Sometimes city governments issue zoning requirements prohibiting the construction of giant retail stores. The latest: Swansboro, North Carolina, where town residents are hotly debating an ordinance that, in effect, would ban construction of a Walmart.
The typical goal of these regulations is to protect local businesses from the crushing competition of "big-box" stores. But it turns out such rules often backfire, according to research by Raffaella Sadun, an assistant professor in the Strategy unit at Harvard Business School.
“Suddenly these mini-Tesco shops were everywhere.”
Studying census data on retail stores located in England, Sadun found that stricter planning restrictions against big-box stores actually coincided with independent retailers closing down or hiring fewer workers, a signal their business was weakening. Why? Because large retail chains can skirt the regulations by opening small stores instead. And while their giant superstores generally sit on the outskirts of a city, their smaller chain stores are often located downtown, creating more direct competition against the mom-and-pops.
Sadun focused her study on England in large part because history provided a convenient research environment. In the late 1980s, Prime Minister Margaret Thatcher adopted a more lenient approach vis à vis planning regulations, which allowed for a significant increase in big-box store openings across the country.
"This started to be scary," Sadun says. "People were concerned that these superstores would keep the small stores out of business and drain activity from local town centers. So, in the early 1990s, subsequent governments introduced much more stringent planning guidelines, which substantially increased the regulatory steps needed to obtain permission to open large retail stores—above 1,000 square meters, especially those located on peripheral locations."
While the planning guidelines were centrally determined, their actual implementation was delegated to local planning authorities. "This setup gave me the opportunity to look at the variations between areas with and without regulations, but also to look at points in time—before and after regulations within the same local authority," Sadun says.
Personally, she was curious about a trend she was noticing first-hand while attending the London School of Economics. Tesco, the second-largest retailer in the world, was opening small shops on street corners all over the city. (While the largest of Tesco stores take up nearly 6,000 square meters, Tesco Express convenience stores are, on average, only 195 square meters.)
"I was living there when these regulations had just started to become much tighter," she says. "And suddenly these mini-Tesco shops were everywhere. You could see with your own eyes that something was happening."
To evaluate the effects of planning regulation on independent retailers, Sadun studied the retail landscape in the United Kingdom between 1998 and 2003. Not surprisingly, she discovered that the implementation of strict retail planning regulations coincided with a reduction in applications for retail superstore construction. There was a big decrease in the average size of stores that belonged to large retail chains, such as Tesco or Asda, a British subsidiary of Walmart.
Yet large retail chains (those with more than 10,000 employees) experienced significant growth in employment between 1998 and 2004. In other words, a decrease in the average size of mega-chain stores coincided with an increase in the chains' overall employment rate. At the same time, employment at small retail chains and independent stores declined.
Sadun sums up the findings in her paper Does Planning Regulation Protect Independent Retailers? (forthcoming in The Review of Economics and Statistics). "Planning regulation ended up harming independent retailers," she writes. "According to the results shown in the paper, the decline in planning grants generated by the regulatory reforms accounted for between 4% and 22% of the employment growth experienced by small formats, and 6% and 26% of the employment decline experienced by independent retailers over the time period [between] 1998 and 2004."
As Sadun had observed walking through the streets of London, tiny Tesco shops were replacing independent businesses.
"What the politicians did not anticipate was that these large supermarket chains were going to come in anyway, regardless of regulations," Sadun says. "They had reached a scale and a capability with IT and logistics, such that they could operate a network of small stores. It was more costly to operate this way, but it was feasible."
And what of the sections of the England that decided not to apply the regulation guidelines against stores larger than 1,000 meters? It turned out that these huge stores did not seem to hurt independent businesses at all. In fact, independent retailers actually seemed to benefit when local governments granted applications for giant stores on the outskirts of a city or town. Each additional grant for a giant store was associated with a .17 percent increase in employment among independent stores in the same postcode. "In the areas with the big stores you see employment growth," Sadun says. "You don't see this killing effect on the small shops."
While Sadun conducted the study in England, the findings are certainly relevant in the United States, where giant chains have been increasing their footprint of small urban stores.
In February, Walmart announced plans to add 270 to 300 small stores during the fiscal year, adding to the existing stable of 346 Neighborhood Markets and 20 WalMart Express stores. The February announcement doubled the initial forecast of 120 to 150 small stores that the company had issued last October.
This July, Target is launching a new store format called TargetExpress in Minneapolis, near the University of Minnesota campus. "Our smallest location ever, the store will serve students and urban guests living in nearby neighborhoods, and cover approximately 15 percent the size of a general merchandise Target store," reads a company press release.
Considering this onslaught of small format chain stores, Sadun believes the subject of big-box regulation warrants further research: "Ideally, the creation of an economic model that would help policy makers to predict the implications of entry regulations more accurately, and in particular the competitive implications of the different store formats."