November 1, 2003
Hit Discriminators Where It Hurts
African American consumers are a powerful force in the U.S. economy. Based on the 2001 Consumer Expenditure Survey, the $383 billion spent by African American consumers accounts for 5% of all U.S. consumer spending and 4% of Gross Domestic Product. Despite this collective buying power, black consumers are still greeted with suspicion about their intentions and with skepticism about their ability to pay.
Given the importance of black consumer spending for the U.S. economy, and given the intense competition by businesses for those dollars, what can be done to discourage future discrimination? The answers may very well lie in how African American consumers respond when there is convincing evidence of consumer discrimination. The nature of the response is critical because it determines the penalty that companies face when their employees treat black consumers poorly. The best way to prevent consumer discrimination is to ensure that companies incur substantial penalties when it occurs.
The continued slights that African American consumers face suggest that the penalties that companies now face simply are not high enough. Victims of consumer discrimination typically respond by filing a lawsuit against the company. Although there may be monetary settlements equaling millions of dollars, these payments serve only to compensate the victims. They do not serve to punish the company, hence deterring similar conduct in the future. For example, in a well-known case against Denny’s, the company paid a settlement of $54 million in 1994, which seems substantial but accounts for only 1.1% of its revenue in that year. Avis and Holiday Spa also faced lawsuits but paid monetary settlements equal to less than 1% of annual revenue. The monetary settlements alone are simply too small relative to the size of the companies to be a strong deterrent.
Civil rights organizations usually attempt to deter future discrimination by negotiating the implementation of administrative changes within the company, such as sensitivity training and the hiring of African Americans in key management positions. However, civil rights organizations simply do not have the resources to continuously monitor these companies to ensure that they adhere to new policies.
Maybe it’s time that African American consumers themselves take a stronger stand by taking their dollars elsewhere. Not only will this impose a large economic penalty on the company engaged in discriminatory practices, it will also send a strong message to all other companies that consumer discrimination will not be tolerated. Put the profits of companies at risk and suddenly they have a strong incentive to implement the kind of administrative policies needed to ensure that African American consumers are treated with respect and courtesy without prodding by civil rights organizations.
This will not work in every case. But where African Americans represent a large share of the company’s revenue, it is likely to be the most effective strategy.
Darrell Williams is a principal at Economic Analysis L.L.C., as well as a member of the BE Board of Economists.