Maine Study Finds Locally Owned Businesses Better for Local Economy

October 08, 2003

According to a recent study conducted by the Institute for Local Self-Reliance (ILSR), a national nonprofit organization providing policy solutions for building strong local economies and sustainable communities, and Friends of Midcoast Maine, a regional grassroots organization supporting smart growth, three times as much money stays in the local economy when consumers buy goods and services from locally owned businesses compared to chain stores. The conclusions of this study, which tracked the revenue and expenditures of eight locally owned businesses in three Maine towns, are similar to those of an earlier study conducted in Austin, Texas, by Civic Economics for the local community organization Liveable City. (To read the full Civic Economics report, click here.)

According to David Morris, vice-president of ILSR, studies such as the one in Midcoast Maine refute the argument that bringing in major chain stores and big box retailers creates jobs locally. He told BTW, "We want to put that argument to the test. Our findings are that more jobs are created locally and the economy is healthier if you don't bring in chains. One should track the dollars spent. It's not enough to say, 'I might save two percent on purchases [at a chain store],' it matters just as much what the direction and dynamics of the money are."

The Maine study, conducted by ILSR research associate Stacy Mitchell, analyzed the Midcoast region from Bath to Belfast, which has a population of approximately 145,000 people and a growing number of national retailers and big box stores. Eight locally owned businesses providing a range of goods and services in Rockland, Camden, and Belfast, Maine, provided detailed revenue and expenditure data for the study.

The ILSR study found that "the eight businesses spent 44.6 percent of their revenue within the surrounding two counties (Knox and Waldo). Another 8.7 percent was spent elsewhere in the state of Maine." The other 46.7 percent of their revenue left the state.

The four largest components of their local spending were wages and benefits paid to local employees; goods and services purchased from other local businesses; profits accruing to local owners; and taxes paid to local and state government. All eight of the surveyed businesses used the services of locally owned banks, purchased inventory from local manufacturers, advertised in local newspapers, and hired other local service providers and repair people.

Out-of-state spending included purchases of inventory, supplies, and insurance from out-of-state companies; interest on mortgages; rent and credit card fee payments; and equipment leasing.

"Because national retailers do not reveal detailed financial information," study researchers found it necessary to create a similar expenditure profile for a major big box retailer with outlets in Maine using data gathered from a number of sources. "Based on our estimate," the study states, "a typical big box store spends 14.1 percent of its revenue within the local and state economy, mostly in the form of payroll. The rest leaves the state, shifting to out-of-state suppliers or back to corporate headquarters."
The study also noted that local businesses contributed more to charity than two national chains, based on data published by Target and Wal-Mart: "The eight local businesses made $24,000 in cash donations to charities in 2002, or 0.4 percent of their revenue. That's more than four times as much, relative to overall sales, as Wal-mart gave in 2002, and twice as much as Target gave."

Study researchers came to the conclusion that "when residents of the Midcoast region spend $100 at a big box retailer, their purchase generates $14 in local spending by the retailer. That same $100 spent at a locally owned business generates $45 in local spending, or three times as much. Dollars spent at the local retailer support not only that store, but a variety of other local businesses."

The analysis projects that based on current growth rates, retail sales in the three cities studied will expand by $74 million over the next four years and concludes that "if all of this additional spending were captured by new and expanding locally owned businesses, it would add $23 million more to the local economy each year than if all of the new spending was captured by chains.

"That's the equivalent of more than 500 jobs…. Based on the results of this study, developing strategies to strengthen and expand locally owned retailers over the next four years, rather than supporting additional chain store growth, could generate as much economic return as attracting a major new employer."

The full report, "The Economic Impact of Locally Owned Businesses vs. Chains: A Case Study in Midcoast Maine" is available on ILSR's New Rules Project Web site at www.newrules.org.

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