Thursday, July 25, 2013

Shopping Local: Not quite yet

Since the fall of the economy in the early part of this century, politicians and academics alike have been rooting for small businesses to help keep the economy afloat. As the need for growth becomes more critical now, especially since everyone has tired of the stagnation, there has been more advocacy for small businesses. 

There is a lot riding on their success. The idea is that if big businesses can't keep Americans working, and production rolling, then maybe the unemployed or the unhappily employed can create new jobs and new ideas that lead to higher profits. 

How has entrepreneurship fared? Pretty well according to the numbers out there. There are more small businesses launched now than ever before in recent history, especially by non-Whites and women.  As these companies grow, their profits grow as well, and the economy flows along with them. 

But there are challenges to contend with. Small businesses are a positive and welcome aspect of the economy. Only they have to compete with big businesses whether they like it or not. Even though corporations have been dealt a great blow because of their roles in economic declines of past years, they are still chugging along, diverting customers and profits away from local businesses. Why? 

First, economies of scale. Because these companies are larger, they can spread their costs. Think the difference between buying at WalMart and Sam's warehouse. When you buy more, for the most part, you save more. You can also better manage your operating costs and develop innovative ways to keep expenses down. 

Another advantage big companies have is with tax breaks, especially with a good legal team on board. Tax codes can be manipulated, sidetracked and bypassed, even legally, to lower liabilities. While small businesses have some tax benefits, they pale in comparison to what is available to larger companies. 

What this amounts to is higher costs for small businesses, which in turn translates to higher priced product offerings. To keep operating, small businesses are forced to pass along higher prices to consumers. In fact, for every $100 a small business spends, $68 is spent to cover its costs, as compared to $43 its larger competitor spends. 

Higher price tags aside, there are huge benefits to shopping at small businesses. For one thing, it helps boost the local economy. To drive down their costs, small businesses also shop local by purchasing their supplies from neighborhood businesses. This helps the local economy grow and create more jobs. But with the level of uncertainty still high, saving money is still on the minds of many Americans. This means that shopping local is not a top priority for the average consumer. 

If small businesses are capable of elevating economies out of declines, then the obvious answer is to offer them incentives to compete with big companies. Tax privileges and the opportunity to suppress their operating costs will enable them to do what everyone is expecting them to do: create better opportunities for creativity and growth.  

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