December/January, 2005

From the Editor

What's Your Vision

Retailers across America see Wal-Mart rolling out supercenters and they ask themselves the obvious question: How do I compete with Wal-Mart? It may be the obvious question, but it is the wrong one. Wrong because a business that defines itself in opposition to competitors is a business lacking purpose and is certain to fail.

The key in retailing is to know one’s customer and then know one’s mission. Only with these two certainties can a retailer begin to answer the day-to-day questions of what products to carry, where to build new stores, how to price, how to promote.

Wal-Mart’s customers live paycheck to paycheck, and Costco’s are willing to pay more for top quality. The successful retailer list is incredibly diverse, more dissimilar than similar in terms of operations and strategies, but they share a laser-like focus on their own customers and missions.

The conventional supermarket stands ready to be picked off because it typically has no focus beyond geography. This manifests itself in executives being unable to decide what to do. “Should we add a Chinese food program?” “How about a tortilla-making machine?” “Why not get an in-store chef?” These questions are asked with no idea who the store is serving or what mission it is trying to accomplish. The executives bounce around endlessly, caught in a bizarre fun house of decision-making in which decisions are always made for tactical rather than strategic reasons because, after all, there is no strategy.

You don’t have to carefully study the merchandising choices at Costco to realize this store has a focus. Just go to the snack bar and order a hot dog. First observation: It is kosher and that is not because of the big Orthodox Jewish population in Kirkland, WA. Second, it is not cheap. You can buy hot dogs in mass merchants for half the price.

But it is a good hot dog. Someone tasted it and selected it for Costco to sell, like a chef selects the menu items at a fine restaurant. And just as a chef both responds to the quality of his diners and creates the quality of his diners by choosing what he puts on the menu, Costco both responds to its upscale clientele and simultaneously dissuades the kinds of folks who look for cheap hot dogs from joining up.

Even Costco’s decision to charge a membership fee involves more than maximizing revenue. Around the country, young professional women like to meet guys not in a pub but at charity benefits. Why? If you meet a man at a charity benefit, you know a few things about him even though he is a stranger. For example, he has a tuxedo and he sprung $75 for a ticket. What does she know about the guy at the bar?

That is what the membership fee does for Costco. It keeps the clientele true to the Costco vision.

To stay alive in retailing, one has to have a successful business model, and that begins with a clear vision of what market one wants to serve and how one wants to serve it. You can go upscale or go downscale or go ethnic. You can fulfill the vision by always having the freshest choice or by always going the most efficient route.

There really is no limit, because this is really about a trend to specialization in retailing that echoes the general societal trend to specialization. Just look at the media. It wasn’t long ago that there were three national broadcast networks and all three had remarkably similar shows.

Contrast this with today’s competitors: The typical family gets cable or satellite and has a choice of hundreds of channels. Some of the differences are obvious: Do I watch Animal Planet or the History Channel? Some are subtle: Do I prefer the ideological tilt of Fox News or CNN?

Just a quick glance at the situation shows the absurdity of focusing on competing against a big competitor. You don’t set up the Home and Garden channel to “beat” a network; you do it to serve a particular viewer. Lo and behold, though, if you set up enough of these niche operations, each of which cuts just slightly into the giant’s size, you may find yourself being a big competitive threat.

This really is the story of the traditional supermarket. Some folks like the Wal-Mart Supercenter, some want the Whole Foods approach, some find Costco exciting and others have become entranced by Trader Joe’s.

The Wal-Mart juggernaught is surprising for only one reason. It is odd that such a successful format as a supercenter should have so few imitators. Just as virtually every supermarket chain developed a food and drug combo store when those proved successful with consumers, it is odd that chains have been so slow in developing their own supercenter concepts. It is only now with concepts like the HEB Plus store that we are starting to see innovation in this area.

Be that as it may, nothing is forever. Executives at Wal-Mart see things like the Dollar Store phenomenon chipping away at consumers more desperate than the average Wal-Mart shopper and then note that Target gets more dollars from families with average incomes just above the Wal-Mart numbers. Could the mighty Wal-Mart be getting set up for a classic squeeze from above and below? How about between Aldi and Whole Foods?

It is fun to play these mind games. But dangerous. too. If the boys in Bentonville are as smart as their reputation, they may debate these competitors over weekend bar-b-ques but they spend their real work hours focused on those families living paycheck to paycheck and doing right by their trust. Who are YOU doing right by? If you know, you’ll probably be around a good, long time.  DB