Why do people say you should buy from local businesses?

Is it just a tactic small businesses use to get people to buy from them? Why should you care?

If you’ve asked yourself these questions, you’re not alone. The buy local movement has been around for some time, but if you’re just hearing about it you’re probably wondering why it matters who you buy from.

There are many reasons to buy local, from cutting back on the distance goods have to travel, to simply supporting the businesses in your community. However, we’re going to focus on one major benefit of buying locally in this post. 

How Money Stays in Your Community When You Buy Local

When you make a purchase with a local business that sources its services or products at the local level and is owned by local owners, something very different happens with your money than when you spend with international businesses or national chain stores. 

Multiple studies have shown that buying local keeps money in the community rather than allowing it to be sent away to a far-off destination where a company's stockholders and executives reside.

This is called the Multiplier Effect, and according to the American Independent Business Alliance, The multiplier is comprised of three elements — the direct, indirect, and induced impacts. 

• Direct impact is spending done by a business in the local economy to operate the business, including inventory, utilities, equipment and pay to employees. 
• Indirect impact happens as dollars the local business spent at other area businesses re-circulate. 
• Induced impact refers to the additional consumer spending that happens as employees, business owners and others spend their income in the local economy.

The combination of these 3 impact sources keeps a local economic ecosystem healthy. When these 3 effects are absent, revenue from the local economy gets sucked out, never to return.

The Institute for Local Self-Reliance conducted perhaps the simplest study of the local multiplier effect in several small Maine communities in 2003.

The study examined how much of a dollar spent at a local independent store is re-spent in the local area as payroll, goods/services purchased from area businesses, profits spent locally by owners, and as donations to area charities. The study found each $100 spent at local independents generated $45 of secondary local spending, compared to $14 for a big-box chain — nearly identical to later results across the many Civic Economics studies.

That’s an incredible gap between local independent stores and big box chains!

Small Businesses Donate 250% More to Charity Than Chains

Another way reason money generated by small business stays in the local community is through charitable donations.

According to the Seattle Good Business Network, small businesses donate 250% more than larger businesses to non-profits and community causes.

Do national chains donate to charities? Sure! We’ve all seen the press campaigns announcing large donations to a great cause, and that’s awesome, but you have to view these donations in the context with their overall revenues.

Al Norman of Sprawl-Busters cautions that communities need to keep corporate retailers’ donations in perspective. “Wal-Mart donated $163 million in 1999,” he notes. “That’s a lot of money, but it represents less than one-tenth of one percent of Wal-Mart’s total revenue. It’s the equivalent of someone who makes $40,000 a year giving $40 to charity, and then making a lot of noise about it.”

Furthermore, there are studies on the effects of company size on charitable contributions, and the results show that as companies scale up, donation sizes shrink:

In 1991, Dr. Patricia Frishkoff, Director of the Family Business Program at Oregon State University, completed a study of charitable giving by 182 businesses in four communities. She combined cash donations with the value of in-kind contributions and found that the small businesses were more generous.

Companies with fewer than 100 employees gave an average of $789 per employee, compared to $334 per employee at firms with more than 500 employees. The 128 small businesses studied donated a combined total of $2.5 million to charitable causes.

So having a diverse collection of smaller local businesses means more revenue stays in the local economy through nonprofits and charities.

Job Creation from Small and Large Businesses

In addition to economic changes experienced by the community after a large big box store or chain store comes to town, there are also impacts on the local job market, which includes poverty rates and the wages and benefits enjoyed by employees.

According to research by the Institute for Local Self-Reliance:

“Studies have found that big-box retailers, particularly Wal-Mart, are depressing wages and benefits for retail employees.”

In addition, a study entitled The Effects of Wal-Mart on Local Labor Markets suggests:

“Analyzing national data, the study found that the opening of a Wal-Mart store reduces county-level retail employment by 180 jobs.”

Although it may seem as though large companies who move into town will employ many people, the reality is that small businesses are forced to close because they can’t compete with the financial might of the large company. As a result, small businesses lay off their employees and the net effect is job loss rather than employment gains for the community.

Here’s How You Can Compete With Large Chains

Here are five things small retailers can do to compete with the large chains:

1. Be Distinctive: Make sure your company stands out! You can do this with great branding: making certain that local people associate your business with the products they need.
2. Join or Start a Buy Local Campaign: Buy working together with other local small businesses you can amplify your resources and reach. Start pitching in to build awareness for small businesses in your area. You have more in common with them than the large chains that compete for customers in your area.
3. Offer Value: Don't hide the fact that your prices are probably higher. Instead, create value by providing an experience when customers visit. Additionally, reward regular patrons with frequent specials through e-newsletters and social media. 
4. Differentiate Products: Because large retailers rarely take chances on new products or new developers, specialty stores have the first opportunity to offer exclusive new items.
5. Get Online: Even if your company is small by comparison to national chains, you can still offer a fantastic website to support the in-store experience. Online shopping will continue to become a preferred method of shopping, so offering your clients this convenience will be a key to success.
6. Go Social: Put in the work to excel at attracting and retaining fans, especially on a local level. No matter how small your retail company, you need to be engaging your customers through social media.

Don’t Let Big Companies Overshadow Your Business

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