Charle’s Marohn’s piece at Strong Towns is almost five years old, but no less relevant now than it was in 2014.
Next time you’re playing bumper cars and competing for inches of asphalt on State Street, look up past the runoff waterfalls to the plateau called Summit Springs, where the buildings being constructed will house businesses like Dunkin Donuts, the subject of Marohn’s focus.
According to Marohn, there are at least two big problems with these chains — which couldn’t have been installed without local government subsidies generally unavailable to indie entrepreneurs, and propelled in the case of Summit Springs by TIF bonds used to finance the Daisy Lane road extension.
First, the relationship that Dunkin Donuts – and any national chain, whether selling tacos or auto parts or massages – has with your community is the same relationship that England had with its American colonies back in the 1700’s. The colonies provided raw materials. English merchants, manufacturers and transporters would take these materials, process them and provide them back – with all the value added – to the colonies. The government would take a nice bit off the top for the trouble and, just like that, you have a mercantilist economy, one designed to have a positive balance of trade for the English.
Second, there is an effect on the genuine grassroots entrepreneur.
In the localized version of capitalism, this person starts the doughnut shop. Over decades they slowly and incrementally build their business, creating a modest amount of wealth for themselves and their family in the process. In the national corporate franchise version of capitalism, this person becomes the night manager. They work for someone else. They may have some corporate profit sharing, but it is disconnected from their day-to-day work. They may have a 401(k) plan, but they’re not going to get wealthy from it.
Here’s what breaks my heart: I’ve seen that night manager. I’ve seen the look in their eyes. And I’ve seen that entrepreneur, felt the look in their eyes. One is borderline resignation, an acceptance of fate. The other contains endless optimism. I want an America full of endless optimists.
Tragically, we’ve priced them out.
Speaking personally, I hate chains because they’re aesthetic abominations. I also know just how hard it is to create a business from scratch without recourse to throwing money at a tested template, and if this means I have a degree of contempt for those with enough cash to do it, that’s fine by me.
But Marohn’s valuable contribution to this discussion, as so often echoed in these pages by other contributors, is this:
Not all economic development is created equal. Not all local investments build wealth in our community. Not all open markets produce optimal outcomes for all places. If we want our places to prosper over time, we have to be prepared to ask a tougher set of questions at the local level.
Here’s the rest of his essay, which has as its starting point the conditions to obtain a Dunkin Donuts “unit” in Minnesota. Thanks to JG for pointing to it.
… Amid all the celebration, one little tidbit of information caught my attention:
Adequate capitalization – Requirements vary by market, but the lowest requirements are $250k minimum liquid assets and $500k minimum net worth per unit.
Now truly, when going through a list of potential small business startups, the kind of thing that someone without an MBA but just a lot of drive and desire could undertake, is not doughnut shop at the top of that list? Along with bakery, pizza joint and coffee shop, in my mind I imagine these as being the familiar Stage 1 businesses that pop up out of nowhere whenever that magical critical mass is obtained. (For more on Stage 1, Stage 2 and Stage 3 businesses, listen to my interview with Economic Gardening guru, Chris Gibbons.)
But if you are going to start a Dunkin Donuts, you need a cool half mil in net worth, at least half of which is liquid, meaning cash or something that can be quickly converted into cash. That doesn’t sound very small business friendly.
For households where the highest wage earner is under 35 years old, the ideal age for someone who is not necessarily college material but nonetheless has the work ethic and the entrepreneurial spirit to step up and start a business, the median net worth (excluding home equity) in 2009 was $2,003. Let me say that again. Take over half the families where the primary breadwinner is 35 years old or less, add up their investments and savings and then subtract their debts, and they have less than $2k. In other words, they are only $498,000 short of being able to start a Dunkin Donuts.
Note that for people 65 and older, that number jumps to slightly over $25,000, which should scare the hell out of everyone.
“Dunkin Donuts – and national franchises like them – are not looking for entrepreneurs. They are looking for investors.”
What this means is pretty clear: Dunkin Donuts – and national franchises like them – are not looking for entrepreneurs. They are looking for investors. They want people who already have money, who have already amassed wealth. They are looking for those people because they want someone locally to assume the bulk of the risk, whose interests will be aligned with the corporation and shareholders sufficiently to ensure that the right management is retained and the store is run efficiently.
That’s a very different person, and a very different impact on the city, than the doughnut shop started by your local go-getter with vision and a dream …