Bogus chain store study ignores small biz benefits

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OPINION

Earlier this month, San Francisco's Office of Economic Analysis waded into the debate over whether the city should beef up its policy restricting the spread of chain stores. In a new study, the OEA concludes that the city's regulations are harming the local economy and that adding additional restrictions would only do more damage. But this sweeping conclusion, hailed by proponents of formula retail, rests on a deeply flawed analysis. The study is riddled with data problems so significant as to nullify its conclusions.

San Francisco is the only city of any significant size where "formula" businesses, defined as retail stores or restaurants that have 10 or more outlets, must obtain a special permit to locate in a neighborhood business district. The law's impact, in one sense at least, is readily apparent: Independent businesses account for about two-thirds of the retail square footage and market share in San Francisco, compared to only about one-quarter nationally. Although chains have been gaining ground in San Francisco, the city far outstrips New York, Chicago, and other major cities in the sheer numbers of homegrown grocers, bookstores, hardware stores, and other unique businesses that line its streets.

San Francisco's policy has gaps, however, which have prompted a slew of recent proposals to amend the law. Members of the Board of Supervisors have proposed a variety of changes, such as extending the policy to cover more commercial districts (it only applies in neighborhood business districts) and broadening the definition of what counts as a formula business.

The OEA presents its study as an injection of hard economic data into this policy debate. There are three pieces to its analysis. Let's take each in turn.

First, the OEA reports that chains provide more jobs than independent retailers do. It presents U.S. Census data showing that retailers with fewer than 10 outlets employ 3.2 workers per $1 million in sales, while chains (10 or more outlets) employ 4.3 people.

One major problem with this statistic is that the OEA includes car dealerships. Retail studies generally exclude the auto sector, because car dealers differ in fundamental ways from other retailers and car sales account for such a large chunk of consumer spending that they can skew one's results. The OEA's analysis is a classic example of this. Because the vast majority of car dealerships are independently owned and employ relatively few people per $1 million in sales, by including them, the OEA drags down the employment figure for local retailers overall.

If you take out car dealers, which are not subject to San Francisco's formula business policy anyway, and also remove "non-store" retailers, a category that includes enterprises like heating oil dealers and mail order houses, a different picture emerges. Retailers with fewer than 10 outlets employ 5.3 people per $1 million in sales, compared to only 4.5 for those with 10 or more locations.

The actual difference is even a bit more than this, because chains handle their own distribution, employing people to work in warehouses, while independents typically rely on other businesses for this. And, of course, a portion of the jobs chain stores create are not local jobs; they are housed back at corporate headquarters. The OEA fails to mention either of these fairly obvious caveats.

The superior ability of non-formula businesses to create jobs is notably evident across many of the categories that generate most of the city's formula business applications, including clothing, grocery, and casual dining. The only exception is drugstores, a category in which chains appear to be supporting more jobs. But even this may not be a true exception, since most independent pharmacies focus almost exclusively on medicine, while chain drugstores are hybrid convenience stores, employing people to ring up sales of cigarettes and greeting cards.

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