Why retail giants like Wal-Mart won’t take over the world
On the corner of Newbury Street and Massachusetts Avenue in Boston sits one of architect Frank Gehry’s least inspired creations: 360 Newbury, a big box of a building, which is appropriate considering that its first three floors have long housed big-box record stores. But for the second time in 10 years, its retail space sits vacant. Its last tenant, the British-owned music giant Virgin Megastore, broke its lease in 2006 after four unprofitable years hawking CDs and DVDs to local college students. A company spokeswoman promised “to seek an alternative Boston location.” It has yet to do so.
Virgin snapped up the space in 2002, when the failing music retailer Tower Records vacated the building ahead of its descent into bankruptcy. Back in 1987, when Tower launched its largest megastore in the Gehry building, the future of Boston’s independent record store business looked grim.
Vinyl merchants and industry experts predicted that most independent retailers would feel the pinch of the big box; megastores like Tower would have more stock on hand and, it was presumed, would offer significantly discounted prices. The three-story Tower Records would pose a direct challenge to small, local stores like Newbury Comics, a comic book merchant turned record shop specializing in independent music, hard-to-find imports, and seven-inch records by local bands. To make matters worse, the new Tower store would be situated on the very same block as Newbury Comics.
But it wasn’t just the specter of Tower that frightened small retailers like Newbury Comics. The music business was experiencing rapid growth in compact disc sales, and chain stores were expected to become the dominant players. Giants like Recordtown, Strawberries, Coconuts, Musicland, and Sam Goody—most of which have now either disappeared or declined—would come to dominate the industry, the Boston Globe predicted. Among independent stores, the Globe wrote, Tower’s arrival was precipitating a panic. So ominous was the thought of a big-box music store in Boston that the New York Times covered the store’s opening, suggesting that the independents might as well throw in the towel, since Tower “has virtually no competition in its league.”
At the time, Newbury Comics co-owner Michael Dreese told the Globe that he too was worried, and that when all the chains had settled in—the British giant HMV would soon open a megastore in the area—“there’s going to be blood all over the place.” It would, presumably, be the blood of the independents. The Times spoke in the past tense, suggesting that the indies’ demise was a foregone conclusion.
“On the block where a punk-rock record store, Newbury Comics, once held sway,” the Times sighed, “a new Tower Records sells that kind as well as more mundane music and a wide assortment of videotapes.” Strawberries, a regional chain, responded by upping the ante. Its store would stock, a spokesman said, “60,000 cassettes and close to 50,000 CDs,” versus the typical average of “12,000 CDs and 13,000 cassettes.” Who could compete with that?
Well, Newbury Comics, for starters. “We had a huge competitive advantage knowing the local market,” Dreese now says. Today Dreese and his partner preside over a mini-chain of their own, with 27 stores in five states, while HMV, Tower, and Virgin are all distant memories in New England. As the market changed, centrally controlled operations such as the Sacramento-based Tower proved to be vulnerable to smaller, more localized competition.
As the chains floundered in the face of declining music sales, Newbury Comics nimbly altered its business model without abandoning its core constituency of indie music fans. Today, compact disc sales account for just below 50 percent of Newbury Comics’ revenue. DVDs are approximately 20 to 25 percent, and pop culture and sports tchotchkes—Boston Red Sox caps, Ozzy Osbourne action figures—cover the rest. Hiring a platoon of tattooed hipsters added an extra patina of authenticity to the shopping experience.
According to Dreese, who spent much of his youth in London hanging around the original Virgin Record Shop’s lunch counter, Newbury Comics challenged the big boxes by liberally borrowing from the big-box business model, making aggressive use of “loss leader” merchandise (pricing items below cost to entice customers into the shop), competitive pricing, and a refined distribution system that used vast online databases. It moved into the Internet early, selling merchandise through both its own website and third-party online stores such as Amazon and eBay. Dreese doesn’t worry much about downloads (iTunes, he says, has helped his business), and, as he recently told Boston magazine, his focus remains on how to “keep beating Wal-Mart.”
The inability of many big-box retailers to adapt to local tastes and their failure to anticipate technological market shifts has been their Achilles heel. When Wal-Mart was forced to shutter its German stores, a mystified company spokeswoman told a reporter, “We thought everyone around the world loved Wal-Mart.” (The International Herald Tribune quoted a baffled Wal-Mart shopper in South Korea, where the company has also abandoned operations, wondering, “Why would you buy a box of shampoo bottles?”) The chain had made the mistake of assuming that full-spectrum retail dominance is achieved by virtue of size alone, without regard to cultural and regional difference.
That error is common not just among chains but also among their critics. Market leaders do not always react nimbly to shifts in taste and technology. While big-box retailers have enormous competitive advantages—leverage with distributors and manufacturers, capital resources, political influence—they also face a distinct disadvantage in adjusting themselves to local preferences.
Just ask Starbucks CEO Howard Schultz. In 1995, community leaders in Harlem’s Hamilton Heights neighborhood, which is largely Hispanic and black, bemoaned their limited retail options and sought to attract new restaurants, markets, and shops, such as Starbucks and Ben & Jerry’s.
In 2002 they got one of their wishes when Starbucks, through its Urban Coffee Opportunities program, opened a store in Hamilton Heights. But the franchise did lackluster business, and after a few years the chain’s Seattle headquarters moved to pull the plug on it.
Elsewhere in the country, activists were staging protests against Starbucks outlets that they said were homogenizing their neighborhoods. In Hamilton Heights, the protests went the other way. According to the New York Times, “residents have mobilized to save their coffee shop,” pressuring corporate headquarters and community leaders because the store was providing jobs and, they hoped, economic benefits.
When the shop finally closed, a community leader observed that Starbucks hadn’t attracted neighborhood support “because of a lack of cultural affinity. Most of the people [in Hamilton Heights] don’t go to hang out in a café. If they hang out, they hang out on the sidewalk. And it’s mostly old men talking about the old days.” Instead, residents preferred Cuban coffee from La Flor De Broadway, a hole-in-the-wall coffee shop with no seats, no Bob Dylan CDs on sale, no chrome espresso machines. It did, however, serve a strong 80-cent cup of coffee.
In 1998 Jon Cates faced a similar challenge from Starbucks. Located in the bustling Westport neighborhood of Kansas City, Cates’ Broadway Café, a haunt of local hipsters, students, and artists, discovered that the Seattle coffee Goliath was slated to open an outlet on the same block. The café’s supporters sprung into action, papering the windows of their new neighbors with leaflets and eventually appealing to the city zoning department to stop development. When that was unsuccessful, the shop’s owners collected thousands of signatures in protest. But that too failed, and Starbucks opened for business.
Four years later, Cates reluctantly conceded to the Wall Street Journal that his business was thriving. Rather than defeating the outsiders with zoning regulations, they won with old-fashioned competition: “Starbucks helped our business, but I don’t want to give them any credit for it.” Eight years after Starbucks invaded Westport, Cates had actually expanded his business, opening a neighborhood coffee bean roastery that supplies other cafés.
Phoenix Coffee Co. in Cleveland Heights, Ohio, an independent café that battled Starbucks for five years, also found the Seattle competition to be a boon for business. Phoenix founder Carl Jones told Cleveland’s Sun Press that “while Starbucks was there”—the store has since closed—“our business grew by 20 percent a year. We’ve been grateful the corporate giant moved in, since its presence had a magnetic effect on the caffeine crowd.”
By understanding local tastes, Newbury Comics, Phoenix Coffee Co., La Flor De Broadway, and Kansas City’s Broadway Café demonstrated that localization, customer care, and authenticity are far more effective means of fighting larger rivals than agitating for anti-chain legislation. In American business, it seems, David can still slay Goliath.
In 1928 New York Times reporter Evans Clark observed breathlessly that American corporations were engaged in a ruthless campaign of economic expansionism and were making “deep inroads into the retail store business” abroad. Lurking behind the ubiquitous Boots drugstore signs in Great Britain, Clark wrote, was the invisible hand of American capitalism: The chain was owned by the Boston-based conglomerate United Drug Company, which at the time operated 10,000 drugstores in the United States and 800 in the United Kingdom.
American business reached far beyond the traditional trading boundaries of the Anglosphere: “The familiar red signs of a well-known domestic five-and-ten-cent chain appear both on Berlin and London street corners; the laboratories of a St. Louis chemical concern turn out American mouthwash in Madrid; the plant of a Detroit manufacturer assembles American automobiles in Osaka . . . fifty-four theaters in Brazil are now linked in a continuous chain of management with the movie palaces of Manhattan, Brooklyn and Queens.” In certain areas of industry, the Times ruefully observed, “American companies have practically monopolized world output and sales.”
Three months later Clark returned to the pages of the Times, this time to warn readers of big business’ domestic plot to “displace the neighborhood store” through predatory pricing and sweetheart distribution deals. Beneath an image of a cigar-chomping capitalist casting a malevolent gaze over a map of America, the paper signaled the death knell of the neighborhood enterprise, writing that the “storekeeper of today is a corporate executive, who presides over chains of a thousand.”
The trade journal Printers’ Ink expressed similar concern for the neighborhood store: “Think a moment. What has become of the old corner tobacconist? Answer: United Cigar Stores. What has become of the old ‘home-cooking’ restaurants in so many cities? Answer: Child’s, $12,000,000 (backed by Standard Oil) and Thompson’s, $6,000,000—to say nothing of several others. Big Business (United Drug Company and Riker-Hegeman) already dominates the drug stores of New York, Boston and Chicago.”
This doom-laden rhetoric sounds strikingly familiar. The anti–big box activism of recent years, directed primarily against retail giants such as Wal-Mart and Barnes & Noble, has its antecedents in the activism of the 1920s, the apogee of the first wave of anti-chain fear. As the business reporter Anthony Bianco argues in his book Wal-Mart: The Bully of Bentonville: “For many people over 30, the phrase ‘the corner store’ continues to be powerfully evocative of an establishment where the person across the counter knew you and would even extend credit if you were a bit short, a place that was as distinctively personal as its proprietor’s fingerprints.”
But this idealized view of the past isn’t entirely accurate. In Land of Desire, historian William Leach describes the small town of Marion, Ohio, in 1929. In “the town where both President Warren G. Harding and socialist leader Norman Thomas grew up and where the houses all had front lawns,” writes Leach, “there were two Kresge’s, two Kroger grocery stores, three chain clothing stores, two chain shoe stores, one Woolworth’s, one Montgomery Ward, and one Penney’s.”
By 1914 the burgeoning chain system boasted 20,000 stores. An industry audit that year listed United Cigar Stores Company as the largest chain, with more than 900 shops. The Great Atlantic & Pacific Tea Company (A&P) had 800, the F.W. Woolworth Company 774.
These numbers would expand dramatically in the coming decades. By 1929 chain stores made up more than 25 percent of all retail sales. By the 1930s, almost 10 percent of chain store grocery business was transacted through a single corporation, A&P, which boasted 16,000 outlets. As the business journalist Charles Fishman, author of The Wal-Mart Effect, pointed out in Fast Company magazine, “At its peak, A&P had five times the number of stores Wal-Mart has now (although much smaller ones), and at one point, it owned 80 percent of the supermarket business.” This alarmed not just the local competition but manufacturers, too, as large chains began producing their own branded products. In a flyer circulated to independent grocers, one breakfast cereal producer warned, “Any jobber is blind who shuts his eyes to the increasing menace of the chains, a menace to your business far more than to ours.”
Of the grocery chains considered “menaces” during the 1930s, few remain in business. Today A&P maintains fewer than 500 stores. They were swiftly replaced by even bigger Goliaths, such as Kroger and Wal-Mart. In 2006, according to the research firm Retail Forward, Wal-Mart was the largest grocer in the country, with around 16 percent of all food and beverage sales.
Industry groups mustered more than pressure campaigns in their battles against the chains of the past. They also called for laws to “defend” local stores. Recent legislation attempting to hinder the expansion of big-box retailers has roots in a long history of legislation—most of it nullified—against chains.
As early as the 1920s, politicians realized that populist rhetoric directed against chain stores was a political winner. In 1928 Senator Smith Brookhart (R-Iowa) called on the Federal Trade Commission to investigate the “chain menace.” After a six-year investigation, the agency published its findings. While the commission sided against the alarmists—there were no true monopolies in retail, it determined—the report’s complaints will sound familiar to today’s Wal-Mart critic: merchandise sold beneath cost, strong-arming manufacturers, employees paid low wages.
In 1927 at least 10 state legislatures proposed anti-chain legislation. In 1928 the Supreme Court struck down a Pennsylvania anti-chain ordinance that required drugstores to be owned by pharmacists, not corporations. The court ruled that the law’s stipulation of who could own a business was unconstitutional.
In 1938 Representative Wright Patman (D-Texas) introduced legislation to tax any chains with 10 or more outlets. Its provisions, one industry observer noted, “were drastic enough to have put many a chain out of business.” The bill never made it out of committee, but the stage was set for future legislative attacks on the chain system.
Today’s independent booksellers and their supporters fret about an Axis of Evil consisting of Amazon, Borders, and Barnes & Noble—and with good reason. Independent bookstores account for just 15 percent of the market, down from 80 percent in the early 1970s. The American Booksellers Association (ABA), which represents nearly 2,000 independent stores, filed suit against publishers’ “unfair” use of volume discounting in 1994 (the case was settled out of court) and again in 1998 against Barnes & Noble and Borders (the ABA dropped the suit).
But the ABA too could assuage its fears by looking to historical precedent, when both publishers and smaller shops attacked chain discounters with blind fury. As far back as 1872, Publishers Weekly argued that publishing houses selling directly to consumers would sound the death knell of the local bookstore.
From 1900 through the 1930s, the American Publishers’ Association and R.H. Macy’s department store repeatedly clashed in court over Macy’s practice of selling books below cost. In 1934 the publishing industry adopted a “book code,” part of the “codes of fair competition” required under the National Industrial Recovery Act, that disallowed discounting of books until two years after their release. In 1935 the U.S. Supreme Court ruled the codes unconstitutional. The author of a 1930 Carnegie Corporation report complained that bookselling had inexorably changed—it had become a business: “The old-fashioned bookstore was a charming place, but charm alone will not solve the problem of modern book distribution. . . . Hard though it may be to face the fact, the bookstore of today cannot be primarily a place for those who revere books as things-in-themselves.” An ABA representative later complained to a Senate committee that “non-book-minded merchants” were killing the industry and “price-cutting, unless stopped, will ultimately eliminate the personal bookstore from the national scene and in turn will have a serious effect on the quality of our national literary production.”
This, of course, has yet to happen. Chain stores are still the undisputed kings of bookselling, but their sales figures have remained flat in recent years. Meanwhile, the ABA announced that in 2004 independent bookstores’ “sales increased, in terms of both dollars and number of units sold, capping a three-year period of sustained growth,” citing an Ipsos BookTrends study. In 2004 an ABA spokesman told the Wall Street Journal, “Even though there are fewer stores, the survivors are doing better.” As for our country’s literary production, 2005 saw 172,000 books published in the United States, a dramatic increase over the 39,000 released in 1975.
Today’s attempts at anti-chain legislation follow a similar pattern—and have, in most cases, met a similar fate. Maryland’s anti–Wal-Mart law, which mandated that the company spend at least 8 percent of its payroll on health care benefits, was voided when a federal judge ruled that “state laws which impose employee health or welfare mandates on employers are invalid.” In 2006 the Chicago city council passed a resolution requiring stores of at least 90,000 square feet in floor space and earning more than $1 billion in revenue annually to pay a living wage, only to see the rule vetoed by Mayor Richard Daley. In California, Governor Arnold Schwarzenegger vetoed a similar law that would have forced large employers such as Wal-Mart to provide health care benefits for their employees, arguing that “singling out large employers and requiring them to spend an arbitrary amount” on insurance would have no appreciable effect on “the health care challenges we face.”
If legislation has done little to restrain the chains, the marketplace has regularly cut them down. Contrary to many critics’ assumptions, America has not been condemned to centuries of retail uniformity. The 21st-century consumer has greater choice and access to a wider assortment of products than American consumers have ever had.
In a country of such colossal wealth, price and convenience are not the only factors affecting consumer choice. Even among Starbucks executives, who single-handedly created a market for espresso drinks in the United States, there exists a deep fear that it won’t be an aversion to paying $5 for a cup of coffee that will inhibit the company’s growth but a backlash against the chain’s standardization. Last year, Starbucks CEO Howard Schultz fretted in an internal e-mail that the automation that has helped to drive the company’s expansion “has led to the watering down of the Starbucks experience.” Starbucks isn’t going to disappear anytime soon, but as Business Week recently pointed out, the chain “is suddenly besieged by tough competitors.”
Wal-Mart is also showing signs of wear and overextension. In 2006 it posted a mere 1.9 percent growth in same-store sales—that is, sales in outlets that have been in operation a year or more. It was the slowest rate since the company’s inception. Writing in the Harvard Business Review, retail analysts Darrell Rigby and Dan Haas suggested that other chains “are managing to coexist and even thrive in the same forest with Wal-Mart.” Business Week reported that “Wal-Mart’s growth formula has stopped working,” and one analyst told the magazine that we were seeing “the end of the age of Wal-Mart. The glory days are over.”
Maybe. But stores like Wal-Mart will always be with us, just as they were when they were called Woolworth’s or A&P. If Sam Walton’s creation disappears, it will doubtless be replaced by a more clever, more modern adaptation of the business model he popularized. It is likely true, as big-box critics contend, that stores like Wal-Mart will always dominate certain sectors, thus threatening the existence of many smaller competitors. But chain stores often create markets that didn’t previously exist, both by forging new trends (like the $10 new-release CD, quickly adopted by Newbury Comics) and by provoking a backlash against the alienating experience of big-box shopping. There will always be those who find Wal-Mart inauthentic, those who prefer the punk rock ethos of a Newbury Comics to the Deep South values of Wal-Mart, with its habit of censoring CD covers and song lyrics.
In 2006, 360 Newbury—graveyard of Virgin Megastore and Tower Records—announced that it would rent its first three floors to the electronics and CD retailer Best Buy. After years of doing combat with big boxes, Newbury Comics’ Dreese doesn’t betray the slightest worry about the latest competitor. “We’re the last man standing in Boston,” he says. It’s a safe bet that, sometime in the near future, he’ll be peering down the road, watching another megastore packing a moving van.
Reprinted from Reason (Jan. 2008), a libertarian journal. Subscriptions: $38.50/yr. (11 issues) from Box 526, Mt. Morris, IL 61054; www.reason.com.