The local spending compounding impact
When consumers spend money at local businesses rather than online retailers or out-of-town chains, dollars tend to recirculate through the local economy many times. This is known as the “local multiplier effect” or “compounding effect” and significantly boosts a community’s economic vitality. Studies find the multiplier for local spending typically ranges from 3 to 7, meaning that each dollar spent locally generates an additional $2–$6 of economic activity in the community.
The multiplier effect occurs because local businesses are more likely to spend their revenue within the community as well. When a consumer spends $100 at a local shop, that business owner may use some of that money to: pay wages to local employees, purchase goods/services from other local businesses, pay rent to a local property owner, donate to local charities and organizations and so forth. Those recipients then re-spend much of that money locally as well, creating an ongoing cycle of local economic activity. In contrast, when a consumer spends $100 with an online retailer or chain store headquartered elsewhere, most of that money immediately leaves the local economy.
Several studies have attempted to quantify the local multiplier effect. A frequently cited study by Civic Economics found that spending $100 at a local bookstore generated $45 of local economic activity, vs. only $13 for a chain bookstore. The New Economics Foundation in the UK found that £10 spent at a local food business was worth £25 to the local economy, compared with just £14 when spent at a supermarket chain. A study in Salt Lake City found local retailers recirculated 52% of their revenue locally,
compared to just 14% for national chains.
These examples point to local multipliers in the 3-4x range. Some analyses have found even higher multipliers. An economic impact study in Portland, Maine estimated that shifting 10% of consumer spending from chains to locally-owned businesses would generate $127 million in additional local economic activity - implying a multiplier over 7x. Studies by the Institute for Local Self-Reliance have found multipliers ranging from 3.5x to more than 5x across various communities and business types.
The strength of the local multiplier effect can vary based on several factors. Type of business: Some local businesses, like restaurants and service providers, tend to have higher local multipliers than retailers because they have higher labor costs relative to inventory costs. Communities with more robust local supply chains will see stronger multiplier effects as businesses can source more goods and services locally. More densely populated areas often see higher multipliers due to the proximity of businesses and consumers. Locally-owned businesses typically recirculate a higher percentage of revenue than local outlets of national chains. The more self-sufficient a local economy is, the stronger the multiplier tends to be. Communities that must import many goods and services will see more money “leak” out.
To better illustrate how the multiplier effect works, let’s follow a $100 purchase through several rounds of local spending, assuming a conservative 50% of each transaction stays local: First, the consumer spends $100 at local bookstore. Secondly, the bookstore spends $50 locally (wages, rent, etc.) Thirdly, recipients of that $50 spend $25 locally. Fourth, recipients of that $25 spend $12.50 locally. Fifth, recipients of that $12.50 spend $6.25 locally. That simple illustration led to total economic impact of $193.75. This simplified example shows a multiplier of nearly 2x. In reality, the effect would likely be stronger as some participants may spend more than 50% locally, and the cycle continues beyond 5 rounds.
Now let’s compare this to a $100 online purchase: First, consumer spends $100 online. Secondly, perhaps $10 stays local as wages for delivery driver and so forth. Thirdly, driver spends $5 locally. Fourth, recipients of that $5 spend $2.50 locally. That total economic impact was only $17.50. These two examples show how quickly money can leave a local economy when spent non-locally. The difference in local economic impact between these two $100 purchases is $176.25 — more than 11 times greater for the local purchase.
Beyond the immediate economic impact, strong local multiplier effects can provide numerous long-term benefits to a community. Local businesses tend to create more jobs relative to their revenue compared to large chains. A thriving local business ecosystem encourages more startups and innovation. Locally-owned businesses are more likely to support local causes and organizations. Local businesses contribute to a community’s distinct identity and sense of place. Diverse local economies are often more resilient to economic shocks than those dependent on a few large employers.
While the exact multiplier varies, evidence clearly shows dollars spent locally have a significantly greater impact on a community’s economy compared to non-local spending. With multipliers ranging from 3x to 7x, even a small percentage of consumer spending to local businesses can generate substantial economic benefits for a community. This multiplier effect shows the importance of supporting local businesses as a strategy for economic development and resilience.
John Newby is a nationally recognized Columnist, Speaker, & Publisher. He consults with Chambers, Communities, Business & Media. His “Building Main Street, not Wall Street,” column appears in 60+ newspapers and media outlets. As founder of Truly-Local, he assists chambers, communities, media, and businesses in creating synergies that build vibrant communities. He can be reached at: John@Truly-Local.org.