Losing sales and property tax revenue as stores close

The difficulties facing retail stores also have an effect on local governments who rely on sales tax and property tax revenue:

Nationwide, sales taxes comprise nearly one-third of the taxes that state governments collect and about 12 percent of what local governments collect, according to Lucy Dadayan, a senior researcher at the Nelson A. Rockefeller Institute of Government, a New York-based research group. “The epic closures of the brick-and-mortar stores is troubling news for state and local government sales-tax collections,” she said. They’re already feeling the hit: States’ tax revenues grew just 1.9 percent between 2014 and 2015, after growing 5.8 percent in the previous four quarters, according to the Rockefeller Institute. Local-government sales-tax collections grew just 1.7 percent, after growing 7.5 percent in the previous four quarters. In Ohio, state tax revenues grew just 0.1 percent, when adjusted for inflation, between 2015 and 2016, according to Dadayan. When revenues don’t continue to grow, governments have to slow down spending and can’t readily invest in long-term projects…

Clark County is not alone. In the southeastern part of Ohio, near the border with West Virginia, Belmont County gets $17 million of its $22 million budget from sales-tax revenues, Mark Thomas, a county supervisor, told me. The county has lost a bevy of retailers of late, including Elder-Beerman, Hhgregg, MC Sports, and Radio Shack. A Kmart in St. Clairsville is expected to close soon, according to the company. The decline in sales tax isn’t the only thing that hurts revenues—abandoned malls mean less revenue from commercial property taxes too. Local governments also see lower income taxes and, when retail workers are unemployed, they spend less, creating a vicious cycle of less and less revenue. “That trickle-down effect is huge,” Thomas said…

States that have seen manufacturing companies depart are bearing much of the brunt of the retail closures, according to Dadayan’s research. She tabulated where Macys, Kmart, and Sears have announced in the past year that they are planning to close stores, and found that Pennsylvania will have the most of those total store closings, at 16. Ohio and Michigan have the second-highest number, at 15 each, alongside Florida. Other states that have bigger populations have much lower combined closings. California, for example, only has eight.

The closures raise the question of what state and local governments will do if retail continues to evaporate. Already, many local governments are attempting to raise taxes to make up for budget shortfalls. Springfield asked voters to approve an income tax in November; the measure failed. The sales-tax rate at both the local and state levels has been creeping up in Ohio as governments try to raise taxes to make up for declines, according to Jon Honeck, the acting director of the Greater Ohio Policy Center, a local think tank. Ohio has also cut back on revenue-sharing between states and local governments since the election of Governor John Kasich in 2010, making it more difficult for local governments to make ends meet. “Some have just cut services, since the state is not going to help them out,” Honeck said.

Two quick thoughts:

  1. Communities have competed for decades over shopping malls and retail establishments. This competition could only increase though it may be less about the opening of new stories (everyone wants replacements for old establishments – for example, see the fate of Dominick’s grocery stores in the Chicago region) and more about retaining existing stores and asking companies to close stores elsewhere.
  2. It is interesting to see which areas are experiencing closures. Not all malls or stores are doing poorly but the successful ones are likely in wealthier areas that will do even better comparatively with the ongoing tax revenues. It is very difficult to convince businesses to locate in communities with less income.

Making money by betting on dying malls

Some are hoping to make a lot of money with the decline of shopping malls:

It’s no secret many mall complexes have been struggling for years as Americans do more of their shopping online. But now, they’re catching the eye of hedge-fund types who think some may soon buckle under their debts, much the way many homeowners did nearly a decade ago.

Like the run-up to the housing debacle, a small but growing group of firms are positioning to profit from a collapse that could spur a wave of defaults. Their target: securities backed not by subprime mortgages, but by loans taken out by beleaguered mall and shopping center operators. With bad news piling up for anchor chains like Macy’s and J.C. Penney, bearish bets against commercial mortgage-backed securities are growing…

Many of the malls are anchored by the same struggling tenants, like Sears, J.C. Penney and Macy’s, and large-scale closures could be “disastrous” for the mortgage-backed securities. In the worst-case scenario, the BBB- tranche could incur losses of as much as 50 percent, while the BB portion might lose 70 percent.

I’d love to see some analysis of whether this is a good development: it doesn’t sound like this will break the mortgage industry in the same way as the subprime mortgage crisis, clearly some investors have learned something from the past, yet the default of shopping malls can have a big effect on the local economy and community.

There is an interesting summary of the fate of the American shopping mall in the final paragraph of the article:

“When a mall starts to falter, the end result is typically binary in nature,” said Matt Tortorello, a senior analyst at Kroll Bond Rating Agency. “It’s either the mall is going to survive or it’s going take a substantial loss.”

This can’t be good in the short term, particularly if the retail money vanishes into the Internet ether. In the long run, it does hint at a very bifurcated retail experience in coming decades: wealthier places where shopping malls still thrive and are popular and other places where there is nothing but big box stores, the occasional strip mall, and online shopping.

Deadmalls.com

The site has not been updated for a year or so but there is a lot of interesting retail information at Deadmalls.com. You can even purchase your own memorabilia (though I was hoping for something more ghastly)!

Four quick thoughts:

  1. The shopping mall was a marvel of the post-World War II suburban era. Today, there are still thriving malls – even in urban locations as they figured out that they needed to play in this game – but plenty of dead ones (27 listed in Illinois alone). The wonder of having all of those stores in one location that is easy to reach by car.
  2. Have the shopping malls been replaced by anything? Shopping online is not the same visceral experience. Perhaps it is big box stores: occasionally when I wander into a Home Depot or Costco or Walmart, I am astounded by the vast size, the number of products, and the relatively low prices.
  3. There are a lot of efforts to renovate or revitalize shopping malls including turning them into lifestyle centers, adding housing, and incorporating new features like skating rinks. Such efforts will probably succeed in a number of malls..
  4. I’m reminded of the portrayal of a dead mall in the book Gone Girl which portrayed it as a suburban wasteland (along with the McMansions). It would be worthwhile to go back to these dead malls sites in a decade or two to see what has become of them. Urban/suburban ruins? New uses?

In economic terms, 1 baseball team = 1 midsized department store

Following up on the academic consensus that sports do not economically benefit communities, one economist notes the economic impact of sports teams:

“If every sports team in Chicago were to suddenly disappear, the impact on the Chicago economy would be a fraction of 1 percent,” Leeds says. “A baseball team has about the same impact on a community as a midsize department store.”

The reason?

Economists say the biggest reason sports teams don’t have much impact is that they don’t tend to spur new spending.  Most people have a limited entertainment budget, so the dollars they are spending when they go to a game is money they would have spent elsewhere, maybe even at a restaurant or small businesses where more money would have stayed in the community. Plus, Matheson says, rather than draw people to a neighborhood, games can actually repel them.

Don’t underestimate the money generated by large retail stores. When I worked a short stint at a local Target at the end of high school, I remember seeing the board in our office that listed daily sales. The figure was typically around $100,000. That generates a lot of tax revenue through sales taxes and property taxes.

This is more evidence that the more important feature of sports teams in major cities is their social and cultural value. Teams provide something for a city to rally around and contribute to the city’s collective identify. In major cities with millions of people, it is difficult to find features or events that can bring large numbers of people together. Sports teams also provide opportunities for leisure, whether through enjoying the stadium experience or experiencing the game from afar. Now, if only we could find politicians that would admit the taxpayer money going to stadiums or teams was due to the interest in having a common sports identity and leisure experience rather than some grand economic impact…

IKEA in China allowing all sorts of activities in addition to shopping

IKEA in China is allowing patrons to hang out:

Sociologist Sangyoub Park forwarded us a fascinating account of Ikea’s business model … for China. In the U.S., there are rather strict rules about what one can do in a retail store. Primarily, one is supposed to shop, shop the whole time, and leave once one’s done shopping. Special parts of the store might be designated for other activities, like eating or entertaining kids, but the main floors are activity-restricted.

Not in China. Ikea has become a popular place to hang out. People go there to read their morning newspaper, socialize with friends, snuggle with a loved one, or take a nap. Older adults have turned it into a haunt for singles looking for love. Some even see it as a great place for a wedding.

This stands in contrast to efforts in some McDonald’s in the United States to limit how long patrons can stay. But, this stance might be ingenious for more companies:

1. It may raise the image of the company. It is a cool place to be. Oh yeah, you can buy stuff there as well.

2. In areas that lack public spaces, these retail locations can serve an important function.

3. It may just lead to more sales. Unfortunately, stories like this often don’t include this information.

How the history of mannequins reveals sociological changes in American society

You might not think to look to mannequins to learn about significant changes in American society:

Mannequins have a rich century-old history. They’re what Dr. Marsha Bentley Hale, one of the world’s leading experts on mannequins, calls “significant sociological reflections of our consumer society.”…

– Until the early 1900s, the most common mannequins had no head, arms or legs. But by 1912, with the rise of mass production clothing, full-fledged human figures became popular.

– During the Depression era, mannequins were inspired by Hollywood starlets as many Americans took refuge in movie theaters, according to Eric Feigenbaum, chair of the visual merchandising department of LIM College, a fashion college in New York City. But during World War II, the displays took on a somber tone to reflect more subdued fashions, he says.

– After World War II, mannequins started looking playful again. But sexuality was squelched during the 1940s and the 1950s. In fact, many American retailers removed the nipples of the older mannequins because they were considered too sexual, says Dr. Hale.

Read on to reach the present day where there are more realistic mannequins. I wish there was more analysis here to further explain how mannequins reflect American ideals and perceptions about the body. Plus, are there big differences in mannequins aimed at men or women or in different class settings (like differences between cheaper clothing lines versus higher-end retailers)?

Stores have cash registers, give receipts to prevent cashier theft

Megan McArdle explains that businesses don’t have cash registers or receipts for the good of consumers; it is to prevent cashiers from taking money.

The great innovation of the National Cash Register company was to market registers not so much as adding machines but as devices for preventing theft. Here’s Walter Friedman’s “Birth of a Salesman” on how these machines were made ubiquitous:

Because of the high price of NCR cash registers, sales agents had to convince proprietors that the machine would eventually pay for itself. NCR’s early advertisements resembled the contemporary flyers of life-insurance. In both, the aim was to heighten customer fear and uncertainty. In the cash-register trade, the fear centered on stolen revenue. One of Patterson’s advertisements, proclaiming “Stop the Leaks,” depicted shop owners ruined by clerks who stole from their cash drawers. This marketing strategy posed problems for NCR, because clerks and bartenders resented the implication that a mechanical “thief-catcher” was a necessary coworker. Some even organized protective associations to keep the product out.

In instances of intense opposition by clerks to newly installed registers, Patterson sent detectives to supervise the machine’s operation. NCR for June 1888 printed a letter from a merchant in Detroit whose store had been watched by an NCR-hired detective. “Your operative’s report relative to my man not registering is at hand. I was very much surprised, as it caught a man, above all others, I have relied upon, not only in the bar but in other matters in the house.”That’s why cash registers ring loudly when the cash drawer opens — so that a clerk with decent mental arithmetic skills can’t pretend to register your sale and then pocket the cash. And that’s why you get a physical receipt — so that the clerk can’t ring up part of your sale, and then siphon the rest into his own pocket.

In other words, NCR helped create the market for their goods by playing up certain fears. Friedman’s link to life insurance is an interesting one; sociologist Viviana Zelizer has written about how life insurance was once viewed as morbid but came to be viewed in the 1800s as a necessary provision for one’s family. This is like the cash register as the good businessperson has to have a cash register. It also sets up an interesting new source of alienation between companies and workers: the basic retail employee can’t be trusted with money.

One reason to look at the social history of products is to note how they are not objects humans inherently need. They are social constructions.