More On Big Boxes Destroying the Competition

When do big box retailers hurt the surrounding business community?

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The "common-man" view of Wal-Mart and other "Big Box retailers" is that they are lethal to other businesses. That was the assumption behind a Time magazine headline from last week. Even a South Park episode that in the end defended a Wal-Mart-like retailer portrayed an abandoned, hollowed-out Main Street that had deteriorated when a big box moved into town.

But there hasn't been much evidence beyond these popular notions. Academic studies, however, are rolling in. Here's a new working paper from several economists that examines the effects Big Box retailers have on the employment growth of small chain businesses and single unit businesses (that is, the traditional Mom and Pop) in the Washington, D.C., metro area.

The study found that, yes, big box retailers reduce employment among smaller competitors, and even drive them out of business—but only in certain situations. What matters is 1) location and 2) industry.

The entry and growth of Big-Box stores has a substantial negative impact on employment growth and survival of single unit and smaller chain stores that operate in the same detailed industry as the Big-Box. This negative impact attenuates with distance from the Big-Box. That is, the impact is largest if the single unit or smaller chain store is within 1 mile or 1 to 5 miles of the Big-Box store relative to being 5 to 10 miles from the Big-Box.

(emphasis added)

So the big box retailer has to be in direct competitionwith a business to make a real difference, and furthermore that business must be in its immediate surrounding. That's not to say they have a positive or no effect on stores outside those parameters, but it's complicated:

General Merchandise Big-Boxes have a negative other sector effect on smaller chain stores in the immediate and surrounding areas especially if the smaller chain store is not a restaurant. For smaller chain restaurants, we find a positive other sector Big-Box effect in the immediate area regardless of whether the Big-Box is in General Merchandise or not.

The location aspect is perhaps most surprising. I think many people believe that big boxes draw in customers from many miles around, so they wouldn't just be competing with stores in a few mile radius. That influence might be overstated, but a study that looked at a more rural environment could find a completely different result.