Chains vs Local...What are the true economics

So I saw this little blurb in the CJ and it got me to pondering...

Lenny’s Sub Shop, a chain based in Memphis, Tenn., will open its first Louisville location Thursday at 3942 Taylorsville Road, between Hikes and Breckenridge lanes in Hikes Point.

Franchisee Dustin Childers of Louisville, a commercial and corporate airline pilot, would like to open 3 to 5 additional sub shops in Louisville “over the next several years,” according to a news release.

So, ignoring Lenny's (the restaurant) for a moment...My question is this: From an economic perspective what is the difference between this (local) guy investing in and opening a "chain" restaurant and some "local" with "out of town investors" (which I would speculate that many of the larger/successful ones have) opening a restaurant ? Menus and aesthetics aside, why is one perceived to have so much more of an economic impact ? Not slamming the "locals"...I love 'em...but I'd be really curious to see if this perception of one providing more economic impact than the other is real or just imagined.

From an economic perspective what is the difference between this (local) guy investing in and opening a "chain" restaurant and some "local" with "out of town investors" (which I would speculate that many of the larger/successful ones have) opening a restaurant ?

My 2 cents.

"out of town investors" is a good point, but we don't have any figures on that subject so it would be pure speculation. I believe most investors are probably friends, family, lifetime savings, and hopefully and local bank.

Assuming some of the "locals" get help from out of town investors, it is still very different from a franchise type deal. After the out of town investors are paid off/back the money leaving Louisville slows or stops. A true local should be supporting other locals, where chains do not. O' Charles isn't going to the local farmers market and using local produce and meat like Varanase and Mayan Cafe. I sure there are many other "local" using local meat/produce but these two were on the top of my head. In theory, it is like creating our own small economy. "Locals" buy from local farmers, we eat at locals and a larger chunk of the profits stay in Louisville.



Thinking Outside the Box: A Report on Independent Merchants and the Local Economy
by Civic Economics, September 2009
This study examined financial data from 15 locally owned businesses in New Orleans and compared their impact on the local economy to that of an average SuperTarget store. The study found that only 16% of the money spent at a SuperTarget stays in the local economy. In contrast, the local retailers returned more than 32% of their revenue to the local economy. The primary difference was that the local stores purchase many goods and services from other local businesses, while Target does not. The study concludes that even modest shifts in spending patterns can make a big difference to the local economy. If residents and visitors were to shift 10% of their spending from chains to local businesses, it would generate an additional $235 million a year in local economic activity, creating many new opportunities and jobs. Likewise, a 10% shift in the opposite direction - less spending at local stores and more at chains - would lead to an economic contraction of the same magnitude. Another noteworthy finding of the study is that locally owned businesses require far less land to produce an equivalent amount of economic activity. The study found that a four-block stretch of Magazine Street, a traditional business district, provides 179,000 square feet of retail space, hosts about 100 individual businesses, and generates $105 million in sales, with $34 million remaining in the local economy. In contrast, a 179,000-square-foot SuperTarget generates $50 million in annual sales, with just $8 million remaining in the local economy, and requires an additional 300,000 square feet of space for its parking lot. See our New Rules article for more background on this study.


http://www.newrules.org/retail/bigboxstudies.pdf

A franchise is not a "big box store". A franchise really is a local business for all practical economic reasons. I just don't care for the product most franchises offer.

I think someone mentioned that when travelling we should eat KFC/Taco Bell so the profits come back home....makes sense?

Justin hit the mark - even IF the independent guy isn't purchasing from a farmer's market, there's a MUCH higher chance they're purchasing something from a local company. As an independent local manager, I shopped a lot of things locally - may not not have kept places in business, but the fact that they remembered me every time I came in makes me think they valued the business. That is not likely from a franchisee where uniformity is key and they have order forms for every need - the idea that this platform is intrinsic to the service. That's a big difference. I appreciate the sake of discussion, Steve, but you really can't do better for this city than to shop totally local.

A franchise is not a "big box store".

Agree, but I figured the stats might carry over to the chain vs local comparison.

A franchise really is a local business for all practical economic reasons.

Totally disagree. Most, if not all franchise stores have to send a set % of profits back to mama.


http://www.lennys.com/section.cfm?secti ... page=rates

The on-going royalty and national marketing rates for a Lenny’s Sub Shop are only 8% of net sales. Many other franchises cost up to 11%-13% of net sales.

I wouldn't consider 8-12% to be a drain on the "local" economy in exchange for the jobs created and the taxes paid to the city and state. A healthy economy would benefit from a mix of options which we have here locally.

I wouldn't consider 8-12% to be a drain on the "local" economy in exchange for the jobs created and the taxes paid to the city and state. A healthy economy would benefit from a mix of options which we have here locally.

Drain or not, 8-12% of sales leaving the city is just the start of the economic difference of a chain vs. local.

In general those percentages sent back to corporate pay for advertising and promotion and perhaps some key supplies or ingredients (among other things). With the best chains, this closely matches what you would pay for advertising yourself (in other words, the chain has enormous buying power, and taking what you would spend for paper goods and advertising, they can ship or provide the same items and pocket half the money).

While it's true the local franchisee is likely not buying as much locally, I have always tried to differentiate franchise operations from company-owned locations.

With the best chains, this closely matches what you would pay for advertising yourself (in other words, the chain has enormous buying power, and taking what you would spend for paper goods and advertising, they can ship or provide the same items and pocket half the money).

The chains are probably not using local advertising/printing companies, like a true local place would be.

I figure most franchise stores are forced to buy item A from company B or from the franchisor in order to keep uniformity between locations. This leaves the franchise little or no option to buy local.

To hell with the economics, the locals are just more interesting. 100% of the time.

To hell with the economics, the locals are just more interesting. 100% of the time.

That I can agree with 100%. I just think some of the financial arguments are weak at best and economics was the issue at hand from the OP.

I wouldn't consider 8-12% to be a drain on the "local" economy in exchange for the jobs created and the taxes paid to the city and state. A healthy economy would benefit from a mix of options which we have here locally.

8-12% is huge. That much leaving the city off the top is big big big.

And when you mention the jobs "created" and taxes paid, well I thought we were discussing local vs. chain, not chain vs. nothing. If the chain didn't open, then a local place could (thus employing people and paying taxes just like the chain).

In reality, the chain is just collecting the tax revenue that someone else would normally be. That doesn't help the city.

And chains/franchises will tend to buy a lot of their supplies from corporate approved out of town suppliers. Locals don't have those restrictions and will run down the street to buy things, or buy from a local distributor. Big big big....

And chains/franchises will tend to buy a lot of their supplies from corporate approved out of town suppliers. Locals don't have those restrictions and will run down the street to buy things, or buy from a local distributor. Big big big....

Chains also buy supplies from corporate approved in town suppliers. Only they are buying for the entire chain, not just for the locals. Talk about big big big....

Actually, the two probably balance out on average.

I think some on here need a lesson in The Law of Comparative Advantage.

And chains/franchises will tend to buy a lot of their supplies from corporate approved out of town suppliers. Locals don't have those restrictions and will run down the street to buy things, or buy from a local distributor. Big big big....

Chains also buy supplies from corporate approved in town suppliers. Only they are buying for the entire chain, not just for the locals. Talk about big big big....

Actually, the two probably balance out on average.

I think some on here need a lesson in The Law of Comparative Advantage.

So you're saying that the chain is already buying from some local suppliers? Or that the chain starts buying from local suppliers because they have a branch or two in town? Most likely the former, in which case, adding a new branch in town does NOT bring extra business to town. Whereas adding a local business DOES bring extra business to town.

You're really just arguing that chains aren't inherently all bad. Which isn't really the discussion in this thread.

Or are you contending that chains will begin to support local suppliers to in essence "throw us a bone?"

From Wikipedia "In economics, the law of comparative advantage refers to the ability of a party (an individual, a firm, or a country) to produce a particular good or service at a lower opportunity cost than another party. It is the ability to produce a product with the highest relative efficiency given all the other products that could be produced.[1][2] It can be contrasted with absolute advantage which refers to the ability of a party to produce a particular good at a lower absolute cost than another.

Comparative advantage explains how trade can create value for both parties even when one can produce all goods with fewer resources than the other. The net benefits of such an outcome are called gains from trade. It is the main concept of the pure theory of international trade."

Lesson us, Rob.....

And chains/franchises will tend to buy a lot of their supplies from corporate approved out of town suppliers. Locals don't have those restrictions and will run down the street to buy things, or buy from a local distributor. Big big big....

Chains also buy supplies from corporate approved in town suppliers. Only they are buying for the entire chain, not just for the locals. Talk about big big big....

Actually, the two probably balance out on average.

I think some on here need a lesson in The Law of Comparative Advantage.

So you're saying that the chain is already buying from some local suppliers? Or that the chain starts buying from local suppliers because they have a branch or two in town? Most likely the former, in which case, adding a new branch in town does NOT bring extra business to town. Whereas adding a local business DOES bring extra business to town.

The former. However, every branch added, whether in THIS town or another, then adds extra local business.

You're really just arguing that chains aren't inherently all bad. Which isn't really the discussion in this thread.

Someone said we should only buy local, so it it the discussion in this thread.

From Wikipedia "In economics, the law of comparative advantage refers to the ability of a party (an individual, a firm, or a country) to produce a particular good or service at a lower opportunity cost than another party. It is the ability to produce a product with the highest relative efficiency given all the other products that could be produced.[1][2] It can be contrasted with absolute advantage which refers to the ability of a party to produce a particular good at a lower absolute cost than another.

Comparative advantage explains how trade can create value for both parties even when one can produce all goods with fewer resources than the other. The net benefits of such an outcome are called gains from trade. It is the main concept of the pure theory of international trade."

Lesson us, Rob.....

Trade enriches both sides. Whether two countries or two states or two cities. A certain San Diego based chain has a comparative advantage when it comes to making crappy burger and fry combos. I think its best we let them do their job and let the locals concentrate on what they do best.

A more general question on the topic:

Should I not eat at the new Havana Rumba in walking distance of my house because they arent a Middletown local, but a St Matthews based chain?