Impact of Contraband, Bootlegging and Peddling on Inner City Small Business Success: A Millennial’s Perspective
Abstract
Inner cities were the business hub for a long period of time. However, in the last 30 years, many large and small businesses have closed down their shops and moved out of inner cities to more affluent city suburbs. Especially noteworthy is the fact that small essential businesses such as grocery stores and drugstores are closing down their stores in inner cities despite a huge demand prevailing there. There are many reasons attributing to the problem. Contraband, bootlegging and peddling definitely have forced some of the small business owners to shut down their business. They are unable to compete with the price offered by the smugglers and they are also unable to seek help from the law enforcement officials for the fear of retaliation and personal attacks by the local hooligan groups. However, the main problem stems from the socio-economic factor such as rising poverty and growing income gap in inner cities. People in inner cities are often jobless or are employed in low paying jobs. This has reduced economic activity in the inner cities and diminished the attractiveness of the same to potential business owners. The problem needs to be eradicated from its very root as increasing policing in the area only will not help. Older millennials are showing same pattern like generation X and baby boomers. They are preferring to stay in city-burbs than the city cores. This is also moving the new businesses away from inner cities.
Introduction
US inner cities are in a constant state of decline for the last 20 years. City downtowns were the most happening place for any cities in the past that attracted many businesses in downtown but in recent years the trend has changed. Most of the businesses are shifting from inner city locations to city suburbs. Companies are not only shifting their manufacturing bases and offices from inner city locations, but are also shifting essential businesses like grocery store, drug store and restaurants to suburbs (Tretter, 2013). A recent study conducted on food deserts in America found that most of the food deserts in the USA are concentrated in inner cities such as south side of Chicago, north side of Philadelphia and east side of Detroit (Mcgahan, 2013). This is particularly concerning as the population density of the inner cities is among the highest and the US government has been trying to improve the life of inner city dwellers for a long time. If the businesses start leaving inner city areas, then the government initiatives will not be able to provide any sustainable result to improve the inner city socio-economic condition. Socio-economic condition and business closures are circularly connected and both seems to be on a negative spiral lately. There is almost no direct research available on the causes of business closures in the inner cities of the USA. This essay will primarily examine the earlier research studies and available trends and reports to find out the causes of business closures in inner cities. The essay will then provide possible solution to the problem based on current evidences.
Business Closures in Inner Cities: Myth or Fact
As per statistical data presented by several organizations such as Dead Malls, Forbes and Reuters, business closure in the inner cities of the USA is a fact. However, almost all the studies suggested that this trend is not a universal phenomenon. Most of the established city downtowns in the USA are facing major issues. City downtowns such as Cincinnati, Chicago, Detroit, Cleveland, Atlanta, Dallas, Kansas City, and Miami are witnessing a huge number of small and big business closures across all the business segments (Mcgahan, 2013). On the other hand, downtown New York, Orlando, Houston are not seeing as much business closures as others. However, many studies cited that business closure is not a phenomenon affecting megacities only; it is also affecting the mid-tier cities. In fact, after the recession of 2008, business closures in smaller city downtowns are more prevalent than that of bigger cities (Tretter, 2013). For example, smaller cities such as Chelsea, Michigan or Polson, Montana have witnessed a huge number of business closures.
Business closures are not an uncommon phenomenon, and over the years because of changes in economy, some businesses shift from one location to another. However, new businesses replace them as per the local need. This is not the case in the current scenario. In a study conducted by U.S. Department of Agriculture (USDA), it was found that food deserts are most prevalent in inner cities. Large food deserts exist in the inner city areas of Washington D.C., Philadelphia, Atlanta, Miami and Chicago among others (Economic Development Quarterly, 2015). Given the fact, it is surprising that these cities have huge economic activities. In fact, the study found that inner city locations are not a preferred choice of grocery stores or food vendors. For example, Walmart, Kroger and other giant superstores are conveniently neglecting inner cities and opening their stores only in affluent city suburbs (Pothukuchi, 2005). This trend means that the inner city dwellers either need to shop from small local grocery stores at a high price or they need to travel to city suburbs for shopping grocery, which is often not an option. The quality of food available at small grocery store is below par standard and the options of goods available are limited. For example, the varieties of fruits sold by Kroger and the prices at which they are offered cannot be matched by the product offerings of small inner city grocers. However, the reasons for big grocery chains not to be willing to come to inner cities is not fully researched. As per statistics released by the US Food and Drug Administration (FDA), the average grocery expense of a family of four is $821 per month (Economic Development Quarterly, 2015). Given the huge density of population in inner cities, if the average spend is lower, then the volume should justify operating stores in the downtowns. Restaurants, which once were the main hangout joints in inner cities, are now on a steady decline. Although, many cities still have the most popular restaurants located in inner city areas, very few new restaurants are opening up there. In fact, a downward trend is visible in the number of new restaurants opening up in inner cities. The main concern is that if a restaurant closes down due to financial difficulty, no new owner is willing to occupy that place for opening a new restaurant from the fear of safety, violence and other bad practices (Tretter, 2013).
Apart from fewer choices in terms of grocery items, other businesses such as hospitals, outpatient clinics and drugstores are also closing down in the inner city areas. Forbes published a report that clearly showed that many hospitals do not want to operate in inner cities due to non-profitability (Economic Development Quarterly, 2015). Most of the patients paying visit to the inner city hospitals are either uninsured or are insured via Medicaid. In both the cases, hospitals had to bear the majority of the cost of treatment. Additionally, most of the people living in inner cities do not have a primary physician and often opt for emergency room treatment at an advanced stage of the disease. Providing medical attention to these patients is costly for hospitals that often fail to recover most of the cost. This is forcing the hospitals to close their operations down in the downtowns and moving to more affluent city suburbs. Many hospital chains such as Mercy and St. Luke’s have moved their city operations to more convenient city suburbs of Detroit and Toledo, showcasing financial difficulty. The number of big hospitals in the major US cities were 723 in 1980, which has reduced to 427 in 2010 (Economic Development Quarterly, 2015). Drugstore is another business seeing a huge number of business closures in inner cities. In fact, in cities such as Miami, drugstore operators are citing safety as a huge concern for inner city operations. Only a handful of drugstores are available in the inner city areas and those too are inadequate and non-exhaustive in terms of coverage and supply of medicines.
Apart from the above businesses, there is an increasing trend of small businesses to shift their inner city operations to city suburbs or smaller cities. For example, Owens Illinois, which once had its headquarter in downtown Toledo, has now shifted its world headquarter to a nearby city suburb because of low rental cost and better availability of services (Tretter, 2013). Small shopping malls are another type of business showing a continuous decline in the inner city areas. High end luxury stores are thriving in some areas, but middle tier stores are facing problem as they are not seeing enough sales volume to sustain in inner cities. Business closure is rampant across all the industry verticals in inner city areas and it continues to be a worry for the dwellers and policy makers.
There are several reasons for business closure in the US inner cities. Starting from counterfeiting, contraband, bootlegging, and peddling to socioeconomic factors, all contribute to the problem of business closure in the US inner cities. There is no presence of a comprehensive research done on the possible reasons for small business closures in inner cities of the USA. However, if the literature available on this issue is analyzed closely, a pattern will come to notice. The primary reasons for small business closures and large business closures are starkly different from one another. For small businesses, the reasons contributing to business closure are discussed in detail in the section below.
Role of Counterfeiting, Contraband, Bootlegging, and Peddling
Inner cities used to be one of the most sought after places of any city in the past. Especially, for pre-millennials, inner cities were the most happening place because of the large concentration of shopping malls, restaurants, and other forms of entertainment. However, as most of the large businesses started moving out from inner cities into more affluent city suburbs, the overall economic activity of the inner cities reduced gradually. Initially, most of the places left vacant by large businesses were occupied by small businesses, but due to the lack of economic activity, the overall per capital and expenditure in inner cities reduced drastically. This put a significant amount of stress on small businesses that were operating out of inner cities. Additionally, during this time, there was a big demographic shift happening in the inner cities which became largely occupied by people of small means. Most of the rich people, who were hitherto dwelling in inner cities, started moving into plush city suburbs. This reduced the overall per capita expenditure of inner city dwellers, which started directly affecting small business houses. Additionally, owing to non-availability of enough jobs in inner cities, the poverty level and the rate of unemployment increased significantly (Baeten, 2004). This resulted in increased rate of crimes and illegal business practices such as contraband, bootlegging, and peddling.
Many parts of the inner city areas were controlled by different illegal groups that often extorted money from small business owners. Additionally, many of these groups were involved in peddling affairs in which they often looted grocery delivery vans and sold the stolen goods on the road at a cheaper price, thereby affecting the overall revenue of small businesses (Tretter, 2013). Small businesses did not have the financial leverage or monetary power to fight these gangs and therefore, they ended up losing business and ultimately closing down their shops. The bootlegging and peddling activities forced a good many small businesses, especially grocery stores and small discount stores, to shut down their business in places such as south side of Chicago, Baltimore, north side of Philadelphia, and Detroit downtown. Cities such as Miami, Orlando, Dallas, and San Antonio are witnessing different types of contraband and counterfeiting activities (Curry, Latkin and Davey-Rothwell, 2008). In these cities, several illegal drug stores are selling drugs smuggled from Mexico or from other Caribbean countries at a cheap price. Legitimate drug stores are unable to compete with their illegal counterparts in terms of price. Additionally, counterfeiting and smuggling rackets also at times rob the legal drug stores and sell the stolen medicines in the market at a cheaper price. This is creating a huge financial stress for the small legitimate drug stores that often shut down their business in the inner city areas and shift to safer places such as city suburbs or other small cities.
Cigarette smuggling is another illegal activity contributing to the shutdown of small businesses. A lot of small downtown businesses make substantial amount of revenue by selling cigarettes (Green, 2015). However, owing to huge difference in taxes from one state to another, cigarette smuggling is rampant in many states of the USA that charge high tax on cigarettes. New York, which charges $4.75 per packet of cigarette, is one of the cities charging high tax on cigarettes (Green, 2015). On the other hand, Virginia, which is only two hours away from New York, charges only 30 cents per cigarette packet as tax (Green, 2015). The differentiating tax rate between states has contributed to the development of a huge cigarette smuggling racket between Virginia and New York City as the consumption of cigarettes in New York City is one of the highest in the USA. Small businesses that are taking part in the cigarette smuggling process are able to generate more revenues than others. This forces the legal cigarette vendors in the New York City to go out of business as they cannot match the price offered by the smugglers (Green, 2015).
The above paragraphs reveal that contraband, bootlegging, and peddling activities contribute to the small business closure in inner cities. However, with increased level of security and police activity, the effect of contraband, bootlegging, and peddling is offset by more legal business practices. Hopefully, in the future, these factors will not act as the main deterrent to small business operations in inner cities.
Socio-Economic Factors
The previous section showed that contraband, bootlegging, and peddling make severe impact on the business operation of small business houses in inner cities. However, those are not the core issues for business closure in inner cities. The core issue for business failure in inner cities stems from socio-economic factors. Over the past 40 years, the poverty level in the US inner cities has only multiplied (Baeten, 2004). Even after the implementation of several public policies, the situation has not improved. Due to the convenient location of inner city, many people prefer staying in inner city than in city suburbs. However, over the years, some patches of inner cities were occupied by low-income groups. Often these people concentrated in those areas where public facilities were not fully developed. When businesses started moving out of inner cities to city suburbs, the condition of inner cities deteriorated, leading to the low-income groups to spread over the larger part of inner cities. As the tax income of inner city areas decreased, policy developers could not spend much on the development of infrastructure. This started the negative spiral for the inner city and its dwellers. Lower investment in infrastructure forced more businesses to move out of inner cities, and this resulted in reduced tax income and increased unemployment rate and poverty. This triggered further budget cuts and fewer investments on infrastructure, which further brought down the number of companies operating out of inner cities (Tretter, 2013). Over a period of time, inner cities became a hub of poor unemployed people who often resorted to criminal activities to make ends meet. These people often targeted small local businesses in and around inner cities. Because of these poor socio-economic conditions, many small businesses started closing down their operations in inner city areas in the fear of extortion, looting, and increased crimes.
Apart from increased level of crime, another factor that decreased the overall economic activity in the inner city was increased level of poverty. Most of the inner cities across the USA have the presence of a large percentage of African American and Latino population that earns less than $30,000 per year, which is almost 60% less than the average American household income (Economic Development Quarterly, 2015). Added to that, the cost of living in inner cities is not cheap. Therefore, these people do not have any disposable income that can increase the overall economic activity in the region and thereby improve the overall economic condition of the region.
Although it may seem from the above discussion that poverty, illegal activities, and criminal behavior are the three most contributing factors to force the small businesses to shut down their operations in inner cities, the actual core issue is purely economic in nature. In the last 40 years, the overall business landscape in the USA has undergone a sea change. People with substantial monetary strength have moved to either city suburbs or smaller cities. Organizations also have moved to city suburbs and smaller cities due to tax benefit and lower cost of operation. Therefore, the overall economic activity has shifted from city downtowns to the affluent suburbs (Tretter, 2013). Due to the lack of economic activity, inner cities have become ghost towns. Millennials perceive inner city as a place for poor, which is in complete contrast to the image pre-millennials have of inner cities (Economic Development Quarterly, 2015). Until and unless the economic condition of inner cities can be improved, no sustainable solution will be reached and small businesses will continue to shift their base from inner cities to more convenient business locations.
Millennials Perspective
Figure: Where Millennials want to live (Walker, 2015)
Millennials are the largest population group in the human history even larger than the baby boomers. Although we call all those born after 1980 as millennials but older millennials and younger millennials show different pattern when it comes to living in inner cities and helping start small businesses. In a recent study conducted by ULI it was observed that only 13% would like to live in the inner city areas (Walker, 2015). Over the last, 10 years many people lauded millennials for coming back to inner city areas and revitalizing the city cores. However, as the first generation of millennials are aging, a trend towards settling to the suburbs have started like it happened for generation X and baby boomers.
Many Urban theorists like Peter Katz still maintains that millennials want a new identity for themselves and they feel that city centers are the place from where they can start their journey (Kotkin, 2013). However, that theory seems to be not working form old millennials who have entered their thirties. Millennials (old) like their previous generation also see inner cities as a less safe place for staying and raising a family. Some of them have said that they opted for downtown living for convenience (can ride a bike to go to office) rather than a permanent choice (Norris, 2012). It seems that the next generation of millennials will also start moving out as soon as they become more economically stable in their life. This trend is not helping small businesses in downtown areas.
Figure: 77% of Millennials plan to live in Urban Core (Norris, 2012)
However, all millennials are not opting for suburb over city centers. In fact, for the first time in over many decades, millennials are starting a trend of opening new businesses in the downtown areas. Millennials care more for inclusive and environmentally responsible holistic growth than its previous generations. Many millennials unlike its previous generations see the contraband, bootlegging and peddling practices as an opportunity for new businesses rather than a barrier (Kotkin, 2013). They believe that there is a huge growth opportunity for new business growth in city centers if they participate with the local community to reduce malpractices. Instead of shying away from the problem, a substantial percentage of millennials are trying to understand socio economic problem of crime in the inner cities and trying to solve the problem from inside. Adam Hollier and Cornetta Lane, both below the age of 30, have taken several measures to improve small businesses in eastern side of Detroit metro area (Kotkin, 2013). Similar stories are also cropping up in many other inner cities such as Minneapolis, Chicago, Los Angeles, New York and Seattle. Wendell Cox, renowned demographer, believes that this trend will not be sustainable as more millennials enter their 30s (Kotkin, 2013). However, even if a decent percentage of millennials continue to live in inner cities and help the inclusive growth drive then US inner cities may get back some of its lost charm.
Conclusion
Inner cities used to be the most happening place in the USA till the 1980s. However, over the past 40 years because of large migration of businesses from inner cities to city suburbs, the overall economic activity in the inner cities has come down drastically. Although small businesses thrived initially in the absence of large businesses, soon they felt the growing impact of reduced economic activity. As the rich and affluent middle class people started shifting to city suburbs, the poverty level in inner cities increased. Owing to the lack of sufficient number of jobs, the overall unemployment rate and poverty multiplied in inner cities. Sustained level of poverty over the years led to increased rate of crimes, which led to contraband, bootlegging, and peddling activities. Small businesses unable to compete with the counterfeiters and crime rackets shut down their business and moved to safer places. Although it may seem that by reducing the criminal activity in inner cities, the economic activity in this region can be improved, that is not the case. Until and unless socio-economic conditions prevailing in inner cities are addressed using sustainable holistic measures, the current trend of small business closure in inner cities will continue.
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