When Walmart Invades: The Independent Retailers' Survival Guide

It's an independent shop owner's worst fear: Walmart is coming to town. Or maybe it's Target, or Home Depot, or some other big-box chain moving into your neighborhood. When the word reaches local, independent businesses, it almost always engenders a feeling of impending doom.

And it's getting worse.

In many cases, small retailers fight back by capitalizing on the disdain local consumers often feel for big-box stores invading their neighborhoods. But now, clever chains are coming up with new smaller stores, sometimes with new names not connected with strip malls and parking lots.

Target has recently opened small stores in densely populated urban markets such as Seattle, while Costco Wholesale and Home Depot have shoehorned smaller versions of their stores into Manhattan. For its part, Walmart is opening smaller Neighborhood Market stores, focused on grocery and pharmacy, in both suburbs and downtowns. Walmart continues to tinker with the smaller-store concept it created in 1998, but the company says a typical store is 42,000 square feet. As of November 2010 there were 181 Neighborhood Market stores scattered around the country in markets including Chicago; Memphis, Tennessee; and Boulder, Colorado.

With their huge economies of scale allowing them to buy super cheap and charge rock-bottom prices, these chains pose a formidable competitive threat -- even when opening smaller-size stores.

Set Yourself Apart

All is not lost, however. It turns out that smart, dedicated independent operators can successfully compete against both big-box chains and their miniature outposts.

Tulsa, Oklahoma-based Bodean Restaurant & Market has no problem competing with the three Walmart Neighborhood Markets in its area. The company's diversified business model, which includes selling fresh fish wholesale to other restaurants in the area, has kept the 42-year-old local institution from competing directly with the retail giant.

"We don't really notice them," says Gene Pounds, Bodean's operations director. "We sell a higher-quality product. We fly everything in fresh, every day."

Many independent stores that stick strictly to grocery have been able to grow despite the presence of full-scale Walmarts in their markets, notes Bob Goldin, executive vice president of Technomic, a food industry consulting firm in Chicago. And competing with a smaller-size Walmart can be even easier, as the chain's smaller stores can't offer the variety or volume of their full-size brethren. The same goes for small retailers in niches that put them in direct competition with a scaled-down Target or Costco.

Still, that doesn't mean you can take these new competitors lightly. To help small businesses do battle, we asked Goldin, Dick Outcalt and Pat Johnson of Outcalt & Johnson: Retail Strategists, and grocery site-location analyst David Livingston of DJL Research for 10 essential tips:

1. Don't compete on price. A small retailer will go broke trying to match big-chain prices, says Goldin, since they have to buy at higher prices. Don't even try.

2. Personalize your customer service. Walmart's service is a weak point -- "nearly nonexistent," cracks Goldin. There's no butcher behind the meat counter or hardware expert to help you choose the right widget.

It's a similar situation for the other big chains opening smaller stores. To compete, make sure your experts are visible and talk with customers, says Johnson. Personal service can be part of your marketing strategy, too. Get customers on an email list, and send them notices about specials of the day and such.

3. Study all the competitors. Rather than obsessing about the arrival of a big-chain store, do market research to learn how all the retailers in your niche are performing versus a typical store in their chain, advises Livingston. Underperforming stores are a warning that the market is overcrowded, while stores doing better than average for their chain are an indicator that there's still room for growth. The new small-format chain store may not impact your business if there's room in the market for another competitor.

4. Market aggressively. It's not impossible to take customers from a Walmart Neighborhood Market or a mini-Target if you advertise aggressively, especially before the store becomes well established, says Livingston.

5. Stock unique products. Shop your local big chain and note the brands it carries, advises Goldin. Find new vendors if you're currently stocking identical products. Offer products that are unique in your market, especially products that bear your store's own brand.

6. Stock better-quality products. For instance, Outcalt and Johnson note that Walmart's fresh produce is often only so-so, and their meats are hardly gourmet. Much of its fresh food is trucked in from far away. A grocery competitor could draw customers by providing fresher, locally sourced, organic produce, or unusual varieties such as heirloom tomatoes. If you're competing with a small Home Depot, switch to more upscale tool brands Big Orange doesn't carry.

7. Think local. National chains stock mostly the same merchandise nationwide; they don't get to know local customers' tastes the way a mom-and-pop store can, notes Johnson. "You compete by really serving your local market with the stuff they want, rather than what Walmart can get a deal on," she says.

8. Be a creative merchandiser. While Walmart's sheer size drives low prices, its cookie-cutter store plans aren't necessarily very inviting or creative -- an area where independent stores can stand out. "I don't consider them to be a good merchandiser," says Goldin. "You can be more visually appealing."

9. Offer in-store events. Successful independent stores that compete with major chains often have busy calendars of in-store events that engage customers and bring them back to the store, says Outcalt. "Move away from price and convenience, and emphasize something very special in order to bond with a group of customers."

10. Expand and block. It may seem crazy, but if there's a vacant small grocery store location in your market area that could be snapped up by Walmart for a Neighborhood Market, you might consider a blocking move. Real estate prices are low now, notes Johnson, so you might be able to secure a good strategic site for your minichain while also keeping Walmart from moving in next door.