BrainTrust Query: Be Small, Think Big and Get Ready
Commentary by Doug
Stephens, president, Retail Prophet
I subscribe
to Chris
Anderson’s point of view. We
truly are entering the golden age of small business. And while the
editor-in-chief of Wired magazine says “It might not feel that way
to a lot of small businesses,” there are enough clear signs to suggest
that the landscape is dramatically changing.
Being a small
retailer will no longer be a disadvantage – in fact, just the opposite.
The enormous scale that gave brands like Home Depot and Wal-Mart their
efficiencies through the 1990’s and 2000’s, will become increasingly burdensome
as they struggle to respond to new trends and changing economics. Small
retail, on the other hand, can and should quickly and nimbly adapt and
shift to capitalize on opportunities.
In short, the
age of “mass” in North America is coming to an end. Mass communication,
mass consumption, mass media, mass everything will be over. As Julien
Smith, co-author of Trust Agents, puts it, mass media was a “fad” in
the course of history. People were meant to converse, not broadcast. Our
interests, relationships, media choices and consumer preferences are increasingly
selective and niche in nature.
Beyond social
change, small retailers can also benefit from quantum improvements in technology. They
now have access to cost efficient store systems as well as a range of hosted
software solutions. Other technologies like Skype and Google Docs
are allowing small businesses to enjoy for free what less than a decade
ago big companies spent a fortune on. Being small never felt so big!
Finally, social
media has endowed small business with the power to establish their own
channels, spread their unique propositions and develop their own "tribes"
of loyal customers. Gone are the days of being shut down by deep-pocketed
competitors who could buy out entire media formats. In fact, some
of the most popular social media channels began as simple conversations.
It all adds
up to opportunity for great independently owned retail, the likes of which
we haven’t seen for at least 25 years. But as always, there’s no
free ride, no guarantee of success. The surest way to earn your place
in the future is by standing apart from the pack, being remarkable and
thoroughly indispensible to the customers who love you.
Discussion
Questions: Are the
advantages in being small now outweighing the disadvantages? What specific applications
and tactics have you seen working particularly well for small retailers lately?
I think the thing missing from both the article and commentary is the wholesale commoditization of products that the larger companies have imposed across all sectors. To stand out in retail starts with the merch mix. Many manufacturers use the smaller retailers to test items, then sell them to the big at a huge discount due to their volume.
Coupled with the incessant discounting by competitors, while I am bullish on small business, I don’t feel it is particularly easier now for them than in the past–especially if you qualify it by “profitable” small businesses.
My uncle who was in the garment business way back when used to say to me: “Doron, if you want to win in retail it’s location, location, location.” Now I tell me kids (who are only 5 and 2 and look at me funny when I say this) “Girls, if you want to win in retail, it’s localization, localization, localization.” This is where independents can truly beat their larger and slower counterparts.
Knowing the demands, desires, and wants of your local selling area is critical to the success of any retailer. Fortunately for the small guy, big box is slow to react and in most cases, have their hands tied when it comes to optimizing their merchandise mix. Owners should get out and meet and build relationships with community leaders. Big box managers and supervisors don’t have the time (or or probably aren’t allowed) to leave the store to cultivate these types of liaisons. Information gathered from these relationships are like gold for merchants.
Bottom line: Small guys can react and plan better for the local selling area. Localization will give merchants a leg up over their larger competition. Big box can’t maneuver fast enough. Advantage: The smaller merchant.
You can also kick their butts in customer service but that can be its own, standalone discussion.
The Internet has created an opportunity for collaboration between similar businesses. Grocery retailers can share merchandising ideas, manufacturers can reach large numbers of retailers with promotions, and common business chores such as maintaining item files can be done in collaboration. Since most manufacturer promotions are now based on scanning data, the advantage of large purchases is lost. Retailers working in collaboration can evaluate retail services such as hardware vendors, wholesalers, etc.
When I thought this whole thing through, the only reasons I could come up with for the headquarters function were to train new entrepreneurs and ensure brand quality if there was a common banner across all locations. It is almost as if the network based services have become the basis for forming virtual cooperatives. The individual retailers would shop around for the service provider who could best meet their needs and contract wholesaler services from wherever they can get the best price, kind of like separating the cost of the natural gas from the pipeline delivery service.
We’ve seen this kind of thing happen in financial industry. That is where the term disintermediation originated. It described the evolution of money market funds as a way for consumers to directly invest in the commercial paper market. Now the Internet is beginning to make it possible for all kinds of affiliations, not only social but also commercial. The key to this will be a robust network connection along with the training and QA function.
One rather large problem for small retailers is that large retailers will always have a price advantage on branded items. Brands may not be as important as in the past, but the big brand names, and there are many, are still very important in many channels. So, small retailers can’t win on price and have to win on unique assortment, service, and the shopping environment/experience.
So, I guess I agree somewhat with the author’s premise but when shoppers think of needing a big basket of groceries at a great price they are still going to think of Wal-Mart; when they think of home projects they’ll think of Home Depot or Lowe’s; when they think of cheap fashionable clothes they’ll think of Target; and on it goes.
Sidenote on the poll question: No one starts a big chain – they start a small business that grows and evolves into a chain.
Great article, Doug.
In many ways, the industry is in a colossal “Back to the Future” moment. Years ago, retail was all local – one downtown department store and several local specialty shops. They were part of and understood the preferences of their local community and delivered products tailored to those preferences. Margins were good. Retailing was, believe it or not, exciting and fun. Then retailers decided to open malls and expand selling space faster than the population was growing. This started a sequence that brings us to where we are today – boring, cheap, and self-service – definitely neither fun nor exciting.
The emerging trends in technology leverage and Social Media present an entrepreneurial opportunity to return to the days when retail was customer-specific, profitable, and fun. What’s most interesting is that the opportunity is not geographically bound. This opportunity exists both on the retail and the wholesale side of the equation.
Large or small, the opportunity exists for the retailer that has exciting product and delivers a real customer focused experience. The small retailer seems to have an advantage right now because the big guys, for the most part, are playing it safe on product and cutting payroll which jettisons service. Large retailers have big overheads, bureaucracies, and “don’t upset the apple cart” mentalities which relegate them to a “don’t, won’t, or can’t” response to the rapidly changing consumer.
But, can the small retailer for the most part really take advantage of this opportunity? Access to capital is a huge issue and consistently reaching a local target customer base can be challenging even with social media access. Small retail owners wear most of the hats in their businesses and developing a social media presence is time consuming and a long haul.
There can and will be winners on both ends of the spectrum. The formula for both is change; big companies must adopt a “think small” mentality by focusing on product localization and customer service, and small companies must “think big” by moving outside their comfort zones and accessing all of the available technologies to get their message out.
Well, you just stole my whole theme for a query. I was going to be a little more blunt and ask “Has the Retail Headquarters Become Redundant?” Many of the factors have been mentioned. But although “social networking” has been mentioned as a demand side opportunity, the Internet also provides an untapped opportunity on the operations side.
The Internet has created an opportunity for collaboration between similar businesses. Grocery retailers can share merchandising ideas, manufacturers can reach large numbers of retailers with promotions, and common business chores such as maintaining item files can be done in collaboration. Since most manufacturer promotions are now based on scanning data, the advantage of large purchases is lost. Retailers working in collaboration can evaluate retail services such as hardware vendors, wholesalers, etc.
When I thought this whole thing through, the only reasons I could come up with for the headquarters function were to train new entrepreneurs and ensure brand quality if there was a common banner across all locations. It is almost as if the network based services have become the basis for forming virtual cooperatives. The individual retailers would shop around for the service provider who could best meet their needs and contract wholesaler services from wherever they can get the best price, kind of like separating the cost of the natural gas from the pipeline delivery service.
We’ve seen this kind of thing happen in financial industry. That is where the term disintermediation originated. It described the evolution of money market funds as a way for consumers to directly invest in the commercial paper market. Now the Internet is beginning to make it possible for all kinds of affiliations, not only social but also commercial. The key to this will be a robust network connection along with the training and QA function.
And, as we talk about small retailers having an advantage, Ahold announces they are buying Ukrop’s.
Anderson’s quote about sums this discussion up for me:
“The transaction costs are actually higher inside the walls of a big company than they are outside.”
This is the paradox of the chain retailer–what’s gained in headquarters “synergies” and buying clout when chains grow large is often offset by increased operational complexity, loss of local market responsiveness, and general bloat.
Compounding this challenge, the career motivations of top retail talent tend to be HQ-focused, because that’s where the big salaries, prestige and big city lifestyles are. This is a lament of corporate recruiters at chains like JC Penney and Target–every retail-bound college graduate wants to be a buyer or marketing trainee; nobody wants to run the stores in Davenport or Muskogee.
While big chains struggle to make effective localization a reality, independent retailers are finding some big-time techniques are becoming more accessible, affordable and practical to use. First it was QuickBooks, cable TV ads, then inexpensive Web hosting, email marketing, online coupons, and now social media and even local loyalty card programs. Buying groups can help some with cost of goods (although nobody will hope to match Walmart’s absolute clout). The absence of headquarters overhead, corporate travel and nattering public shareholders is also a favorable offset for the little guy.
It’s definitely tough to be a small retailer these days. You have to be a multi-talented genius to succeed, and the hours are looooonnngg. But local retailers are inherently more focused on local shoppers than their chain competitors, and they don’t waste time and resources sending reports back to headquarters in another state.
While I like Wired and Chris’ commentary, I also caution that his additional concept of “Free” flies in the face of this as small businesses usually cannot compete with “give it away and sell something else.” That is a method only growing at the top end. Rather, I think we see a bifurcated market with opportunities at both ends that require sophisticated and dedicated work and solutions. It is far too easy to predict a big trend only to find the devil, as always, is in the details. Truly good efforts will work and this environment is only outing the poor ones faster.
I like having (owning) a small and growing business. You can be more responsive, hands-on, and provide more value to your end users. The interest in loyalty, engagement, and customer experience is quite important.
Thanks to everyone for your comments. One “elephant under the table” that I really didn’t comment on in the article is this…The enormous growth of big retail over the last 20-25 years was predicated on 3 primary things…
1. Robust demand: Allowing for massive scaling up, growth and expansion.
2. Predictable consumer tastes and preferences: Enabling mass merchants to bring in goods by the container load.
3. Homogeneous Customer Segments: Helping retailers to bring in generalized assortments that would appeal to a large target consumer base.
All three of the conditions have been eradicated.
* Demand will be inconsistent and modest as a result of both the recession and the decline of Boomers as the primary consumer group.
* Tastes/preferences will be varied across Boomers, Gen X and Gen Y. And even vary greatly within Gen Y as a demographic.
* Multicultural consumers (especially Gen 1.5 and 2) will be massive force in the market. Estimated to hit 1 Trillion in 2010 and far out-pacing the growth of other non-ethnic segments.
So, essentially all the conditions that gave rise to the astounding growth of big retail will barely exist. The ability to buy tonnes of something will be less relevant than the ability to change an assortment quickly. Size will be as much an impediment as an advantage.
Being big means you can shed a few locations in order to survive. Being small means you can’t. Small is an all-in proposition all the time. After a decade with Fleming and consulting later for SuperValu and 7-Eleven, I got to know independent retailers pretty well. And despite their off-the-books registers and coffee cans buried in the back yard, they were always living on the edge. Always afraid of being all-in all the time. It made them tough and resilient, and also very difficult to work with.
Today, small retailers are simply staying in the game, biding their time. They’re surviving. It’s something they’re good at, something that distinguishes them. I like their chances. It’s like ham n’ eggs: The chicken is involved while the pig is committed. Large retailers are involved but small retailers are committed.
Small businesses have a challenge to stay connected with their market, appear smart, be one step ahead of the big guy, and don’t get stepped on when their idea is finally discovered by imitators. They can move fast and into directions the big guys can’t but often, at risk.
What’s best about being a small business is doing it yourself. What’s hard is you always have to do it yourself.
Social Media has probably been the most effective asset for Small Business in general. I believe there was a recent article about Whole Foods moving away from their mega stores, and of course we all know the small formats Walmart is experimenting with. AND needless to say, when do any of us go into Trader Joe’s and not see it teeming with customers?
However, small businesses too many times suffer from the “I don’t know what I don’t know” syndrome or what are called Blind Spots. Small Retailers will need to learn in much greater depth about shopper behavior, segmentation and targeting, etc.
Being small will be good in the future, but thinking smarter and “bigger” will make small work.
On the plus side, being small and nimble permits retailers to quickly adapt to changing customer preferences and to build closer relationships with Best Customers. The close customer contact provides rapid feedback on assortment, pricing and marketing activities. In addition, much technology can now be accessed at little cost, “through the cloud.”
On the negative side, small retailers lack the economy of scale to purchase in bulk and to utilize the technology that is still expensive, such as data warehousing and supply chain software. In addition, smaller retailers lack the ability to partner with larger, branded companies to form added-value relationships.
I net out that smaller companies can succeed where larger companies can fail, if they can listen to their customers, create relationships and communicate with those customers consistently though email and direct mail, as well as handwritten notes and phone calls.
Critical technology includes e-commerce sites and personalized email design and marketing tools. In addition a company will also need to maintain a single customer database that can be accessed via the web by customers and store personnel. In this game, a small company will truly live or die by the quality of data on customers and their transactions, as well as by the “feet on the street” insights directly from their customers, particularly Best Customers.