By Jeff Edmonds
Jeff Edmonds has a BS in Business Administration and has worked in the financial services industry for over 12 years
Lowe’s is an S&P 500 Company that is aggressively growing throughout the country. Large retailers like Lowes, Wal Mart and Home Depot been detrimental to small businesses. The City of Cotati recently hired a firm called Economic & Planning Systems (EPS) to review the impact of a Lowe’s “big box” retailer on the City of Cotati. EPS has worked on a number of “big box” projects in the Bay area.
I thoroughly reviewed the 12/13/03 memorandum issued by EPS. The purpose of the report was to “determine the potential impacts upon local business, including the existing home improvement business and the Downtown, and the potential effects on the City budget.”
The memorandum offered limited analysis of the impacts on Cotati and minimized the risk to the local economy. Further, EPS offered only the highest estimates for growth rates in the HIM (Home Improvement Market) and projections for the City of Cotati budget. More importantly, the report failed to provide a realistic and unbiased view of all the impacts on this project to the City of Cotati and surrounding communities.
The memorandum indicates that the estimate for growth in the California HIM is 6-8% near term and 5% longer term. Their projection is extremely aggressive and is at the very high end of future potential. For example, Lowes reported on 2/23/04 that same store sales increase for fiscal year ‘03 at 6.75% and forecasted same store sales growth of 5-6% for 2004. Same store sales at Home Depot for 2003 were 3.8%. Same store sales are commonly used by economists when analyzing the health of the retail sector. Same store sales are growing significantly less than the EPS’s estimate of the HIM. In the memorandum, EPS offered no validation of the source of their estimates and did not mention that same store sales would provide a more accurate picture of the real growth rate. Further, it is impossible to project the growth rate accurately far into the future. A more conservative number should be considered. Same store sales would be an excellent start.
There are approximately ten businesses in the home improvement market in Cotati and all of these businesses will be at risk. EPS indicates that “big box” retailers are often associated with the closing of small businesses that are financially marginal. The City of Cotati received a report based on a Toronto study provided by EPS entitled: Box Retailing and the Urban Retail Structure (October 2000) the report states that when a big box retailer opens, “less competitive retailers are forced out of business after an adjustment phase.” EPS thought that an adjustment phase might have occurred but was not sure. When comparing one of the ten or so small businesses in the HIM in Cotati, they would be considered “financially marginal” in comparison to a huge national retailer. Lowes has the potential to put many, if not all, of these local employers out of business or seriously hurt their existing business. EPS believes that a big box retailer does not represent a competitive threat to the HIM in Cotati because small locally owned business can compete by offering high customer service, specialized product selection and convenient accessibility. Their opinion differs from the independent reports and studies issued with the memorandum. If Lowes can, as EPS indicates, “contribute to Home Depot’s financial trouble” clearly there is significant risk to local small businesses in this sector.
More importantly, Lowes does not improve the local economy. The project will simply shift revenue from existing HIM stores to Lowes. EPS states “the primary source of sales to a new Lowes, in addition to new growth, is likely to come at the expense of existing large scale home improvement stores in the region.” For Lowes to generate the estimated $ 49.6 million in annual sales, a shift in sales will occur from the large and small retailers in the surrounding area. This is a significant shift of sales and will be divided among all the HIM retailers. EPS offers no evidence that additional significant shifts in sales from small retailers will not occur. The reports issued with the memorandum indicated that significant shifts can and will occur. Lowes will saturate the HIM and poses risks to small businesses in Cotati and surrounding areas.
Shifting profits from small businesses located in Cotati to a national publicly held corporation takes consumer spending out of Cotati and Sonoma County and puts those profits into the pockets of Lowes Corporation. The result is that profits leave the area and will not be spent in this area or support this community. Lowes may help the City of Cotati’s budget but it will hurt the local economy and small businesses. Cotati needs to protect these businesses to ensure a strong local economy. Shifting profits from small businesses to a national retailer is not the way to achieve a strong local economy.
The restaurant sector is a very important part of Cotati’s economy and character. Residents strongly support Cotati’s restaurants and financial results reflect the resident’s choice to dine locally. Cotati, according to EPS, has “extraordinary sales” in the restaurant business and “Cotati restaurant sales are double Sonoma County’s average, on a per capita basis.”
There are 12 independently owned restaurants on Old Redwood Highway in Cotati. According to EPS, this project will likely attract food chains to the proposed complex. These restaurant chains will contribute to further market saturation and increased competition. Food chains have economies of scale that an independent restaurant does not have. A small restaurant would be considered “financially marginal” in comparison to a chain. In addition to the 12 restaurants on Old Redwood Highway, Cotati has other restaurants patronized by local residents that are at risk. Food chains will compete with other restaurants in surrounding towns as well. EPS indicates local restaurants may see an increase in sales because of regional traveler’s dining in town, but there is no evidence that this will be true. The evidence that EPS presented, however, is that “less competitive retailers were forced out of business” when a big box retailer opens. A regional traveler may be more likely to patronize a recognized chain restaurant located close to their shopping destination than an unknown restaurant. The Lowes proposal puts at risk one of the most important components of Cotati’s economy and charm. Cotati needs to protect its independently owned restaurants and it can do that by avoiding the development of intensely competitive food chains in the City.
The proposed Lowes complex will likely bring in other types of franchises or chain stores, according to EPS and the studies issued with the memorandum. These companies have not yet been identified. EPS indicates that chain and franchise businesses will compete directly with local business. The Toronto study submitted to the City indicates that individual businesses “may experience some increased competition” and “less competitive retailers were forced out of business” when a big box retailer opens. EPS guesses sales per square foot and the impacts on the budget without knowing what businesses would be developed on the site. Relying on such numbers to make a long-term decision that affects many small businesses, the local economy and the character of the City is pure speculation. Further, EPS makes no mention that profits will be shifted away from local businesses and into the pockets of corporations that do not contribute to Cotati or Sonoma County’s economy.
When a small local business shuts down due to competition from a “big box” retailer, important jobs are lost. The Lowes complex will not bring high quality jobs to Cotati or Sonoma County. The Lowes project will also stifle growth of new small businesses and job creation due to competition and market saturation. Cotati needs to focus on growing the local economy by allowing small businesses to thrive.
Local residents embrace Cotati’s charm and chose to make this unique
town their home.
There are no national retailers in Cotati and the town’s unique shops
and restaurants enhance its local flavor and appeal. The Lowes project is significantly
different from the existing retail conditions in Cotati that support local
business owners and attract pedestrian traffic. A huge “big box” complex
and subsequent chain stores will detract from the “unique small town,
pedestrian oriented destination,” as EPS describes Cotati. Cotati runs
the risk of losing patronage from surrounding communities if it becomes dominated
by national retailers and food chains already infiltrating their area. Cotati
will no longer be a unique community drawing patrons who seek something besides
strip malls and big box retailers.
Dining and entertainment are why many people come to Cotati. Competing business from the Lowe’s complex will result in corporatizing Cotati and the “unique small town feel of Cotati”. Corporatizing Cotati is poor planning and will hurt at least 22 businesses identified by EPS and potentially many more. Cotati needs to focus on growth by maintaining its unique appeal and keeping profits and businesses within the community. A strong local economy will result in a strong budget.
The proposed Lowes complex and the surrounding new businesses will certainly provide sales tax revenue to Cotati at the expense of other communities. EPS states: “the new store will enter an increasingly competitive market served by Home Depot and other large retailers, effectively dividing sales”. All of the studies provided with the memorandum support this statement. EPS clearly indicates that the primary source of sales tax revenue to Cotati will result from “shifting revenue from other retailers”. Profits, on the other hand, will be funneled out of the city, county and the state. This will occur in the HIM, restaurant sector and subsequent other retailers that would open in the complex. Neighboring community budgets will suffer from shifts in sales tax revenue. Unfortunately, this realistic projection of the negative impact on the local economy was undermined in the report.
EPS uses the best case estimates for the projection on sales tax revenue. It also does not account for any “shift” in sales or business failures and the result is a potentially inflated estimate. EPS speculates that Lowes and other retailers will produce $73,000,000 in sales. This results in $730,000 in sales tax revenue. They estimate the hiring of 1 police officer @ $150,000 per year and a net estimate of $579,000. The Lowes budget estimate also does not include a conservative estimate of sales tax revenue. Below is a more realistic estimate than offered in the report:
Total sales based on square footage:
Lowes 165.000 sq.ft. @ $300 per sq. ft. = $49.6 million
Other Retail 93,000 sq.ft. @ $250 per sq. ft. = $23.4 million
Subtotal $73.0 million
Sales Tax @ 1% = $730,000
Realistic Estimate:
Total sales based on square footage:
Lowes 165.000 sq.ft. @ $250 per sq. ft. = $41.2 million
Other Retail 93,000 sq.ft. @ $200 per sq. ft. = $18.7 million
Subtotal $59.9 million
Sales Tax @ 1% = $599,000
Conservative Estimate:
Total sales based on square footage:
Lowes 165.000 sq.ft. @ $200 per sq. ft. = $33.0 million
Other Retail 93,000 sq.ft. @ $150 per sq. ft. = $13.9 million
Subtotal $46.9 million
Sales Tax @ 1% = $469,000
Another way to look at these figures are by per capita . According to the EPS estimate, the result calculates to $85 per Cotati resident. The above conservative estimate calculates to $25 per Cotati resident (the mean being $55 per Cotati resident). Additionally, Lowes will undoubtedly attract people, traffic and crime. It is highly possible that more supervision (i.e. police personnel) may be needed for this huge project than EPS projects. The people of Cotati have the right to know what the impact on the budget will be and not just a “best case scenario”. EPS does not account for a slowing economy, a drop in consumer spending, higher interest rates, increased competition from other big box retailers. They ignore the fact that the HIM is extremely cyclical and very sensitive to consumer confidence. Most importantly, they jeopardize “our unique small town feel” by undermining the risks and impacts.
The Lowes project offers significant economic risk to the local economy and small businesses in Cotati and the surrounding area. Even though the EPS ignored many key issues, it states that there are real risks by bringing in a national chain to a small town. The City of Cotati needs to address the risks and present them to the citizens. The memorandum offered a best case scenario in determining the impacts on local business, the HIM, the impacts on the downtown and the budget. The Lowes complex proposal puts at risk dozens of small businesses, potential future small businesses and the unique character of Cotati. This will result in providing profits to large corporations instead of local small businesses and that is bad economics and irresponsible planning for Cotati. The people of Cotati need to understand that there will be consequences with the project and they should have the final decision if the risks are worth the rewards.