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POINT: Is retail brick and mortar still a good investment for cities?

No. Tax incentives caused the retail apocalypse; Illinois will feel it soon

    Following the end of the Great Recession, retail sales in the United States have been growing at their slowest rate on record. Over the past two years, sales of retail products have grown at about half their post-World War II rate. Given the economy is entering its ninth year of recovery, retail sales growth is weak, hovering maybe 1.5 percent above inflation.
    In contrast, real growth in e-commerce sales is about 10 times faster. E-commerce sales of retail goods grew by more than 15 percent last year. Since the end of the recession, e-commerce sales have expanded from 4.1 percent to 8.9 percent of total retail sales and now totals $111.5 billion. Few readers will be terribly shocked by these data. Amazon, Walmart, Zappos and others are rushing to seize market share in an industry where the absence of an online presence is apparently invitation to closure.
    The crass industry term for this is Retail Apocalypse. Since 2010, Sears has closed more than 2,000 stores and Walmart more than 150 locations, marking its first actual closures in 50 years of business. Old steadfast firms such as Macy’s, Gymboree and Radio Shack are closing stores. Likewise, newer offerings from Teavana, Lululemon and Gamestop are cutting their brick and mortar footprint.
    It is no wonder that American retail stores are in trouble. The USA has more than twice the square feet of retail space of our next closest nation (Australia), and more than five times that of the typical European nation. At that rate, we have maybe twice the retail space we will need in 2025. How can that be?
    Americans consume more retail goods than other nations, but not twice as many as Australians, or five times that of European. The most likely reason we are now closing brick and mortar stores is that government incentives for retail firms are ubiquitous and stunning.
    Since 2010, the Subsidy Tracker at Good Jobs First accounts for some $2.45 billion in state and local incentives for retail firms. Illinois alone has spent $404 million since 2010, on 60 retail deals. Unfortunately, the incentives for 20 of these were undisclosed. It is likely each Illinois household has unwittingly spent more than a $100 to subsidize retail firms, like Walgreens, Kohl’s, Aldi’s and Family Dollar, Old Navy, Menard’s, Walmart and others.
    I confess to being a bit confused by all this, but I supposed most sane Illinois residents would have thought the state government had more pressing fiscal problems than incentivizing Old Navy. The current retail apocalypse has some analysts suggesting will lead to the loss of 25 percent of U.S. malls, and maybe half of rural and small-town stores by 2025.
    To be clear, this loss of American retail stores is primarily due to a bubble in retail space, largely caused by poorly considered incentives offered by state and local governments. Illinois is one of the gravest offenders nationwide, accounting for one out of every $6 spent nationwide incentivizing retail stores. Big bubbles burst deeply, as Illinois residents will soon learn.
    The use of tax dollars to incentivize retail stores is not an inherently bad idea. Households relocate to places with attractive amenity mixes, and retail is an important part of that. The problem in any incentive from TIF to direct subsidies lies in their overuse. And to be clear, they have been mightily overused in Illinois.
    In the coming year Illinois residents will hear a great deal of clamoring for new incentives for retail stores. The claim of job creation is a siren song to elected officials, but Illinois and all her communities face much more daunting fiscal problems. Continuing to reinflate the retail brick and mortar bubble in Illinois is simply folly.
    Michael J. Hicks, Ph.D. is a George & Frances Ball Distinguished Professor and director of the center for Business and Economic Research at Miller College of Business, Ball State University. He wrote this column at the request of the Illinois Business Journal.

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