Big-Box Blues

A Wal-Mart grocery invasion could be very bad news for cities and the tax revenue they get from local supermarkets.
January 2004
William Fulton
By William Fulton  |  Columnist
Director of the Kinder Institute for Urban Research at Rice University and former mayor of Ventura, Calif.

For the past several months, the biggest news here in Southern California has been the supermarket strike. Fearing an invasion by non-unionized Wal-Mart, the three biggest supermarket chains in the region threatened to reduce medical benefits for unionized grocery clerks, many of whom make $18 per hour or more. Drawing a line in the sand, the grocery clerks walked out, leading to a strike that lasted through Thanksgiving, New Year's--and beyond.

The Southern California supermarket strike touched off a vigorous debate in Los Angeles about the underpinnings of the economy--the "race to the bottom" that leads corporations to seek the lowest-cost workers worldwide; and the resulting downward pressure on prices that will make it difficult for supermarket employers such as Vons, Ralphs and Albertsons to support unionized workers with good benefits. It's hard to know what the long-term impact of the Wal-Mart grocery invasion and the grocery clerks' strike will be, although an erosion of the supermarket chains' market share seems almost inevitable.

And that raises an issue for local governments throughout the nation: The race to the bottom may affect not only grocery clerks but cities that count on the tax revenue from their own residents' everyday activities, such as grocery shopping.

Local governments have been engaged in cutthroat competition for a decade or more in hopes of attracting "big-box" retailers--the Wal- Marts, Costcos and Home Depots of the world that generate huge retail sales by drawing from a huge market area. There's generally room for only one Wal-Mart and Home Depot in every market area, but in most states all of the sales tax goes to the city or jurisdiction where the store is located. So cities that capture a Wal-Mart or a Home Depot are big tax winners, often at the expense of their neighbors, whose residents leave town to spend money as a result.

Up to now, virtually every city has been able to count on some sales- tax revenue because local residents tend to do their everyday shopping close to home. This is true for a wide variety of retail goods--dry cleaning, drug stores, and so forth--but the biggest cash cow is the supermarkets. In many states, grocery items are exempt from sales taxes because they are staples of life. Nonetheless, because they are full-service operations, chain supermarkets are big sales-tax generators.

Large supermarket chains drove most local grocers out of business decades ago. Even though they are centrally owned by large corporations, however, they have remained community-oriented institutions. Most grocery shoppers traditionally won't drive more than 2 or 3 miles to buy groceries, and the rule of thumb in the business is that you'll find one supermarket for every 10,000 or so houses.

The result is that the taxes generated by supermarket sales--next to the house and the car, the biggest portion of the household budget-- have usually stayed in the same community as the residents themselves. But, as the Southern California supermarket strike has illustrated, even that might be changing.

The reason is simple: In its new 100,000-square-foot-plus "superstores," Wal-Mart sells groceries. So do Costco, Target and a wide range of big-box retailers whose core business traditionally has not been food. As these chains play out traditional expansion opportunities--new stores in new communities--they are looking at groceries as the next big growth opportunity. And they are betting that they can get shoppers to cross city lines and buy groceries in a big-box setting--especially if they are already traveling 5, 10 or 20 miles to buy other discount goods.

Local governments have started to deal with the political fallout from this phenomenon, as unions and other big-box opponents seek to use land-use regulations to try to keep Wal-Mart and other big-box grocers from entering certain marketplaces. And the big-boxes are not shy about fighting back. In the racially mixed Los Angeles suburb of Inglewood, Wal-Mart has sought to overcome local opposition to a superstore by placing on the local ballot an initiative to allow the store to locate there. The initiative also calls for streamlining the permit approval process. There's little question that such tactics will continue.

For many cities, the next step will be more disturbing: a battle over their own residents' grocery money. They will have to compete with each other for grocery-enhanced big-box retailers that will attract grocery shoppers from all over a wide area. In other words, the age of the local supermarket might be ending and competition for the regional supermarket just beginning.

Over the past century, generation after generation of Main Street stores has been driven out of business by ever-larger and more efficient corporate retailers. In pursuing their own economic development goals, local governments have at least been able to hang on to the tax revenue generated by basic day-to-day activities. But now, cities can no longer take even the milk money for granted.