area (a loss of 7,326 businesses in small Iowa towns between 1983 and 1993). Two studies of Supercenters in California conducted by Ph.D. economists also concluded that Supercenters are, at best, a mixed blessing. One study, conducted for the Orange County Business Council by professors at UC Irvine and UCLA, 13 concluded that: • The economic loss due to lower wages and benefits paid by Wal-Mart would create a negative economic impact on southern California equal to $2.8 billion per year. • "The fiscal impacts of a facility are often seen as clear-cut, but they are not, particularly when a big box retailer expands into food sales. This threatens to lower the taxable sales per square feet for a land use that is already riddled with inefficiencies and great risks should market conditions become unfavorable" (p.93). Another similar study of San Diego County 14 also came up with similar conclusions, including the following: • "Wages and benefits can be expected to decline in San Diego County by $105 million to $221 million annually" (p. i). • "Lost pension and retirement benefits will impact the region negatively by an additional $80-170 million per year" (p. i). • Taking into account multiplier effects, this loss could amount to $440 million a year (p. i). • "Fiscal benefits, in the form of sales and property taxes, are frequently less than originally expected and are not likely to cover the costs of traffic, police, fire protection, among others. Ultimately the net cost of these public services for Supercenters could exceed $700,000 per year" (p, ii). The report also concludes that a number of other negative results may result .from poor land use planning and the closing down of other businesses; we will discuss these issues later in this report. Urban Decay and Physical Deterioration For all of the reasons stated above, we believe there is a serious and significant possibility that the commercial space created by this proposed plan would create 13 "The Impact of Big Box Grocers on Southern California: Jobs, Wages and Municipal Finance," by Marlon Boarnet and Randall Crane, prepared for the Orange County Business Council, Sep tuber 1999. 14 "The Potential Economic and Fiscal Impact of Supercenters in San Diego," by Rea and Parker Research, prepared for the San Diego Taxpayers Association. Report by California Economic Research Associates 15 January 18, 2005 urban decay in the downtown as well as in other areas in the City of Lodi and lead to a less healthy business climate in the City. Urban decay in urban areas can include several possible adverse impacts on the quality of life in the local community. This includes visible symptoms of physical deterioration, capital stock and buildings in impaired condition, and involves aspects of "broken window" theory—that run-down, abandoned buildings signal lack of public policy concern and invite vandalism, loitering, graffiti, high crime rates, and arson for profit. They signal hopelessness for nearby residents who may lose faith in local government. Such sites also pose significant policing problems and fire protection issues. They could become sites for dangerous rodent infestation and avoidable public health issues. The outward manifestations and visual evidence of urban environmental urban decay and physical deterioration, but are not limited to, such markers as: • Plywood boarded doors and windows; • Parked trucks and long term unauthorized use of property and parking lot; • Extensive gang graffiti and offensive words painted n the buildings; • Dumping of refuge on site; • Overturned dumpsters; • Broken parking barriers; • Broken glass, litter of liquor or beer bottles; • Dead trees and shrubbery together with weeds; • Unsightly and permanent "For Lease" signs; • Homeless encampments on the property or doorways; and • Lack of building maintenance, paint peeling, or property encased in an unsightly chain-link fence. • Closed Stores. Another sign of physical deterioration are "brownfields"—abandoned, urban industrial sites that have become little more than neighborhood eyesores and that are typically accompanied by pollution. In cities throughout the country, dark factories tower over lots littered with garbage and scrap, neglected by their owner until the Environmental Protection Agency (EPA) takes notice. Through a unique urban renewal program, the EPA is targeting 50 brownfields it wants to clean up. It plans to provide the seed money, the expertise, and a legal green -light to cities looking to restore life to these dying urban areas. The EPA's website provides insight and definitions/guidelines to urban physical deterioration and brownf eld conditions. Existing Urban Decay in the City of Lodi A number of malls as well as the outskirts of the downtown area are already marginal, however Lodi has not yet experienced significant urban decay or physical deterioration. As we point out above, the downtown appears healthy, but many businesses are marginal and it is very possible that the downtown will decay as stores that anchor sales in the downtown exit. Report by California Economic Research Associates 16 January 18, 2005 Fiscal Impact to the City of Lodi Finally, ADE estimates that the proposed shopping center will generate an additional $111.5 million in sales to the City of Lodi. As we point out in this report, ADE's analysis fails to account for any new development and assumes, incorrectly, that much of the new retail space will draw additional customers from outside Lodi. If Lodi did not currently serve non-residents that might be a reasonable estimate, however, since Lodi already generates over half its sales from outside, it is unreasonable to assume more sales can be generated from outside. Instead, it is our professional opinion, based on our analysis in this paper, that the Supercenter and build out of the Lodi shopping center will simply displace sales from existing retailers in Lodi, in the process driving a number of businesses under and creating excess retail space. At a minimum ADE needs to account for new retail planned and approved in the market area. A consequence of our analysis is that the build out will generate no significant increase in sales tax revenue for the City, while simultaneously producing significant (social) costs. Report by California Economic Research Associates 17 January 18, 2005 CONCLUSION ADE's analysis is incomplete. It fails to analyze the full build out of both the Lodi and Vintner's square mall. The new Wal-Mart Supercenter, along with the build out of Lowe's and Vintner's Plaza will create over 600,000 square feet of new retail space and CEQA requires all of this new space be part of their analysis. ADE fails to examine new developments in the market area (as they define it), in particular the Power Center in Stockton which will have over 1 million square feet of retail and the new Wal-Mart Supercenter in Stockton as well as the planned second Supercenter in Stockton. CEQA requires a full analysis of all cumulative impacts and this ADE has failed to meet this test. ADE's analysis of grocery sales is seriously flawed. They underestimate current sales in Lodi and fail to provide sales data on individual stores. Without such data, no analysis of subsequent sales (and store closings) is possible. ADE provides no analysis of demand for retail space after the build out of all these planned centers. Our own analysis indicates that a substantial overcapacity,. equal to 24% of current retail sales, will exist in Lodi, resulting in a large number of store closings. We conclude that the proposed Supercenter will displace the current Safeway, Albertson's and Grocery Outlet and place the Apple and Rancho San Miguel markets under severe pressure. In addition we conclude one major pharmacy store in Lodi will close, most likely the Long's near downtown. We also anticipate that the build out of the Vinter's square and Lodi shopping area will close many other stores throughout the City—the most likely candidates: numerous small downtown stores including one pharmacy, numerous restaurants downtown, the ACE hardware, the Orchard supply hardware and other discount retailers such as K -Mart. ADE examines retail sales leakage in the City of Lodi and surrounding region and claims that new retailers could be found to fill this leakage. However, they ignore Lodi's high capture of sales in other retail categories. While it is possible for some leakage in specialty retailing and furniture to occupy retail space in Lodi, ADE fails to point out that this leakage would generate only a small amount of retail space when compared to the new development. At current growth rates, it will take over 10 years for Lodi to generate sufficient sales to fill the excess retail created by the Lodi shopping plaza and the new Vintner's square. In the meantime, many shopping centers in Lodi will deteriorate, creating urban decay. ADE asserts that the Supercenter will have little effect on downtown Lodi, but they fail to provide any analysis for this assertion. Our own analysis indicates that key anchor stores in or near downtown (e.g., Long's and Albertson's) will close leading to substantially lower sales downtown. Our analysis of sales in the Report by California Economic Research Associates 18 January 18, 2005 downtown also indicates that the average business is struggling, generating just over $100 per square ft in sales, far below national averages. Urban decay and physical deterioration is an environmental impact which must be addressed. While Lodi is currently healthy, the store closings stemming from the Lodi shopping plaza, which significantly increases retail space in the City will lead to urban decay and physical deterioration. See Appendix 1: Photos Report by California Economic Research Associates 19 January 18, 2005 References Applied Development Economics, "Socio -Economic Impact Analysis of the Proposed Lodi Shopping Center, July 2004. Draft Environmental Impact Report: Wal-Mart Supercenter Commercial Project, Appendix F: Economic Analysis, 19 February, 2004. Boarnet, Marlon, Randal Crane, Daniel Chatman and Michael Manvill (2004). Supercenters and the Transformation of the Bay Area Grocery Industry: Issues, Trends, and Impacts, " Bay Area Economic Forum, Bay Area Economic Forum, A Partnership of the Association of Bay Area Governments (ABAG) and the Bay Area Council, R. Sean Randolph, Project Supervisor. Prepared by the Public Economics Group, January, pp. 1- 104. Accessed at www.bayeconfor.org. Boarnet , Marlon and Crane, Randall, "The Impact of Big Box Grocers on Southern California: Jobs, Wages and Municipal Finance," prepared for the Orange County Business Council, September 1999. Casey, Douglas, "U.S. Retail Sales, Mall Sales, and Department Store Sales Review," International Council of Shopping Centers, April 2002. Claritas, various data, www.claritas.com. City of Lodi, Draft Environmental Impact Report: Wal-Mart Supercenter Commercial Project. City of Lodi, various data from website, hLtp://www.ei.Lodi.ca.us/. Progressive Grocer, "Wal-Mart vs the World," October 15, 2003 Rea and Parker Research, "The Potential Economic and Fiscal Impact of Supercenters in San Diego," by, prepared for the San Diego Taxpayers Association, 2002. Retail Forward, "Wal-Mart Food: Big and Getting Bigger," September 2003. Shils, Edward B. (1997) Measuring the Economic and Sociological Impact of the Mega - Retail Discount Chains on Small Enterprise in Urban, Suburban and Rural Communities, The Wharton School, University of Pennsylvania. State of California, Board of Equalization, "Taxable Sales in California (Sales and Use Tax) During 2002", 2003. State of California, Dept. of Finance, Population projections, ho://www.dof.ca.goy/fLTML/DEMOGRAP/rep ndat.htm. Urban Land institute, Dollars and Cents of Shopping Centers: 2004. Report by California Economic Research Associates 20 January 18, 2005 Qualifications Dr. Pbilip King is Associate Professor and Chair of the Department of Economics at San Francisco State University. He received his Ph.D. in Economics from Cornell and has published numerous articles in scholarly journals and edits a book on Economic Policy for McGraw-Hill. His major fields are Applied Microeconomics and Economic Development. He has conducted over a dozen studies of local economic conditions as a consultant to the State of California and for various city governments in the State including two major Economic Impact Reports covering the State of California and six local economic impact reports for City governments in California. He prepared a report on San Francisco's Economic Growth 1995-2000: The Fiscal Health of the City and Implications for the Future," for the San Francisco Committee on Jobs Summer 2001, available at http:(lonline.sfsu.edul—pgkinneyMage22.htm. This report was widely cited in the San Francisco press including front-page articles by the Chronicle and Examiner. He consulted for the City Council of Davis California on the impact of planned conference site development. Dr. Sharmila King is Assistant Professor at the University of the Pacific. She received her Ph.D. in Economics from the University of California at Davis and she has published in professional journals. Her major research fields are macroeconomics, statistics, and econometrics. She prepared "The Environmental Impact Report on the Conference Center, Hotel, and Graduate School of Management Building for the University of California, Davis" prepared by EIP Associates for the City of Davis, CA in January 2002. Report by California Economic Research Associates 21 January 18, 2005 Appendix 1: Photos See attached. Report by California Economic Research Associates 22 January 18, 2005 -r Food 4 Less is located in the Sunwest Plaza with Wal-Mart and JC Penny. The Wal-Mart Supercenter will be built in the same intersection. low The Target, Staples, Marshalls, and Safeway are located across from Food 4 Less. The Vineyard Shopping Center comprises Ace Hardware (virtually empty lot), The Wherehouse, Blockbuster Video, Jo -Ann Fabrics, Longs Drugs, and Fashion $5 (closed). This mall is clearly struggling. The Fashion $S is already closed (see below). S-Mart Foods located on Kettleman's Lane. Downtown Lodi at Church and W. Oak Streets there is an unsightly boarded store (see below). •ipoZ umolumop siopmop zurQ pum wogs s,uoling �■I CO ITI N "R" No conditional or final certificate of occupancy or other permit authorizing occupancy or use of a building shall be issued for the proposed Wal-Mart until all of the following events are fully satisfied: (1) At least fifty (50) percent of the Wal-Mart building located at 2350 West Katleman Lane is leased to tenants under a lease or leases containing a term or terms of at least five years at a market rate rent; (2) For a period of three consecutive months the sales tax produced by the leased space, on a square footage basis, equals or exceeds the sales tax generated by the existing Wal-Mart building, on a square footage basis, for the equivalent three month period during the preceding year; and, (3) Wal-Mart has not imposed or waives any restriction concerning the type or nature of tenants that may occupy the existing building. For purposes of this condition, the term "operating" means a tenant or tenants have obtained a permit for all tenant improvements necessary to receive a certificate of occupancy, have received final approval from the city for completing the tenant improvements, have received a certificate of occupancy and have been open to the public for business for a period of at least three months.