Rural RESEARCH REPORT Published by the Illinois Institute for Rural Affairs Stipes Hall 518 Western Illinois University 1 University Circle The Impact of Large Discount Stores on Retail Sales in Illinois Communities by John Gruidl and Steven Kline 1 Winter 1992 Volume 3, Issue 2 Macomb, IL 61455-1390 309/298-2237 In recent years, retailing in small Illinois communities has undergone major changes. Improvements in the highway system have facilitated travel to larger neighboring towns serving as regional shopping centers. Discount stores have proliferated bringing additional competition to local merchants. 2 Although the concept of discounting has existed for a long time, the tandem strategies of offering everyday low prices and locating in smaller communities are fairly recent. The news that a large discount store is opening in the community is met with diverse reactions among residents. Some anticipate that a discount store will bolster the local economy, by providing jobs and sales tax revenues and by expanding the size of the trade area. Others fear large discount stores, believing that they will contribute to the failure of existing stores and the long-term stagnation of the downtown area. Local public officials need to know whether a large discount store will improve the competitive position of the retail sector. Furthermore, it is important for local government officials, chambers of commerce and others influential in development to have information on the potential effects of large discount stores on existing retail businesses. This report examines the impact of large discount stores on retail sales in Illinois communities. Fifteen communities in which a large discount store opened between 1986 and 1989 are included in the study. The analysis examines retail trade before and after the opening of a discount store in these communities. We examine changes in total sales and in seven retail categories; general merchandise, automotive and filling stations, eating and drinking places, apparel, food, furniture and household, and lumber and hardware. The results indicate the effect of the newly-opened discount stores on the aggregate drawing power of the retail sector. The results also provide insights as to how existing businesses in specific retail categories, such as apparel, are affected by large discount stores. Strategies of Discount Chains Discount stores are an important element of Illinois retail trade. Approximately 362 full-line discount stores operating in Illinois generate sales of $4 billion, or approximately 5 percent, of Illinois total retail sales. Interestingly, Discount Merchandiser (June 1991) reports that the actual number of full-line discount stores operating in Illinois declined 9.5 percent since the previous year. However, the 1991 report also indicates that the total square footage of discount store space in Illinois is 26 million square feet, only 7.1 percent less than the previous year. These trends for Illinois discount centers parallel a national trend that is occurring within the discount store industry after more than 30 years of continuous growth. One explanation for these apparent reversals is that discount firms are strategically replacing dated stores with fewer, but larger units capable of serving much larger trade areas. An example of this strategy in action is illustrated by the dueling Wal-Mart and K mart chains. Nearly one-half of Illinois discount activity is accounted for by these two competitors. In recent years, as competition among large and small discount centers intensified, it has become com- 1 The authors are assistant professor and research associate, Illinois Institute for Rural Affairs. This Rural Research Report was prepared with funding from Lt. Governor Bob Kustra, Chairman of the Rural Affairs Council. The authors thank Kay Seng Soon for his assistance in data analysis and Ken Stone of Iowa State University for his comments on a previous draft. This is the second Rural Research Report on the topic of discount stores in Illinois communities. A previous report (Summer 1991, Vol. 2, Issue 10, by Steven Kline) describes strategies that local merchants and communities can adopt to succeed in a discountstore environment. 2 Discount Merchandiser (June 1991) defines a discount store as a departmentalized retail establishment utilizing many selfservice techniques to sell hard-goods, health and beauty aids, apparel and other soft-goods, and other general merchandise. It typically operates at uniquely low margins, has a minimum annual volume of $1 million, and has at least 10,000 square feet of total space. By large discount store, we refer to discount stores with more than 50,000 square feet of total space. 1
monplace to find two, or even three discount stores battling for market shares in rural communities of 20,000 population or less. As the store wars continue, discount chains are proceeding to make strategic adjustments by establishing new stores, relocating many stores, and closing some locations altogether. Wal-Mart and K mart have followed very different store location strategies (Davies and Rogers, 1984). Only after saturating urban markets has K mart developed smaller sized stores for rural markets and the fill-in areas of major urban markets. K mart has more than 120 stores in Illinois, but approximately 60 percent are in Cook and the collar counties. Wal-Mart, in contrast, targeted rural markets from its inception with a down-home merchandising format that appeals to residents of small-towns. The rural locations have been so profitable that Wal-Mart is now the nation s leading retailer in sales and profits. Wal-Mart also locates around, or rings, cities like Chicago and St. Louis and is beginning to enter urban markets. Because Wal-Mart has expanded so rapidly and has focused on rural areas, it is the chain most widely recognized as affecting small-town economies. Wal-Mart first entered Illinois in 1978, and by late 1991, had 86 stores in predominately rural locations. The average 1990 population of a Wal- Mart community in Illinois was 18,721. Wal-Mart especially appeals to lower to middle income households; 40 percent of its customers have household incomes of $20,000 or less (Rawn, 1990). The average Discount City has approximately 70,700 total square feet with sales per comparable gross square foot of $263, up from $250 in 1989 and $194 five years earlier (Wal-Mart Stores, Inc., 1991). Thus, the average Wal-Mart store has annual sales of more than $18 million. Downstate Illinois also has several other discount stores, such as Jacks (a Penn-Daniels, Inc. chain of 13 stores), Target (the discount arm of Dayton Hudson Corp.), and Farm King (six family owned stores in west-central Illinois primarily serving people in farming). Many of these stores are located on the outskirts of small towns. Although these stores generally are smaller in size than K mart or Wal-Mart, presumably they have similar effects on retail trade patterns. Effects of Wal-Mart in Iowa Stone (1989) studied changes in retail trade in 14 Iowa communities where Wal-Mart stores had opened in the mid- 1980 s. Although Wal-Mart stores were studied, presumably the findings would apply to other large discount stores in similar retail environments. Stone compared the retail drawing power of Wal-Mart communities with similar size communities that did not have Wal-Marts. Iowa communities, in general, had stable or declining demand, as indicated by population and income trends during this period. In effect, the retail pie was fixed in these communities, except for changes in the capture of retail customers. Stone reports that, in general, total retail customers increased at a faster rate in the Wal-Mart communities than in same-size communities. This is an important finding, since it suggests that large discount stores improve the competitive position of the retail sector. Stone also reports that even though Wal-Mart protected the trade market, there was considerable redirection of sales away from existing merchants. In the average town, total retail sales increased by approximately $4 million after the opening of Wal-Mart. Since the typical Wal-Mart store, in his study, had annual sales of approximately $13 million, approximately $9 million was redirected from local stores. Of this $9 million, roughly $6 million represented losses by existing general merchandise stores and $3 million was the net reduction by local stores in other retail categories. This applies to circumstances in which the retail pie was fixed. If the retail pie had been expanding, it is likely that redirection from local merchants would have been less severe. Stone developed two rules of thumb regarding the effects of a discount store on existing businesses in a community with a fixed retail pie. First, businesses supplying goods and services other than those sold by Wal-Mart tend to experience higher sales due to the spillover effect of the higher additional traffic attracted to the community by Wal-Mart. Second, businesses that sell the same goods as Wal-Mart tend to experience some reduction in sales after Wal-Mart opens. In examining specific sales categories, Stone reports that home furnishings (including furniture stores, major household appliances, floor coverings), eating and drinking places, and apparel sectors performed better in Wal-Mart communities. Generally, this finding is consistent with his rule of thumb, since these stores probably enjoy spillover effects. Apparel is a possible exception, since Wal-Marts carry an extensive line of clothing. Of course, overall trade capture in general merchandise (department stores) increased dramatically, since Wal-Mart stores are classified as general merchandise stores. 2
Specialty stores and food stores in Wal-Mart communities performed poorly relative to communities of the same size without a Wal-Mart. Specialty stores include drug stores, sporting goods, and gift shops which often are in direct competition with Wal-Mart. Food stores may lose sales in goods that compete directly with Wal-Mart, such as health and beauty aids, cleaning supplies, and paper products. The retail market for building materials changed at approximately the same rate for Wal-Mart communities and samesize communities without a Wal-Mart. This category includes lumber yards which are expected to gain from a discount store and hardware, paint and glass stores which generally carry merchandise similar to Wal-Mart. Stone reports that discount stores negatively impact the retail trade of neighboring communities. Smaller communities within 20 miles of a Wal-Mart location had average cumulative losses of 23.5 percent in total retail sales, in the four years after the Wal-Mart opening compared with a 10.8 percent loss for communities of the same size. This suggests that neighboring communities feel the competitive impact of Wal-Mart, without receiving any spillover benefits from increased traffic. Stone s findings have important implications for rural communities and suggest that research in Illinois might be fruitful. The current retail environment in many Illinois communities differs from the Iowa communities at the time of Stone s study. First, generally there is a denser concentration of towns/cities in downstate Illinois than in Iowa, providing consumers with more retail outlets from which to choose within 20 miles of their residence. Second, there has been a rapid proliferation of discount stores in Illinois putting nearly all communities within 20 miles of a major discount store. In contrast, the Iowa communities, at the time of Stone s study were among the first small communities to have a discount store. These differences imply a more competitive retail environment in Illinois in which the effects of a discount store may be less pronounced. Illinois Study Our study focuses on 15 downstate Illinois communities (with 1990 populations from 5,000 to 22,000) in which a large discount store opened in the period 1986-89. Six additional large discount stores opened in the period, but were not included in the analysis because they were located either contiguous to the metropolitan areas of Chicago or St. Louis or in cities with populations larger than 50,000. The study took place during an expansionary phase of the business cycle, and therefore, downturns in retail activity because of business recessions do not complicate the analysis. Raw data were obtained from retail sales tax reports of the Illinois Department of Revenue. Sales taxes were converted to current dollar retail sales by using the appropriate local sales tax percentage. Data were collected from 1984 to the first half of 1991. Comparable sales tax data are not available prior to 1984. By selecting communities with store openings between 1986 and 1989, at least two years of data were available prior to store opening. Aggregate retail sales, in current dollars, are not a good basis for comparison over time or between communities. Retail sales are affected by changes in population, income, and prices. Pull factors screen out the effects of these variables. A pull factor is the number of customer equivalents divided by population. For example, if Town A has 1990 apparel sales of $1,500,000 and downstate apparel sales in 1990 are $100 per capita, the number of customer equivalents for apparel in Town A is 15,000. With a population of 10,000, the 1990 pull factor for apparel in Town A is 1.5. The interpretation of pull factors is straightforward. A pull factor greater than 1.0 means that the community is attracting customers from outside its boundaries, or local people are spending more in the selected category than the downstate average. For example, if residents are assumed to spend the downstate average for apparel, then a pull factor of 1.5 suggests that the community attracts 150 percent of its population as retail customers. A pull factor of less than 1.0 means the community attracts less than its population. Analyzing changes in pull factors before and after the opening of a discount store indicates whether trade capture is expanding or contracting. Seven retail sales tax categories of the Illinois Department of Revenue are used in the analysis: general merchandise, automotive and filling stations, eating and drinking places, apparel, food, furniture and household, and lumber and hardware (Table 1). Unfortunately, some of the Illinois Department of Revenue categories are broad and do not permit identification of particular types of stores, such as hardware or appliance. Pull factor changes after the opening of the discount store show the impact of the discount store. Of course, it is not appropriate to attribute all changes in retail trade in a community to the presence of a large discounter. Other variables unrelated to the presence of a large discount store, such as the growth of a nearby regional shopping center and the quality of local store management, also affect pull fac- 3
tors. However, when a consistent pattern of pull factor changes occurs after the opening of a discount store, the connection becomes more likely. Table 1. Retail Trade Classification Trade Category General Merchandise Automotive and filing stations Eating and drinking places Apparel Food Furniture and household Lumber and hardware Major Types of Stores Included Variety stores, department stores, general discount stores Motor vehicle dealers, tire shops, gasoline stations, auto repair shops Restaurants, taverns Family clothing stores, shoe stores Grocers, retail bakeries, fresh fruits and vegetables, retail meat markets Furniture stores, floor covering stores, musical instruments, TV and radio, household appliance stores Lumber, plumbing and heating, electrical, paint, glass, tools Source: Illinois Department of Revenue, revised August 1984. Retail Market Changes for Discount Store Communities This study addresses two basic questions: Do retail customers increase in a community after the entrance of a large discount store? Does a large discount center protect the retail trade capture of small communities? Which business categories gain or lose customers after the opening of a discount store? Figure 1 clearly answers the first question. Figures in this report show cumulative changes in pull factors, measured from two years prior to a discount store opening. Retail customers, as measured by pull factors, generally increase after the opening of the discount store. In particular, trade capture increases by an average of 15.25 percent. The finding is consistent among the communities studied, with nearly all communities showing increases in trade capture. In contrast, trade capture was stagnant in the year prior to the store opening (average change.26 percent), suggesting that large discount stores expand the trading area and stimulate increased retail traffic. The second question, the impact on existing merchants, is addressed in subsequent figures. Figure 2 shows the changes in retail capture in general merchandise. Of course, general merchandise gained dramatically since it is the category in which discount stores are classified. Figure 2. Changes in General Merchandise Sales Figure 1. Changes in Total Retail Sales Changes in automotive and filling stations (Figure 3) and eating and drinking places (Figure 4) clearly gain after the entrance of the discount store. Improvements in automotive/ filling station and eating/drinking places are consistent with Stone s finding and reflect the increase in retail traffic resulting from the discount store. The increased retail traffic brings more demand for gas stations, automotive services, and restaurants. 4
Figure 3. Changes in Automotive and Filing Station Sales discounter. This may be due, as Stone suggests, to declines in products that compete directly with discount stores, such as paper products, cleaning supplies, and health and beauty aids. Figure 5. Changes in Apparel Sales Figure 4. Changes in Eating/Drinking Place Sales Figure 6. Changes in Food Stores The impact on apparel (Figure 5) is less clear. Apparel customers fell by 14.41 percent in the year preceding the discounter. The rate of decline in apparel after the opening of the discount store was actually less than the rate of decline before the discounter. The capture of apparel customers is higher in the presence of large discount stores, consistent with Stone s finding. Some retail categories, however, decline after entrance of a discount center. Food stores (Figure 6) continue to expand their customer base after a discount store opening. However, the gains are smaller than in the year prior to the The decline in furniture and household (similar to the category of household furnishings in Stone s study) is severe and inconsistent with Stone s results. Stores in this category gained customers prior to the discounter, but lost customers afterwards (Figure 7). This category is broadly defined to include several types of stores. Furniture stores are expected to gain from spillover effects of large discounters, 5
while stores selling small appliances, televisions, radios, and other household items face direct competition and are expected to lose customers. Unfortunately it cannot be established, with these data, which particular stores gain or lose, only that the net effect is negative. Figure 7. Changes in Furniture and Household Sales of the discount store. However, other stores in this category, such as hardware, plumbing and heating, electrical, paint, glass, and tool stores face direct competition from discount stores. Overall, in this category, an increase in customers in the year prior to the large discounter, and declines afterwards show that the overall impact is negative (Figure 8). Again, with these data, we cannot determine which specific stores gain and lose. Figure 8. Changes in Lumber and Hardware Sales Similarly in the lumber and hardware category, lumber stores are expected to have spillover benefits, particularly if more home improvement projects are undertaken because Evaluating the Local Retail Environment Readers should realize that although the findings are generally true for the Illinois study communities, the specific impacts of a large discount store depend on the local retail environment. To better evaluate the impact of a large discount store opening in their town, community leaders should consider each of these factors. Local purchasing power. The economic impact of a large discount store on local merchants depends, in part, on the demand characteristics of the community. If the population and per capita income of the community are growing rapidly, the ability to absorb additional retail activity is also increasing. If population and per capita income are stable or declining, the discount store must pull new customers into town. Otherwise its trade will be at the expense of existing businesses. The Illinois communities included in this study generally had stable or declining economies. Ten of the 15 communities lost population between 1980 and 1990 and all had per capita income growth less than inflation from 1979 to 1987. Presence of other discount stores. When the first discount store opens, it is likely to impact local retail trade more than if there are pre-existing discounters. The first discount store is likely to be a major draw and attract consumers locally as well as from neighboring communities. This point is verified by examining the experiences of the Illinois study communities. Communities without another discount store experienced a larger increase in total retail capture (10.7 percent after three years) than communities containing a discount store already (3.9 percent). After the first discounter enters, there is an adjustment process during which local merchants change product mix and services. As another discounter enters, the local merchants are better positioned and less likely to be adversely affected. Merchants in apparel, furniture and housewares, and lumber and hardware conducting business in Illinois communities with pre-existing discounters lost fewer customers than their counterparts in communities without other discounters. 6
The mix of retail stores. The impact of a discount store likely depends on the types of existing retail businesses. Stores offering similar products as discounters will face more competition in a static market. However, if existing businesses have products and services distinct from the discount store s, the effects will be more positive. When a discount store draws more people to town, existing businesses will be better positioned to enjoy spillover benefits. Merchants can work together to avoid unnecessary competition among themselves and to identify new businesses that complement the retail district and the local discount store. Accessibility of larger communities which are retail trading centers. Many small-town consumers travel to shopping malls or discount stores in nearby towns or cities. Merchants in communities with rapid highway access to larger towns are accustomed to competition from large retailers. These merchants probably have already shifted their merchandise and service into areas not in direct competition with discount stores. Therefore, the opening of a large discount store in these communities will have a less adverse effect on existing merchants than in more remote communities. Summary Discount stores are a major force in the retail environment of small communities. Local government officials, chambers of commerce, merchants, and others interested in development need information on the effects of discount stores on local retail trade. This study has shown effects of opening a large discount store in 15 Illinois communities in the late 1980 s. The findings reveal both positive and negative effects. First, a discount store boosts local capture of retail sales; an average increase of more than 15 percent two years after opening. This increase brings other benefits, including more retail jobs and an increase in retail sales taxes, an important source of revenue for local governments. Second, merchants in some categories, including automotive and filling stations, eating and drinking places, and possibly apparel, are likely to gain customers because of the discount store. Third, merchants in other categories, including furniture and household, lumber and hardware, and possibly food, are at risk of losing customers due to the discount store. Perhaps most importantly, the impacts of a new discount store depend on the attitude and actions of local merchants and community leaders. Merchants and local leaders are well-advised to prepare for the impacts of a discount store even before it opens. The news that a discount store will open can be viewed as an opportunity. Merchants must think creatively and be willing to change their product mix, inventories, and service. Merchants and community leaders working together can develop an identity for the downtown shopping district and provide a reason for customers to shop downtown. References Davies, R. L. and D. S. Rogers. Store Location and Store Assessment Research. New York: John Wiley and Sons. 1984. Kline, Steven. Competing with Rural Discount Centers, Rural Research Report, Summer, Vol. 2, Issue 10. Macomb, IL: Illinois Institute for Rural Affairs. 1991. Rawn, Cynthia Dunn. Wal-Mart vs. Main Street, American Demographics, June, pp. 58-59. 1990. State of Illinois, Department of Revenue.. Kind of Business 360 Reports: Receipts from County/Municipal Retailers Occupation Tax; County/Municipal Service Occupation Tax; and County/Municipal Use Tax -- Amounts Collected from State Tax Excluded, Calendar Year Reports 1984-1991. Springfield, IL: Department of Revenue. 1984-1991. Stone, Kenneth R.. The Impact of Wal-Mart Stores on Retail Trade Areas in Iowa, unpublished manuscript, Ames, IA, Iowa State University. 1989. The True Look. Discount Merchandiser, June, pp. 48-72. 1990. Wal-Mart Stores, Inc. 1991 Annual Report, Bentonville, AK, Corporate and Public Affairs Division, January 31, pp. 1-20. 1991. The Rural Research Report is a series published by the Illinois Institute for Rural Affairs to provide brief updates on research projects conducted by the Institute. Rural Research Reports are peer-reviewed and distributed to public officials, libraries, and professional associations involved with specific policy issues. Printed on recycled paper 7
Large Discount Stores in Downstate Illinois, 1991 There has been a rapid proliferation of discount stores in downstate Illinois putting nearly all communities within 20 miles of a major discount store. Illinois Institute for Rural Affairs Western Illinois University 518 Stipes Hall Macomb, IL 61455 Nonprofit Organization U.S. Postage Paid Macomb, IL 61455 Permit No. 489 8