Cities leery of big-box retailers like Walmart and Costco have long embraced one tool in particular to keep them at bay: zoning requirements too narrow for a 250,000 square-foot store to fit through. These regulations – common outside of the U.S. as well – often deny planning permits to new retailers of a certain size, or within a protected location.
The goal is usually to protect the character of urban shopping districts and the independent businesses that exist there, or, as regulation in the U.K. puts it, to “sustain and enhance the vitality and viability of town centers.” The strategy is a pretty simple one, singling out big-box stores for the one thing that defines them.
These laws, though, may have some perverse consequences. A new study by Harvard Business School's Raffaella Sadun concludes that independent retailers are actually harmed by the barriers to market entry created by anti-big box laws. Why?
Instead of simply reducing the number of new large stores entering a market, entry regulations created the incentive for large retail chains to invest in smaller and more centrally located formats, which competed more directly with independents and accelerated their decline.
Sadun's study was conducted in the U.K., assessing the impact of new regulation from the mid-1990s that targeted retailers larger than 2,500 square meters (or about 27,000 square feet – not that big by American standards). But we can see evidence of the same process she describes in U.S. cities, too, in the rollout of urban Walmarts and compact multi-story Targets.
In the years after the tighter U.K. regulation went into effect, Sadun found that the number of large retail chains in the country actually grew. But the size of their stores dramatically decreased. Meanwhile, employment growth for independent retailers declined, too.
Overall, these findings suggest that the effects of planning regulations interact with the store strategies of large retail chains. In this setting, restricting the entry of large stores does not necessarily lead to a world with fewer stores, but one with different stores, with uncertain competitive effects on independent retailers.
It seems inevitable that big-box retailers would find a way to slim down and cater to urban shoppers whether these laws forced them to or not. The logistics, and not just the regulation, simply make it difficult to replicate suburban big boxes in urban neighborhoods where parking is scarce and land is much more expensive. But it's possible laws like this helped push that innovation.
Top image of a Walmart Express store in Chicago: John Gress/Reuters.