Multinational Monitor

SEP/OCT 2006
VOL 27 No. 5


Greasing the Deal: A Royalty Scam
by Mandy Smithberger

Not Very Sporting: Outdoor Sporting Goods Retail Subsidy Scam
by Greg LeRoy

Relocation Racket: How Relocation Consultants Pit Cities and States Against Each Other
by Greg LeRoy

South Africa Embraces Corporate Welfare: Mega Deal Subsidies Over Services for the Poor
by Patrick Bond

The Corporate Beneficiaries of the Medicare Drug Benefit
by Dean Baker

Public Funds Up in Flames: The Incineration Industry Seeks Renewable Energy Subsidies
by Monica Wilson

Green Mountain's Other Faces: The Dirty Side of Clean Energy
by Andrew Wheat


The Big Box Swindle: The True Cost of the Mega-Retailers
an interview with Stacy Mitchell


Behind the Lines

Letter to the Editor

The State of Corporate Welfare

The Front
Climate Changing Africa -- African Inequality

The Lawrence Summers Memorial Award

Book Note
The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer

Names In the News


The Big Box Swindle: The True Cost of the Mega-Retailers

An interview with Stacy Mitchell

Stacy Mitchell is a senior researcher with the New Rules Project, a program of the nonprofit Institute for Local Self-Reliance. She has advised numerous communities on strategies and policies to limit chain store proliferation and strengthen locally owned businesses. Mitchell is the author of Big-Box Swindle: The True Cost of Mega-Retailers and the Fight for America's Independent Businesses (Beacon Press, 2006), as well as Hometown Advantage: How to Defend Your Main Street Against Chain Stores and Why it Matters (Institute for Local Self-Reliance, 2000). She is chair of the American Independent Business Alliance.

Multinational Monitor: What is the big box “swindle?”

Stacy Mitchell: The swindle is that many of us believe that we are doing well by shopping at big box stores, that the chain retailers are bringing us economic growth, prosperity, jobs and low prices. But, in fact, we are paying a huge hidden cost for these retailers. That is the swindle.

MM: But people are shopping at them; they must be happy with what they are getting.

Mitchell: People say, well this is just the free market at work. But I think what’s happening is more complex than that, for a number of reasons.

For one, there are the many externalized costs that these companies impose. These are costs that do not show up on the price tags at these stores, but that are borne by society as a whole. Hidden costs distort the market.

The playing field has also been tilted by government policy, which, for more than two decades, has fostered and underwritten the expansion of big-box retailers while systematically undermining the survival of independent businesses. For example, every year, cities across the country provide hundreds of millions of dollars in development subsidies to retailers like Wal-Mart and Target to help them build new stores. About half the states have enormous tax loopholes that enable multi-state retailers to escape paying all or part of their state income tax.

A third way that the market is distorted is that mega-retailers routinely use their market power to undermine their rivals. They win not by being better competitors, but by using their size and power to gain an unfair advantage. They pressure suppliers to give them special deals that are not available to independents. They often build far more square footage of retail space in a community than the spending power of local consumers can support. They do this because they know that by flooding a market with excess retail capacity, it is a lot easier to capsize independent retailers.  No matter how well-run or popular, independents often lack the deep financial resources to withstand a sustained attack by a global corporation.

Consider what happens if Blockbuster Video locates a new store across the street from an established independent video store, in a neighborhood that only has enough spending on movie rentals to support one video store. Blockbuster doesn’t have to be the most popular of those two stores. All it has to do is to skim off just enough of the independent’s revenue to put it in the red. Blockbuster has the financial wherewithal to operate at a loss and to hang on for as long as it takes. The independent can’t do that, so the independent ends up closing — even though it was the more popular of the two stores. That’s consumer choice in a market where antitrust laws are no longer enforced.

MM: Can you give a brief sketch of the spread of chains over the last two decades?

Mitchell: To some extent, the growth of chain retailers in recent years is a continuation of a trend that started quite a long time ago with A&P and Woolworth. But the pace of chain store growth picked up significantly about 20 years ago and the level of consolidation we have seen over the last two decades is staggering and unprecedented.

The top 10 retail chains 10 years ago had 15 percent of the market. Today, they have 30 percent. Every category is now dominated by two or three companies. Home Depot and Lowe’s, which barely existed 20 years ago, now have half of all hardware and building supply sales nationally. The top five U.S. grocery chains in 1998 captured one out of every four dollars that Americans spent on groceries; today they capture one out of every two. In books, you have Barnes & Nobles and Borders — again, companies that were quite small 20 years ago and today capture half of all bookstore sales. There is Best Buy and Circuit City in electronics; CVS, Walgreens and Rite Aid in the pharmacy market.

And, of course, Wal-Mart dominates them all. Wal-Mart captures one out of every 10 dollars that Americans spend in retail stores. Wal-Mart is the largest grocer in the country. They sell more toys, clothing, CDs, jewelry, furniture and a host of other products than any other retailer in the country.

Over that period we’ve lost tens of thousands of independent businesses, a die-off that is unprecedented in history.

MM: How has retail space expanded during this period?

Mitchell: Since 1990, the amount of retail store space per capita in the U.S. has doubled.

I don’t know about you, but I don’t remember 1990 as being a time when there was a dearth of shopping options in this country.

We now have five times as much retail store space as in Western Europe. Our land binge is even worse than that suggests, though, because for every square foot of store space built in the last 15 years, we also built three to four square feet of parking lots. These companies have transformed the American landscape, with major implications for both the built and natural environment.

MM: What is the Geoffrey loophole?

Mitchell: Named by tax policy experts after Geoffrey the Giraffe, the Toys-R-Us mascot, the Geoffrey loophole enables multi-state retailers to escape paying all or part of their state income taxes. It essentially enables a chain retailer to set up a subsidiary that owns its trademark in a state like Delaware or Michigan that doesn’t tax income on trademarks. Then the chain can pay large license fees to the trademark-owning subsidiary, thereby shifting profits made at stores to the subsidiary, and escaping state income tax on those profits.

If you are an independent business with a store in one of these states, you can’t do that. So you end up paying income tax on 100 percent of your earnings, as you’re supposed to do, putting you at a significant competitive disadvantage.

Estimates suggest between $8 billion and $12 billion a year in tax liability is escaped as a result of the Geoffrey loophole and similar corporate tax dodges.

MM: Communities are also doling out hundreds of millions of dollars in tax breaks and subsidies to big box retailers. What is the rationale for these gifts?

Mitchell: Local officials believe that these stores are generating economic activity in their communities, that they are creating jobs and new tax revenue.

You can understand on the surface why they think that. You take an undeveloped piece of land, and then there is a store there, paying taxes and employing 250 people. So it seems like economic development.

As we know from academic research, however, the reality is that big box stores eliminate more jobs than they create in a community. They also impose very high costs on local governments, and in some cases, the costs actually exceed the amount of tax revenue coming from the new store.

MM: How do the chains eliminate rather than create jobs?

Mitchell: The amount of retail spending in a given market area is a function of how many people live there and what their incomes are. You cannot create more consumer spending just by building a new store. We only have so many dollars in our wallets.

As a result, when you bring in a big box store, you invariably displace sales an existing business. These businesses either downsize or close altogether. The number of jobs that are lost at those stores typically equal or exceed the number of jobs that are created at the new big box store.

There was a major national study released in April 2006 by David Neumark at the University of California, Irvine. He looked at Wal-Mart openings nationally going back to the 1970s. He tracked what happened with retail employment in those communities. He found that, on average, a Wal-Mart store opening eliminates 180 more retail jobs than it creates.

The job losses do not end there, though. Locally owned businesses tend to spend a lot of their revenue in the local area. They hire local accountants, local attorneys, local website designers. They tend to buy more of the goods that they stock locally, as well. When you spend a dollar at a local store, you are supporting not only that business, but all of these other jobs and businesses in the community. That is not the case with a big box store. They have little or no need for these local goods and services. Studies suggest that more than 80 cents of every dollar that you spend at Wal-Mart or Home Depot or Target leave the community.

MM: How significant is the problem of dead stores and malls, and how does it come to be that the investment in a store or mall is abandoned by the developer, or the chain itself?

Mitchell: Some empty retail is a result of companies that have gone under or have had to scale back. That is true in the case of a number of vacant malls, where the department store anchors have had to close because of competition from Target and Wal-Mart.

But there are also many empty big box stores that are the result not of failure but of success. Wal-Mart has over 200 empty stores nationwide right now. Most of those stores were closed so that the company could move across the street or a mile down the road, and build a supercenter that is twice the size of the older store. They simply close the older store and leave it vacant. There are substantial market advantages to having a newer, bigger store — more than the cost of vacating one of these relatively cheap, single-story boxes.

But ultimately planners and city officials are responsible for the epidemic of dark malls and empty superstores. Most communities have zoned huge swaths of land along every major roadway for commercial development. These chains have every reason to abandon a store that is five or 10 years old, and go a mile down the road and build a bigger one. The company profits while the community suffers the cost of that abandonment, and the resulting blight.

MM: But, at the end of the day, consumers do get cheaper products from the chains.

Mitchell: Not necessarily. I have a chapter in Big Box Swindle titled, “Sometimes Low Prices.”

I was surprised to discover how few studies have been done that compare prices at local-owned businesses with chains. The ones that have been done come to conclusions that many people might find surprising.

In 2005, Consumer Reports did a nationwide study on where to buy appliances. They found that the lowest prices were at independent appliance stores, not at Costco or Best Buy or Home Depot, or even Wal-Mart.

A number of states have looked at prescription drug prices and found that independent pharmacies beat chains like Rite Aid and Walgreens, and that they even beat supermarkets and mass merchandisers like Wal-Mart and Target.

Studies have looked at independent hardware stores, and found that they are price competitive with Home Depot and Lowe’s.

Part of what is going on is that many of these independent retailers now belong to wholesale buying cooperatives, so they are able to buy in volume and get the same advantages of scale that the chains enjoy. That’s true of the appliance and hardware stores, and the drug stores as well. They all have these buying coops.

The other thing that is going on is that the big box retailers employ very sophisticated strategies for getting us to think that their prices are lower across the board than they actually are. They use a tactic that relies on “signposts” and “blinds.” They price key, visible items — the signposts — very low — often below what they paid for them. They price other items — the blinds — higher than what they are going for elsewhere, and that is where they make their margin.

You walk into Wal-Mart and you see a big pile of DVDs that are super cheap, or you see that they are selling gallons of milk for some unbelievably low price, and this helps to form an impression that they are what they say in their ads — always low prices. So you decide to get the new blender that you have wanted. What you don’t know is that you are paying more for that new blender than you would if you had gone to the independent appliance store down the street. But you don’t shop for blenders very often, so you don’t know what the going rate is, and you assume that Wal-Mart must be the cheapest.

These companies also come into markets with very low prices, and raise their prices once the competition has been eliminated. A study in Nebraska found that Wal-Mart was charging 15 percent more on groceries at supercenters where they don’t face much competition. The idea that they are always out to provide the customer with the lowest price is a lie.

MM: In Big Box Swindle, you emphasize how the big companies are able to leverage power over the supplier companies. What is the nature of that dynamic, and why should anyone care?

Mitchell: Big retail chains have become the most powerful corporations in our economy. They are much larger than manufacturers. Because they are the gatekeepers through which products must pass in order to reach consumers, they have near complete power to dictate to manufacturers what goods will be produced, and how and where those goods will be produced.

They use that market power to pressure manufacturers to move jobs and production overseas, to low-wage factories. Home Depot and Lowe’s, for example, recently told Black & Decker, the tool maker, that they would stop stocking its products unless it moved production to lower wage countries. Home Depot and Lowe’s not only represent half the market, they also contract directly with Chinese factories to manufacture their own lines of competing power tools. So it is a very credible threat for them to say that they can get by without Black & Decker. Black & Decker did what most manufacturers in this situation do; they laid off 4,000 workers in the United States, and moved production elsewhere. That is a common story, and the retailers are the ones driving and propelling that.

Meanwhile, you have small manufacturers. For example, I interviewed the owner of Becca, which is a small, family-owned toy manufacturer in St. Paul, Minnesota. They looked at selling to Target and Wal-Mart, which are the largest sellers of toys in the country. Target and Wal-Mart were very interested in Becca’s products. But in the end, the family decided they did not want to sell to Target and Wal-Mart, because it would have meant moving overseas. They said, “We like our employees. We love what we do. We enjoy actually working with the products that we are making. We don’t want to just contract with a factory elsewhere to have this done. And we’re committed to our community.” So they have decided not to sell to the big boxes. Their products are only sold to independent toy stores. They are doing well, but their future survival depends entirely on whether there are independent toy stores left in the country.

That is true for lots of small manufacturers and small farms. Without independent retailers, they no longer have shelf space, and they no longer exist, no matter how innovative their products, no matter what the consumer demand may be for them.

MM: You write that the chains are now more substantial contributors to water pollution than manufacturing.

Mitchell: Polluted runoff from pavement has overtaken point sources of pollution — that is, discharges from factories — as the top threat to many of our lakes and streams. Some rivers that had undergone major improvement since the passage of the Clean Water Act in the 1970s are once again in decline and the culprit is runoff.

  No other type of land use creates a larger volume of polluted storm water runoff than big box retail. That’s because of the size of the parking lot and the stew of toxic chemicals that are deposited on it by all of those cars. When there is a storm, instead of the water sinking into the ground, it rushes in a torrent off of the paved surface, carrying those pollutants into the nearest lake or river. We now have many waterways that are severely affected by runoff from pavement.

MM: Wal-Mart claims it can use its size to bring an environmental revolution to the market place — that it can use all of the things you complain about to make positive change.

Mitchell: In light of global warming, and the fact that transportation — of both people and goods — contributes the largest share of U.S. greenhouse gas releases, I would argue that a paramount environmental goal ought to be reducing the distance that both people and goods travel.

Wal-Mart’s growth is taking us in exactly the opposite direction. At its very core, Wal-Mart is about long-distance distribution and large-format, auto-oriented retailing. No other company has done more to make running our daily errands an environmental hazard.

Since 1990, the amount of road miles logged by the average American household for shopping has grown by more than 40 percent. We are driving more across the board, but our shopping-related driving is the fastest-growing segment of our driving, by a long shot. We are now collectively putting an extra 95 billion miles a year on the road, over 1990 levels, just for our daily errands. The primary culprit behind this trend is big-box retailing, which has destroyed small-scale neighborhood businesses and replaced them with massive boxes that aggregate shoppers from a wide area.

Wal-Mart and the other chains have also increased the distance that goods are traveling to reach us, because they have pushed so much manufacturing to the other side of the world. Thanks to the Wal-Mart model, transport of goods is growing faster than the world’s economic output. It is one of the fastest growing sources of greenhouse gas emissions. Trucking alone now accounts for 16 percent of U.S. greenhouse gas emissions.

Chains inherently have very limited ability to do any of their sourcing locally. It creates a bureaucratic nightmare if their stores try to carry more than a few token foods or other products from the local area.

So when Wal-Mart talks about putting LED lighting in its refrigerator cases; or making its stores a bit more efficient in terms of electricity consumption; or reducing the packaging on products it sells by 5 percent — this is not exactly rearranging the deck chairs on the Titanic, but it is like bailing water with a bucket even as the company’s continued expansion ensures that the ship sinks even faster. Whether new Wal-Mart stores will be more energy-efficient does not change the fact that a far-flung, centrally controlled global empire is not a sustainable way to organize economic production and distribution.

The environmental implications are particularly scary when you consider how aggressively Wal-Mart is trying to expand in other countries. They are working now to sidestep regulations in India that prevent them from opening superstores. India is a country where 98 percent of the retail is in the hands of local shops, many of which source goods from local producers. Wal-Mart wants to replace this rooted economic system with auto-oriented superstores that source goods from all over the world.

MM: You highlight the long history of citizen opposition to chains.

Mitchell: When the first generation of chain retailers began to expand in the 1910s and 1920s, they were met with widespread opposition. Citizens groups formed in hundreds of communities to block the expansion of these stores, and to make a case that people should not shop at them. There was a widespread sense that these stores undermined communities and local economies, that they destroyed small businesses and good jobs, and that they harmed democracy by concentrating economic power.

This opposition led to many cities and about half the states enacting special taxes and other laws to curb chain store proliferation. These policy changes and the many “buy-local” campaigns around the country seemed to have worked. Chain stores stopped expanding. Their market share stagnated at about 20 percent of retail sales and remained there for the next 20 years.

One thing that worked against the chains in this period is that Americans had a much more expansive view of themselves as actors in the economic and political arenas. They thought of themselves as small business owners, as workers, as citizens, as stewards of their communities. From any of those perspectives, they tended to view the chains as a threat to their livelihoods and their communities, and ultimately to democracy.

Eventually the chains, led by A&P, moved to change public opinion. They embarked on a huge public relations campaign that encouraged people to think only as consumers and to drop all of those other identities. The chains basically invented the consumer identity that so dominates American thinking today. When you view the world through that lens, you tend to see these retailers as nothing more than shopping options. Shortly after that, we get the explosion of malls and later big-box stores.

MM: What are communities doing now to fight back against the chains?

Mitchell: Since 2001, citizens have organized and stopped big box proposals in more than 200 communities around the country. Communities have a great deal of authority over development, and a growing number of cities are adopting planning and zoning laws that limit or prohibit the proliferation of chain stores.

We are also seeing many communities using their economic development resources not to lure in outside corporations, but rather to find ways to grow a new generation of independent businesses.

Retail incubators are one example. In the book, I describe one of these that nurtured several start-up businesses that helped repopulate a commercial district in Chicago.

Another is mentorship programs. Since 2002, we have actually experienced a net increase of 400 new, independent pharmacies in this country. Part of this increase has to do with mentorships that are going on, where established independent pharmacists are helping pharmacy students just coming out of school open their own businesses, rather than go work for Walgreens or Target. We should set up these kinds of local business mentor programs in every city and town.

Independent businesses are also using cooperatives and alliances to gain new strength in the marketplace. For example, in the music industry, we have seen independent record stores form alliances that have given them new-found clout with the record labels. This has enabled them to demand the same access to promotional giveaways and funds that used to be provided only to the big chains. There are also a growing number of wholesale cooperatives that enable independent retailers to take advantage of volume and distribution efficiencies.

Public education is also taking off. Most people don’t think about where they shop, and they don’t think about the difference between a locally owned business and a chain. Independent Business Alliances in several dozen cities around the country are running “buy local” campaigns to get that message out. These campaigns involve hundreds of local businesses — distributing educational materials in their stores, putting posters on their storefronts, running joint ads and generating media coverage — to highlight the hidden costs of chain retailers and the importance of supporting locally owned businesses. They aim to make “locally owned” something that people think about in their shopping choices, in the same way that organic is now something that many people consider. In the communities where these campaigns have been going for a number of years, we are seeing very tangible results in terms of an actual shift in spending behavior.

MM: You also describe some nascent regional efforts to control big box development.

Mitchell: In addition to towns using their zoning authority to set appropriate limits on corporate retail development, to insist on more community-rooted and small-scale retail, we are also seeing neighboring towns develop regional planning policies. One of the best examples is in Cape Cod.

In 1990, voters in the 14 towns that make up Cape Cod endorsed the creation of the Cape Cod Commission. Since then, whenever anyone wants to build a store over 10,000 square feet — about one-twentieth the size of a Wal-Mart supercenter — they must not only obtain approval from the town they are going into, but also from the Cape Cod Commission. The Commission is made up of representatives of all 14 towns. They look at these proposals to see if they are going to be a benefit to the whole region.

The Cape Cod Commission has turned down proposals for quite a few big box stores over the years, including a Home Depot, a Wal-Mart and several others.

This arrangement prevents companies from playing neighboring towns against one another, which is what they do so often. Wal-Mart typically tells communities that are resisting a new store proposal that it will simply build in a neighboring community — inflicting all of the harms people fear but providing no tax revenue. Many communities succumb to that kind of bullying tactic.

You can’t do that in Cape Cod, because all of the communities have agreed to work together, and to recognize that they have to cooperate, in order to protect their assets into the future.

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