Tuesday, June 27, 2006

Small Business: Surviving Wal-Mart

One of the standard raps against Wal-Mart and other big box stores is that they drive mom and pop stores out of business.

In a nation where the mythology of the mom and pop store is almost as strong as the mythology of the family farm, this is a potent line of attack.

But the claim is at best too simple, and at worst downright wrong.

From a recent article in the Detroit News.
Conventional wisdom says that once mega-retailers such as Wal-Mart, Home Depot, Starbucks and other mega-brand juggernauts roll into town, mom-and-pop stores on Main Street are bound to get crushed.

That’s news to Trish Wolfbauer.

The 26-year-old entrepreneur says business at her Roseville coffee shop has never been better since java giant Starbucks came to town. The fact that two of them opened within miles of her Trixi’s Coffee shop only helped get Macomb County residents hooked on gourmet lattes, espressos and cappuccinos.

“Now that Starbucks is around, more people are willing to pay $4 for a cup of coffee,” Wolfbauer said.

Independent specialty stores, boutiques and cafes are surviving — and even thriving — in the shadow of the retail giants through a mix of personal service, specialized skills and unique products. They fend off the mega-stores by catering to a specific clientele or carving out a niche that’s small enough to keep the big retailers out.

A 2005 survey of small-business owners found that 52 percent of those already in business changed their tactics and either retained their market share or actually increased business when a Wal-Mart, Target, Kohl’s or other “big box” retailer opened nearby, according to DollarDays International Inc. of Scottsdale, Ariz., an Internet-based wholesaler to small businesses.

“If a store has a niche that means they are highly specialized, and the big guys can’t compete,” said Bruce Wood, a retail analyst with Farmington Hills-based Kenneth J. Dalto and Associates.

One tactic small operators can take is to avoid competing with the powerhouses altogether and focus instead on offering service and merchandise that the big businesses can’t. In some cases, a small business can ride the big stores’ coattails, such as servicing items sold by the big-box stores.

“You can go to Wal-Mart and get a clock and it does the same thing, but they can’t do what we do,” explained Mai Pin, whose family runs the 30-year-old Roseville Clock Shop. The store — within a mile of a Wal-Mart — sells clocks ranging from $20 to $2,000, but 80 percent of its business is repairing and servicing broken clocks.

The mass-merchandising approach of the mega-retailers also creates opportunity for small stores, noted Charlie Owens, Michigan director for the National Federation of Independent Businesses.

“The weakness of big boxes is that they carry standard products,” Owens said. “Nothing is specialized.”

And that simply won’t do for the Rev. Dr. Althea Brown.

Brown hates showing up at an event in the same clothes someone else is wearing, so the 52-year-old Farmington Hills resident bypasses Neiman Marcus, Macy’s and other major department stores for Tipper’s, a small, independently owned women’s clothing boutique in Southfield that sells upscale new and resale fashions such as Armani, St. John, Dana Bachman and Escada.

That kind of personal service and relationship-building neutralizes the major weapon big retailers wield against small stores — price.

If Brown has to pay a little bit more, she said she’d do it if she’s wearing something unique. “It’s worth a few extra dollars if I don’t see someone else wearing my outfit,” Brown said. “If I like it, cost doesn’t matter.”
It’s true, of course, that mom and pop businesses who offer the same products as the big box stores and charge more are going to get hurt, and badly.

But it’s a poor small business that can’t find a niche to fill or a business plan — stressing service or personal attention or especially knowledgeable salespeople — that will allow it to survive and prosper.

Another dimension of this issue is addressed in an article in the New York Times.
. . . for Sparky Electronics, a family-owned store in California that sells hard-to-find watch batteries and record-player needles, Wal-Mart is more ally than enemy, more lifeline than threat.

The 43-year-old store, which has a loyal customer base of handymen and contractors, wanted a Web site to reach consumers beyond its home in Fresno. But the big technology companies wanted up to $1,000 for a simple site, far more than the owner, Cheryl Cook, was willing to pay.

Then there was Wal-Mart. For $100, the retailer helped create sparkyelectronics.com, complete with the icon that sits above its store, an oversize electrified cartoon character. “The nice thing was that it did not cost us an arm and a leg,” Ms. Cook said.

For thousands of independently owned convenience stores, restaurants and hair salons, the nation’s largest — and most feared — retailer also happens to be a business partner. Through its Sam’s Club division, a chain of 570 club stores, Wal-Mart helps them process credit-card transactions, build Web sites, pay employees and take out loans, all at bargain prices.

In that sense, Sam’s Club is an oasis within the harsh climate of Wal-Mart. At Sam’s, the very qualities that make Wal-Mart such a formidable competitor — its size and hard-nosed negotiating tactics with suppliers — have been unleashed on behalf of small businesses.

At Wal-Mart’s request, for example, the health insurance company Extend Benefits Group waived a $500 fee for Sam’s Club members who signed up for its plans. And the financial services company First Data, which processes credit-card payments, set aside 50 executives to work with Sam’s members.

It is a relationship that the company has invested heavily in. Sam’s Club has exclusive hours for small businesses (7 a.m. to 10 a.m., five days a week), a designated online ordering system for small businesses (order by 5 p.m., pick up anytime the next day) and a team of sales representatives who even make house calls to small businesses.

Sam’s Club is not the only warehouse club store to pursue small businesses — Costco offers services like health care and Web site development, too — but Sam’s is the first to put those customers at the center of its business plan and marketing strategy. Its slogan: “In business for small business.”

Certainly, it is in business to make money. And, as it turns out, small-business owners are ideal shoppers. They consume more merchandise and earn more money than the average consumer. The average household income of a Sam’s Club member is $72,000, says Scarborough Research, compared with about $45,000 for a Wal-Mart shopper.

Sam’s Club, started by Sam Walton, the Wal-Mart founder, in 1983 (the year Costco opened), relies on a simple model: buy and sell products in bulk, charge little more than the original cost and earn profits from annual membership fees. Today, the fees range from $35 to $100 for Sam’s 47 million members, yielding nearly $2 billion.

Sam’s Club’s pile-it-high, sell-it-cheap strategy, while attracting a cross section of consumers, is particularly appealing to small businesses, which can buy a package of, say, 50 bags of Frito-Lay potato chips at 19 cents apiece, resell each for 50 cents and pocket $15.50.

Most businesses that use Sam’s Club depend on it for routine purchases — cleaning supplies, hamburger patties, file folders, ink cartridges. Increasingly, however, they rely on Sam’s Club for basic services that the retailer gets through a growing network of outside companies.

Sam’s Club’s involvement in these services is limited. It negotiates the prices, but companies like Extend Benefits administer them, with Sam’s Club closely monitoring customer service. Sam’s Club generally derives little or no direct profit from its role.

Rather, services like credit-card processing and health insurance generate good will for Sam’s, and create an incentive to renew an annual membership.

Internal research shows that services increase loyalty to the retailer because members cannot secure the same discounts on their own.

The owners of K.C.’s Country Store, in Nacogdoches, Tex., needed to process credit-card and debit-card payments in their two-month-old store. After researching five competing services, they chose First Data, another Sam’s partner, because it charged the lowest rates.

K.C’s., a rural retailer that sells hot dogs, cigarettes and farm feed, is the kind of business that Wal-Mart has competed with — and mostly trounced — for 40 years. “It’s pretty ironic,” said the store’s owner, Chairity Meagley, who is 29. “But Wal-Mart is helping us.”
The issue here is what economists call “transactions costs.”

A small business simply can’t have a sophisticated purchasing department. Neither can it have a specialized Human Resources department to handle things like health insurance.

So the proprietors have to become shoppers, and if they can buy cheaply, they may survive and prosper.

Of course, people who don’t like economic change won’t like Wal-Mart or other big box stores. They don’t like globalization. They are perfectly happy with the status quo, usually because they are well ensconced in good-paying secure jobs and have no urge to do anything entrepreneurial.

They are the last people who should be allowed to dictate economic policy, because they will promote their own symbolic and ideological interests at the expense of the rest of society.

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