How Small Stores Can Lure Holiday Shoppers

With economists predicting one of the weakest Decembers since 1991, merchants must put their best foot forward for top customers

Call it a customer service Christmas. Consumers are expected to rein in spending this year, and the retail climate favors big-box stores that can offer bargains. But because small retailers can't win price wars (, 4/14/08), experts say independents need to leverage their biggest advantage over the chains: personal relationships with customers and the ability to deliver superior service. With some economists predicting one of the weakest Decembers since 1991, retailers that falter could face a cold winter

"The independent and the small business person are fighting a much steeper battle for sales in a shrinking market," says Eugene Muscat, professor of management at the University of San Francisco. Unemployment reached 6.1% in August, the highest rate since 2003, and while gas prices are down from their summer peak, consumers still face high costs for energy and other essentials. The spending boost from the summer's tax rebates has mostly petered out (, 8/11/08). With shoppers squeezed, the National Retail Federation expects year-over-year sales to rise just 2.2% for November and December, half the average rate of the last decade, the group plans to announce Sept. 23. (Retail estimates exclude spending on cars, gasoline, and restaurants.) TNS Retail Forward, a consulting and market research firm in Columbus, Ohio, predicts a 1.5% growth rate over the fourth quarter last year, while Deloitte Services forecasts between 2.5% and 3% from November to January over the same period last year.

Pursue the Well-Heeled

The outlook for independent stores is bleaker still, says Frank Badillo, senior economist at TNS. "As shoppers become more value focused, they're turning toward big-box retailers," he says. Small retailers can bolster sales by targeting wealthier shoppers who are less price-sensitive and may pay premiums for better service, Badillo says. "Upper-income households often perceive of value in very different ways from lower-income shoppers."

So what can independent retailers do to compete with their larger counterparts? Advice from experts follows:

1. In whatever market they're targeting, small retailers need to court their best customers this holiday season. "During the next three months they need to maximize the one-on-one personal relationships that they have with customers," says Daniel Butler, vice-president for retail operations at the National Retail Federation. "That is the secret weapon that small independents have against big national chains. If I'm savvy and communicate with my customers well, I can draw loyal customers into my store before they go into the national chains," Butler says.

One way to do that is through affinity discounts that encourage loyal customers to spend more, rather than trying to attract new business by cutting prices across the board, says the University of San Francisco's Muscat. "They're going to their customer base, and they're mailing out to their best customers targeted discounts to get them into the store. That's a lot smarter than putting a "70% Off" sign in front of your store," he says. Through affinity programs, retailers can strengthen their relationships with their best customers and appeal to those shoppers' bargain-hunting mood at the same time.

2. Beyond customer service, retailers need to keep inventories lean to keep costs down. Butler says store owners should be especially vigilant in refusing late orders and watching for overshipments to avoid having merchandise they won't be able to sell. In addition, small retailers can take a cue from large chains that display as much merchandise as possible on the floor, rather than holding inventory in the stockroom. "National chains don't have any inventory in stockroom," he says. "They want it to be out there where the customer is."

3. Likewise, stores should watch their staffing levels to control costs. "They want to be able to staff to the peak hours as much as they can," Butler says. That means mostly in evenings and weekends, as most two-income families have little time to shop during the day. Businesses might decide to open later in the morning and extend hours at night to reach more customers without needing to staff more hours.

4. Retailers that sell both online and through physical stores should coordinate their Web and brick-and-mortar strategies, especially in anticipation of "Cyber Monday," the post-Thanksgiving shopping day that's been deemed the online equivalent of Black Friday. Many people browse in stores the weekend after Thanksgiving and then make their purchases online. "If you have a Web site and do business online, you want to make sure you're cross-promoting your Web site with your in-store traffic and vice versa," Butler says. Still, retailers may not be able to count on strong Internet sales. While TNS Retail Forward predicts Web sales will grow 9% this year, that's down from 19% in 2007 and the first single-digit growth rate since 1999.

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