Mammals versus Dinosaurs.

I saved up an article awhile back, which had to do with the demise of the big box stores...

It's a subject I wanted to tackle when I thought maybe I could do it justice. Today, there was a nice convergence of another article, which talks about the fall and rise of the small retailer. So here goes....

(I've included both articles below.)

While the article about the big box stores, REALITY CHECK TIME, never uses the words 'ponzi scheme', it sort of says the same things I've been saying-- that the chain stores depend on "the dynamics of a high growth roll out of stores."

Technically, I know this doesn't meet the definition of a ponzi scheme, I've always used the term as a way of pointing out the dubious strategy of depending on future revenues to justify your current tactics. Because there will always come a moment when that 'growth' strategy won't work any longer, and just like a ponzi scheme, the whole thing falls apart.

This guy makes the case that the expansion of the big box was based on borrowing and credit, and that the American consumer is tapped out.

I'd add a couple of other elements -- the pricing strategy of buying material from foreign markets is bound to fail eventually because of it's very success. That is, by making foreign markets more successful, they are bound to breed eventual higher labor costs. What happens if China's workers want more of a slice of the pie? How do you keep them from raising their standard of living? What happens with rising transportation costs? Material costs?

Basing your entire strategy on high volume depends on unending markets, constantly lower prices, and static technology.

And the ever quickening rate of change in technology make the strategy of growing bigger and bigger more of a gamble as we accelerate into the future. I suspect that building such an ediface is going to be looked upon as a ponderous gamble every time a new technology makes such ediface obsolete. Big box stores risk getting caught flat footed, totally committed to a strategy that no longer works. The bigger they are, the bigger they'll fall.

I suspect that when the economic climate changes overnight, that being small and nimble is going to be key. Like the small mammals that scurried beneath the dinosaurs feet, who emerged blinking into a new day.

Thus all the recent news about "smaller" Walmart stores getting ready to roll out in the big cities. Again, this would seem to be the endgame for the big boxes -- that, ironically, they have to get smaller to gain more market share. But if they get smaller, then a large part of their advantage will disappear. Small stores can compete again small stores.

The second article," AS BLOCKBUSTER'S CREDITS ROLL....." talks about small video stores that more or less took the opposite strategy as the big boxes.

These smaller stores focused on "... building a comprehensive film library rather than catering to the constantly changing tastes of the broader public."

See if this sounds familiar to what I've been saying through the life of this blog:

"Others might not get rich in this line of work, but passion keeps them going long after the credits roll.

“I sacrificed a lot to keep this business going,” said David Buffa, owner of New York Video in New York City. “It certainly did not make me rich, but I was able to stay in business and do something I love. It’s not a job for us. We like what we do. Having a passion for what they do is one thing these entrepreneurs have in common. While the big guys were constantly updating their product mix and getting rid of the less popular titles to make room for high turnover movies, New York Video has focused on creating a breadth of offerings.

“We lost business to them initially,” said Buffa, because Blockbuster had so many more copies of each movie. “But, we would sacrifice having more copies of one title to get single titles of more obscure movies. We don’t get rid of anything. We’ve kept every title we’ve ever had,” he told BusinessNewsDaily.

A couple of sentences here really leapt out at me:

"While the big guys were constantly updating their product mix and getting rid of the less popular titles to make room for high turnover movies, New York Video has focused on breadth of offerings."

And:

"....we would sacrifice having more copies of one title to get single titles of more obscure movies. We don't get rid of anything."

And that, folks, in a nutshell is pretty much what I've been doing and pretty much what I think works.

Nice to get confirmation from unexpected sources.

Sure, it may be a case of the most efficient buggy whip makers surviving the longest, but I don't think so. I think the future holds two main possibilities -- online, obviously. And small, nimble, service oriented small business.

Big box stores will be looked back on as a curiosity.



Here's the first article, minus the graphs. (Which are quite compelling, by the way, google the title of the article, because it no longer shows up on it's original site, but was referenced by quite a few other people.)

RETAILERS -- REALITY CHECK TIME. The Burning Platform, Jim Quinn, Sept. 8, 2010.

Having worked for a big box retailer for 14 years, I understand the dynamics of a high growth rollout of stores as a key to increasing market share and profits. Some of the best retail names in the US have practiced the identical strategy of concentrating many stores in each market to drive the small competitors out of business. This strategy worked wonders for Lowes, Wal-Mart, Target and Kohl’s during the early part of this decade. The combination of solid same store sales and opening new stores is a fantastic combination during good times. The results actually make the CEOs of these companies think they are brilliant. Their store expansion models based on rosy assumptions are followed like they can’t go wrong.

What these CEOs didn’t realize was that their expansion plans were based on lies and frauds. If they had advisors who could give them a reality check, they could have avoided the massive downsizing that awaits them. Their hubris didn’t leave room for a reality check. The population of the US has grown from 281 million in 2000 to approximately 308 million today. We’ve had a 10% population increase in 10 years. Consumer expenditures have grown from $6.7 trillion in 2000 to $10.3 trillion today. This is a 54% increase over the course of the decade. Amazingly, real average weekly earnings have only gone up by 6% in the last decade.

The chart below tells the story that retail CEOs have been ignoring for a decade. Consumer credit has advanced from $1.5 trillion in 2000 to $2.4 trillion today. This 60% increase in consumer debt has allowed workers who have barely increased their earnings to spend like they made a lot more money. This debt fueled consumption binge led major retailers to expand in order to keep up with the delusional consumers.

Retail America has run directly into a brick wall. Below are charts detailing the expansion history of four of the most admired retailers in America. Lowes grew their store count from 600 to 1,700 over the course of the decade, a 183% increase. Wal-Mart grew their store count from 4,000 to 8,500, a 113% increase. Target grew their store count from 1,000 to 1,750, a 75% increase. Kohl’s grew their store count from 300 to 1,050, a 250% increase. Same store sales are the true measure of a retailer’s health. When comp store sales are +5% or better, retailers make substantial profits and confidently build new stores. As the charts below clearly show, comp store sales have been in a substantial downtrend since 2006. The new stores that have been built in existing markets are over cannibalizing their existing stores.

Lowes has 500 more stores today than it had in 2005, $4 billion more sales, and $1 billion less profits. Target has 340 more stores today than it had in 2005, $12 billion more sales, and the same profit. Kohl’s has 240 more stores than it had in 2006, $1.6 billion more sales, and $100 million less profit. Only Wal-Mart has kept the profits flowing, mostly due to its international expansion. The tough times have only just begun for these retailers.

The American consumer is still heavily indebted. Much of the retail spending in the last decade came from mortgage equity withdrawals. Using your home as an ATM is history. Home equity is at an all-time low and 25% of homeowners are underwater. Home prices are destined to fall another 20%. There are 15 million people unemployed. Consumer expenditures still account for 70% of GDP. In order for the US economy to achieve equilibrium, consumer spending will need to regress back to 65% of GDP. This will require an annual reduction in consumer spending of $800 billion. The CEOs of these retailers have not grasped the implications of this coming adjustment in our consumer society.

There are three major errors that have been committed by every retailer in America. They failed to recognize that the spending per household was 30% over inflated due to debt financed demand. They then extrapolated the spending per household using a 5% to 10% growth rate. Lastly, they ignored the fact that their competitors had the same strategy. There are 1.5 million retail establishments in the US. Thousands of these stores are going out of business every year.

Lowes, Wal-Mart, Target, and Kohl’s have yet to recognize their predicament. They are still blinded by their hubris. The point of recognition will occur within the next year. Each of these retailers will be closing hundreds of underperforming stores in the next two years. Time for a reality check.

**********

"AS BLOCKBUSTER'S CREDITS ROLL, SEQUEL STARS INDEPENDENT VIDEO RETAILERS." Sept. 24, 2010. Jeanette Mulvey, Business News Daily.

Blockbuster’s Chapter 11 bankruptcy filing yesterday is being characterized as the final nail in the coffin of the brick-and-mortar video rental business. And, while Netflix, Hulu and Redbox have done their best to render independent video rental stores a quaint anachronism, some Davids have survived where Goliaths typically rule.

Around the country small video stores, many of whom have long struggled against the video rental giants, are thriving even as one of the mighty oaks of the retail forest falls.

By practicing good customer service, finding a niche and staying focused on what they do best, these independent video retailers, some still renting VHS tapes, are succeeding in spite of the burgeoning online video business.

Building a business

“Blockbuster employees literally laughed in our faces when we opened our doors in 2000,” said Matt Martin, co-owner of Black Lodge Video in Memphis, Tenn.

But, 10 years and 30,000 movies later, Black Lodge is one of the biggest video stores in the Eastern United States and its business continues to grow.

The secret to Black Lodge’s success, said Martin, is that the store, which occupies a 3,500-square-foot house with a music studio upstairs, has focused on building a comprehensive film library rather than catering to the constantly changing tastes of the broader public.

“We’ve gone to a lot of trouble to build up a vast film library for movies that are out of print,” said Martin, who started collecting movies in the seventh grade with his business partner Bryan Hogue.

Whether it’s horror, science fiction, or foreign films, Black Lodge has them and continues to add to its collection. Its broad selection, especially of hard-to-find and out-of-print movies, attracts customers who know they will be able to find even the most obscure films at Black Lodge.

The company rents movies for $4 for five days and doesn’t charge late fees. Putting trust in its customers is part of the process of building a relationship with them.

“The honor system works better than you’d think,” Martin said. The mass text messaging the company uses to remind renters to return videos doesn’t hurt, either.

Doing what you love

Others might not get rich in this line of work, but passion keeps them going long after the credits roll.

“I sacrificed a lot to keep this business going,” said David Buffa, owner of New York Video in New York City. “It certainly did not make me rich, but I was able to stay in business and do something I love. It’s not a job for us. We like what we do. “

Having a passion for what they do is one thing these entrepreneurs have in common. While the big guys were constantly updating their product mix and getting rid of the less popular titles to make room for high turnover movies, New York Video has focused on creating a breadth of offerings.

“We lost business to them initially,” said Buffa, because Blockbuster had so many more copies of each movie. “But, we would sacrifice having more copies of one title to get single titles of more obscure movies. We don’t get rid of anything. We’ve kept every title we’ve ever had,” he told BusinessNewsDaily.

The commitment to the business and the customers is what’s kept New York Video in business for 22 years.

The secret to survival? “Have the stuff people ask for and be able to answer people’s questions,” Buffa said.

Buffa also advises that small businesses—in any industry—to tailor its products and services to its customer's preferences.

“Once I started to see what people were interested in I would focus more on those, which in our neighborhood was classic Hollywood and foreign films.”

Finding out what people want isn’t just good business, it’s good customer service.

“People really, really appreciate when you can answer their questions or when you turn them onto something new,” Buffa said.

Back to the future

While technology has made Netflix and other live-streaming services a convenient choice for those seeking instant entertainment, not everyone has embraced the technology. This has created an opportunity for retailers willing to take the road less travelled.

Movie Madness, in the small town of DeMotte, Ind., is thriving by renting and selling “outdated” VHS tapes and video games for discontinued game systems. While the company does its share of renting current DVDs, it also does a healthy business selling VHS tapes to folks who are still using VCRs.

“So many other video stores only have DVDs,” said Mary Holobowski, who has owned the store with her husband, Rich, for 12 years. “But we still have VHS tapes, and a lot of games for game systems they don’t make anymore. A lot of people can't afford the new systems.”

Not only does the business make money renting tapes, it has created another income stream by selling VHS tape collections on commission. The company sells VHS tapes for a dollar each. It keeps 50 cents per tape and pays the owner of the tapes the other 50 cents. It’s a good deal for the buyer, the seller and for the Holobowskis.

Finding ways to serve its customers—even if it means renting a video or a game with nothing more than an IOU on a piece of paper—allows Movie Madness to build an ongoing relationship with customers.

“People still like that personal touch,” Holobowski said. “Being able to talk to someone and ask for recommendations is important. So many people are tired of dealing with big business.”