Most mid-market retailers have as much chance of becoming “like Target” as Anna Nicole Smith has of becoming “like Laura Flynn Boyle.”

Ask any retailer what they want to be when they grow up, and they’ll tell you that their strategy is to become like Best Buy, Home Depot, Target, or Wal*Mart. Nice chains to emulate. Problem is that most mid-market retailers have as much chance of becoming “like Target” as Anna Nicole Smith has of becoming “like Laura Flynn Boyle.” Which is to say, no chance at all.

Sure, these 4 retailers have enviable positions in the market. Together, the Big 4 accounts for 24% of the revenue and 30% of the profits seen in their peer group, which we define as the top 50 retail chains in the US. Between 2001 and 2000, the Big 4 grew revenues by 14%. Not too shabby when you consider that the retail market as a whole grew by only 3.3% during this period. What is really interesting, however, is to look at the Big 4 in comparison to what we’ll call the “Other 46”. The Other 46 retailers we looked at are also big, but not always profitable.

What these numbers tell us that the Big 4 are adept at controlling their growth. Not so the Other 46 — who grew revenue at a torrid pace (up 156%) while seeing margins plummet (down 69%).

To effectively compete against these Goliaths, retailers must change both their mindset and business plans in at least 4 ways:

1. Avoid bulking up on revenues — simply to boost same-store sales
The first change — and it is a big one — is to avoid focusing on same-store sales as the one barometer that matters. Each month, as regularly as one calendar page flips to the next, retailers announce their financial results in terms of same-store sales. The problem is that it is relatively easy to manipulate same store comps simply by fielding a few, well-timed sales promotions. The result of this strategy is to build an income statement that is top heavy when it comes to revenue but light below the line where profits get reported.

2. Be selective — recognizing that not every revenue dollar and not every customer is worth having
Kmart provides a negative example here with its focus on Sunday supplements and “blue-light” specials to drive store traffic. These tactics worked to drive in-store traffic up, revenue up, and profitability down to the point of bankruptcy. A more positive example can be found in Hot Topic, a mall-based retailer that is growing at a rapid clip (35%) and profitable to boot. Its secret? It sells music-related goods (t-shirts and accessories) designed to appeal to fickle teenagers. The more fickle the better. Because fickle teenagers spend more (a lot more) on music-related merchandise, particularly as it relates to esoteric bands that are here today and out of favor tomorrow.

3. Be relentless about driving new customer acquisition costs down
Five years ago, virtually all retailers had the same costs when it came to new customer acquisition. Today, new customer acquisition costs can vary by a factor of 10x from one retailer to the next. New customer acquisition costs are highest for retailers who rely on a single channel, lowest for those who use multiple channels to reach the customer, including not just retail outlets but also the web (e-commerce) and cataloging (even if you don’t sell direct off the page).

4. Invent new products and services that address the needs of your best customers

Mercer Consulting calls this demand innovation, a term that unfortunately IBM Global Services claims as its own. No matter what you call it, the point is to figure out who your best customers are and what need they are satisfying when they buy from you. Looking at the customer’s need set in a more wholistic fashion can allow retailers to effectively compete with the Big 4, by identifying pockets of growth and profitability that bigger players cannot exploit cost effectively.

Our client the Good Guys, for example, effectively competes against Best Buy – not by trying to be “like Best Buy” but by a concerted effort to be different. Integrating today’s high definition television with yesterday’s PC and audio tuner is a daunting task, one that makes regular networking over Ethernet look like child’s play. While there are numerous third parties you could involve to install and integrate your equipment, the Good Guys has recognized that their customers want them to take ownership of the problem. Today, they offer a wide variety of custom installation offerings that enable a customer to purchase the right system with confidence and see that system get set up and integrated with other equipment already available in the home.

The bottom line
Most retailers in a given category have access to virtually the same goods and services. So to compete and win, a retailer must focus on understanding who their best customers are and what needs are not being met elsewhere in the market. Resist any urge to imitate the Big 4. What works for them will not necessarily work for you, and in fact may sink your franchise.

Related Links

• Chain Store Age Rankings for 2002
• To read up on Hot Topic¹
• To see differences in new customer acquisition costs
• To learn more about demand innovation

— Marcia Kadanoff

Note

1. You must subscribe to Business Week online to access this article dated June 9, 2003 and entitled “Hotter than a Pair of Vinyl Jeans.”↩

Originally published on Firewhite Consulting site, 6.03.