Civic Economics' Dan Houston on Indies vs. Chains

December 14, 2004

As a partner in Civic Economics, Dan Houston is emerging as a leading proponent of progressive economic development. The firm, which he founded with Matt Cunningham, provides "businesses, communities, and civic organizations with creative tools to achieve sustainable prosperity."

Civic Economics gained widespread attention with the December 2002 release of the study "Economic Impact Analysis: A Case Study, Local Merchants vs. Chain Retailers,", which was commissioned by Liveable City, a local nonprofit group in Austin, Texas. The study made news by demonstrating that local merchants contribute more than three times as much economic value back to the community than do chain retailers.

Recently, Civic Economics released a second, more in-depth economic study, "The Andersonville Study of Retail Economics," which again clearly illustrated that local merchants (this time in the Andersonville neighborhood of Chicago) contribute significantly more money to the local economy than do retail chains.

Bookselling This Week recently spoke with Houston via e-mail regarding the two economic studies and the ongoing debate over whether local retailers are more economically viable for a community than large corporate merchants.

BTW: It seems that the 2002 Austin Study, and now the Andersonville Study, really opened a lot of people's eyes about the value of local, independent businesses to their communities, especially attracting the attention of the media and many communities' politicians. Since local businesses and their customers have been touting their value anecdotally for quite some time, are you surprised it took an economic analysis like the Austin study to really grab people's attention?

Dan Houston (DH): Municipal officials rightly regard anecdotes as a poor basis for public policy. And all too often, that's what grassroots initiatives bring to the table. In Austin, for example, the debate was largely based on emotional pleas with an occasional economic argument thrown in for good measure. The Liveable City study was designed to provide the City Council with credible numbers about the true impact of the Borders development.

To be honest, we expected that study to be influential in City Hall and nowhere else. That it attracted so much attention, both with Austinites and national media, caught us by surprise.

BTW: When your company first set out to do the Austin study, did you think you would actually find out that the figures backed up what independents were saying?

DH: Civic Economics was just getting started, but the issue of local retail had been on our minds for years. In our conventional economic development work, we'd seen that communities paid lip service to local multipliers without thinking creatively about ways to encourage the circulation of money in the local economy. Client communities were celebrating the opening of big box stores as if they were, in and of themselves, economic development projects.

We had a good sense that we'd find that local businesses circulate a larger share of their revenue in the local economy. One visit to the fourth floor at BookPeople made clear to us the essential difference. Up there we saw an army of professionals doing things that, in a chain store, are done at headquarters.

BTW: And when you saw the results, were you surprised at the disparity between locals and chains in terms of how much more local businesses brought back economically to the community?

DH: When the numbers started to come together, we were really convinced that we'd done something terribly wrong. How could the difference be so dramatic? We knew the methodology was solid, but we spent weeks making sure we had accounted for any differences in financial reporting. We even asked two professors at the University of Texas to vet the work, and together we wrestled the data into a model in which we could have real confidence. So, yes, the three-to-one difference shocked us into really doing our homework on this study.

BTW: Your work in Andersonville took the study even further by analyzing even more businesses, and it came back with about the same results. Do you think you would see similar results in other towns throughout America?

DH: After the Liveable City study, we started seeing those results cited all over the nation. We constantly cautioned that we had studied three specific businesses at a single intersection in the Sunbelt and that we could not say these numbers would be the same in different circumstances, but reporters and activists usually just disregarded those caveats. So, we started looking for a chance to do a more thorough study, looking at a range of goods and services in different economic settings. One setting we thought would be interesting was a big city, and Andersonville provided a perfect opportunity to do that.

There, we refined our methodology and reporting somewhat to make the findings more useful to policy makers. With so much hard data, we were able to report our findings by multiple variables. We looked at impact as a function of store size as well as total sales, for example, and broke those out for restaurants, retailers, and service providers.

Since then, we've talked to other communities about the possibilities. I think it would be interesting to study outcomes in a tourist town and in a more rural setting.

BTW: Did you find any of the results of the Andersonville Study surprising?

DH: By the time we got to Andersonville, we had spent a lot of time thinking about how the various factors would play out in different circumstances, and what we found there fit pretty well into our range of expectations.

What did jump out at us, though, was that the locals we studied were achieving sales per square foot equal to or better than their chain competitors. As a result, economic impacts on a square foot basis are much better from locals than from chains. In communities where land use is at issue, that has significant policy ramifications. If the city is largely built-out, for example, or faces environmental obstacles to expansion, public policy should focus on making the most out of the land they have. That's where we expect the Andersonville findings to have the most impact.

BTW: What are the key driving factors as to why local businesses are contributing more to the economy?

DH: Most of the difference comes down to local payroll. Locals inject more money into the local economy in the most direct way possible, by paying local residents to come to work. We've found that to be true across the board. Other variables include things like local procurement of goods for resale, charitable giving, advertisements in independent weeklies, and local service provision from bankers, accountants, lawyers, and the like.

Waterloo Records, for example, sells hundreds of thousands of dollars worth of locally produced recordings by unsigned bands each year. Except for the plastic in the compact disk, everything about that product is local. In my own neighborhood, we have working musicians, producers, and artists who earn their living doing these things and, without Waterloo, they would have a hard time making a go of it.

BTW: While your studies, as well as the efforts of local businesses to bring this message to the attention of their communities and local politicians, have garnered a lot of media coverage, it seems that many developers and city officials still need convincing that local businesses can do as good a job, if not better, anchoring a development. Is this mindset starting to change at all?

DH: I'm glad you asked that question in that way, because it hits on two very different issues: city officials have one set of concerns and developers another.

Our work is having a real impact among policy-makers. We have traveled a good bit to discuss the studies and find that city officials generally understand the issue and are making good faith efforts to address the problem. The first challenge they are struggling with is the fear of litigation, so we are working now to develop policy solutions that make economic sense and can be defended. Another challenge is to determine in each setting what the actual economic impacts of various outcomes will be. We don't pretend to have answered that question for all time and for all places, so communities still need to work on getting credible figures for their unique circumstances.

Developers are an entirely different animal. No matter how creative or well intentioned a developer may be, and most of them are both, he has to fit his projects into a very constrained model in order to satisfy the financial community. In doing so, they follow a well-worn path to the shopping center convention in Las Vegas, where they sign a chain bookstore, a chain coffee shop, and a chain restaurant as anchors, then look to independents to fill out the development. Booksellers and restaurants in particular need to engage with the development community to develop a mechanism for filling those anchor sites.

Developers also turn to leasing agents to fill projects, and there you hit another obstacle. True story: The International Council of Shopping Centers sponsors an annual "University of Shopping Centers" at the Wharton School, the leading center of business study in America. A course called "Leasing to Independent Retailers" sounds promising, but here's what the syllabus promises:

The space that is often left un-leased is considered "tough" real estate that nobody wants. … Leasing great space in great centers requires great skill. Leasing "difficult" space in "difficult" centers presents much greater challenges. You'll walk away with how to deal with the economics of leasing difficult real estate, and how to sell tough economics to prospective tenants.

Booksellers beware: the leasing agent schmoozing you may not be your friend.

BTW: Are you currently working on, or do you have planned, any economic studies in other communities?

DH: We are always looking to build on the research we have done. In Austin and Chicago, we broke new ground in economic analysis and would love to carry that forward. We have discussed studies in other communities and expect we'll have the chance to see how these economic issues play out in, say, tourist towns, or rural areas in the coming years.

We are also interested in working out policy solutions that can be applied across the country. There are a great many experiments underway today, and many of them will generate litigation to test the policy. We're working with the Austin Independent Business Alliance on a program that will identify specific districts in the city with a focus on local business, and city officials have indicated a great interest in where that leads.

Another area of interest is to help booksellers and restaurateurs in their dealings with developers and leasing agents. The best new urbanist projects are expensive undertakings with substantial public sector involvement, and they present a great opportunity to change the rules of the game. That, to us, is essential if we're going to get beyond the present ad hoc fights over specific developments and move to a more credible, orderly, and economically viable model for development. --Interview by David Grogan

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