Big Box Stores vs Choice

One of the benefits of a large store is that it can afford to carry a greater variety of items than can a smaller one. Since it attracts more traffic there will be adequate sales of even less popular items than would be the case in a smaller store.

The problem that arises with a big box store is that they only want to carry items which produce a certain revenue per shelf space, so truly specialized items will soon be eliminated since they don't "pull their weight."

Let's see how this works in practice with something like hardware. We compare three retail models:
1. Mom and pop hardware
2. Home improvement center (Lowe's or Home Depot)
3. Broad spectrum retailer (Walmart, Target, etc.)

Now let's suppose we are shopping for something popular but inexpensive like a package of machine screws. There are about six common sizes (even numbers from 2 to 12) and a variety of lengths from 1/2 to 4 inches. So to stock all the choices means about 50 distinct varieties. What happens with the three types of merchants?

Mom and Pop carry the 50 types because they provide "full service" and are willing to (uneconomically) tie up capital to keep customers happy on the small items when they also buy the larger items.

The home improvement centers also carry all the choices since the capital is a small part of their overhead and they want to maintain the hardware store paradigm even though they really make their profits from appliances, tools and other items.

The big box stores like Walmart, evaluate each item on its turnover. So they probably only carry two or three sizes. Hardware is only one of their sectors and their plan is to cherry pick the most profitable, highest turnover items, from each sector to maximize revenue.

Next we examine a more expensive, popular item like an electric drill. In this case there are many brands, but within a category (say cordless 3/8" drills) all of them are pretty much the same. So each store will probably carry one or two brands at most. The mom and pop store needs to charge more to cover their overhead on the screws, in addition they probably carry a brand or model which is more upscale in some manner. This helps differentiate them from their competitors. The home improvement store probably carries a model from a popular brand and at a slightly better price, but it is possibly a model made just for them. This prevents price comparisons. The big box store also carries a single model, but designed to compete on price as the primary focus. Subtle differences like a smaller capacity battery which has a shorter use time, will not be evident to the buyer and helps keep the price low.

Finally, we take the case of a real specialty item, say a size 9, 3 inch machine screws (only the even sizes are popular). The mom and pop store might stock it, or they might offer to special order the item (probably subject to a supplier minimum). The home improvement store will order items from standard catalogs for items where they have a regular supply chain. This occurs with things like faucets where they show a much larger variety than they keep in the store. The big box store can't be bothered. They depend upon turnover and it just doesn't fit their business model.

Now what happens if the big box store and/or the home improvement store drives the mom and pop out of business. In the case of the slightly uncommon machine screws the customer comes out OK if there is a home improvement store nearby, but loses out if the only choice is a big box store. Similarly, in the case of the drill the customer may find a good choice at the home improvement store, but will probably have to settle for a lesser quality item at the big box. And as mentioned above only the mom and pop will help with the specialty item.

Taking this to the logical conclusion, the customer who demands, or requires, the specialized item, or the higher priced item, will be forced to find a consolidated hardware store. Increasingly this is a store which only exists on-line. Dealing in specialty items requires a large customer population and being restricted to a retail store limits the size of the market. So the customer can get the item needed, but will have to pay extra (for shipping) and wait for delivery. In addition, in most cases, they lose the ability to get advice from the store owner.

This trend has already played out in the photographic business. The big box stores and electronics retailers have taken over the profitable part of the business (digital cameras and printers), the local camera stores can no longer compete and have closed. This means access to photographic accessories and local picture processing has disappeared from small towns. Where, in the past, every town you entered had at least one shop with a "KODAK" sign over it we now how nothing left but a drugstore with an automated processing machine run by poorly trained part-time help. In fact the push in the industry is to make each purchaser take on all aspects of picture making, even when they don't wish to.

In conclusion, the introduction of big box stores provides the promise of variety and lower prices, but often at the cost of local expertise, quality choices and access to specialized items. Choice is not within a sector, but over the number of merchandise sectors offered. The appearance of variety without the substance. Just like the fast-food restaurants, you can have it your way, as long as it is a hamburger on a bun. The growth and centralization of most businesses is a continuing trend, with little on the horizon to change the market dynamics. It is a mixed blessing, at best.


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Copyright © 2005 Robert D Feinman
Feel free to use the ideas, but the words are mine.