Mom & Pop Fight Back
Against a backdrop of mega-retailers and the revenue-hungry cities that support them, mom-and-pop stores learn to do battle or die.
Thursday, August 27, 1998
With his short stature and agitated manner, consultant Kent Burnes looks a little like a bird--an indignant jay perhaps--pacing back and forth in front of this group of 20 Salinas merchants, cordless mic in hand, sounding the alarm about predators in paradise. Burnes'' message is sharp and succinct: Mega discount-retailers are multiplying, but through their own mistakes, small retailers may have let the wolves in the door. And if mom-and-pop stores don''t arm themselves with better strategies for pricing, marketing and serving their customers and take aim against the big boys, they''ll be devoured and left like carcasses by the wayside.
To the mom-and-pop store proprietors assembled for this seminar, it is an alarm worth sounding. At least partly fueled by municipal addiction to sales tax revenues, California is increasingly seeing the steady increase of chain stores like Target and Wal-Mart stores that have irrevocably changed--and in some cases decimated--independent retailers in other parts of the country. In the past nine years alone, Monterey County has seen a proliferation of chain stores: two Targets, two Costcos, a Home Depot, two Circuit Cities, two Blockbuster Videos, two Hollywood Videos and a Wal-Mart, just to name some of the obvious corporate carnivores.
To a growing consortium of academics, preservationists, and slow-growth activists, the end result of this new wave of retail development with its accompanying sprawl and miles of parking lots is nothing less than the destruction of the American landscape. In his mammoth 1997 report on the economic and sociological impact of mega-retail discount stores on small businesses, University of Pennsylvania professor Edward Shils stated that his findings "presented a picture of rapidly increasing ghetto-ization and blight as the mega-retail discount chains continue their free-wheeling from city to city, town to town and county to county, leaving behind, in many cases, urban, suburban and rural sprawl."
Some places, like the entire state of Vermont, have even tried to keep discounters like Wal-Mart out--only to have to cede to popular tastes when customers started flocking to stores on the other side of the state border and depositing their revenues there.
"Our research shows that yes, people do want the convenience provided by many of these stores, and the prices," says Constance Beaumont of the National Trust for Historic Preservation, herself the author of two books on preventing urban sprawl. "They like what''s inside the store, but they often hate what''s outside the store--the traffic, the air pollution generated by the traffic, the ugliness."
To a growing number of American consumers, the rise of the mega-retailers has meant the demise of family businesses, personalized service and specialty products--places where you can get hard-to-find crafts, a certain brand of hot sauce, hat boxes with hats.
But to small independent retailers, concerns about behemoth retailers go beyond concerns about mediocre merchandise and the leveling of American consumer goods. Their concerns go beyond fears of sprawling to fears of mauling--terror that stores like Costco, Target and Wal-Mart with their low prices and huge volumes--will put them right out of business.
"I always start out with the basic premise that whenever a store like Wal-Mart or Home Depot comes in, we''re dealing with a zero-sum game," says Ken Stone, a professor of economics at Iowa State University who has made a specialty out of studying the effects of Wal-Mart on retail establishments in small, rural towns. "If someone comes in and does $40 million a year, that doesn''t come out of thin air. It must come out of some other retailers'' cash register--at least until the population increases."
Patti Llorim is the office manager of Monte Vista Market, a beloved neighborhood grocery that''s been around on Soledad Street in Monterey for years offering shoppers a small selection of grocery items, plus a deli, gourmet prepared food and an outstanding butcher shop. Two months ago, Whole Foods moved in virtually across the street at Del Monte Center, replacing the old Lucky store with a chain food store offering the same sort of upscale merchandise as Monte Vista and an even bigger selection of gourmet and prepared food. "Of course it [Whole Foods] has had an effect on us," says Llorim. "We carry a few of the same items--the fresh milk, the salsas, a few of the sauces, and of course they do have a deli which does compete with our deli."
"I worry," admits Steve Andre, the proprietor of Monster Video in Carmel, one of the few remaining independent video stores to survive the Blockbuster/Hollywood invasion. "They [the chains] are a very real threat. "
Andre, who boasts an extensive collection of classic and foreign films, believes he may have survived thus far partly as a result of some good business decisions. He offers customers a better selection of some types of films than they''ll find anywhere else on the Monterey Peninsula--and he''s kept his new release offerings contemporary and available. But he also lucked out. When a big name video chain came calling on his landlady, looking to usurp his space, their rep hadn''t counted on the fact that she liked Andre, she didn''t like chains, and that something about the rep''s arrogant attitude just plain pissed her off.
All that''s good for Andre. But he still worries--about small video store operators, some of whom he admits "aren''t doing it right"--but also about what the chaining of America means to the retail landscape as a whole.
"Our democracy thrives on the idea, the concept that we should have individuals," says Andre, who''s proud of being one of the few local video stores that doesn''t have a policy of censoring the types of films available for rent. "Chain stores are the antithesis of this. They represent the leveling of society, the kind of mass merchandising of everything to the point where we don''t have choices."
Who''s on the Chain Gang?
By anyone''s calculations, the growth of discount retail chains has been nothing less than phenomenal. Ironically, both Target and Wal-Mart started with single stores in 1962--Target''s store opened in Roseville, Minn. and Wal-Mart opened in Rogers, Ark.
Since then, Wal-Mart has become the top retail chain in America and the youngest start-up business of the Fortune-50 companies, with 2,368 stores in the U.S. alone, 446 domestic warehouse membership Sam''s Clubs and 600 stores overseas. Wal-Mart employs 820,000 "sales associates," offering them a benefits package that includes medical, dental and company-paid life insurance, a 401k and stock options. According to figures compiled by the National Retail Federation, Wal-Mart had the largest earnings of any retailer in America in 1997, with earnings of $3.5 billion--up 15 percent from 1996. Wal-Mart opened its first California store in 1990. Eight years later, there are 100 Wal-Marts in California, with more to come.
Target, which is owned by Dayton Hudson in Minnesota--the parent company of Mervyn''s--is also a relative newcomer to California, but that hasn''t stopped it from expanding to 142 stores in the Golden State, part of its fleet of 807 stores in 39 states. "We''re building all across the country," says Denise Workcuff, spokesperson for the Target corporation. Dayton Hudson came in fifth in the National Retail Federation''s Top 100 list of companies for 1997 with earnings of $751 million--up a phenomenal 62 percent from 1996. Home Depot (number seven on the list) and Costco also showed significant gains in 1997, with Home Depot up 23.7 percent to $1.1 billion and Costco up 25.5 percent to $312 million.
How are discount retailers able to flourish? A combination of factors can be credited, including a strategy by the stores themselves focusing on cost-control, and the sale of mass-produced items that aim clearly for general, rather than specialty items.
What are the net effects of those policies? For small retailers, clearly a tendency toward an erosion of revenues. In his studies of small Iowa towns affected by Wal-Marts, Stone found that over a 10-year period towns without Wal-Marts even fared substantially worse than Wal-Mart towns, with shoppers apparently leaving their own shopping districts to flock to the Wal-Mart Mecca for their shopping needs. Particularly hard-hit were very small towns of 500 to 1,000, which showed a sales decline as high as 46 percent in the decade after a Wal-Mart opened in their area.
Perhaps contributing to that decline is Wal-Mart''s own development strategy, which from the beginning has focused on opening large stores in small towns, with stores in relative proximity to one another so as not to be too far from Wal-Mart''s distribution centers. As a result, Wal-Mart is able to saturate small, rural markets and even to put other chain retail discounters out of business. "There were regional chains that had as high as 500 stores that went into bankruptcy and were gone," says Stone. "You''ll see a lot more of that happening in the next few years."
With the growth of mega-retail chains and the proliferation of warehouse stores, wholesalers are also being eliminated--a situation that favors large retailers by essentially giving them control of the supply of goods. And, the huge volume of business the big chains command means that they can strategically price items--creating the appearance that items are cheaper at their stores, even when they''re not, to the detriment of small retailers.
"Most small business are still using a cost-based mark-up--I take my cost, and add a standard mark-up," says Burnes, who has been working as a consultant to small businesses for the past 15 years. "That just doesn''t work anymore. We need to be in the mind-set that all products need to be marked based on demand and competition."
Price, supply, location. Those are all factors contributing to the success of the discount retailer. But there are other willing partners in the success story of stores like Target, Costco and Wal-Mart. Those are the municipalities who are all too desperate for the sales tax revenues those discounters bring to town--1 percent of all the sales tax they collect in that location. And, in California''s anti-tax post-Proposition 13 era of dwindling revenues, the movers and shakers in many cities and towns are only too happy to encourage entire developments devoted to discount retailing. Sometimes, they''re even willing to fork over big bucks in grants and redevelopment money to pay for the improvements that will sweeten the pot for the big stores.
"For most cities in California, it [sales tax revenues] is the single largest general fund revenue source," says Lloyd deLlamas of HDL companies, a revenue management company that advises 215 cities and counties on municipal finances. DeLlamas points out that because sales tax revenues are so "narrowly focused"--food, business-to-business, and medical supplies are among a laundry list of products exempted from sales tax revenues--cities become particularly addicted to the huge revenues that only big box retail centers can generate.
In Salinas, the county''s largest city, sales tax revenues of close to $15 million make up 37 percent of the $40 million general fund budget--"the largest single source of revenue in the city''s general fund," says John Copeland, the city''s finance director.
Copeland says the city doesn''t break down the specific sources of that revenue by location, but city publications acknowledge that virtually all of Salinas'' big box stores--Target, Wal-Mart, Toys R Us, Home Depot and Costco--are among the city''s top sales tax revenue producers. And, according to figures produced by Copeland, Salinas'' take of the sales tax revenue gold mine has done nothing but climb in the past five years, from $11.9 million in 1994-95--just a few years after the opening of Harden Ranch''s discount retailers in October of 1991--to an estimated $14.7 million this year.
The money, says Copeland, is essential to meet the demands of 122,000 residents who need and demand better public safety, recreation and libraries. But Salinas didn''t have to make any fiscal concessions to tap into that gold mine. "None of those [big box stores] are in redevelopment areas," says Copeland. "The city made no concession tax or otherwise for them to come here. In fact, because in some cases, [the developers] had to make significant improvements to roads, streets and signages."
But over in Sand City, city officials willingly gave $5.5 million in grants and redevelopment money to help finance infrastructure improvements for the new Edgewater Center that includes Target, Borders and Circuit City. The city also gave $3.2 million in grants and loans to help bring on the Sand Dollar center that nine years ago introduced Costco to Monterey County.
Were the investments worth it? Absolutely, says Sand City Manager Kelly Morgan--especially considering the fact that half of the city''s general fund revenue comes from sales tax revenues generated directly from the big box stores that make up Sand City''s shopping districts. Annually, those revenues deposit about $2 million into Sand City''s coffers. In fact, says Morgan, sales tax revenues now make up 50 percent of the Sand City general fund budget.
Don Orozco, who developed Edgewater and 29 other shopping centers, says the city''s contributions were needed to offset the high cost of developing the land in Sand City--land that he says ended up costing something like $22 a square foot to develop.
But anti-sprawl and small business advocates say sweetening the pot for multi-million dollar discount retailers amounts to using corporate welfare to tilt an already uneven playing field even more dramatically away from small independent retailers.
"We need to quit giving corporate hand-outs to the richest companies, just for locating in our communities," says Burnes. "If you had your fixed costs lowered, if you could come to town and say, ''I''m Wal-Mart, here''s what I''ll pay,''hey I bet I could discount too. This is the largest employer in the United States of America and the richest retailer in the world." Adds Burnes: "We need to understand, let''s make a level playing field. If there''s a demand for a Wal-Mart, they''ll build."
"I really take exception to the city fathers who let this happen," says May Waldroup, who owns both the Barnyard Shopping Center and Thunderbird Books. As Thunderbird''s owner, Waldroup was also the only local bookstore proprietor to join in the American Booksellers Association suit filed in federal district court against a slew of big box bookstores--including Borders--charging the big boys with unfair business practices.
Waldroup says part of her aim as an independent business owner is to wake up both customers and elected officials to what she sees as the evils of mega-chain store developments. Independent store owners like herself need to "try to wake up the people that make the rules in their counties that let in the Wal-Marts, that let in the Costcos, that let in the big boxes. They''re killing the golden goose. Carmel was always known for its cute little stores. If everyone''s going to shop at Wal-Mart or Costco, well nobody can afford to go against that."
Legislation by Assemblymember Tom Torlakson of Antioch would have put a curb on the use of some municipal funds for big box development. AB 1835 sought to prohibit cities and counties from offering financial assistance to auto dealerships or big box retailers seeking to move from one tax collection area to another within the same market. The bill died in committee, although the assemblymember plans to re-introduce the measure in some form next year.
But city managers like Morgan see nothing wrong with bringing in as much retail development as shoppers will support (Wal-Mart, says Morgan, has already expressed some interest in adding a Peninsula location). And, he defends the idea of providing incentives for retail development which will, in turn, support the city, provide local jobs, and perhaps keep life in California a little more affordable.
"It just depends on how much you need to improve the economic development of your city," says Morgan. "If you''re already healthy and you have a good revenue source, and your city is flourishing--like Monterey and some other cities in this area--you probably don''t need to play that game. But cities like Seaside, Marina and Sand City, we don''t have a good, solid economic base. In order to improve our economic base, we have to get into the real world and compete."
Mom and Pop Take Aim
Faced with the formidable pressure of large discount retailers and the municipalities desperate to support them, small retailers are in many cases, fighting for economic survival.
Then again, mom-and-pop stores are used to struggling. Their first mammoth opponents were the shopping malls of the ''60s that drew millions of folks away from their downtowns to the climate-controlled, multi-convenience wonderlands called shopping malls that have all but killed a plethora of America''s downtowns. The late ''70s saw the creation of the discount warehouse store with the birth of Price Club in 1976. And the ''80s and ''90s have seen the proliferation of the retail discounters that also got their start in the 1960s.
External pressures aside, there are also indications that in trying to weather the competition, small retailers have forgotten some of the fundamentals of what made their businesses unique.
"In the ''70s, we saw a real rise in volume-oriented discounters," explains Burnes. "Small businesses decided, ''Gee, we need to be more like them.'' They wanted to lower their fixed cost of operation, so they eliminated service. We stopped seeing things like delivery, special orders, an array of hours of operation."
For his Salinas audience, Burnes is even more succinct in identifying the problem: "The 1970s to the 1990s showed the most explosive growth for national retailers. We opened the window for them."
Like a minister in a revival tent, Burnes is relentless in querying the small business operators he meets as he travels across country. When was the last time they shopped the competition? Tried to order something by phone at either their own businesses or competing businesses? Surveyed customers--or better yet, surveyed former customers? Are business owners pricing items once and only once--or are they willing to go back and re-price according to whether an item is at the beginning, middle or end of its popularity cycle? Are mom-and-pop stores stuck with hours reflective of the yesteryear, when at least one adult per household was home running errands--or do they reflect the reality of when and how people shop?
"Seventy percent of the goods and services in this country are traded between 4 and 10pm," says Burnes. "By and large, the majority of small businesses close around 6 o''clock--60 percent. That''s 60 percent that have an entire network of shoppers not even getting in the door."
"Small businesses have to realize that good service is their niche," says Teresa Thomae.
Thomae directs the Aptos-based Small Business Development Center that is funded by state and federal money specifically to provide small businesses with the kind of free assistance they need to remain fiscally viable. She says much of what she does in diagnosing small business problems has to do with weaning store owners away from outmoded inventory and outmoded ideas about pricing and service. "There has to be an adjustment," adds Thomae. "It''s a lot cheaper to keep someone''s business than to win it back."
The local business owners who are fighting the good fight against mega-retailers are the ones that seem to be following the advice of experts like Thomae, Burnes and Stone. Rather than competing head-to-head with the products offered in discount stores, they''re trying to offer something different: more upscale or specialized products, a more customer-friendly ambiance, more focused customer attention. And they say plenty of shoppers, weary of being waved away by indifferent clerks to the far corners of cavernous mega-retail centers, are enthusiastically embracing alternatives.
Monte Vista''s Llorim says the store''s owners are gambling on the fact that their long-time loyal customers will still opt for personalized service, like grocery delivery. So far, Llorim says that gamble is paying off, and Whole Foods "hasn''t had a major effect" on store profits.
"There are a lot more warehouse stores now," says Mark Phillips, who has co-owned Thinker Toys in Carmel--one of the county''s only independent toy stores--for 20 years. "There''s a lot more discounters that are out there. But what I''m finding is more and more and more people are leaning toward independents. You get tired of going to stores that have the same basic look and lack of personal service."
Phillips, who this month opened a second toy store in Monterey''s Del Monte Center, says his stores are intended to cater to "those who put some thought into toy-buying"--a prolific market, what with the ever-growing pool of new parents and grandparents looking for educational toys for their little geniuses.
"I think the independent toy store will always be here," says Phillips, who claims not to worry much about chain store competition. "If you''re the type of person who goes to a big chain like Target, if you''re going to buy your toys at Costco, as far as I''m concerned, I''m never going to see you anyway."
"You need to stay focused on your own business," says Jonina Meyers, owner of Del Monte Pets in Monterey and Pet Fun in Salinas, two independent pet stores that are weathering the chain store invasion. "You can shop the competition and know their strength and weaknesses, but don''t focus on the competition so much that you lose focus on your own store."
Meyers speaks from experience. She''s been at Del Monte Center for 15 years, where she faced her first mega-discount challenger in the form of Pet Pals, a local chain that just recently closed its Seaside store. The latest pet supply giant to enter the ring is the huge Pet Smart, which recently opened in Sand City. But Meyers says the strategy she developed to deal with Pet Pals is so far working with Pet Smart. She lets the discount store take the lead in deep-discounted, big-name pet food while she and her husband focus on other things--ultra-specialty pet food, tropical fish and their accouterments, small animal pets carefully purchased from local breeders.
Sometimes, says Meyers, ceding over part of the market even makes smart business sense. "We want Pet Smart to sell as many of their discount 10-gallon aquariums as possible," she says. "Once they''ve introduced customers to the hobby, we can take the truly interested hobbyists to the next level by offering classes, customer service and upgrades."
But some local businesses say they''re ceding nothing--and whupping the big boys too. Michael Morrison, the owner of Valet Auto Care, says he''s been able to compete favorably with bigger operations like Q Lube, by offering his customers something they don''t: on-site oil changes. What that means--especially to businesses with fleets of cars, like California-American, Budget and National--is a savings of time and money, since employees don''t have to drive car after car over to get the oil changed. And they can get that service for about what they''d pay someplace else. "We''re pretty much a new concept," says Morrison, who is clearly pleased with his success.
For River Gurtin, co-owner of the 21-year-old local Bagel Bakery chain, the moment of truth came when Noah''s--the powerhouse bagel chain that''s sweeping the rest of the country--closed its doors in December, just about two years after setting up shop in the Crossroads Shopping Center, near where one of Gurtin''s stores is located. "Oh yeah, we were definitely worried," says Gurtin. "I had studied Noah''s a lot before they moved in for a couple of years, just to understand their strategies."
Gurtin says his research yielded several valuable insights. One point was that Noah''s would prefer to locate near a competitor, rather than in virgin territory where the store might have built its own customer base. The second weakness was that Noah''s wouldn''t take the time to boil their bagels the traditional way, yielding the traditional chewy product Gurtin''s customers have come to know and love.
But as any foot soldier can tell you, a victory in the field doesn''t mean a victory in the war. Even as he was opening his seventh store, in Sand City, Gurtin wasn''t resting on his laurels. On a recent weekday, he spent time in one of his stores, asking customers for their reactions to different types of coffee.
"The real strength that a mom-and-pop organization has is that we can listen to our local customers and modify our business to suit the local needs," says Gurtin. "That''s an incredible strength."
So how are Monterey County independent stores doing? Well--thanks to the demise of local appliance stores like Burdick''s and Dores Superstores--you can no longer buy a washing machine anywhere in the city of Monterey. M&S Hardware, PG Hardware, Hayward Lumber and Pet Pals are all gone. The ever-popular Granary Market was purchased this year by the mega Whole Foods. Other independents--PC People, Computer Works and Monterey Auto Stereo-- are surviving, even in the face of chain store competition.
The retail landscape has definitely changed with the addition of hundreds of thousands of square feet of retail space, Undoubtedly more changes will follow as more space is inevitably added. Perhaps all these new stores and lower prices will make shoppers the true winners. But the big boxes bring with them a different community marketplace, one devoid of neighborhood. One thing is certain: The store wars will continue. And the ultimate victors? The consumer will decide. cw