What Gives Store Fronts An Edge?

The local dry cleaner that’s been on Main Street for generations. The corner grocer (who’s not part of a chain). The hardware store where the owner still knows their customers’ names. The CPA who does the taxes for half the businesses in town. A friendly neighborhood coffee shop. The local watering hole. The place where locals get their hair and nails done.

In other words, the heartbeat of the local economy. AKA: The Store Front Businesses in the U.S.

That’s the Store Front business sector that seems to be  propping up the economy — especially as the stock market is swooning, and the investment environment has chilled.

But from all indications, these businesses are doing well – even outpacing GDP.

Of course, not all Store Fonts are created equal. So what gives Store Fronts the local edge against their larger counterparts? Where are these small business gems flourishing? Which sectors are growing the fastest? And what’s the most surprising about how the market is evolving?

That’s just a taste of what was bandied about in a recent conversation between CAN Capital CEO Dan DeMeo and MPD CEO Karen Webster, who dug into the health of Store Front Businesses in the U.S. based on the last Index that measured, in fact, how healthy, they really are.

Catch their conversation bellow.

WEBSTER: According to our latest Index, Store Front Businesses, overall, seem to be outperforming their larger counterparts – and by a lot. What is it about Store Front Businesses that gives them such an advantage?

DeMeo: It’s the essence of the Store Front business: They are local and serve local communities.

While the broader U.S. and global economies continue to experience volatility in the first half of 2016, these small businesses that operate on the main streets and side streets of their local communities are showing positive, healthy results. Even though they demonstrated some volatility since coming out of the recession – now some 8 years ago, small business owners have dug in and remained optimistic. They’ve demonstrated growth across the country, specifically in the Southwest and Mountain areas. This growth can largely be attributed to strong wage and employee growth which has helped create a steady stream of revenue, for businesses and consumers alike.

We can relate to that, too. CAN Capital was established in 1998 by a small business owner, frustrated at the lack of options for obtaining working capital. Our mission is to help these businesses stay healthy and vibrant by finding more efficient ways to provide them with access to capital. So far, $6 billion in capital has been provided to business owners to cover the cost of inventory, equipment, remodeling or expansion – all things that help these businesses and the communities in which they operate thrive.

WEBSTER: The Store Front Business Index showed a number of growth pockets. Were you surprised to see where the growth was strongest? What is the impact on their local economies?

DeMeo: One of the industries that stood out and demonstrated a great growth surge was professional services. This sector has benefited from strong wage growth and strong growth in employees. In particular, in terms of wages, Professional Services grew at 8.0% for the second quarter of 2015 and is expected to grow by 8.6% for the fourth quarter of 2016. The impact of salary growth means these Store Front Businesses are paying their workers more, who in turn have more money in their pockets to shop at Store Front Businesses. And that has the potential to generate a greater flow of capital through local businesses in their respective regions.

WEBSTER: According to the Index, both Professional Services and Eating and Drinking establishments are two segments of Store Front Businesses that have the highest increase in wages, (PS at 8% and E/D at 5.1%) yet have such dramatic differences in overall growth and index value (PS at 4.9% and E/D at 2.5% in Q2 of 2015). Do you have a hypothesis as to why?

DeMeo: We thought that was interesting too. We saw that specific industries were positively influenced by a number of factors. Professional Services in particular benefited from strong wage growth. The segment was also accompanied by strong growth in the number of new employees.

By contrast, the Eating and Drinking Places category showed very strong wage growth of 5.1%, but this was offset by nonexistent growth in the number of establishments and below average growth in the number of employees. A big contributing factor could be wage growth driven by the increase in minimum wages in those sectors – something that was an adjustment on the cost side without a corresponding increase on the business growth or expansion side.

WEBSTER: Another way to look at the Index data is by what drives the demand for certain types of Store Front Businesses: The “need” businesses (professional services, contractors, service/repair and health care) and the “want” businesses (fitness, personal services, eating/drinking and retail). Why do you think that consumers continue to spend money at “want” Store Front Businesses and what factors do you think are important to get more spending to generate a higher Index value across these industries?

DeMeo: We have observed that across all regions, Store Front Businesses have mirrored the overall impacts of the 2008 recession and subsequent improvements thereafter. Long-term growth has been fairly consistent and employment gains and economic growth have led to confidence among this Store Front Business owners.

Consumers on the other hand are impacted by daily market turbulence. The volatility experienced in the front half of 2016 has triggered worries about the overall health of the U.S. economy. This concern accounts for the decrease in spending money at some of the “want stores.” Overall, we’re seeing that consumers value – and therefore spend more at – places that offer an “experience” rather than the purchase of a tangible good. So, consumers may value eating out with family and friends more than buying a new sweater at the local retailer. That said, we believe that steady job gains and faster wage growth will boost consumer spending across these industries – and in fact, consumer spending so far this year has boosted overall GDP.

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The Store Front Business Index (SFI), powered by PYMNTS. com and CAN Capital, tracks and profiles the health of 3.4 million store front businesses in the U.S. These are businesses we know and interact with on a regular basis – the ones that keep our communities thriving and surviving. Across all regions of the country, the Index measures the health of  eating establishments, professional and personal services, construction, remodeling and repair services, fitness clubs, and a wide variety of retailers across three dimensions: growth in sales, growth in establishments and growth in the number of employees. The data reflects this growth by segment and by geography – going back to 2007.

To download the newest Store Front Business Index, click here.