Retail recruitment: Boon or boondoggle?

analysis by Mike Kroll

Economic development is a multifaceted endeavor pursued for two principal reasons: to create jobs and to generate government revenue. Locally we always presume the the first reason is paramount, and that is true when it comes to our relentlessly unsuccessful pursuit of manufacturing jobs. But from the perspective of the city budget the second reason is just as critical and the real rationale behind the current effort to attract additional retailers to the Galesburg area.

It may surprise the average citizen to note that sales taxes are by far the city's single largest source of revenue. Considerably more income is generated through sales taxes than by property taxes and as far as most of our elected officials are concerned sales taxes are much more palatable to residents. An additional argument for increasing sales tax revenue is that this is a tax that is paid by non-residents (as well as residents) when they shop or dine in Galesburg.

Of course the opposite is just as true. When Galesburg residents travel to Peoria or the Quad Cities to make purchases or seek entertainment or a dining experiences those communities gain sales tax revenue at our expense. This is referred to as “retail leakage” and that is the acknowledged motivator behind Galesburg's hiring of the Buxton Group to conduct a retail development study of the city. Last November the city council voted to hire Buxton at a cost of $58,000 to conduct a statistical study of the local retail market and recommend strong potential retailers for recruitment efforts.

The hiring of Buxton was driven not by city staff as much as some council members who had been awed by the company's sales presentation at conferences they had attended. In addition to the Buxton report city economic development director Cesar Suarez compiled additional sales tax and demographic data to broaden and supplement the Buxton results. The purpose was to identify areas of retail activity that are under-served locally and to identify strong potential national or regional retailers that could be recruited to fill the void.

To justify this exercise Suarez used Illinois sales tax figures to calculate his estimate of Galesburg's retail leakage and came up with an astounding figure of $2.26 million. What is interesting is how he arrived at that figure. Suarez compared sales tax revenues generated in Galesburg with those from Peoria and Moline and divided the totals by the number of households. His figures show that Moline generated $41,148 in retail sales per household in 2006 while Peoria generated $41,851. When you sum those two figures and divide by two you get an “average” of $41,500 but this is mathematically suspect since Peoria and Moline differ considerable in size and number of households and therefore do not contribute equally to the true mean figure.

Next Suarez took the 2006 Galesburg retail sales per household of $35,149 and compared that to the suspect “average” figure for Peoria and Moline and determined that we are loosing 15 percent of our potential sales tax revenue. He then used the category breakdowns provided by the Illinois Department of Revenue to look at specific types of retailers in this same manner. These categories are both broad and an unlikely mix of retailer types but one of the cleanest of these categories, Apparel, also appears to be a hugely missed sales tax opportunity for Galesburg as only $277 in retail sales per household was spent in such local stores compared to $1,203 in Moline and $1,892 in Peoria in 2006.

In the odd conglomerated category of Furniture, Household and radio that presumably incorporates most electronics Galesburg collected $1,330 in retail sales per households while Moline received $2,116 and Peoria $3,511. Apparently another key opportunity for local recruitment but one that also illustrates some of the weakness of this overly simple analysis. Merely comparing retail sales generated per household with neighboring communities and then presuming that if the Galesburg figure falls below the average it must be due to loosing retail sales to these same communities is a giant conceptual leap of convenience. It is equally likely that due to the depressed local economy that Galesburg households simple have less discretionary income to spend or that they are spending such income outside of the scope of sales tax collection.

How many of us regularly buy items by mail order or on the Internet or through television shopping channels? Ask your UPS of FedEx delivery guy next time you see him and he will tell you plenty of us are doing just that. Most such sales never generate sales tax of any kind and consumer electronics and apparel are two of the largest categories of such sales. The reasons why we purchase by mail order or on the Internet are as varied and the shoppers themselves and include not only lack of local availability but also lower price and convenience. While these sales represent retail leakage they aren't addressed at all in the city's study methodology and are more likely to continue to be a factor when the rising cost of gasoline motivates Galesburg shoppers to decrease out-of-town shopping excursions.

The only category where Galesburg's sales tax revenues exceed the mythical “average” was in groceries which should not be surprising given that throughout Knox County there are only three non-Galesburg grocery stores and they are much smaller and narrower in scope than what is offered here. But as sales tax on groceries is capped at one percent this is hardly a big revenue opportunity.

The end result of this process is supposed to be a list of hot prospects for retail recruitment to Galesburg. Suarez has identified five targeted retail districts: Sandburg Mall, Henderson Street, Downtown, Seminary Square shopping center and the East Main/I-74 interchange. But you can eliminate both Downtown and Seminary Square from this process for two differing reasons. First, there is little or no chance of attracting any national or regional retailer to the downtown area and Suarez must realize this. Second, Horne Properties is developing the Seminary Square area and undoubtedly knows far better than anyone locally what will or will not be a good match to their development. Sandburg Mall can be dropped as it is extremely unlikely that there will be a payoff to attempting to recruit national retailers to a local mall in its death throws when such malls are in decline nationwide.

That leaves two areas where pursuing recruitment of national retailers might be sensible, Henderson Street and East Main Street. But even here you must deal with a community experiencing declining population and reduced discretionary income amidst a rural region seeing identical trends. This will be a tough sell to retailers who can find far less risky investments elsewhere. If there is a compelling reason for a national retailer to open in Galesburg you can bet that the company is already looking at us and that spending lots of money on consultants selling snake oil will make little difference in that outcome.

What will matter to the citizens of Galesburg is whether or not in their desperation to attract retail development the city council chooses to offer broad and attractive incentives. Such incentives are almost never declined by businesses even when they factor little in their location decision but such incentives essentially diminish or destroy the near-term revenues that are our putative justification for recruiting retail in the first place.

3/20/08