Our Sponsors

Want to take part in this feed?
Join us!

Search this Site
Hidden Stuff
« Friday News Digest | Main | The cost of auto orientation »
Wednesday
Jan042012

The lost opportunity of auto orientation

On Monday we gave a vivid example of how the auto oriented development pattern yields less in tax base than a traditional neighborhood development. In looking at two, half-block areas both fronting a state highway, the one that held to the traditional development pattern was worth 41% more than the one that had completely redeveloped into an auto-oriented establishment.

This observation runs counter to conventional wisdom, particularly in the city planning and economic development arenas. Most cities today see new growth -- especially along the highway with a design catering to automobiles -- as having the greatest set of advantages. Besides increased tax base, the second myth is that is most frequently put forward is that of job creation.

Here is a photo of the traditional-style block we evaluated on Monday. All these businesses together have a combined tax base of $1,136,500 (compared to just $803,200 for the new Taco John's drive through up the street), despite being dilapidated and obviously stunted in its development by a lack of compatible public investment. City plans identify this block as a good area for redevelopment. 

I went and visited each of these businesses, and tried to call the ones that weren't in, so as to gather some basic information on their economic impact to the community. In doing so, I spoke with an interesting collection of small business owners and local entrepreneurs, the type of people that our politics pretends to venerate but who the establishment has generally done little to support. More on this some other day. For now I need to share the data I collected.

Among the nine businesses I was able to reach, there were thirteen (13) full time employees, including owners who worked full time in their establishments. There was an additional four (4) part time staff. When I asked if they used the services of a local accountant, attorney, printer or advertiser, most answered in the affirmative.

I stopped in at Taco John's but it was during the lunch rush and it was just too busy to talk (the place was packed). I called over there later but they would not reveal to me how many employees they had or any information about the services they contract for. As part of a city application, they did indicate that they had between 20 and 25 staff, were looking to add more, and pay an average of $9.20 per hour. Of course, as a franchise they pay for outside (not local) marketing and advertising. I don't know if the franchise provides them printed materials (I would assume they do) along with legal and accounting assistance.

With scant information, I did some back of the envelope calculations. Filling in the table above with one full time and two part time employees for the retail establishment and campaign headquarters I could not reach, we have a total of 12 owner, 2 full time and 6 part time staff. Assuming annual earnings of $30,000, $22,000 and $18,000 respectively (hardly a princely sum but not inconsistent with the area's statistics), the traditional neighborhood would generate a total of $512,000 in income annually.

Moving to the new drive through, I assumed an increase to thirty staff of which 8 would be full time and 22 would be part time. I assumed a ratio of hours worked to be 0.57, which means the average part time employee works 23 hours per week. At the $9.20 average rate they have reported, Taco John's is estimated to pay total annual salaries of $393,000.

These numbers are rough and I'm not going to use them to suggest that the jobs created and wages earned on one of these blocks versus the other is clearly superior. What I will suggest, however, is that there is not much difference between the two. If we are setting up a system that encourages the traditional neighborhood to be torn down and replaced with the auto-oriented fast food establishment, we should not be anticipating an increase of jobs or income as part of that transaction.

And since we also can't expect an increase in tax base, one has to ask: What exactly are we expecting?

What is clear are the secondary impacts. Each of the businesses in the traditional block routinely use local professionals. They hire local accountants. They get their printing done locally. Those that needed legal assistance hired a local attorney. They pretty much all engaged with local advertisers. This is what they told me. They are all passing their earnings around the community, providing residual impact that we do not get from a franchise chain.

Now I know the ownership of Taco John's and they are kind, caring people that are vested in the community. I'm not trying to suggest otherwise. But the franchise business model, by definition, provides many of these services in a corporate (read: "out own town") system. Along with name recognition, that's the benefit of being in a franchise. Taco John's has 400 franchises in 25 states and is headquartered in Cheyenne, WY. I'm happy for Cheyenne -- this model works for them -- but a city like Brainerd loses a lot financially (and socially) when it actively works to convert its traditional neighborhood restaurants to chains and franchises.

Finally, there is another resiliency issue that needs to be pointed out. If Taco John's fails, what next? The city's development model for this corridor is basically all in on a fast food restaurant being successful in that location. What if it isn't? Subway, which is really flexible in its locations, has a failure rate of 7%. By comparison, Quiznos has a failure rate of 25%. Even if we give Taco John's a 10% chance of failing over the next thirty years, that's a one in ten chance that this site goes bust. And if a Taco John's won't work here, what will? More precisely, what will that will fit into the Taco John's building layout?

Up the block in our marginal and blighted traditional design, we have businesses failing right and left. I know those liquor stores have been there a long time, but the barber shop and law office have only been there a few years. The cafe moved and is being replaced by another. Each of those spots is interchangeable with many different business types and models. And if one fails, the entire block doesn't fail. That's resiliency.

When comparing the shiny and new auto-oriented development with the old and blighted traditional development on the same street, once again the traditional design is superior. It is more resilient, generates a competitive numbers of jobs, pays comparable salaries and is doing it all despite the city and the DOT doing everything possible to put the location at a disadvantage.

Imagine how successful and prosperous this traditional block could be if the city opted for a Strong Towns strategy.

 

If you find this material interesting and would like to know more about how to apply this thinking to your community, join us at the Strong Towns Network, a social enterprise for those working to implement a Strong Towns approach.

PrintView Printer Friendly Version

EmailEmail Article to Friend

Reader Comments (11)

I just found this website and I love it. This post shows clearly the disadvantages of relying on one franchised business instead of many independent business. It is a no brainer. This post (and website) should be required reading for every municipal leader and planner.

January 4, 2012 | Unregistered Commenterlovetowalk

Fantastic analysis Chuck, nice work. I have two more questions concerning these businesses and their impact on your community.

1 - Which is used more? How many customers use Taco Johns compared to the older block?
2 - You've talked about local services like attorney and printing, what about supplies like produce a restaurant like Taco Johns would clearly use.

You are inspiring me to conduct a similar analysis in my own city... keep up the good work!

January 4, 2012 | Unregistered Commentergml4

Like gml I think I'm going to try and analyze this in Mason City if I can find time, but I want to point out a few things:

As far as marketing, Taco John's (and other franchises) do advertise locally. They buy ads in the local paper, spots on local TV and radio, etc. While the money may be coming through corporate, and the content creation might not being done locally, it's still happening and some of the money is still ending up at the local media outlets. With accountants, attorneys and printing though, unless the franchisee has multiple businesses, it is mostly going out of town.

Something that I think you overlook though Chuck in your comment about "when it [Brainerd] actively works to convert its traditional neighborhood restaurants to chains and franchises". I agree that if a town is actively converting (or replacing existing businesses might be more accurate) business that it's inexcusable, but when it comes to a totally new enterprise, i.e. "This town has no {Mexican Food, Women's Clothing Store, Siamese Cat Supply Warehouse, whatever}" it is MUCH easier to recruit from a corporate or existing entity than to create something from nothing. You can't call up Entrepreneurs, Inc. and say we'd like to have you move to our town. I think if you talk to at least 50% if not more Economic Developers, they would tell you they would much rather have all local businesses in town. Now that doesn't say much about how those local businesses are oriented physically, and it doesn't say much for the other 50%, but to assume that all Economic Development go after franchises and out of town companies because they think it's better than growing new or existing local businesses is simply untrue. They might be lazy, or just trying to use their time more efficiently, but it's not that their all out preference is to bring in outside business over locals.

January 4, 2012 | Unregistered CommenterMarty

This is a great analysis, and definitely something we all need to be more aware of. Chuck, I assume you know about many of these, but for those of you who don't, there is a lot of interesting research being done in this area. The Business Alliance for Local Living Economies has a good list of what's out there, available at :
http://www.livingeconomies.org/aboutus/research-and-studies/studies

One that I highly recommend looking at is the Andersonville Study of Retail Economics done by Civic Economics, available here:
http://www.civiceconomics.com/Andersonville/html/reports.html

January 4, 2012 | Unregistered CommenterKaty

I am still reeling from thinking about Taco John's. I had the misfortune to eat at one on a trip through Wyoming, and it was seriously disgusting.

January 4, 2012 | Unregistered CommenterRuben

Based on the description and aerial photos of the "dilapidated" block from the last post, I expected something much worse. That's not dilapidated at all, I wouldn't even call it blighted. It's a little worse for wear, but it's mostly occupied and decently kept up. Still, it's just single-story commercial, which is totally too small for fronting on such a huge road. Imagine what the tax return would be if those were two or three story buildings with apartments and offices above. Also imagine how much more vacancy or dilapidation such a place could have and still come out ahead for the city.

January 4, 2012 | Unregistered CommenterJeffrey Jakucyk

A quick check on the nutrition values of Taco John's menu (listed on the corporate website) leaves me less than happy for Cheyenne. The most interesting part of this story for me would be to hear, after all the industrial ag food sourcing problems Taco John's had in 2006, why the franchise doesn't convert to using locally grown food for at least some of their offerings.

January 4, 2012 | Unregistered CommenterSophia Katt

@Sophia - The franchise probably doesn't have the option to convert to a different supplier. Franchisers can and do mandate what items the franchisee buys, as long as the franchiser is not directly profiting from it.

Another thing to think about Taco Johns is going to be able to negotiate a bigger discount on advertising rates, and likely doesn't leave as much money in a local bank. Company owned chains routinely transfer all of their funds out of the community daily!

Chuck, thank you for doing this analysis. Its one of those things that I'm amazed has not been done sooner!

January 5, 2012 | Unregistered CommenterNicholas Barnard

Do you really think that the local owners are not using a local lawyer to represent them when it comes to the franchise or that they don't use a local accountant to help them with there annual taxes and books? Come on!

Seriously, that's your best investigative work is to compare a local non franchise business with a franchise business which independently owned and operated by a local owner?

So the local franchise doesn't run local ads in the newspaper? Would that count for advertising locally?

Your comparison is so flawed with your lack of detail and understanding of how a franchise works its pathetic.

January 5, 2012 | Unregistered CommenterPatrick

Nicholas, to clarify, when I wrote "franchise" I meant the corporate head/franchise developer Taco John's Intl, which got the big hit in 2006 when Minnesota and Iowa franchisees had e.coli outbreaks:

http://www.msnbc.msn.com/id/16188638/ns/business-retail/t/taco-johns-drops-supplier-amid-e-coli-scare/#.TwXdvoIeWSo

I believe TJ Intl would have been smart to start rethinking their supply chain economics after that incident. Sorry if I wasn't specific. :-)

To Patrick and Nicholas--I do operational and financial consulting, and have seen the guts of a number of franchise docs/setups pre-purchase. The structuring of franchises is extremely variable, and businesspeople who have owned several different entities often find that the new franchise they are looking at behaves differently yet again. A colleague in another WA city told me that his client who owns three successful UPS shops has a different level of franchisor involvement and fee schedule for each site. The overall point of control is a good point for Chuck to consider, though.

One of the attractive qualities of the Strong Towns blog community for me, so far, has been the general intent to express differing viewpoints in a civil fashion. I hope we can all avoid epithets like "pathetic" from now on.

January 5, 2012 | Unregistered CommenterSophia Katt

Chuck, the Google Map in the original post was very enlightening. Los Angeles, California and the surrounding communities are like on a different planet. We also though have concentrated too much on auto and though we are now slowly going to pedestrian oriented have far more than MN to undo for past sins We do have sales tax coming to our communities at 1% of what is collected but even that can be more like a drug in encouraging bad planning decisions of grasping for municipal revenue instead of trying to get good jobs into the community. If this had been in a redevelopment area we would have captured part of the increase in property tax revenue for the redevelopment agency for investment back into the redevelopment project area in which it was located. That is gone now.

I was surprised at the land valuation of the two sites. I know we are speaking of assessed valuation and in California we have Prop 13 which dampens the value of property below that of market value. Assessed value though equals market value when a property sells and folks can appeal property value when it gets over market. So is the appraised market value (vs assessed value) of the old time site really that much more than the new and shiny? Also seems to be a heck of a lot of parking for a drive through. I noticed that it Taco John just moved from up the street so its not even a new business for the area.

Since you don't get any sales tax and the net on property improvement does not seem to be there, I don't see why this was seen as being so beneficial to the community by the community leaders since its a relative job loss. It seems like they are trying to capture money from outside the community which I can appreciate but this seems a haphazardness way of doing it.

January 17, 2012 | Unregistered CommenterBrian Dowling
Comments for this entry have been disabled. Additional comments may not be added to this entry at this time.