The Economics of Going Local
Author: SSU School of Business and Economics
February, 2012 Issue
A 2011 study conducted by Sonoma State University
’s School of Business and Economics examined the economic impacts of using a “go local” strategy concerning business behavior. This study used 2010 Oliver’s Market
data for a simple analysis of buying and selling local, with “local” defined as Sonoma County. The following is an excerpt from that report.
Oliver’s hires local workers and buys and sells many locally produced goods. As a local grocer, when Oliver’s buys local goods, labor and other resources, it generates economic activity in larger volume than nonlocal grocers. Simple economics suggest that the more locally sourced goods purchased from locally owned grocers, the larger the benefits to the local community. Oliver’s purchasing and sales habits provide a way to look at how “buying local” affects the Sonoma County economy.
Many advocates of go local strategies advertise that buying locally sourced goods has large effects on the local economy. Local merchants, as this study shows, can provide the local economy with incentives to shop locally: By sourcing goods locally, these merchants provide more jobs, business income and tax revenue than national brands headquartered outside the area. Going local is also about behavior change, where merchants and consumers choose to buy local over lowest price due to incentives to invest in the community.
The challenge with the go local concept is leakage. Consumers are bombarded with incentives to buy from nonlocal producers far and wide. If local grocers purchase goods from local suppliers, hire local workers and keep the profits local (which is the major argument against the expansion of chain/big_box retail versus an expansion of local retail and other firms) for potential reinvestment in the community, the multiplier effect is more robust than the chain store will provide. The more a retailer buys local goods to sell, the more the local economy retains the economic value of its production, as revenue is made at every stage of the value chain.
Oliver’s Market is located in Sonoma County, with locations in Cotati and Santa Rosa. It sells an array of goods, including food and general merchandise. Oliver's sources many goods from inside Sonoma County, and that provides a multiplier effect that’s larger than buying goods produced outside Sonoma County and selling them here.
As a locally owned retailer, Oliver's Market provides a case study in both selling and buying locally. In 2010, Oliver’s bought 22.2 percent of its goods sold from suppliers in Sonoma County. A grocer is a simple case of the retail value chain. The grocer sells both value-added goods (packaged goods, sundries, general merchandise, onsite prepared foods and goods) and primary product goods that can come from local sources in raw form (such as fruits, vegetables and meats). From 2005 to 2010, Sonoma County had an annual average of approximately $1.536 billion in retail sales.
Because Oliver’s buys both local labor and goods, it reduces the leakages inherent to sourcing goods from outside the local area versus chains that buy goods and labor outside Sonoma County. Most of Oliver’s local buying behavior is in fresh meats, bakery and dairy and produce.
For every $100 of local products bought and sold by Oliver’s, there’s an additional $63 of spending in Sonoma County for a total impact of $163. If Oliver's didn’t source locally, $27.5 million in its overall impact would flow out to another area. Oliver's buying behavior retains these gains for Sonoma County annually.
We’ll assume that Oliver's retains a portion of its overall sales as margin. Because Oliver’s is locally headquartered, Sonoma County retains these gains for reinvestment in its businesses, space and as profit for the owners. The key point is that being locally headquartered means additional local taxes are paid as if paying employee/owners.
For a local grocer, the second major purchase locally (behind merchandise) is labor. For a firm such as a local grocer, local buying is the first part of the process; the labor delivers the products in the marketplace. Of the $70 million in revenue for Oliver’s in 2010, $39.1 million paid for labor ($32.1 million in wages) and margin on sales (assumed to be 10 percent of sales revenue, or $7 million). In the same way local farmers, food or goods distributors otherwise receive revenue for their goods, workers at the local grocer receive revenue for their time. For every local worker Oliver’s hires, there’s $129,960 in spending generated for Sonoma County. There are also $16,915 in state and local taxes generated by each local hire. Of the $113 million potentially generated by Oliver’s operations, $57.1 million comes from hiring locally.
The economic impact of buying local goods has direct, indirect and induced effects on the local economy beyond a nonlocal retailer, because a wide breadth of industries is affected by local buying behavior of a merchant. For every $100 spent at Oliver’s on local goods (versus a national brand), there’s at least a 32 percent larger economic impact on Sonoma County. Oliver’s generates more than 100 percent more local economic impact when selling local goods versus nonlocal stores selling similar goods sourced outside Sonoma County.
Support your local community and go local.
The School of Business and Economics at Sonoma State University has as its mission to act as the educational nucleus for economic vitality in the North Bay. Formed in 1992, the Center for Regional Economic Analysis (CREA) at Sonoma State University can provide economic impact, community impact, regional data and other analyses for North Bay businesses, governments and organizations. For a full copy of the Oliver’s Market Case Study, go to www.oliversmarket.com/assets/files/goLocal-042111.pdf
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