Retail's Little Guys Come Back
By Amy Tsao
The annual trip home to celebrate Thanksgiving for those with family in New Hampshire has its perks. In the land of no state sales tax, the long weekend after the turkey offers opportunities to get a lot of holiday gift buying out of the way. I have relatives in Nashua, a retail mecca with several Wal-Marts (WMT ), more than a few large chain stores, and dozens of regional retailers and independent outlets.
Nashua is a microcosm of what's happening on the retail scene nationwide. Certainly, many midsize retail chains and mom-and-pop shops have been squeezed out of business by big-box stores over the past decade. Competition is intensifying all the time.
Yet something very interesting is happening at the same time: Retailers -- of every size and persuasion -- are finding ways to get by or even thrive. And online retailing, with its own 800-pound gorilla in Amazon.com (AMZN ), is evolving and proving to be a marketplace with more dynamism and diversity than originally anticipated.
Driving these changes in cyberspace, at shopping malls, and on Main Streets are consumers who want more than low prices and name brands. "We see Wal-Mart around for generations to come," says Candace Corlett, principal of consulting firm WSL Strategic Retail. "But we're seeing on a day-to-day basis a shift in consciousness that there are other choices, that it's not always about the lowest price."
Consumers want to be inspired and often desire products that can't be had at discount behemoths. Many retailers are using a strategy popularized by Target (TGT ) -- signing big-name fashion designers to create a special line. Swedish clothing chain H&M's fall lineup includes clothes by Karl Lagerfeld. In a similar vein, Bath & Body Works is selling $25 Henri Bendel scented candles.
Some things just aren't Wal-Mart's bag. Most sporting gear is better at stores that specialize in such products, says Irma Zandl, president of retail consultancy Zandl Group. She notes that young adults she has polled are looking to buy from www.boardzone.com, a snowboarding Web site. Hot Topic (HOTT ) sells a comprehensive array of gifts featuring characters from the foul-mouthed animated hit South Park -- definitely not Wal-Mart's cup of tea.
Specialty-apparel chains have figured out this shift in attitude. Little wonder groups such as Chico's (CHS ) and Urban Outfitters (URBN ) are reporting record results. People are spending more of their apparel budget at such stores, says Corlett.
In 2000, some 8% of survey respondents said they made their clothing purchases at specialty stores. That number jumped to 21% in 2004. Apparel retailers like Los Angeles-based American Apparel offer "uber-hip energy," and small boutiques where the designer hand-sews clothes or makes jewelry in the store are personal interactions that entice a lot of customers, says Zandl.
Specialty shops are focusing on "the environment, experience, and the art of merchandising," say Corlett. These are all components that have "vanished in big retail stores," she says. According to her firm's latest annual survey of shoppers, 45% of respondents (many of them baby boomers) said they would pay more for household products if they could shop in a nicer environment. "That's a pretty strong minority," say Corlett.
Wal-Mart's influence over shoppers "has peaked," says Zandl. Maybe consumers need to go to big-box retailers to buy toilet paper, cat food, and such everyday items. But shopping is about more than the necessities. And "more consumers today are looking for products and experiences that are more unique, more stylish, and more sensory than what Wal-Mart delivers." The retail giant did not return calls for comment.
In a new report, "Challenges of the Future: The Rebirth of Small Independent Retail in America," the National Retail Federation highlights several case studies of small retailers that aren't just surviving but growing. "I was sure we would find retail categories or locations where the independent retailer couldn't be successful," says Jim Baum, an author of the report and a shop owner in Morris, Ill. "That simply is not true."
In Baum's town, he says, the best retailers are small ones that focus on "different niches that Wal-Mart can't touch." A fabric store stresses crafts and quilting, while a stained-glass retailer and kitschy gift stores are also flourishing.By Amy Tsao
Even within the most competitive merchandise categories -- like food and toys -- it's often the smaller-scale retailers that have found ways around the big-box approach. Some 30% of all dollars spent on toys go to Wal-Mart, but smaller toy stores continue to attract customers. At the Little House toy store in Baton Rouge, La., young girls can dress up and throw tea parties like proper ladies. This kind of distinction sets it apart from Wal-Mart and helps Little House get its tiny slice of the $220 billion-a-year toy-retailing business. Year-to-date sales at Little House in 2004 come to $350,000.
Food retailing is arguably an even tougher category than toys. But winners have emerged here as well. Trader Joe's, a chain that sells earthy-crunchy groceries and wine, is rapidly expanding with its small, folksy store format and Trader Joe-brand items ranging from curry sauces to gourmet cookies. Whole Foods Market (WFMI ) is a hugely successful part of the same phenomenon -- alternatives to traditional supermarkets and giant superstores. Its strength: organic produce and appealing prepared foods.
Others have made personalization and customization an integral part of their business models. Dollmaker and retailer American Girl and custom-teddy-bear purveyor Build-a-Bear Workshop have emerged in recent years as two of the country's fastest-growing toy outfits. They're giving new meaning to classic toys by outfitting them to a child's particular tastes. Customization is a niche that even Target is trying out. It recently began a Web-based custom-clothing service for women's jeans and men's pants and dress shirts.
E-TAILERS' FATTER MARGINS.
In the online arena, Amazon and auctioneer eBay (EBAY ) are the giants, but even there, smaller outfits are creating niches. This holiday season, sales via the Internet will grow in the ballpark of 19%, to about $21.6 billion, according to Jupiter Research. Surprisingly, some of the best gains are expected from smaller pure plays like eBags and Red Envelope (REDE ).
"Online-only retailers have done a great job of cutting costs and offering a unique buying experience or alternative to traditional retailers," says Scott Silverman, executive director of Shop.org. According to its latest online-retail survey, Web-based vendors reported operating margins of 15% in 2003, up significantly from negative 16% in 2002.
Undoubtedly, technology will continue to drive how some of the smaller players can compete, experts say. The future holds more "multichannel" retailers -- with store, catalog, and Web operations, says Wendy Farina, principal at New York-based consulting firm Kurt Salmon Associates. Even a family-owned general store such as Vermont Country Store in Manchester, Vt., has adopted the three-channel strategy.
E PLURIBUS PLURIBUS.
To manage the supply-chain demands that arise from selling across channels, high-end consumer-electronics retailer Tweeter (TWTR ) recently hired Yantra, a Tewksbury (Mass.) fulfillment specialist. Others like Campbell (Calif.)-based Redline Networks are making the online buying experience faster with software that cuts page-download times substantially. Its clients include women's retailer bebe (BEBE ) and upstart interior-design outfit Design Within Reach.
As Americans digest their turkey dinners on Thanksgiving and prepare for the holiday shopping season ahead, they can rest assured that they have more choices than ever. Just a few years ago, experts were gloomily warning of the Wal-Martization of the retailing landscape. Today, although the behemoth discounter continues to grow, its dominance hasn't eliminated the diversity of holiday-shopping choices. Now that's something to be thankful for.
Tsao is a reporter for BusinessWeek Online in New YorkEdited by Beth Belton