Competing With The Big Guys
Competing Against The Big Guys By Serving Niche Markets
By Steven Pollack
Mar 19, 2006, 09:23

Whether you are considering starting up a new retail business or are already a retailer, it is easy to be intimidated at the prospect of competing with the established big box competitors in your product area.  They have more inventory, better buying power, and more advertising dollars than you could ever hope to have.  Don’t despair because understanding the constraints they operate under will help you visualize ways to effectively compete against the big guys.

Their Economies of Scale are a Friend of Your Niche

Large retailers achieve low prices because they buy in large lots in order to supply their nationwide chain of stores.  If you try to buy the same goods from the same suppliers you are likely to find a situation where your wholesale purchase price is very close to the big guy’s retail selling price. You should never try to compete head to head with a large retail competitor with the same items unless you can bring something more to the value proposition such as service.

The economies of scale for these large retailers also work against them in a critical way.  These retailers are typically public corporations whose stock is traded in the equity markets.  These equity investors demand a substantial growth rate of the large retailer; otherwise they will hammer their stock and move on to another investment opportunity.  Because the retailer only has limited shelf space, they will always choose inventory that is common looking and “value” priced.  These average looking and moderately priced items are chosen because they represent the center of the bell curve of what customers are looking for and can afford.

Imagine a product category such as diamond anniversary bands.  For simplicity lets assume there are 100 styles ranging from very unique on one end of the continuum to the average looking items in the middle to the very elegant on the other side of the range.  The typical large jewelry retailer will choose the middle 50 items because that will bring them the most sales for the limited amount of showcase space they can devote to diamond anniversary rings.

If they try to also stock the 25 unique and 25 elegant designs they will crowd out watches or some other product category.  In order to obtain the growth rate demanded by the investor market they need to maximize return on both rent and inventory investment. They cannot do this by offering every style to every taste.  Go to the mall and check this out for yourself.  You will find that the larger retailers, from clothing to jewelry, stock a similar assortment of moderately priced but bland goods.

You are probably already ahead of me where the small operator can effectively compete against the big guys.  You can stock inventory targeted to a niche such as the very unique or very elegant and avoid directly competing against a big retailer.  Alternatively, you can choose to be a category killer of an item such as diamond anniversary rings and stock the whole 100 styles in the category.  This way you attract the anniversary ring customer with your superior stock and still get to sell some of the bread and butter middle 50 styles.

Your Small Size Enables You to Develop a Following

By operating within one of the niches abandoned by the larger retailers, you can create a loyal following with buyers of these items.  The tighter you focus the look of your inventory the more likely you are to get buyers of those items to keep coming back.  This is especially valuable with items like clothing that are repeat purchases.  The big retailers do not tend to get the same kind of loyalty.  I will usually choose where to shop based on convenience over retail brand for many items.  From groceries to coffee to shoes, whoever is closest usually gets my business.  For special items I will shop more and tend to buy where the store seems most focused on what I am looking for.

You need to be careful though because this tight focus can also be a liability.  One of the things a successful retailer of any size does is watch closely for sales trends to capitalize on success and minimize dog inventory.  The large retailers can do this because their large size allows them to add and subtract from the 50 styles they carry.  A small niche retailer does not have the same variety of styles with which to differentiate the winners from the losers.  The small retailer can overcome this, however, because she is typically closer to the customer and can easily ask what about a particular style was most compelling.  A small retail can get much better market data than the big guys by having a willingness to listen and act on customer feedback.

A small niche also, by definition, means a smaller customer base to sell.  If these buyers cannot find you they will not buy from you.  Broad category sellers can set up a retail store and assume the general public that walk through the doors are relevant customers for the goods offered.  The niche seller, in contrast, cannot assume the general public will be good candidates for their specialized items.  A niche seller must therefore rely more on marketing than location in order to drive sales.

Niche Category Sellers Can Effectively Target Their Limited Marketing Budget

For the same reasons that big box retailers focus on middle market goods, they also focus on mass media advertising.  They do not have the time and they do not get the large boost from segmented target marketing.  The niche retailer, however, can find advertising vehicles to reach only those most likely to want their goods.

One of the best ways to target niche customers, for those with websites, is Google and Yahoo Pay Per Click advertising.  Instead of targeting anniversary rings where the large retailer needs thousands of sales to meet their quarterly numbers, the small niche retailer will potentially waste money by bidding on such a broad keyword.  Instead, the small retailer will bid on one-of-a-kind anniversary rings which will deliver much less, but more targeted, traffic.

Likewise, the smart small retailer will send out quarterly or monthly postcards to the 500 to 2,000 people on its mailing list whereas the large retailers focus more on the expensive proposition of bringing in new customers all the time.  A general rule of retailing is that 20% of your customers account for 80% of your sales.  It is simpler for small retailers to build their marketing lists to reach this 20% because niche customers want to be contacted.  I fight tooth and nail to avoid giving my contact information to large retailers because I know where they are and will find them if I need them.  I enjoy getting mail from small organizations because it tends to have interesting information.

In conclusion, the small retailer can compete with the big guys by choosing an underserved niche, readily reacting to changes in consumer preference, and taking advantage of marketing opportunities that target small niche communities.