Competing When Wal-Mart Comes to Town

By David Diamond

Strategies to beat Wal-Mart can be used by every small family business that's trying to outfox a large competitor.

WAL-MART IS COMING! Those are fighting words for the family owners and operators of the 60 shops that line State Street the main thoroughfare in Belle Fourche, South Dakota. When news leaked out last March that the legendary discounter would open a mammoth outlet this fall, only 10 miles away on the outskirts of Spearfish, panic spread through this ranch town of 4,700, once the largest cattle transfer center in the world.

In Spearfish, local merchants may actually benefit, as thousands of bargain seekers flock to the area from the many small towns that dot the hills here and in nearby Wyoming and Montana. But in Belle Fourche (pronounced Bell Foosh), almost all of the businesses are family owned, retailers stand to lose more than 23 percent of their sales by the time the new Wal-Mart celebrates its fourth anniversary, according to Kenneth E. Stone, an economics professor at Iowa State University who has studied the impact of Wal-Mart on local retailers. To prepare countermeasures, Fourche's town leaders called in Stone for a day-long workshop. Before telling them what they could do to survive, he shared some disturbing research about small towns in Iowa, located within 20 miles of various new Wal-Marts that have sprung up there:

 

  • By the third year of butting heads against a new Wal-Mart, retailers in a typical town suffered a combined reduction in annual sales of $9 million, while Wal-Mart grossed an estimated $13 million in sales.
  • General merchandise stores, such as five and dimes, accounted for $6 million of that loss. a
  • After five years, among those that survived, only food stores gained in sales. Specialty stores (drugs, gifts, fabrics, and the like) that didn't go under still suffered a 9.9 percent loss in sales; building materials stores lost 10.4 percent; apparel stores 11.5 percent; service businesses 14.2 percent; and home furnishings 18.9 percent.

Not a rosy picture. But the many family business owners of Belle Fourche were determined to prevail, and so brought in Stone as the first move in what has proved to be a fast and wide-ranging reaction.

Merchants in other towns are taking note, because the strategies being implemented in Belle Fourche are the same ones that any small-business owner can use to beat a large" competitor, whether it's Wal-Mart, or, K-mart, or the new shopping mall.

THIS LATEST INVASION by Wal-Mart comes 104 years after Sears, Roebuck and Co. took advantage of the advent of rural free delivery and introduced its famous general merchandise catalog. Owners of general stores, who provided everything from ladies' garments to wood planes, found the competition daunting and scaled back the breadth of their wares. In the sixties and seventies, a similarly strangling effect was felt by downtown merchants as strip malls, built around K-marts or other chains, and enclosed shopping malls sprouted at the exit ramps of newly paved highways.

These incarnations catered to larger communities, however, and retailers in rural areas were left pretty much unscathed. Until the late seventies, that is.

That's when Wal-Mart, based in Bentonville, Arkansas, began an aggressive drive to bring its stacked-to-the stores, its boast of "everyday low prices," to the very markets that national mass merchandisers had ignored-the one-traffic-light towns in the South and Midwest. The strategy has made a fortune for founder Sam Walton, who struggled with his first Wal-Mart in 1962, and has since caused the near ruin of scores of economically fragile towns. In Livingston, Texas (population 6,200), for example, the arrival of Wal-Mart Discount City 11 years ago led to the closing of 20 businesses, including Livingston Drug, which had served the community since 1900.

Currently America's fastest growing retailer, Wal-Mart now operates in 1,465 locations, and adds another new community at the staggering rate of one every other day. WalMarts offer small-town shoppers the opportunity to pick up everything from prescriptions to peat moss, at hours as late as 10 p.m., and at prices that-at least in the beginning-are far lower than those family shopkeepers can afford to charge.

The discounter has a record of vigorously cutting fixed costs through such moves as leasing its stores instead of owning them. Wal-Mart also eliminates the middleman when possible, an option generally unavailable to independents. And by building 17 mega-distribution centers, some of which could house 25 football fields, it has reduced the cost of getting goods from manufacturers to its stores to an enviable 1.3 percent of sales (compared to 3.5 percent for K-mart and 5 percent for Sears).

Those savings mean prices that compete favorably against Sears and K-mart-which are roughly in a three-way tie with Wal-Mart as the country's largest retailer-let alone the typical family store. Belle Fourche's Ben Franklin variety store, at 5,500 square feet, would be lost within the 71,000-squarefoot Spearfish Wal-Mart. If estimates hold, the Spearfish store will do up to $15.8 million in annual sales, much of that drained from places like Ben Franklin, which rang up a little more than $550,000 last year.

No wonder, then, that when Wal-Mart announces it will open in their midst, some longtime storekeepers beat a hasty retreat. More defections are likely, as Wal-Mart pushes its frontier northward and westward (South Dakota alone got six Wal-Marts this year), and even into the suburbs of the northeast.

Butfor most independent family merchants, the common urge is to stay and fight. To thrive in the shadow of Wal-Mart, a strategy must be drawn up well in advance of the grand opening. "It's crucial that you know what to expect and start taking action ahead of time," warns Stone. "A lot of problems are caused when people wait two years to act, by which time they're short on capital and on the downhill slide."

Established proprietors, particularly families, may be tempted to "wait and see." That's how Dean Humann, owner of Belle Fourche's Trustworthy Hardware store, feels. "I'm a businessman. I've been in business for 14 years and I'm not going to die tomorrow morning because of Wal-Mart." Upon being told that the giant retailer will sell virtually the same houseware items he sells, at lower prices, Humann fumes, "Housewares is 23 percent of my business! I'm not going to throw 23 percent of my business out the door. I'm just not going to do it."

Unfortunately, while it may be admirable, defiant pride isn't enough. Lack of flexibility will kill a small-town operator who faces big-time competition. That conclusion is recognized by Wal-Mart itself. While the discounter's chief executive officer, David Glass, recently told the Dallas Morning News, "I can't deny that our stores have a negative impact on local businesses," he also said, "Those that do better are those that reposition themselves in the market."

Stone adds that proprietors should not simply believe their longtime customers will remain loyal. While your regulars may hang on for some months, sooner or later a significant percentage of them will gravitate toward lower prices and "onestop" shopping.

Local business owners are learning the lessons they need to survive, and through Stone, Belle Fourche's retailers are putting into practice effective strategies that will help keep them in business long after Wal-Mart opens. And small-business owners around the country are learning how to apply the same strategies against their own competitors.

SELL PRODUCTS THEY DON'T Any local shopper who walks into Doug and Mary Miller's Ben Franklin store on State Street will immediately notice that the husband-and-wife team has emptied out their long-standing housewares department, replacing it with Belle Fourche's first custom framing center, a service Wal-Mart will not offer since it can't be mass merchandised, and one that no other local merchant offers.

A few doors down, at Cliff Thomas Drugs, the first thing that catches your eye is a waist-high machine with the sole function of stuffing teddy bears and other gift items into inflated balloons, at a charge of $5.95 apiece. "It's highly labor intensive, so 'they' are not going to have one. At least I hope not," says pharmacist Ron Schwans, who, with his wife Marilyn, bought the pharmacy from Cliff Thomas seven years ago (and didn't change the name, particularly considering that Cliff still works there part time).

These and other proprietors are adhering to Ken Stone's advice to cash in on holes in Wal-Mart's services and inventory, to address market niches that the mass merchandiser cannot or will not fill, to use gimmicks and come-ons, and to put all these in place before the giant retailer opens its doors.

Within its hardware departments, for example, Wal-Mart tends to carry only prepackaged nails, bolts, and screws. "So an independent hardware store owner would be well advised to carry bulk hardware, so he could go after the contractor trade and anybody who's doing substantial building," advises Stone. Also, Wal-Mart prefers to stock items that are fast-moving, such as inexpensive hand tools and power tools. "They're not going to have $400 table saws," Stone says. "In general, you have to offer complementary merchandise."

OFFER BETTER SERVICE A discount-store sales clerk will know little or nothing about the goods on the shelves. By contrast, employees in family owned stores generally have developed strong technical expertise. Hardware store owners, for example, know how best to apply wood sealer or how to repair a screen. Such service should be made a priority, and should be advertised as well. "I know hardware stores where the customers literally line up to talk to the salesmen for advice on how to use what they're buying," says Stone.

Perhaps the biggest advantage family merchants can offer is the personalized service that will just not be available at the Spearfish Wal-Mart, or at the K-mart that's supposed to open nearby next January. "We have free delivery," notes Doug Miller, who also owns Western Drugs, across the street. "We've delivered up to 40 miles away in a snowstorm because a patient needed medication. You won't get that from Wal-Mart," he contends, "nor will they have pharmacists who, like ours, are on call 24 hours a day."

In addition to accepting major credit cards, Western Drugs extends an in-house charge system to customers. "We're not going to turn our back on them just because they run into financial problems," he says. "We've carried people for four or five months. I don't think you'll find that at the chains."

Rosemary Massie, owner of Rosemary's Fabrics Plus, and her family also plan to promote services they already provide. "I sew fabric for customers, which Wal-Mart doesn't do. And I give classes. They don't give classes." Such services help prevent customers from defecting. Owners can also consider bundling products and services-buy so much material, get a free sewing class.

"With fabrics and crafts, people want to be helped," explains Doug Miller, whose Ben Franklin stocks some of the same goods as Wal-Mart. "So we've worked hard in the past six months to train our people to be more customer oriented." The Millers hold classes on how to make denim jackets, jewelry, and tie-dye T-shirts. Other services Stone suggests: Offer on-site repairs and develop special order capability.

Sure, some folks will patronize the Spearfish Wal-Mart because its hyped atmosphere is the closest thing to theater that a rural community can offer. But store proprietors can win over customers by offering a personal touch. At the Medicine Shoppe, a strictly drugs business around the comer from State Street, owners Bill and Connie Husband have put a table and four chairs in the middle of their tiny store, and set a pot of coffee nearby. As Connie hands a youngster a free balloon, Bill asks a patron, "How do you like your new job, Jane?" Jane sits down and gives a lengthy response. If 's a scene that isn't likely to occur at a discount store.

G0 UPSCALE WITH YOUR PRODUCTS Wal-Mart is known for its low-end goods, so one obvious tack for direct competitors is to upgrade, although this may be tricky to pull off without alienating hard-won loyal customers. Thats why Karen Horn, who with her husband, Rod, owns the Country Lady apparel shop (and two others elsewhere in South Dakota), has instructed her buyer to slowly bring in slightly more sophisticated lines from New York and California manufacturers. For merchants who already stock high-grade goods, more emphasis should be placed on them. Adds Rosemary Massie, 'They can't hurt me if I continue selling the fabrics I sellthe satins, the bridals. I only deal in high-quality goods."

STOCK A DIFFERENT PRODUCT LINE It's virtual suicide to sell exactly the same brands as Wal-Mart, which is bound to undercut your price. For example, Wal-Mart may sell Rustler jeans for $10. Regardless of service, if a local retailer prices the same jeans at $13, he is always going to be compared to Wal-Mart, and leave customers with the impression that everything in his store is overpriced. There are other brands that cost the store owner the same and are of comparable quality, and these should be the ones offered. The store owner can sell them for $13, and people will never be able to make a direct comparison on price or quality. It's a plan being devised by Ron Schwans of Cliff Thomas Drugs, who says, "If I find they're going to carry a particular line of gifts, I'll drop it and carry something else."

ADOPT YOUR COMPETITOR'S TACTICS Doug Miller's drugstore stock room is lined with eight-foot-high towers of soda pop. "We've started buying truckload quantities. We get a better buy, and we sell it for a penny less than we pay for it," he says, pointing around the room. "This will probably last us 10 days. We use it as a loss leader to get people into the store. You've got to learn to adopt some of their merchandising philosophy. After a customer leaves here, he'll go around saying he bought a six-pack for 48 cents ... well, you can't get any better advertising than that," he says. "We do the same thing with Hy-Dry towels, Crest toothpaste, aspirin. In every department we have items that we sell for less than what we pay. Just like Wal-Mart does."

According to Stone, Miller is smart to manipulate the prices of selected items to give customers-and more importantly, potential customers-the impression that Western Drugs is an inexpensive place to shop. "Not everything is lower at Wal-Mart, but the average person perceives it is," Stone says. "Wal-Mart is masterful at undercutting things that people tend to know theprices of, like health and beauty aids, things you buy more frequently. Or items that you've been checking on because they happen to be in season."

Offering competitive prices only on selected loss leaders is the key. "I've heard of local hardware guys who go and check WalMart's prices and then go back and mark theirs down to a penny below Wal-Mart's. I can tell you that strategy will not work, because Wal-Mart has such great efficiencies in their distribution system and they buy in such volume, at such low prices, that if you try to go head to head with them on every item, you're going to lose."

ATTRACT MORE SHOPPERS TO YOUR COMMUNITY Belle Fourche, it happens, is situated near the exact geographic center of the United States. Town leaders are trying to get the state's transportation department to move the geographic center marker from a highway rest area 27 miles north of town to the center of Belle Fourche, as a potential hook for the tourist trade, which has been on the upswing since gambling was legalized in the Black Hills town of Deadwood, 25 minutes away.

The promotion of Belle Fourche as the center of the nation, coupled with a planned revitalization of State Street's historic storefronts, might just bring in more shoppers. In a similar manner, retailers in the town of Pella, Iowa, played up the community's Dutch heritage and succeeded in bringing in tourist business-despite the nearby Wal-Mart.

PROMOTE YOUR STATUS AS A FAMILY BUSINESS The most natural advantage a family business has is the very fact that it is a family business. Ibis should be promoted. Further, it is wise to build a sense of community; join the Rotary, sponsor some local events, do whatever you can to make local people take note of your role in their town. It may not work on everyone, but some portion of your customers will continue to come your way if you remind them that you have been, and still are, an integral part of their community.

In advertising the "familiness" of your operation, be direct, but not crass. In Belle Fourche, for example, Dean Humann has a sign posted in his hardware store's front window that reads simply: "Locally owned."

There are other tactics. In April, one year after a Wal-Mart opened near Shannon's True-Value Hardware Store in Colorado Springs, owner Paul Shannon mailed letters to 20,000 customers and local residents that read "We can't survive if you don't support us." He played up the family nature of his small business, and also listed services his store offered that Wal-Mart didn't, like sharpening chain saws and cutting glass. The result? "This has been our best summer ever," he says.

However, Stone believes that, while the listing of services was smart, Shannon's aggressiveness will not help in the long run. "In a way, Shannon was threatening people, saying, 'If you don't do business with me, the town will wind up losing.' He's laying a guilt trip on people, and it won't last."

Instead, Stone recommends quietly but consistently enumerating your contributions to the town at the bottom of ads and circulars, using such lines as "Proud to be a member of the community for 78 years."

He suggests you avoid the urge to preach, saying that customers are turned off by lines that challenge the wisdom of shopping elsewhere. "There's a fine line between being tasteful and being obnoxious," he says.

IF YOU ARE FACING newfound competition, it's vital not only that you implement certain business strategies, but that you prepare for some rough going. If you can weather the storm for a few years, you might then see a prosperous future. A new Wal-Mart, for example, typically offers low prices for the first year or two, but then slowly raises them. 'Two years later, after running all of the independents out of business, their prices go up 30 or 40 percent," says an angry Doug Miller. Druggist Ron Schwans researched the point on recent vacations, and reports, "In the Rock Hill, South Carolina, Wal-Mart, an older store, they sell greeting cards at a 10 percent discount. In Scotts Bluff, Nebraska, where the store is only two years old, they've marked them down 30 percent."

Miller, who has 17 employees, has a plan for holding out. 'We've prepared our cash flow for one or two years during which we may not have profit. We may lose money, but we'll have planned for it."

Work habits may have to change as well. The typical Wal-Mart closes at 10 p.m., long after the average small-town retailer has settled in for an evening with the family. When a discount store arrives, out goes the 8 to 5 workday. To survive, a proprietor must welcome customers well into the evening and possibly on Sunday. Warns Stone, "If you're really serious about competing, you have to extend your hours." Wal-Mart, he notes, wouldn't be where it is today if it closed at 5 p.m.

In the months before the arrival of a Wal-Mart, or K-mart, or the new mall, family business owners must be calm and forthright as they plan countermeasures. Strategies hatched in panic rarely work. It's a time to meet with other retailers and brainstorm about joint promotions, special sales, and community events. Keep your chin up and resist the urge to bad-mouth the big guy to everyone. Nothing turns off customers more quickly than a downbeat merchant-or one who forgets the pridehe's placed in his family name.

 

David Diamond is a business writer in Philadelphia.

 

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December 1990

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