The opening of big-box stores – i.e., large chain supermarket stores – has been a political concern in many countries over the last 20 years. Their critics claim they create enormous negative externalities in pre-existing market and city structures. They also say that this type of stores exacerbates pollution levels and contributes to the hollowing out of city centres, as grocery stores, their main competitors, are forced into closure. Yet, there are those who argue that these stores tend to push prices down and, so, consumers are better off when big-box stores locate to their municipalities.
As a response to many of these concerns, throughout the 1990s, many European countries – most notably the UK, Italy, France and Spain – introduced stringent policies to restrict the entry of big-box stores, or, at least, implemented controls on the type of store that could be built and where they could locate. The main rationale for these policies being to protect the existing businesses. Many studies have focused on analysing the employment and productivity effects of such regulations (see here for the case of France, here for Italy and here and here for the UK, as examples of a more extensive literature). However, not many studies have looked at other outcomes such as city structure that have arisen as concerns in recent years and that could potentially drive new waves of regulations in the future. In recent research I study precisely this by looking at what are the consequences of opening out-of-town big-boxes on the commercial structure of cities using Spanish data.
Spain passed a law in 1997 that required a developer seeking to open a big-box store to obtain a second license, in this case from the regional government, in addition to the municipal license. The fact that the two licenses had to be solicited from two different entities meant that big-box developers incurred an additional entry cost. Given that the opening of big-box stores is not random, I use a particularity of the regulation to be able to establish the causality between the opening of the big-box store and the reaction in the city centre. The central government opted to define a big-box as one with at least 2,500m2. However, nine regions chose to strengthen the law by further limiting the number of square meters from 600 to 1,500 m2, depending on the region. They did this in line with the population of their municipalities. Thus, in smaller cities a more restrictive definition was placed on the size of big-box stores, making their market entry even more difficult.
In my analysis, I focus on those municipalities centred around 10,000 inhabitants which, for most regions, was the lowest population threshold. This means that, for all regions, municipalities below the 10,000-population threshold restrict the opening of big-box stores, while municipalities above this threshold are non-regulated. Then, we can assume that those municipalities around the threshold are going to be similar in many dimensions and the only difference between them would be the big-box opening. Therefore, any change in the composition of the city centre’s retail activities has to be a consequence of the big-box opening.
The findings show that non-regulated municipalities experienced about 16 per cent more big-box openings and, following these openings, the municipality gradually lost grocery stores, showing some evidence of downtown hollowing out. In fact, three years after the opening, around 15 per cent of the pre-existing grocery stores had closed down. I also examine whether these effects differ according to the location of the big-box (city center vs. out-of-town) and the type of the big-box opened (conventional vs. discount). The results show that the closer the big-box is to the current set of traditional grocery stores, both geographically and in terms of product sold, the larger its adverse effects. However, even if a big-box store opening is a big threat to grocery stores, my results also indicate that it does not seem to be the case for the city centre’s commercial activity as a whole. In fact, I find that other non-grocery stores increase in number and that the overall number of retailers – grocery and other – remains unchanged, suggesting that the new retail stores take over the empty commercial premises. These results show that the big-box only affects the composition of the commercial activity in the city centre, but it does not make it disappear.
My findings have a number of policy implications. First, regulations aimed at restricting the opening of big-box stores under the pretext of protecting existing businesses may serve their purpose with respect to the shops that are competing directly with them – the grocery stores in the case of my study. However, there may be other indirect effects that need to be taken into consideration. For instance, my results indicate a greater number of non-grocery retail stores. Because of this, the overall employment or productivity effects of the policy are unclear. For example, if the loss of jobs generated by the closure of grocery stores is offset by the employment created by the big-box opening and the new stores, the net employment effect would be positive. Additionally, if the exiting grocery stores are less productive than the new entrants, also average productivity might have increased. Although the productivity and employment results in this case are unclear, the study shows clear evidence on city centres not dying as a response to big-box openings and only changing their commercial structure.
- This blog post is based on the author’s Retail Shocks and City Structure, Discussion Paper No 1636 of LSE’s Centre for Economic Performance (CEP).
- The post gives the views of its author, not the position of LSE Business Review or the London School of Economics.
- Featured image by Richard Humphrey, under a CC-BY-SA-2.0 licence
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Maria Sanchez-Vidal is a research economist at KSNET and an affiliate at LSE’s Centre for Economic Performance (CEP) and at the Barcelona Institute of Economics (IEB).