Preparing and Promoting Communities through Economic Analysis
"What does your local economic development agency do?" In the public's eye, economic developers are viewed as community marketers, but there is so much more we're supposed to be doing. Economic developers' missions generally align with support of business development (attraction, creation, retention, and expansion of business and industry), which will also include those factors impacting business development—addressing workforce, housing, primary education, and quality of living issues and opportunities, among others. Clearly, it's about both preparing and promoting communities as great places to live, work, play and invest.
To accomplish this, the economic developer must work within a realm that is both art and science. So, marketing just may be an art form. However, measuring the local economy one chooses to market and that economy's opportunities for new and existing business is very much a science! Perhaps this (social) science aspect of the job is understood the least, even among some economic developers. This article will focus on some of the practical methods that have proven most effective in measuring economic realities, and that effectively support efforts to convey local and regional strategies and decision-making. Specifically, retail analysis (identifying a community's market area and the dollars it is capturing or losing) and economic impact analysis (measuring the worth of a company or program to a community or region in terms of jobs, income and revenues) will be discussed.
I have been increasingly involved in assisting communities in retail analysis and working with mayors, Main Street programs or local economic developers. Retail activity indicates economic well-being in those communities dependent on the sales tax. Additionally, as an economic sector, retail and service are absolutely crucial to a community for several reasons. First, they are jobs creators or maintainers. Second, the sales tax collections generated from local retailers are critical to maintaining and growing communities. Third, the availability of products and services wanted and needed by consumers is a quality-of-living pillar for communities. Retail selection gives residents incentive and opportunity to spend their money locally, making them less likely to move outside the community, either to shop or to relocate totally to an area with greater amenities and retail options.
I find that the best place to start is in the measurement of a community's market or "trade area." Where are shoppers coming from? Where should they be coming from? If a community's retail and service establishments have customers, they have a trade area.
Measuring Trade Areas
There is nothing more accurate than a properly conducted survey to assess a trade area. The survey can be as simple as collecting, organizing and mapping the ZIP codes of the customers supporting local businesses. National chain stores use this method, and we can do the same thing as the big retailers by organizing with local businesses to conduct a trade area survey. In fact, having local businesses participate in a survey is a terrific program concept for a chamber of commerce and its participating businesses.
Another method for measuring trade-area boundaries includes the use of models. Some models measure a market for a community based on travel time. For instance, a trade area might be measured as a 20-minute drive time from the city. Other models measure retail gravity by calculating trade-area boundaries based on the distance to competitive markets and the size of the local market relative to competitors, either in terms of population or volume of existing retail activity. Figure 1 provides an example of a gravity model measuring the trade area of the city of Blytheville, Ark.
Who Makes Up Your Trade Area?
Once the trade-area boundaries have been calculated, the next step is to identify the number of people within those boundaries, how much money they have and spend, and what they spend their money on. The real value-added quality in a trade-area study is found here—in the demographic and consumer spending assessment—as it shows local leaders just how many spending dollars are available in their communities and the surrounding areas. Assessments are generally built on a number of factors, including total number of people within the trade area by age and other breakdowns; number of households within the trade area; median household income of trade-area residents; projections of future population, housing and income; and available dollars to be spent on multiple retail categories, from groceries to clothing, restaurants and many others.
Measuring Retail Capture and Leakage
Retail capture and leakage analysis measures the dollars from the trade area (or other geography) from which a business should be drawing its customers and compares that amount with the actual dollars spent. The fact is that retail leakage is devastating many rural communities, and that is all about consumer choice. Why do people spend their money somewhere else? Business hours, selection, price, internet shopping and other factors impact consumer decision-making. Strategies to change this paradigm of leakage require active participation of elected leaders, businesses and citizens!
Economic Impact Analysis
As previously stated, economic developers focus their energies on business development. Analyzing what a business (whether existing, future or potentially lost) means to the community and region in terms of jobs, income and revenues is critical to successful business development. This kind of evaluation is known as economic impact analysis and is a method of calculating the economic effects associated with a change in economic activity or an employment and income change (e.g., the location of a new business). Those measuring economic impact use quantitative models (there are several available) to assist in calculating these effects. Each model relies on state and national data sets, and on input-output tables, which identify economic linkages between each and every business type.
Measuring Economic Impact
Economic impact analysis is not an exact science. However, when properly performed, it will provide the best estimate of activity, either the current activity of an existing industry or the potential of a prospective business. So what is a business' contribution to a community and region? An existing industry employing 100 people, for example, with employee benefits packages, the spending of salaries and the spending of the industry itself generates other economic activity in the community and beyond. This is the multiplier effect. Those 100 jobs are really responsible for fostering a number of other jobs in the community and region, including everything from construction to manufacturing, retail/service, transportation, finance, government and others. From a community's perspective, this economic activity equates to city revenues and fees, etc.
Multiplier Effect (What It Is and Is Not)
When it comes to multipliers and economic effects, all businesses are not the same. Companies that build a product in a community and sell it outside of the area bring new money into the area as a result. Consequently, they generally have a larger multiplier effect on the region. Businesses such as retail and service industries typically have a smaller effect, as they generally move money around the economy through local transactions. An exception to this is the tourism industry, where retail and service activity bring new money into the area by attracting tourists whose spending contributes to the local economy.
Multipliers are calculated for employment, income and economic output. Typically, the economic developer or community leader is interested in employment, income activity and multipliers. If a company employing 100 people is responsible for creating an additional 100 jobs in the area economy, they would have a multiplier of 2.0 (i.e., total employment of 200 divided by direct employment of 100). Generally, employment or income multipliers greater than 3.0–3.5 are not seen, though they do exist.
It is also important not to confuse the multiplier with the turnover of dollars in the local economy. Multipliers can be innocently misrepresented as the number of transactions (rounds of spending) in the local economy that the money from an initial business transaction goes through (which can be as high as 10 times) before it leaves the community. This is not a multiplier of 10, but rather 10 rounds of spending turnover! There may or may not be any relationship between multipliers and turnover.
Economic Impact Is Regional
We've all heard of neighboring communities fighting over the location of a business. Just as significantly, there are cases where a community is losing a large business and its neighbors do not come to their support because it doesn't involve them. What we know is that economic impact is truly regional, and regional participation is critical to realize the maximum impact for all. After all, a company may locate in one community, but its employees come from many and they bring paychecks to their hometowns!
Regional Application of Analyses
Now more than ever there needs to be regional participation in economic development. The flow of consumer dollars and people between employment centers and local markets travels in all directions. This flow can be quantified and suggests that one community in a region is economically linked to other communities in the same region as if they are a part of an economic ecosystem.
A good example of regional economic development analysis can be found in a project currently underway with the East Arkansas Planning and Development District, where retail analyses (and other assessments) have been conducted for each of the counties and major communities across the region. When complete, the analyses will support business development, existing industry support, strategic planning and other regional initiatives. This is a great example of using data and analysis to drive economic development decision-making.
Where Do I Go for Help?
Retail and economic impact analyses are tedious; economic impact analysis, in particular, is very complicated. But the analyses are arguably critical to successful economic development. In fact, impact analysis is a powerful marketing tool in support of economic development programming and existing industry efforts. For more information on selected models for each, please contact the author. (Contact details are at the end of the article.)
Communities and economic developers generally rely on third-party providers to do this work. Consultants and university or government research agencies often are used for both retail and impact analysis. However, models and data can be designed or purchased (along with the training to use these models) for those interested in doing the analysis themselves. Your choice of external assistance will depend on how much you are able to spend, how quickly you need the results and how often you want to conduct such analyses.
Bridges is a regular review of regional community and economic development issues. Views expressed are not necessarily those of the St. Louis Fed or Federal Reserve System.
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