1 Agribusiness & Applied Economics Miscellneous Report No. 191 July 2002 Threshold Popultion Levels for Rurl Retil Businesses in North Dkot, 2000 Rndl C. Coon nd F. Lrry Leistritz Deprtment of Agribusiness nd Applied Economics Agriculturl Experiment Sttion North Dkot Stte University Frgo, ND
2 Acknowledgments Severl people nd orgniztions were helpful in providing dt nd informtion used in this study. Our thnks re extended to the North Dkot Stte Tx Deprtment for providing current informtion bout the number of sles nd use tx permit holders in vrious communities. Thnks re extended to Norm Ackerson nd Crol Jensen for document preprtion nd to our collegues who reviewed the mnuscript. Finncil support ws provided by the United Sttes Deprtment of Agriculture s prt of the Regionl Center for Rurl Development in North Dkot nd the North Dkot Agriculturl Experiment Sttion. The uthors ssume responsibility for ny errors of omission, logic, or otherwise. Any opinions, findings, conclusions or recommendtions expressed in this publiction re those of the uthors nd do not necessrily reflect the view of the United Sttes Deprtment of Agriculture. We would be hppy to provide single copy of this publiction free of chrge. You cn ddress your inquiry to: Crol Jensen, Deprtment of Agribusiness nd Applied Economics, North Dkot Stte University, P.O. Box 5636, Frgo, ND, , Ph , Fx , e-mil This publiction is lso vilble electroniclly t this web site: NDSU is n equl opportunity institution. Abstrct Business nd community leders frequently question the popultion level necessry to provide dequte sles volume for prticulr type of business. This study exmines popultion levels ssocited with specified numbers of 16 business types in North Dkot towns between 200 nd 10,000 popultion in The dt used to identify the presence of prticulr types of businesses in given community were records of sles nd use tx permit holders by Stndrd Industril Clssifiction (SIC) group from the North Dkot Stte Tx Deprtment. Threshold popultions for the 16 business types were estimted using ordinry lest squres (OLS) regression nlysis. The resulting estimtes indicte tht the popultions required to support vrious business types vry substntilly. Businesses with reltively low popultion requirements included eting nd drinking plces. Deprtment stores nd vriety stores hd the highest popultion thresholds mong the businesses studied. When the threshold estimtes were compred with similr estimtes for 1988, the threshold popultion to support one business hd decresed for four business types (eting plces, drinking plces, frm supply, nd drug stores), while for the other 12, the threshold popultions hd incresed. Key Words: retil businesses, rurl business, trde nd service sector
3 Tble of Contents List of Tbles...ii Objectives...2 Procedures...2 Definition of Threshold Popultion...2 Empiricl Model...5 Results...6 Conclusions nd Implictions...9 References...10 Pge NOTICE: The nlyses nd views reported in this pper re those of the uthor(s). They re not necessrily endorsed by the Deprtment of Agribusiness nd Applied Economics or by North Dkot Stte University. North Dkot Stte University is committed to the policy tht ll persons shll hve equl ccess to its progrms, nd employment without regrd to rce, color, creed, religion, ntionl origin, sex, ge, mritl sttus, disbility, public ssistnce sttus, vetern sttus, or sexul orienttion. Informtion on other titles in this series my be obtined from: Deprtment of Agribusiness nd Applied Economics, North Dkot Stte University, P.O. Box 5636, Frgo, ND Telephone: , Fx: , or e-mil: Copyright 2002 by Rndl C. Coon nd F. Lrry Leistritz. All rights reserved. Reders my mke verbtim copies of this document for non-commercil purposes by ny mens, provided tht this copyright notice ppers on ll such copies.
4 List of Tbles Tble No. Pge 1 SIC Codes, Industry Description, Subclssifictions Included in Ech Ctegory, nd Number of Estblishments for Ech SIC Code, Included in Threshold Anlysis Number of North Dkot Cities by Popultion Group Included in Threshold Anlysis Number of Cities in North Dkot with Selected SIC Codes for Threshold Anlysis, Men Popultion per Cities with One, Two, Three, or Four Firms, For Selected SIC Codes, Estimtes of City Popultion Required to Support n Indicted Number of Estblishments of Selected Business Types, North Dkot, Estimtes of City Popultion Required to Support One nd Two Estblishments of Selected Business Types, North Dkot, 1988 nd Estimted Popultion to Support One Estblishment of Selected Business Types, North Dkot, ii
5 Threshold Popultion Levels for Rurl Retil Businesses in North Dkot, 2000 Rndl C. Coon nd F. Lrry Leistritz * Chnging socioeconomic conditions in mny nonmetropolitn communities hve creted substntil pressures for djustment by locl retil firms. In North Dkot, for exmple, the continuing trend of griculturl mechniztion nd frm consolidtion led to continued outmigrtion nd popultion decline in most nonmetropolitn counties during the 1990s (Hodur et l. 2002, Coon nd Leistritz 1998). Most of these counties hd lost popultion during the 1980s s well. These chnges hve posed mjor chllenges for business proprietors nd for community leders seeking to mintin vible retil sector. Chnges in the shopping ptterns of rurl residents hve excerbted these problems, s the retil selection nd prices found in lrger cities prove incresingly ttrctive to mny rurl residents. As result, merchnts in smller communities hve discovered they re receiving decresing shre of retil sles volume. For exmple, in North Dkot, the shre of totl txble sles nd purchses ccounted for by the stte s four lrgest urbn centers rose from 50 percent in 1980 to 69 percent in The shre ccounted for by towns with popultions less thn 10,000 fell from 35 percent to 21 percent during the sme period (Coon nd Leistritz 2002). In response to these chnges, mny rurl communities in North Dkot nd elsewhere in the Upper Midwest hve tken steps to revitlize their locl economies, both by recruiting new primry sector (i.e., bsic sector) employers nd by enhncing their locl trde nd service sectors. In the ltter cse, some towns hve emphsized re-estblishing business type previously lost, such s frm mchinery delership or furniture store, while other communities hve perceived new mrket opportunities for prticulr business types. Whtever the initil stimulus for ttempts to revitlize or diversify their locl retil sector, mjor question tht must be ddressed reltes to the dequcy of the community s popultion bse to support given type of business. Popultion thresholds, the minimum number of consumers necessry to provide n dequte sles volume for prticulr type of retil business, hve long been key concept in centrl plce theory (Berry nd Grrison 1958, Shffer 1989). As community leders evlute their locl retil sector, the threshold concept is prticulrly useful. This study exmines the popultion levels ssocited with specified numbers of businesses of vrious types in nonmetropolitn communities in North Dkot. * The uthors re, respectively, reserch specilist nd professor, Deprtment of Agribusiness nd Applied Economics, North Dkot Stte University, Frgo.
6 Objectives The purpose of this study is to determine popultion levels ssocited with the presence of businesses of specified types in North Dkot communities. The 16 business types exmined represent retil estblishments frequently found in nonmetropolitn trde centers. Communities included in the nlysis were North Dkot towns with popultions between 200 nd 10,000 in The estimtes developed re compred with vlues previously derived for 1988 (Schuler nd Leistritz 1990). Procedures The dt used to identify the presence of prticulr types of businesses in given community were records of sles nd use tx permit holders from the North Dkot Stte Tx Deprtment. The number of permit holders by Stndrd Industril Clssifiction (SIC) group were identified for ll incorported towns with popultions between 200 nd 10,000 in 2000 (U.S. Census Bureu 2000). Sixteen business types tht re reltively common in the stte s nonmetropolitn trde centers were used s the bsis for the nlysis. These re SIC 3-digit industries except for two 4-digit industries (SIC 5812 Eting Plces nd SIC 5813 Drinking Plces-Alcoholic Beverges). A description of the 16 business types is found in Tble 1. A totl of 161 communities ws included in the study. The number of towns by popultion group is summrized in Tble 2, nd the number of towns hving different numbers of estblishments of ech type is shown in Tble 3. Although the dt set consists of the entire popultion of permit holders for the 16 business types in North Dkot cities with popultions between 200 nd 10,000, this dt set my be regrded s smple of two different popultions. It could be considered s smple (North Dkot) of lrger geogrphic re (severl sttes) hving similr trde nd service ctivities in rurl communities or s smple of one yer (2000) from popultion of number of yers. In either cse, the dt set my be considered s smple whose sttistics could be used to mke inferences regrding the vlues of prmeters of the popultion tht the smple represents. The inferences could involve either hypothesis tests or estimtions (either point estimtes or confidence intervl estimtes). A previous study used similr dt for 1988 to develop confidence intervl estimtes s well s point estimtes (Schuler nd Leistritz 1990). In this report, point estimtes of threshold popultions re developed nd compred with the estimtes developed using 1988 dt. Definition of Threshold Popultion A threshold popultion is generlly defined s the minimum level of popultion required to support business estblishment t n cceptble level of return or profit (Shffer 1989). A portion of the entrepreneur s return is norml profit, i.e., the minimum return or profit necessry to retin the entrepreneur in this prticulr business. If this minimum or norml return is not relized, the entrepreneur will withdrw his/her efforts from this specific business nd rellocte the resources to nother ctivity. 2
7 Tble 1. SIC Codes, Industry Description, Subclssifictions Included in Ech Ctegory, nd Number of Estblishments for Ech SIC Code, Included in Threshold Anlysis SIC Code Number Industry Description SIC Codes Included Number of Cities with Estblishments Frm nd Grden Mch. & Equip. Stores Frm Supply Stores Lumber & Other Building Mterils Hrdwre Stores Deprtment Stores Vriety Stores Grocery Stores Gsoline Service Sttions Fmily Clothing Stores Home Furniture & Furnishings Stores ,5713, 5714, b b Rdio, TV, nd Electronic Stores 5731, 5732, 5733, 5734, 5735, b Drug Stores Sporting Goods Stores & Bicycle Shops Florists Eting Plces Drinking Plces (Alcoholic Beverges) b Dt showed tht 123 cities hd SIC code 519 permits, but 5 of those hd 0 permit holders. Therefore, 118 cities ctully hd this SIC code business. b Dt for SIC codes 521, 541, 573, nd 594 showed one city with permit but hd 0 permit holders. Tble 2. Number of North Dkot Cities by Popultion Group Included in Threshold Anlysis 2000 Popultion Number of Cities ,000 1,001-1,500 1,501-2,500 2,501-10, TOTAL 161 3
8 Tble 3. Number of Cities in North Dkot with Selected SIC Codes for Threshold Anlysis, 2000 SIC Code Industry Description Number of Businesses for ech SIC Code or More Number of Cities with Estblishments Number of Businesses 508 Frm & Grden Mch. & Equip Stores Frm Supply Stores Lumber nd Other Building Mterils Hrdwre Stores Deprtment Stores Vriety Stores Grocery Stores Gsoline Service Sttions Fmily Clothing Stores Home Furniture & Furnishings Stores Rdio, TV, & Electronic Stores Drug Stores Sporting Goods Stores & Bicycle Shops Florists Eting Plces Drinking Plces (Alcoholic Beverges)
9 Although the trditionl definition of threshold popultion implies level of popultion tht is brely sufficient for one business of given type to be successful in community, estimtes derived from this study re essentilly the expected city popultion ssocited with given number of businesses of tht type in community. However, the existing number of businesses in most rurl communities in North Dkot is probbly lrger thn the long-run equilibrium number becuse of popultion decreses in those communities over time. Economic theory indictes tht firms will remin in opertion in the short run s long s their revenues exceed their vrible costs, even though they my not recover ll of their fixed costs. A substntil number of North Dkot businesses my be in tht sitution. They my be owned nd operted by people who re too old to seek lterntive employment, nd the business my not be n ttrctive investment for others. The present owners best options my be to operte their business until they retire, but the businesses will likely not continue to operte in their present form fter the retirement of the current owner. For these resons, the expected city popultion estimtes obtined in this nlysis my indeed be resonble estimtes of the threshold popultion for selected business types in rurl North Dkot communities. Empiricl Model Previous empiricl studies typiclly hve employed models in which popultion is the dependent vrible nd the number of estblishments is the independent vrible (Schuler nd Leistritz 1990). These models were often of the form: where: P i = B 0 + B 1 N ij + B 2 N 2 ij P i = popultion of city i, N ij = number of permit holders of SIC group j in city i, nd B o, B 1, nd B 2 re prmeters of the eqution. While it cn be rgued tht n lterntive specifiction with popultion s the independent vrible nd the number of estblishments s the dependent would be more consistent with economic theory, the popultion-dependent model is used in this nlysis. The previous nlysis (Schuler nd Leistritz 1990) estimted four different functionl forms of the popultion-dependent model. These were liner, qudrtic (illustrted bove), exponentil, nd double log. The performnce of the estimted models ws then evluted on the bsis of the frequency with which the men vlue of the popultion for cities with N permit holders ws observed within the 95 percent confidence intervl of ech model. A similr procedure ws employed in this study, nd the evlution reveled tht the qudrtic model yielded the most relible estimtes. Therefore, the qudrtic model ws employed to develop estimtes of threshold popultions for the 16 business types. 5
10 Results Men popultion for cities with 1, 2, 3, nd 4 permit holders of the 16 business types re shown in Tble 4. Point estimtes of the threshold popultions (city popultion required to support given number of firms) for the 16 SIC ctegories re shown in Tble 5. The interprettion of the vlues in Tble 5 is tht town of 212 people could support one eting plce, but popultion of 2,606 would be required to support deprtment store. The estimtes indicte tht the popultion required to support vrious business types vries substntilly. Businesses with reltively low popultion requirements include eting nd drinking plces. Deprtment stores nd vriety stores hve the highest popultion thresholds mong the businesses studied. Tble 4. Men Popultion per Cities with One, Two, Three, or Four Firms, For Selected SIC Codes, 2000 SIC Code Number Industry Description Number of Permits Frm nd Grden Mch. & Equip. Stores Frm Supply Stores Lumber & Other Building Mterils Hrdwre Stores Deprtment Stores Vriety Stores Grocery Stores Gsoline Service Sttions Fmily Clothing Stores Home Furniture & Furnishings Stores ,131 2,606 2, ,351 1, ,324 2,077 5,061 2, , ,797 3,303 1, ,141 4, Rdio, TV, nd Electronic Stores 1,602 4, Drug Stores Sporting Goods Stores & Bicycle Shops Florists Eting Plces Drinking Plces (Alcoholic Beverges) 1, , ,769 1,089 3, ,551 1, , The number of permit holders in the ctegory were too few to provide relible men popultions. 6
11 Tble 5. Estimtes of City Popultion Required to Support n Indicted Number of Estblishments of Selected Business Types, North Dkot, 2000 Number of Estblishments Business Type Drinking plces (lcohol) Eting plces Gsoline service sttions Grocery stores Frm nd grden mchinery nd equipment Frm supply stores Hrdwre stores Sporting good stores nd bicycle shops Lumber nd other building mteril stores Home furniture Rdio, television, nd consumer electric stores Florists Drug stores Fmily clothing stores Deprtment stores Vriety stores , ,020 1,640 1,602 1,287 1,022 1,928 2,606 2, ,774 1,207 1,167 2,589 4,712 2,141 5, , ,161 1,668 2,140 4,647 7,823 3,373 3,763 7, , ,089 2,329 2,222 3,929 7,815 10,933 4,171 5,886 18,258 Not estimted becuse the dt set contined insufficient numbers to support relible estimtes in these ctegories. The threshold popultions required to support one nd two businesses of ech type in 2000 re compred in Tble 6 to similr estimtes for 1988 developed by Schuler nd Leistritz (1990). For four business types (drinking plces, eting plces, frm supply, nd drug stores), the threshold popultions to support one business hd decresed, while for the other 12 business types, the threshold popultion hd incresed. Threshold popultions to support two businesses of given type hd decresed from 1988 to 2000 for five business types (those mentioned previously plus lumber nd building mteril stores) nd hd incresed for six types, while for the remining five business types, there were too few permit holders in the smple to provide relible estimtes (Tble 6). The threshold popultions required to support one business of given type in 1988 nd 2000 re further compred in Tble 7. As noted erlier, threshold popultion estimtes for four business types were lower for 2000 thn for Eting plces exhibited the gretest percentge decrese in threshold popultion, s the vlue for 2000 (212) ws only 62 percent of the 1998 vlue. On the other hnd, fmily clothing stores registered the lrgest percentge increse in threshold popultion (170 percent). 7
12 Tble 6. Estimtes of City Popultion Required to Support One nd Two Estblishments of Selected Business Types, North Dkot, 1988 nd 2000 One Estblishment Two Estblishments Business Type Drinking plces (lcohol) Eting plces Gsoline service sttions Grocery stores ,285 Frm & grden mchinery & equipment Frm supply Hrdwre stores 763 1,167 1,333 1,774 Sporting goods stores & bicycle shops ,122 1,207 Lumber & building mteril stores 793 1,020 1,480 1,167 Home furniture 1,007 1,640 1,765 2,589 Rdio, television, & consumer electronic 1,044 1,602 1,574 4,712 Florists 1,093 1,287 1,698 Drug stores 1,103 1,022 2,305 2,141 Fmily clothing stores 1,135 1,928 1,804 Deprtment stores 1,651 2,606 3,373 Vriety stores 1,806 2,324 4,614 5,061 The number of permit holders in the ctegory ws too smll to provide relible estimtes. 8
13 Tble 7. Estimted Popultion to Support One Estblishment of Selected Business Types, North Dkot, 2000 Threshold Popultion, 2000 Business Type Popultion % of 1988 Eting plces Frm supply Drinking plces (lcohol) Drug stores 1, Sporting goods stores & bicycle shops Frm & grden mchinery & equipment Florists 1, Lumber & building mteril stores 1, Vriety stores 2, Gsoline service sttions Grocery stores Hrdwre stores 1, Rdio, television, & consumer electronic 1, Deprtment stores 2, Home furniture 1, Fmily clothing stores 1, Conclusions nd Implictions Business nd community leders frequently question the popultion level necessry to provide dequte sles volume for prticulr type of business. Further, these reltionships my hve chnged in recent yers s result of chnging shopping ptterns of rurl residents. This study exmines popultion levels ssocited with specified numbers of 16 business types in North Dkot towns between 200 nd 10,000 popultion in The estimtes developed in this study must be interpreted with cution for severl resons. First, this nlysis, like most other nlyses of threshold popultion levels (Shffer 1989), is bsed on the number of firms offering prticulr type of good or service in towns of different sizes. It does not necessrily follow tht these popultion levels will yield sufficient sles volume to llow the business to be finncilly successful. Second, the nlysis is bsed on city popultion, wheres the popultion of the trde re (i.e., the city plus the surrounding rurl re) should be considered in ssessing the prospects for new business. Finlly, the reltionships reported here represent verges cross the stte. The sitution for n individul community my differ gretly from stte norms bsed on differences in popultion composition (e.g., ge nd gender distribution), in per cpit income, nd in the strength of competing trde centers. With these limittions in mind, however, it is hoped tht the informtion provided will be useful to decision mkers in both privte nd public sectors. 9
14 References Berry, Brin J. L., nd Willim C. Grrison A Note on Centrl Plce Theory nd the Rnge of Good. Economic Geogrphy 34: Coon, Rndll C., nd F. Lrry Leistritz The Stte of North Dkot, Frgo: North Dkot Stte University, Deprtment of Agribusiness nd Applied Economics (in press). Coon, Rndll C., nd F. Lrry Leistritz The Stte of North Dkot: Economic, Demogrphic, Public Service, nd Fiscl Conditions. Frgo: North Dkot Stte University, Deprtment of Agriculturl Economics. Hodur, Nncy M., F. Lrry Leistritz, nd Den A. Bngsund Locl Socioeconomic Impcts of the Conservtion Reserve Progrm. Agr. & Applied Econ. Rpt. No Frgo: North Dkot Stte University, Deprtment of Agribusiness nd Applied Economics. Schuler, Aln V., nd F. Lrry Leistritz Threshold Popultion Levels for Rurl Retil Businesses in North Dkot. Agr. Econ. Misc. Rpt. No Frgo: North Dkot Stte University, Deprtment of Agriculturl Economics. Shffer, Ron Community Economics. Ames: Iow Stte University Press. U.S. Census Bureu U.S. Deprtment of Commerce, 10