Ethical Risk: Independent Small vs Big Box Store Competition

January 8, 2021 by David Nitkin | Categories: Stakeholder Engagement | Tags: competition, Retailing No Comments ↓

One in seven retail stores may not survive the pandemic’s second wave. Compounding the tragedy, experts fear that many retailers who do struggle to stay afloat and may temporarily close during lockdown will, even if they survive limping, fail after the pandemic is over. One serious dimension of those struggles is the inequity that large box stores and e-commerce warehouse operations are allowed to remain open during lockdown whereas small stores are closed, except for curbside pickup or home delivery. Customers patronizing box stores for groceries or drugs can also shop for a whole range of other non-essential products.

This Blog addresses three questions.

One, to what degree do distancing and lockdown rules disproportionately and unfairly affect small business?
Two, what remedies might exist to address this unfair competition?
Three, what actions can communities, retailers and governments take to help small and medium-size businesses not only to recover but also to prosper—during and after the pandemic?

The Issue

Retail has undergone profound transformation during COVID. As noted in EthicScan blogs COVID Adaptation Scenarios: Retailing (July 4) and Radically Remaking the Future of Retailing Industry Post-COVID (November 12), this includes enforced closures or curtailing of services, the growth of e-commerce and curb-side pick-up, and stronger competition from big box stores and online giants like Amazon. Alleged manifestations of unfair competition include:

Profits at large, diverse-merchandise box stores like Walmart and Costco (where in-store shopping is allowed) are surging in part because their sale of non-essential goods is not addressed by lockdowns rules on diverse-merchandise, big box stores.
Retail stores of all sizes have had to invest heavily in creating safe and healthy environments for workers and customers.
Malls and box stores with in-store shopping face rapidly changing, different rules than do smaller independent retailers.
87 per cent of Canadians surveyed agreed that closing small retailers to in-store sales while allowing big box stores to remain open is unfair.
A few big-box stores now account for 29% of total US retail sales: that’s a 14% increase in market share since the pandemic started.
Canadian Federation of Independent Business survey conducted in August showed 82 per cent of Canadians are worried their favourite local businesses will shut down. That possibility is quite real. Some 225,000 businesses across the country may permanently close due to COVID-19. Even those that survive could be paying off debt for years to come.

In most regions of Canada, markets are a retail oligopoly where a few sector players control a large portion of business. Retailing is generally said to be characterized by low wages, part-time hours, and lack of health insurance and pension benefits. Many chains generate fewer ripple effects in local economies: they are said to procure less, bank less, contribute less, and proportionately participate less. With this much concentrated power comes both the temptation and potential reality for market abuse.

Coronavirus changes have contributed to a complex shopping environment that has affecting owners, customers and retail staff as well as the bottom line in specific ways:

Third quarter profits in 2020 were up at Amazon 53%, Walmart 45% and Costco 11%.
There is a lack of clear, harmonized, government rules for business operations — even within the same province or region– with many shoppers unsure about what’s open or closed.
While big box stores, often foreign-controlled, remain open (alongside those declared essential like grocery and pharmacy operations), local businesses declared non-essential have been told to close once again.
Tighter restrictions and lockdowns tend to hurt certain categories of retail — regardless of size.
Many retailers who have made sanitation and face-to-face contact investments, including enforced mask-wearing and hand sanitizing, now find they’re being forced to close.
Many businesses that remain open but are operating at a reduced capacity are losing money and facing mounting bills.
Independent businesses appear to be structurally disadvantaged against the big box competitors.

On-line sales giant, Amazon, which is being investigated by the Competition Bureau, has had a long-term disruptive impact on retail markets due to its ability to both offer a substantial assortment and provide an efficient service to residential addresses unmatched by most small or mid-sized retailers. According to industry insiders, Amazon’s practice is to review sellers of fast moving products on their marketplace, find a supplier who could produce an ‘Amazon own label’ and then position it visibly on the virtual shelf with a price point to attract consumers looking for a good deal. The advantage Amazon has is immense data analytics capabilities and a keenness to be the most customer-centric retailer in the world. The Competition Bureau investigation of Amazon will attempt to determine if Canadian retailers have been disadvantaged by not being allowed to list on Amazon.

Big-Box Retailing

Big-box retailing refers to massive “big-footprint,” “category-killer,” stores such Walmart, Home Depot, and Costco that have reshaped our country’s economic and physical landscape during the past few decades. A number of features that typify big-box stores. They:

occupy more than 50,000 square feet of space (sometimes as much as 250,000).
require large sales volumes, so they often use predatory marketing strategies to take sales away from existing retailers.
rely on shoppers who typically arrive at the store by car, so they need large-capacity roads.
include acres of parking and occupy a large footprint.
create a site development that neglects many community or pedestrian amenities.
attract massive subsidies in the name of “economic development”, although they pay poorly, fail to provide most employees with full-time hours, and often cannibalize existing retail employers.

Big-box stores are icons of sprawl. Since they occupy large footprints, they rarely choose urban infill locations and opt instead to locate in suburbs and exurbs, furthering the movement of economic activity away from urban cores. With their massive parking lots and big-road access systems, they are often inaccessible or poorly accessible by public transportation. Increasingly, dead malls (called “greyfields”) and abandoned big-box stores (or “ghostboxes”) litter Canada’s and America’s landscape.

An abandoned mall open to the elements

For decades, larger retailers have attempted to battle and dominate competitors. With their massive advertising budgets, chains have the ability to squeeze suppliers on wholesale prices, and use of devices such as “loss leaders” and end-cap specials (those catchy deals at the ends of aisles), the chains have the ability to undercut smaller retailers.

Criticism of the harm caused by Big-Box Retail chains include:

(a) they undermine small businesses and entrepreneurship;
(b) they foster decline in main street retailing;
(c) they undermine retail wages;
(d) they promote loss of open spaces and natural habitat;
(e) their hidden costs include taxpayer-funded economic development subsidies as well as public food and health-care assistance paid to low-wage workers; and
(f) growing mall abandonment leads to a staggering drop in property taxes.

Changing Regulations and Unfair Competition

During the first wave of mandated shutdowns, only select retailers deemed essential were permitted to remain open for business. This time around, during wave two, efforts to expand the definition of an essential product or retailer have helped keep more stores open. Some business analysts say the retailers that have benefited most tend to be bigger stores that offer more products which government officials deem to be essential. The outcome is that some stores can remain open while similar retailers are forced to close.

Pandemic lockdown inconsistencies and equalities include the following:

(a) if reducing time spent indoors in crowds is the objective, then shopping in neighbourhood small businesses is a better choice;
(b) it makes no sense in health terms to close small businesses that are deemed non-essential to in-store shopping while pushing crowds to big box stores who are permitted to sell the same merchandise, like Ontario has done in Toronto and Peel; and
(c) retailers who are not considered essential include small, medium and large businesses. For example, an apparel chain may have 30 stores in a province, but because it’s not essential, it will remain closed.

If a retailer sells goods that fall into an essential-goods, public-health order category, it can continue to operate, whereas if it sells only books or flowers, for example, it would have to close. The unfair playing field has the following characteristics:

larger retailers and big box stores remain open, while smaller independent stores are closed.
while a local bookstore is shuttered, for example, shoppers can still buy books at Walmart and Costco.
an independent flower shop is fully closed but you can buy fresh flowers at the grocery store.
little public evidence is being released that analyzes the degree to which retail has been a major contributor to the spread of COVID-19.
the lockdown and closure of ‘non-essential’ operations may make things worse health-wise by funneling shoppers together into big box stores.

Pandemic and Post-Pandemic Remedies

Remedies need not involve just government. There is comparatively little public discussion of alternative multi-stakeholder remedies like the ones from the Knowledgebase noted here. While remedies proposed for pandemic times may be transitory, many would seem to have benefits beyond COVID. Some of these remedies are mutually exclusive; others can or might be applied in combination.

Remedy	Ethical Description	Stakeholder Ethical Impact Analysis	Category
Remedy	Ethical Description	Stakeholder Ethical Impact Analysis	Same Rules For All	Different Rules	New Rules
Close non-essential areas of big box stores (1)	Fair	Disadvantage vendors and consumers intent on in-store shopping	X		X
Impose capacity restrictions on big box stores (1)	Positive health infection risk reduction	Disadvantage vendors and consumers intent on in-store shopping		X
Allow small firms to open for in-store shopping with a strict capacity (1)	Negative health risk impact	Assist smaller vulnerable businesses		X
Change property assessment standards to reflect measureable local services advantages (2)	Positive health promotion impact	Encourage essential services in inner city and marginal communities		X	X
Remedy	Ethical Description	Stakeholder Ethical Impact Analysis	Category
Remedy	Ethical Description	Stakeholder Ethical Impact Analysis	Same Rules For All	Different Rules	New Rules
Community groups and businesses collaborate to promote local buying initiatives (3)	Address food insecurity Reduce crime and promote community cohesion	Help extend survival and pivoting options for local entrepreneurs		X	X
Change property insurance rules to reflect pandemic risk	Recognize and reward investments in healthy workplaces	Assist smaller vulnerable businesses	X	X	X
Provinces avoid blanket lockdowns during holiday periods	Negative health risk impact	Confusing public health message to consumers and retailers		X
Change business registration practices standards (2)	Address food insecurity Reduce pollution	Encourage safe curbside pick-up and home delivery		X	X
Invest tax dollars in community enterprise	Address health services inequalities	Assist access to enhanced temporary funds for local businesses	X	X	X
Fund detailed independent research of retail dissemination of infection risk (1)	Add knowledge to public policy decisions	Empower public health policy and front line health care workers			X
Remedy	Ethical Description	Stakeholder Ethical Impact Analysis	Category
Remedy	Ethical Description	Stakeholder Ethical Impact Analysis	Same Rules For All	Different Rules	New Rules
Specific sector business associations set up shared low cost local delivery options (3)	Enhance community cohesion and local economies	Enhance resilience of local businesses		X	X
Require financial institutions to offer services in underserviced communities	Reduce access to opportunity and quality of life inequities	Reduce mental and physical health risk to retailers and at risk populations		X	X
Require essential businesses to service high health and food insecurity risk areas	Positive health promotion impact	End red-lining of essential services in inner city and marginal communities: food, prescriptions, loans, clothing		X	X
Control cross-boundary shopping (1)	Positive health infection risk reduction	Infringe on privacy and personal mobility rights			X
Require companies to disclose (a) taxes paid; (b) receipt of taxpayer benefits	Add knowledge to public policy and consumer decisions	Enhance corporate accountability and transparency	X		X
Status quo (1)	Unfair				X

Source: EthicScan

(1) application in COVID times
(2) municipal government initiative
(3) community initiatives

Ethical Analysis of Renewal, Recovery and Beyond

Photo by Branimir Balogović

The thinking and actions that communities, retailers and governments might take to aid small and medium-size businesses not only to recover but also to prosper—during and after the pandemic — include the following ethical perspectives:

1. The application of any lockdown rules would seem to disproportionately affect already disadvantaged small and medium-sized businesses.

2. Supporting a local economy should involve more collaborative initiatives from consumer groups, social justice groups, co-ops, public-health agencies, employee assistance programs (EAPs), and business improvement associations (BIAs): these overlapping-interest stakeholders understand relational local benefits above and beyond just transactional business relationships.

3. Retail oligopoly is unlikely to change: that is, economy of scale will continue to favour sector-dominating larger enterprises that have more home delivery, on-line resources, channel management, store locations, and partnership agreements.

4. Lockdowns disproportionately hurt certain categories of retail regardless of size of business.

5. There is insufficient scientific testing, transparency, or evidence about the degree to which what kinds of retail, when and where, are hot spots of transmission of infection.

6. Tax avoidance accounting by foreign-owned on-line retailers remains a growing problem that contributes to less public monies available for addressing the social determinants of disease, fighting food insecurity, and preventative health care.

7. Dead malls (“greyfields”) and abandoned big-box stores (“ghostboxes”) litter our urban landscape. Our nation is awash in excess retail space.

8. There is insufficient measurement and analysis of the physical and mental health consequences of the pandemic upon populations like retail staff (we’re at risk and dying while supporting you) and entrepreneurs (we’re earning much less and working much harder).

Conclusion

Advocates of reopening the economy have been battling with those who would stress disease control. As infection and hospitalization rates have changed, so too have government rules mandating degrees of lockdown, each with different consequences. The choices implemented raise questions of equity and fairness. Health regulations not only have done little to give support to those retailers and their employees that are most at risk of dominant oligopoly in retail but also have demonstrated inconsistency, lack of transparency, and unnecessary confusion among consumers.

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