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Retail’s Contribution to the Tri-Cities Economic Base is Small but Growing according to King University Study

BRISTOL, Tenn., Sept. 25, 2015 – The King Institute for Regional Economic Studies (KIRES) has released a new study. KIRES Report No. 14, “Measuring Retail’s Contribution to the Tri-Cities Economic Base,” was prepared by Dr. Sam Evans, director of KIRES and associate professor of Finance and Economics in King University’s School of Business and Economics. Hannah Pierce, a recent graduate of the University’s MBA program contributed to the report.

According to Evans, “The purpose of this study is to estimate the extent to which the existing retail sector in the Tri-Cities contributes to the region’s economic base and the extent to which new retail development adds to the economic base.” The Tri-Cities consists of the Kingsport-Bristol and Johnson City metro areas as defined by the US Census Bureau. The region includes Carter, Hawkins, Sullivan, Unicoi, and Washington counties in Tennessee; Virginia locations include Bristol city and Scott and Washington counties.

The authors note that firms or industries that produce goods and services for sale to customers outside the Tri-Cities region are known as basic industries. These (exporting) industries bring income and employment into the region that would otherwise not exist. These firms constitute the region’s economic base. Firms or industries that support basic industries by providing services or inputs, and firms that provide goods and services to households in the region are called non-basic industries. The economic health of non-basic industries depends on the economic health of the region’s basic industries

Pierce writes, “The retail sector is often the largest non-basic industry in any regional economy. This is certainly true for the Tri-Cities as employment in the retail sector currently is around 26,000, accounting for 13 percent of total employment.” Evans adds, “Retail has been described as a zero-sum game in which gains by one retailer tend to be offset by losses among other, competing retailers, with no net benefit to the local economy. This view holds that retail trade is supported by the economic base of a region but contributes little to the expansion of the economic base. Attracting shoppers from outside the region is especially critical if new retail development is to add to the region’s economic base.”

Evans states, “The economic impact of new retail sales should be based on margined sales rather than total retail sales. A simple example will explain the logic of using margined sales rather than gross sales. Suppose a local retailer sells a product for $100 and that factory and shipping costs are $70. The sale is recorded as a $100 increase in retail sales, but only $30, the gross margin, stays in the local economy. Retailers depend on gross margins to pay employees, purchase inputs from other businesses in the region, and earn a profit.”

Pierce adds, “The same example can be used to illustrate the rationale for basing the economic impact on export sales. Suppose the $100 product is purchased by a Tri-Cities resident. There is no injection of “new” money into the regional economy. And, if the $100 spent for this particular product is simply $100 not spent at another store, we have an example of the zero-sum nature of retail. However, if the purchase is by a nonresident, a tourist, the regional economy receives a $30 injection of new money. This injection of money into the local economy is the basis for a positive economic impact.”

According to the authors, the vast majority of the more than $6 billion in retail sales recorded in the Tri-Cities in 2014 were to local residents. That portion of retail trade does not produce an economic impact, per se. Pierce notes, “Our analysis indicates that 15.5 percent of retail sales were to nonresidents. That portion of retail trade can be considered a basic industry to the region, yielding a positive economic impact.” The study also found that the proportion of sales to nonresidents has risen over time, from 6.3 percent in 2005 to 15.5 percent in 2014. Evans notes, “This is good news for the Tri-Cities given the substantial investment in new retail development in recent years.”

The authors report the main economic impacts of sales to nonresidents in 2014 were the creation of more than 5,600 full-time and part-time jobs in all sectors of the regional economy and an increase of $175 million in earnings received by households employed in all industries in the Tri-Cities.

The authors write, “Our analysis should provide, at the least, a starting point to assess the economic impact of new retail development. Economic analyses of new retail development must consider the potential for the development to attract nonresident spending. Aside from making the region more attractive to visitors and investors, development, which competes with existing retail stores, likely will have an insignificant economic impact – a zero-sum game. On the other hand, new stores, which are unique to the region and the surrounding region, have the potential for a more significant impact.”

KIRES Report No. 14 is available electronically at http://kires.king.edu, along with the previous 13 reports by the King Institute for Reginal Economic Studies.

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