Plucky Little Competitors

By Daren Fonda/Dallas

Conventional wisdom would tell you Beverly's Pet Center in Pembroke Pines, Fla., should have a going out of business sign in its window. A family-owned shop that has sold animals and supplies since 1974, it's surrounded by hulking outlets of PetsMart, Pet Supermarket and Pet Supplies Plus. Facing the cut-rate prices of these giant chains, Beverly's was expected to get gobbled up faster than a mouse in a snake pit. But as in the wild kingdom, life in the retail jungle is full of surprises.

Beverly's turned out to be about as digestible as a porcupine. Kids love it and pester their parents to take them there. Sure, the dog food costs a little more, but they get to play with plenty of puppies, stare at exotic reptiles and marmosets, eat free popcorn, cheer hamster races and get good and scared by the predators in Beverly's 4,000-gal. shark pond. "We run a clean shop and train our employees to know what they're talking about," says co-owner Greg Rosenberg. One of Beverly's big rivals, PetsMart, abandoned a location across the street from the shop and relocated several miles away. Beverly's moved into PetsMart's old superstore last year, doubling its square footage, and reports that its sales are rising 10% annually. Says Kim Paoletti, who shops there a few times a week with her two young daughters: "It's more expensive than at the chains, but the pet-food quality is better."

Beverly's success is part of a feisty comeback by independent shopkeepers, and not just in the pet business. Mom-and-pop retailers in several industries--books, coffee and hardware--are prospering, sometimes literally in the shadow of popular national chains like Barnes & Noble, Starbucks and Home Depot. This wasn't the case for much of the 1990s, when lower prices and broader selection enabled the giants to crush local shops. And to be sure, in the mass-merchandising field, Wal-Mart continues to stomp most rivals, whatever their size. But big specialty retailers today are focused more on fighting one another--and fending off Wal-Mart--than on targeting stores such as Beverly's, whose $3 million in annual sales is mere kibble to them.

These trends have left a smaller number of strong indies to fight for some juicy scraps. Independent bookshops have battled successfully to hold a steady 15% share of the market since 1999, says the American Booksellers Association. And despite the Starbucks blitz, the number of independent java joints has increased from 8,200 in 1999 to about 8,800 today, according to the market research firm Mintel.

Why the comeback? In part, it's survival of the fittest. Aggressive competition from the chains killed thousands of shaky retailers. Some were financially strapped and couldn't afford higher rents. Others tried to match the discounters' prices and perished. In hardware, many old-timers were not willing to invest in merchandising or such new technologies as inventory-management systems and instead let their businesses decline until they retired.

The survivors in each field, however, discovered ways to compete. Almost all provide superior service. Their sales staffs know their products and customers well and stock what the locals want. They emphasize convenience and make things easy to find. Some choose specialties in which they can excel, whether it's children's books or saltwater fish. And many now employ more sophisticated pricing strategies.

Pat Sullivan, 42, owner of Sullivan Hardware shops in the Indianapolis area, is surrounded by Lowe's outlets and a Home Depot. But he steadily increases revenues 6% to 8% a year, and he books pretax margins of about 10% on $5 million in annual sales. "I'm a speck to the chains," he says, "but I do well." Over the years, he adapted his merchandise mix and pricing to cope with the big-box stores. He knows he'll never beat Home Depot and Lowe's on prices for $100-plus power tools, so he stocks a minimal quantity. Instead, he targets weekend tinkerers who need repair and maintenance goods in a hurry, and he has bulked up on lawn and garden supplies and high-end paints, which are hot growth lines on which he can earn good profits.

He also practices guerrilla pricing. Sullivan comparison-shops at the chains and tracks the smaller-ticket items they advertise, like sealant or tape measures. He prices the same merchandise about 10% to 15% higher and, like them, earns a higher margin on items that aren't so price sensitive, such as basic tool kits and paint accessories. The strategy lures customers to his store (as it does to the chains), but Sullivan wins additional business through service. His sales force helps people find the right socket wrench fast, holds their hands through a plumbing project and pays a home visit if necessary. Says longtime customer Dan Laycock: "If I need a couple of nuts and bolts, I don't want to wait behind people buying drywall." Sullivan is doing so well that he opened his fourth store just six months ago.

Sullivan owes part of his success to the advice he gets from the co-op to which he belongs, Do It Best, which has 4,128 members nationwide and provides consolidated buying power. (Other co-ops, such as Ace Hardware and TruServ, offer the same service to their members.) And the co-ops have become more savvy in advising members on ways to beat the chains.

In the book business, the indies are also banding together. Their American Booksellers Association established national gift certificates so that customers or their friends and family could redeem them at any member shop (of which there are 1,200, about half the nation's indies). The independents have an e-commerce site called BookSense.com to go up against Amazon.com They display best-seller lists compiled from indie shops nationwide and benefit from a $600,000 ad budget, used for promotions in such publications as the New Yorker and the Atlantic Monthly.

Collette Morgan, owner of the children's bookstore Wild Rumpus Books in Minneapolis, Minn., says the website helped increase her sales 10% last year. But she generates plenty of her own buzz. When she opened a decade ago, she was fresh from a general-interest indie that died after a Barnes & Noble moved in across the street. Morgan decided to make her store "something a corporate mind would never dream up and that a large company could never sustain."

Her idea was to open a store that would sell children a good time along with their reading material. Wild Rumpus is part zoo, with a couple of chickens named Dalai and Elvis (which kids chase around), along with cats, tarantulas, fish and birds. Boys play poker in the store's Haunted Shack, which sits atop a Plexiglas surface that exposes a gray rat colony below. Saturday afternoons feature offbeat activities like sheep shearing. Customer Carrie Watson's toddler Isabel loves the Monday story readings and the animals. "I would much rather visit an independent than a large store anyway," says Watson.

Morgan charges the cover price for her books, while the big boxes often discount, but she carries hundreds of titles they don't stock. Being nimble and able to respond rapidly to local trends also fattens her bottom line. After noticing that Minneapolis' Somali-American community was booming, she started purchasing books written in Somali with English translations. When she discovered that local schools were ramping up French classes, she stocked more French-English titles.

Despite all the stores they displaced, the big boxes have also indirectly helped such shops as Beverly's Pet Center thrive. Outlays of billions of dollars for advertising and marketing have bolstered not only the chain brands but also demand for everything from gourmet coffee to home-improvement projects.

In the pet-shop business, firms like Petco helped spark a boom in part by changing people's conception of smelly, helter-skelter pet stores, according to Marshall Meyers, executive vice president of the Pet Industry Joint Advisory Council. After folks found that they adored their new cockatiel, they started going to local shops for accessories unavailable at the chains, he says. The hostility between the independents and the chains has abated somewhat, replaced by a realization that David and Goliath can help each other. Want a hedgehog? You'll have to visit a local pet shop--the big chains haven't a clue how to care for them. For hedgehog food, Petco also accommodates.

The complementary effect may be even more robust in the coffee trade. After Starbucks proved that plenty of customers will pay $4 for a soy-caramel machiatto, many local shops profited from selling equally fancy fare. Michael Thomas, co-owner of the Unicorn Cafe in Evanston, Ill., says that after a Starbucks opened across the street from his place in 1992, the increased customer traffic in the neighborhood helped him post his best year ever; his yearly revenues are up 40% since then. "We always felt guilty about raising prices," he says, "but Starbucks helps us do that from time to time."

Many indies have also exploited the Starbucks backlash. Mike Sheldrake, owner of Polly's Gourmet Coffee in Long Beach, Calif., was losing money before he reformatted with an anti-corporate feel, highlighting his giant antique coffee roaster and telling baristas to remember regular customers' names. He has been profitable ever since. "It's as close to a hometown watering hole as you can get," says client Howard Homan, a retired civil servant.

The indies' success hasn't escaped the chains' notice. Both Home Depot and Borders Books & Music are experimenting with smaller-format stores. Home Depots are supposed to become more user friendly, especially for women, who perform a growing proportion of home-improvement jobs and have been instrumental in Lowe's rapid growth. But the best-run indies should continue to stay ahead of the competition if they're mindful of the old bear joke: Two guys are backpacking and notice a bear approaching. One guy drops his backpack and starts running, while his buddy stays put, frozen in fear. "You can't outrun a bear," shouts the guy standing still. "I know," replies the sprinter. "I just have to outrun you." --With reporting by Matt Baron/Evanston, Deborah Edler Brown/Long Beach and Sarah Sturmon Dale/Minneapolis

With reporting by Matt Baron/Evanston, Deborah Edler Brown/Long Beach and Sarah Sturmon Dale/Minneapolis