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The Small-Mart Revolution

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Defenders of massive multinational chains like Wal-Mart and Fortune 500 big business argue that, like it or not, there is no alternative. Their huge scale and international reach, they claim, make them more efficient and profitable, better able to deliver value, and an uncontested boon for the job market. According to the big boys, locally owned small businesses are simply quaint remnants of the past, unable to compete in the global economy.
But in ,em>The Small-Mart Revolution, Michael Shuman shows that the benefits these mega-stores and huge corporations supposedly deliver to communities are illusory. Crunch the numbers and you'll find that locally owned businesses turn out to be much more reliable generators of good jobs, economic growth, tax dollars, community wealth, charitable contributions, social stability, and political participation. Unlike their global competitors, they do this without massive tax breaks and subsidies that often put local economies in a permanent hole. Plus, contrary to popular belief, local businesses are competitive with the multinationals--and gaining ground every day. Shuman highlights numerous trends that are making the old "bigger is better" economies of scale argument obsolete, and he describes a variety of innovative strategies these businesses are using to successfully compete with their over-sized competitors. He also shows how consumers, investors, and policymakers can support their own communities by "going local." The Small-Mart Revolution offers a robust alternative to "go-go" globalization, one that nurtures the creative capacities of local businesses and enables communities everywhere to thrive.

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17 Chapters

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ONE: WRECKONOMICS

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Jack J. Shuman, my father, never had it easy, but compared to his parents, immigrants from Russia who had to cope with Czarist oppression, exhausting ocean voyages (two, in my grandmother’s case), antiSemitism, and the Great Depression, life was sweet. After World War II, he completed a master’s degree in mechanical engineering and soon found a job working for Western Electric, the major parts and equipment supplier for the nation’s telephone system. He worked his entire professional life for Ma Bell and even wound up retiring a few years earlier than planned after a court-ordered breakup of the telecom monopoly in 1984. The deal was simple: work hard and stick with the company, and we’ll give you a decent middle-class salary for the rest of your life with periodic raises, decent health care, and a generous pension. The family settled in North Massapequa, New York, where the public schools were good, tract housing affordable, and mass transit to Manhattan fast and reliable.

Today, this lifestyle seems so alien that it might as well have existed in the Middle Ages. Almost no one expects to hold a job for a lifetime anymore. Companies hire and fire employees at will, and even top executives pack parachutes and expect to bail every few years. Workers, even those few still represented by a union, know that they are increasingly on their own and that they must be prepared to move nomad-like from job to job. For most Americans weekly take-home pay in wages, once inflation is factored out, has grown by remarkably little over the past generation.1 Employer health care plans are being pruned every year and increasingly charged directly to workers, and more than fortysix million Americans lack any health insurance whatsoever.2 Company pension plans have gotten smaller and less reliable, requiring Americans to save what they can through individual retirement accounts and other private vehicles. Taxes seem continually to go up as public services go down. Mass transit systems and public schools are a mess—where I live, in the District of Columbia, public schools rank dead last in the country, and even the best of the lot have their occasional playground shootings—pushing middle-class families to exhaust their savings on private schools.22

 

TWO: THE LOIS ALTERNATIVE

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The Hershey Chocolate Company in Hershey, Pennsylvania, is not your typical LOIS business. Its stock is publicly traded, which normally makes local ownership impossible, but a local charity, the Hershey Trust, keeps ownership local by controlling 77 percent of all voting shares.1 Unlike most LOIS businesses, it is hardly small. In 2001 about sixty-two hundred employees were on payroll, many living in the Hershey area. The company not only saturates local chocolate demand but also sells worldwide to the tune of $4.6 billion per year.

The Hershey Trust is effectively the heart that pumps monetary blood throughout the regional economy. It owns 100 percent of the shares of the Hershey Entertainment and Resorts Company, which employs another fifteen hundred locals (plus five thousand seasonal workers) in its amusement parks, stadiums, campgrounds, country clubs, and numerous other enterprises. On top of that, the Trust runs a school for twelve hundred underprivileged kids, grades K through 12. Milton Hershey put all his stock in the Trust in 1918 to underwrite the academy in perpetuity.

 

THREE: AMAZING SHRINKING MACHINES

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Paleontologists millions of years hence might describe our time as the Era of the Gigantic Bankasaurs. Their digs might turn up fragments from 1998, when Citicorp took over Travelers, Bank One nabbed First Chicago NBD, and NationsBank gobbled up Bank of America (while assuming the latter’s name).1 Or they might find signs of Wells Fargo combining with Norwest, or of Bank of America spending $47 billion to acquire FleetBoston Financial in 2003. All these fossilized remains would suggest that only the biggest creatures could survive.

Well, not quite. Despite all the hoopla, researchers at the Federal Reserve in Minneapolis have quietly concluded that “after banks reach a fairly modest size [about $100 million in assets], there is no cost advantage to further expansion. Some evidence even suggests diseconomies of scale for very large banks.”2 Larger banks pay less on savings accounts, charge more on checking, pay higher overheads, and suffer greater default rates. The Financial Markets Center, a financial research and education organization, has found that, compared to banks with far-flung portfolios, those that concentrate lending in a geographic region are typically twice as profitable and wind up with fewer bad loans.3 Sooner or later, consumers will wake up and smell the locally brewed coffee.

 

FOUR: CONSUMERS

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Who stands in the way of the Small-Mart Revolution? Are the biggest opponents the captains of TINA businesses, who will resist cutbacks in public pork? The politicians who receive lavish TINA campaign contributions? Or the economic developers who promote elephant-mouse casserole? As ubiquitous and powerful as these obstacles are, I would nominate a more formidable opponent. If you’d like to meet him or her, please step in front of a mirror.

Okay, as my journey to Wal-Mart suggested, I am no saint, either. In fact, my life is riddled with hypocrisy. On the one hand, I drive a Japanese car, my shoes come from Italy, my drink of choice is singlemalt whiskey from Scotland, and my pension sits in the Nasdaq 100 Index Fund. On the other hand, I work at home, drive very little, favor local restaurants over chains, wear clothes twice as long as the fashion police think I should, and give priority to local charities. I’m not perfect. But I am trying gradually to localize my own purchasing habits. That’s my modest hope for you. The Small-Mart Revolution depends on a reasonable evolution of our consumption patterns. The small steps we take as individuals matter, both because others pay attention to our exemplary behavior and because modest changes by many people can quickly add up to significant shifts in the entire economy.

 

SMALL-MART REVOLUTION CHECKLIST: TWENTY-SEVEN ITEMS FOR CONSUMERS

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FIVE: INVESTORS

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Do you bank locally? When I give talks, I usually ask the audience this question and most hands instantly pop up. (This would not be true for the U.S. population generally, but those who come to learn about localization are naturally predisposed to putting their money in local financial institutions.) I then ask how many have pension funds. Almost every adult pays something into Social Security, but most think only about private pensions, so about half the hands appear. Then I ask how many of their fund managers are investing in locally owned business. Usually, only one or two hands are left up, and I must explain to these well-intentioned souls that, most likely, they are mistaken.

Although place-based businesses in the United States account for 58 percent of the economy, very few investment dollars find their way into LOIS businesses. Even those of us who want to invest in the SmallMart Revolution have no reasonable way to do so. Sure, I could knock on the door of my favorite local entrepreneur and ask if she would be willing to let me put one thousand dollars into her business, and she might be able to figure out some way to restructure her company to accommodate my wishes. But putting our life savings in any one, two, or three LOIS businesses this way requires lots of expensive paperwork by you and the entrepreneur. It’s also not very prudent. The risk that any one business will perform poorly or go belly up is simply too great. Most of us do not invest for a living and are looking for simple, cookiecutter, low-cost, low-risk ways to protect and grow our savings for our kids’ college education or for our retirement. We typically accomplish this by putting our money into diversified funds made up of the stocks and bonds from hundreds or even thousands of individual companies. Millions of Americans now entrust their portfolios to mutual funds. And if you ask them to find you a stock, a bond, or a fund that specializes in local small business, they will look at you as if you’ve just arrived from Mars.119

 

SMALL-MART REVOLUTION CHECKLIST: FOURTEEN ITEMS FOR INVESTORS

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SIX: ENTREPRENEURS

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If I remade the classic film The Graduate, the single word of business advice I would offer Dustin Hoffman’s character would be not “plastics” but “chicken.” Around the country small poultry producers are beating the odds. Eberly Farms, based in Amish country in Pennsylvania, sells a mean organic chicken. So does Nature’s Premiere in Michigan, Buddy’s Natural Chicken in Texas, Real Chicken in New Mexico, and Petaluma Poultry in California. With the world now on high alert for a deadly avian flu pandemic, it seems likely that Americans are going to become extremely demanding that the poultry meat they put on the table is raised carefully, cleanly, and healthily. That’s bad news for a global industry notorious for producing broilers quick, dirty, and cheap, but great news for LOIS entrepreneurs eager to reinvent the poultry industry. Care to become one?

On the surface it might seem that the poultry industry has such a large economy of scale that LOIS competition is all but impossible. Nationally, Tyson controls nearly a quarter of the domestic broiler market, and the top five producers control 60 percent.1 The ability of these large firms to convert corn and soy into a reasonably tasty protein that costs just over one dollar per pound appears unassailable. But so-called Big Chicken is very vulnerable to defections by consumers once they become aware of its abysmal business practices.

 

SMALL-MART REVOLUTION CHECKLIST: TWELVE ITEMS FOR ENTREPENEURS

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SEVEN: POLICYMAKERS

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We would all love to keep politics out of the Small-Mart Revolution. Public policy and public money certainly can spread LOIS business, but just as often “official” assistance can be co-opting, limiting, wasteful, and corrupt. Even the best-intended pro-LOIS programs can move at turtle speed, get ensnarled in bureaucracy, and become so politicized that half the public could wind up hating small business. Nearly all the efforts described so far—local purchasing, local investing, local business building—can be done by the private sector or by nonprofits. Yet, it’s hard to continue ignoring the $113 billion advantage that the public sector is conferring on TINA. Indeed, because global corporations have insinuated TINA logic, bias, and money into all kinds of political decisions at all levels—local, state, national, and global—LOIS supporters must rise up to challenge TINA’s political monopoly. Policymakers sympathetic with LOIS, inside and outside government, have an important role to play in the Small-Mart Revolution—in their research in local initiatives, in their spending and regulatory practices, and in their national lobbying.

 

SMALL-MART REVOLUTION CHECKLIST: THIRTY ITEMS FOR POLICYMAKERS

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EIGHT: COMMUNITY BUILDERS

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Bucksport, Maine, is a quaint coastal town halfway between Bangor and Bar Harbor. Historically it was a shipbuilding center “eighteen miles from everywhere,” but over the past generation, the backbone of its economy has been a mill run by the International Paper Company. Every year the city council dutifully reviews and updates its emergency plans if, God forbid, a fire, explosion, hurricane, or some other disaster were to destroy the mill. Elaborate preparations are made for routes of escape, entry points for fire and police vehicles, and requisition spots for airlifts of the injured. And yet for the one disaster most likely to occur and most likely to destroy Bucksport, there is no planning whatsoever. What happens if International Paper does what it has done in towns across the United States and moves operations elsewhere?

What’s missing in Bucksport, and in practically every community in America, is a serious plan for escaping from TINA. How can the Small-Mart Revolution be accelerated so that the inevitable exit of a big TINA business does not lead to a regional catastrophe? As consumers, investors, entrepreneurs, and policymakers, we can help spread and strengthen LOIS businesses and diversify our local economy. And yet, ultimately, success depends on removing these hats and realizing that we are all members of the same community. The fundamental building block of participatory democracy is community, and each of us, irrespective of our wealth, color, gender, or even age (at least once we’re adults), has an equal say as a citizen in the future. How can we come together as community builders and assemble the jigsaw pieces of the Small-Mart Revolution into a more compelling action plan?

 

SMALL-MART REVOLUTION CHECKLIST: FIVE ITEMS FOR COMMUNITY BUILDERS

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NINE: GLOBALIZERS

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Martin Luther King, Jr., once invoked the words of the prophet Micah to say that the ultimate measure of a society was how it treated its most powerless members. With this principle in mind, I found the most horrifying event of 2004 to be when Chechen terrorists took over School Number One in Beslan, holding hostage a thousand young children on their first day of school. How the shooting began, no one knows for sure, but by the time the carnage was over 344 people were dead, 186 of them children. I don’t have an opinion on whether the Chechens should or should not be a part of Russia, but every civilized person in the world knows that the last people you ever put in the line of fire are children. It’s the fate of the world’s children that should inform everything we, their guardians, do in their name, and by any standard, we, the residents of planet Earth, are failing our children miserably. According to the 2005 State of the World’s Children, prepared by UNICEF, about half the world’s children—more than a billion—“are denied a healthy and protected upbringing….”1 About 90 million children are “severely food-deprived,” 140 million have never gone to school, 270 million have no health care, 400 million lack access to safe water, 500 million live without proper sanitation, and 640 million are essentially homeless. Millions of children now have HIV, and 15 million are orphans from parents who have died of AIDS. Even the slaughter in School Number One was not an isolated incident. Since 1990, 3.6 million have been killed in wars, many deliberately targeted.

 

SMALL-MART REVOLUTION CHECKLIST: EIGHT ITEMS FOR PROMOTING THE LOCAL, GLOBALLY

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APPENDIX A: THE FALL AND RISE OF SMALL-SCALE COMPETETIVENESS

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One way to get a handle on the “optimal” scale of any business is to analyze data in the North American Industry Classification System (NAICS). For each of its thousand-plus industry categories, NAICS presents aggregate data on the location, branching, employment, and payroll of member firms. The U.S. Bureau of the Census collects these data every five years, most recently in 2002. There are twenty broad categories with two digits, starting with 10 (“Agriculture, Forestry, Fishing, and Hunting”) and going up to 30 (“Unclassified”). Each of these two-digit categories breaks out into subcategories, with each additional digit representing another level of detail. The calibration of some industry categories can go as fine as six digits.

It’s possible to calculate for each of these thousand-plus NAICS sectors a number that indicates its propensity toward larger scale. Table A1 compares these numbers for each sector between the years 1998 and 2002, and shows which sectors are undergoing the greatest consolidation. Table A2 performs the same exercise, this time highlighting those sectors decentralizing most rapidly. I discuss some of the implications of these findings in chapter 2.

 

APPENDIX B: THE SCALE OF EXISTING BUSINESS BY PAYROLL

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In chapter 3 the point was made that in nearly all the thousand-plus categories in the North American Industry Classification System (NAICS) (see appendix A for a description), there are more small firms than large ones, even if a small business is defined as having fewer than one hundred employees (the SBA uses the criterion of fewer than five hundred employees). This means, significantly, that there are compelling examples of successful small-scale enterprise in almost every nook and cranny of the economy.

But skeptics can point out, quite rightly, that this does not tell us much about the typical scale characteristics of an industry. Because more than 99 percent of all firms are small, it should not be surprising that small firms dominate most industry categories in terms of the sheer number of firms. By employment or by payroll, the character of each industry will look very different. Take the six-digit code 451211 for “Book Stores.”

There are 5,790 bookstore companies, and only forty-three of these firms have five hundred or more employees. This hardly means the book industry is decentralized. Those forty-three firms, like Borders and Barnes & Noble, actually account for two-thirds of the industry’s jobs and payroll. So the distribution of payrolls between small and large firms in each industry turns out to be a better measure of its overall scale.

 

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