The Multiplier Effect of Local Independent Businesses
Nueva! Leer en español
Explaining the local economic multiplier effect or “local premium” is a key part of effective "buy local" and public education campaigns. Typically, independent businesses recirculate a much greater percentage of revenue locally compared to absentee-owned businesses (or locally-owned franchises*). In other words, going local creates more local wealth and jobs.
Total economic impact is determined by measuring three components -- the direct, indirect, and induced impacts.
- Direct impact is spending done by a business in the local economy to operate the business, including inventory, utilities, equipment and pay to employees.
- Indirect impact refers to the conventional multiplier that happens as dollars the local business spends at other area businesses re-circulate.
- Induced impact refers to the additional consumer spending that happens as employees, business owners and others spend their income in the local economy.
Click either image to see a large print-quality version
The private research firm Civic Economics has executed the bulk of studies attempting to quantify the difference in local economic return between local independents and chain businesses. Their first such study (pdf), for the City of Austin, Texas showed an independent book (Book People) and music seller (Waterloo Records) returned more than three times as much money to the local economy as a proposed Borders Books and Music outlet would.*
Those results since have been mirrored by subsequent studies (ten summarized here), each showing a much greater local multiplier for spending at independent businesses than chains. These studies measured the direct and indirect impacts to determine the base level local economic activity of a purchase made at a chain and a local independent business.
On average, 48 percent of each purchase at local independent businesses was recirculated locally, compared to less than 14 percent of purchases at chain stores. (See blue graph.)
The Institute for Local Self-Reliance conducted perhaps the simplest study of the local multiplier effect in several small Maine communities in 2003. The study examined how much of a dollar spent at a local independent store is re-spent in the local area as payroll, goods/services purchased from area businesses, profits spent locally by owners, and as donations to area charities. The study found each $100 spent at local independents generated $45 of secondary local spending, compared to $14 for a big-box chain -- nearly identical to later results across the many Civic Economics studies.
Other studies by Civic Economics in Grand Rapids, Michigan and Chicago expanded exploration of the indirect impacts by including more business types (see discussion below) and added induced impacts, so the results are not directly comparable to most other CE studies or the ILSR Maine study.
Civic Economics' Andersonville neighborhood (Chicago) study found a total impact (direct, indirect and induced) of $.68 for each dollar spent at ten local independents, compared to $.43 projected for their chain competitors. However, the projection of indirect and induced impacts does not mean $.68 of each dollar spent at a local independent "stays" in the local economy, but that $.68 of additional local economic activity ultimately is generated after additional spending cycles. Citing the higher numbers without explaining they include impacts by entities other than the original business is simply wrong. It also gives any opponent an easy point to undermine the credibility of your group.
One of four posters in the "Why Buy
Bear in mind the Andersonville study examines ten businesses in one neighborhood of one large city. Businesses in smaller cities and towns typically have less ability to source many goods and services locally.
To gain respect as an authoritative voice within your community, we suggest you guard your credibility by checking your materials to ensure they convey verifiable, accurately-worded information. We urge you not to rely on any secondary sources or attributions. The New York Times published a claim that 80% of money spent with local independents was re-spent locally. Subsequently, at least two other publications then attributed the claim to AMIBA, which is why we're now zealous about correcting misinformation when we see it.
In addition to being accurate, make sure your message is memorable. Saying, "Multiple studies show locally-owned independent restaurants return twice as much per dollar of revenue to our local economy than chain restaurants. And independent retailers return more than three times as much money per dollar of sales than chain competitors," is a far more memorable phrase than talking in terms of percentages or comparing $.68 to $.43. It's also easily verifiable (include links to Civic Economics and this page).
Of course, you could add, "and buying remotely on the web creates almost no local benefit--just a few minutes' work for a delivery person." You also may add for your outreach materials or interviews, "That adds up to a huge difference in creating local jobs and local wealth." Calculating the added local wealth that would be generated by a 10% shift to local independents is one tactic successfully employed by several communities.
Details on Study Variants
The size of the local premium varies depending on the type of business. This is where the San Francisco and Grand Rapids studies get interesting, because they gauge the local multiplier for different business categories. Restaurants and service providers generate a large multiplier because they are labor-intensive and, therefore, more of each dollar of revenue goes to local payroll. Pharmacies, for example, generate a lower multiplier because so much of each sale goes to drug manufacturers. Most retailers, unless they source an exceptionally high percentage of their goods locally, also create a more modest multiplier than restaurants.
This is not to say restaurants are better for economic development than pharmacies. Pharmacies have sizable revenue and professional job opportunities, which are important to any local economy. It's helpful to be aware of these differences because the mix of businesses involved in a particular study will influence the results.
In 2009, Stay Local!, an AMIBA affiliate in New Orleans, commissioned Civic Economics to evaluate economic return per square foot of retail space used by both local merchants and Target Corporation. The local merchants studied generated twice as much sales activity per square foot and nearly quadrupled the local economic return per square foot compared to projections for Target. See the resulting report: Thinking Outside the Box (pdf).
Quantifying Shifts in Spending
To gauge the overall impact on your local economy of shifting 10% of purchasing from non-local or absentee-owned to locally-owned businesses, you would need to know the local multiplier for each category of spending and the percentage of people's spending in each category. (i.e., 20% goes to groceries and the grocery multiplier is 0.15; 5% goes to books and the local multiplier is 0.32; etc.)
Presumably, this is how Civic Economics arrived at the Grand Rapids figures for the impact of shifting 10% of all retail sales. The average local multiplier in that study works out to 0.16 across all retail categories.
Thanks to Civic Economics and Stacy Mitchell of ILSR for assistance with this content. ILSR summarizes and links many relevant economic impact studies. Note: AMIBA does not conduct these studies. Please contact Civic Economics for information about commissioning one for your community.
* The Austin Independent Business Alliance (one of AMIBA's first affiliates) used the study results to rally opposition against a public subsidy planned by the City to attract Borders. They succeeded. Tellingly, the corporation chose not to compete on a level playing field against two well-run independents -- Borders never opened.
A Note on Franchises. Despite claims by countless franchisors (the companies that sell to a person wishing to operate a franchise -- the franchisee), franchised businesses overall are no more likely to succeed than independent businesses and typically deliver a worse return on investment, as this article explains). The local multiplier effect of most franchises will fall between that of local independents and chain competitors in their business category.
Recent Multiplier Effect Studies
British Columbia 2013 (pdf) See p. 12.