Regional survivors stress soft goods to weather the Big Three storm - regional discount chains compete against national chains - Regionals - Industry Overview

Discount Store News, August 15, 1994 by Pete Hisey

NATIONWIDE DSN REPORT -- Regional discount chains are circling the wagons, developing strategies to fend off aggressive expansion of their national competitors, particularly Wal-Mart.

Most regional discounters seem to have settled on a very similar set of initiatives to reclaim their market share.

A wave of bankruptcies over the past three years caught regional discounters' attention: While there were individual circumstances prevailing in each case, the beleaguered as well as the strong regionals share a commitment to battling Wal-Mart and Kmart on their own terms.

Today, virtually every regional chain faces a Wal-Mart in a majority of its locations. At Rose's, for instance, 75% of the chain's stores compete directly with a Wal-Mart location, and that percentage continues to rise. About half of Ames' stores face a Wal-Mart (and even more of them a Kmart). Venture, ShopKo and Jamesway are all in roughly the same boat. Among the major regionals, only Pamida--because of its strategy to locate in markets too small for even Wal-Mart's rural philosophy--finds itself in the enviable position of facing fewer Wal-Marts this year than last year, and expects to face still fewer next year.

Chains that failed to adapt, such as Heck's, Fishers Big Wheel, et al, no longer exist. The survivors have learned to differentiate themselves from the industry giants by shifting their merchandise assortments away from Wal-Mart and Kmart's strengths and by aiming for their weaknesses.

Major trends industrywide include:

* Sharp growth in apparel, with clothing accounting for up to 45% of sales at some chains, and about 33% overall compared to Wal-Mart's 24%. That sales percentage will continue to grow over the next few years. Despite its incredible strength in almost all areas, including apparel basics, Wal-Mart has never successfully operated a fashion business. Coincident with this growth is a move to upscale merchandise by the regional chains. For instance, Rose's now markets $20 Disney applique T-shirts, which compare to cheaper screen-print versions at Wal-Mart and $30 price points at specialty stores. Smaller chain size also allows regionals to micromarket more effectively, particularly in team sports apparel and regional trend merchandise.

* Rapid growth in RTA furniture, domestics and seasonal. While these are not weaknesses per se at the national chains (Target is particularly strong in all three), decorative home products offer a wealth of differentiation possibilities. RTA in particular is booming at regional discount chains.

* De-emphasis of private label goods. All three national chains have extremely powerful PL statements, and the marketing clout to maximize them. At the same time, they had to give up some branded business to find the shelf space, opening a window for regionals. Jamesway, for instance, now stocks a major Stanley hardware program, directly attributable to Wal-Mart's de-emphasis of Stanley in favor of its own Popular Mechanics line. Several chains, most noticeably Rose's, have replaced private label goods with closeout branded merchandise, offering values similar to private label with a national brand attached.

* A shift in consumer electronics from hardware to software. Trendy and fastturning, music and video games are highly appealing businesses in which a smaller chain can make a visible statement. Regionals like Fred Meyer, Rose's and ShopKo emphasize this category, and are beefing up selection.

* Convenience food is on a growth track as well. The Big Three may have supercenters, but regional chains are appealing to consumers with programs that accentuate staples and impulse items. Cereal, canned meat, frozen steaks and condiments have all been major success stories at various chains.

* Hard goods are history. At most regionals, automotives, paint/hardware, H&BC and sporting goods are all declining, some sharply. Wal-Mart simply owns these businesses (along with category killers like Auto Zone, Home Depot and Sports Authority) and has driven the profit out of the fastest turners. Regionals are paring their selections to make room for more soft goods and home entertainment products; several have dropped categories like paint and crafts altogether.

* Cleaner, more spartan store design. As Wal-Mart continues to stack goods to the roof, many regionals (Caldor, Venture, Rose's, Ames and Pamida) have reacted with simple, attractive store presentations that emphasize convenience. Sightlines have been lowered, with highly visible accent walls to help orient shoppers. The stores are also becoming more interactive, with listening posts and video kiosks in entertainment departments. The latest Caldor and ShopKo stores stand out as some of the most attractive in all of retailing, in stark contrast to the often brutally efficient Wal-Mart prototype.

* Toy departments are growing across the board. Virtually all regionals are emphasizing the category and building their selections to levels that meet or even exceed the national chains.