Iowa service-related businesses outperform retail in ISU five-year threshold report

AMES, Iowa -- If Iowa State University economist Meghan O'Brien was starting a business, she'd choose one in the service industry rather than retail -- and for good reason.

An ISU Extension program specialist who is on the staff of Iowa State's Regional Capacity Analysis Program (ReCAP), O'Brien just did comparative analysis of select Iowa retail and service business thresholds from 2000-2005. Using the U.S. Census Bureau's reports on County Business Patterns and Non-Employee Statistics, she found that service-related businesses outperformed those in retail in terms of reduction of threshold levels, which indicates the size of the market necessary for a business to survive. A lower threshold, therefore, reflects a smaller market needed for a business to survive.

"If I were looking to go into business, I would definitely want to be in one of the service businesses," she said. "Credit has become increasingly difficult to obtain, and will probably only become more difficult due to the credit crunch driven by the mortgage crisis. Given that it's hard to get loans, it would be really difficult to go into a retail business that requires inventory and more capital versus a service-based business where there's less required up front. And also, I think as the demographics are changing, if you can focus on a service that actually appeals to baby boomers, there's probably a lot of opportunity there for profit."

Downsized thresholds for superstores

According to her report, the largest retail change in Iowa during the five year-period was the threshold level decline for superstores, which dropped nearly 64 percent. At the same time, retail businesses overall did not see threshold level reductions outside of the big box retailers.

With the population stagnant and the increasing number of superstores, O'Brien projects that the threshold level will continue to drop at an exponential rate for larger superstores or big box retailers.

"The interesting thing is probably that if I had the data on 2006 and 2007, that number would be even more dramatic," she said. "But what's going on in retail that's kind of interesting is there is this big move towards superstores, and then consumers started pulling back because they weren't as easy to shop in. So now what you're seeing, Wal-Mart's investing in a smaller version of grocery stores. They found that consumers like shopping in the smaller stores, so there's kind of a trend within a trend."

For other retail businesses, O'Brien found the major gainer was the category of electronic shopping and mail order -- an expected trend given the increasing prominence of Internet shopping and trade.

While retail businesses overall did not see threshold level reductions, motor vehicle dealers -- which includes sales of recreational vehicles, motorcycles and boats (new or used) -- saw a decline around 11 percent. Yet the overall category of motor vehicle and parts dealers did not exhibit similar drops in threshold levels.

"This may be an instance where the reduction in the threshold level over time tells us something about consumer demand, that is that consumer preferences for recreation goods are increasing," O'Brien wrote.

Service with a threshold smile

Among the service industry, the real estate category -- including appraisers and title companies -- experienced a threshold level drop of nearly 37 percent, while the offices of agents and brokers category dropped 18 percent.

Another service industry that saw a substantial drop in threshold levels was the financial investment activity category, representing financial planners, investment firms, and portfolio management.

"Given the impending retirement of baby boomers in record numbers and predictions about the amount of wealth changing hands in the next few years, it is logical this would be a faster growing segment of the economy and increasingly sustainable given relatively stagnant population growth," O'Brien wrote.

The service category of management, technical, and scientific consulting has also seen a 25 percent decline in threshold levels.

The most stable businesses were also largely service-based, including offices of dentists and physicians, death care services, automotive repair and legal services.

Among businesses where threshold levels increased, shoe stores, department stores, grocery stores, office supplies stores, building material and supplies stores, and electronic stores all saw at least a 13 percent increase in threshold levels. O'Brien cites the increase in the number of superstores and big box retailers as one of the reasons, with the market for some of the smaller retailers' goods being absorbed by the larger stores.

For service-related industries, the largest threshold level increase was in the travel and reservation services category -- by 26 percent. O'Brien reports that the availability of the Internet and the number of travel sites has had a huge impact on the sustainability of a business.

Her complete report is available at this link. It is a continuation of the program created by Ken Stone, a former professor of economics at ISU, in the early 1980s designed to help business and community leaders understand trends and strengths in their local retail sectors.