Retail Business Sizes: Cycles Small to Large and Back Again
There is a direct kinetic link between consumer driven retail business and the trend in the size of retail businesses. Although consumer demands drive the retail Industry, the cycle of independent to conglomerate size businesses dictates what is accessible to the consumer. This shows that neither end of the cycle completely controls the industry and one is dependent on the other.
When consumers decide they want specific products or services they begin to shop around for those services more widely than just going to the store around the corner. When large franchise or super stores do not offer the options that consumers are interested in, small independent specialty shops begin to emerge to satisfy this need. As these small businesses become more and more successful larger companies begin to feel the pressure to also fill these needs in order to survive and begin attempting to search out methods of providing these products or services; typically in one of two ways:
• Developing Their Own Product or Service –
Just as larger chains, franchises, or superstores have developed their own “generic” or “store brands”, they will also shop around to find the cheapest method of providing a low cost version of new desired products or services. This often entails product or service modification that makes the product or service a lower quality than the competitor, but provides the retailer with the opportunity to offer the same brand name for a substantially cheaper cost to the consumer. Larger retailers can also buy at a much higher volume than most smaller independent stores can making it possible for larger stores to provide similar products at much lower prices.These practices often make it impossible for smaller independent specialty retailers to compete putting them out of business and limiting consumer options for locating these products or services. Once the main competition has been eliminated consumers often see that the low prices they previously received for these products from the larger retailers begin to rise and the product or service selection begin to shrink due to a lack of true competition.
• Buying Out the Competition –
When a super chain retailer cannot locate a competitive product or service item at a substantially lower cost their next step in the competition is to begin buying out the most successful smaller specialty retailers and sometimes manufacturers of the product. This practice gives larger retailers a near monopoly portion of the market, because as long as there is a retailer out there selling the same service or product there is considered to be competition, even if the competitor cannot offer the consumer the same low prices. After larger retailers have bought out their major competitors, it is common to see selection begin to drop and prices begin to increase.
Walmart Corporation is a prime example of both of these practices. Walmart’s 11,000 plus locations worldwide in 27 countries provides them with the buying power to demand exclusive items or packaging from top name manufacturers. These items usually mean modifications to lower the manufacturing costs that also minimally negatively affect the quality so that the sale price can be the lowest in town. Other times these exclusive items will include an added bonus product or service packaged in with the item to make the product or service appear to be greater than the competition.
This massive buying power also creates the opportunity for Walmart to buy at bulk pricing providing them with the lowest price available. Their having a greater negotiating power than the smaller independent or specialty shops makes it impossible for these smaller stores to compete head to head with the conglomerate.
Another example of conglomerate buying power is the Kroger Company. In May of 2014 Kroger Company was reported by Forbes to be ranked 309 in the global 2,000, and posted 98.49 billion U.S. dollars. Kroger’s ability to diversify their branding into multiple sales areas such as drug stores, grocery stores, and multi-department stores while using their combined size to receive the most effective buying power has given them the opportunity to reach many niches and continue to offer lower prices than smaller specialty shops can provide.
After larger companies have dominated their smaller competition, they will then focus on minimizing the number of larger competitors which significantly lowers consumer choices. The past two decades have made this point very visible with the record breaking number of mergers and acquisitions worldwide. According to an article published by Bain and Company, in 2007 merger and acquisition figures hit an all-time high with more than 40,000 deals that amounted to 4.6 trillion U.S. dollars. These numbers beat the year 2000’s record by 40 percent. A prime example of the enormity and impact of these mergers and acquisitions is the:
• Anchorage Capital Partners Complete Buyout of Dick Smith in 2012 – Woolworth’s sold all holdings of the Dick Smith franchises that included 325 locations throughout Australia and New Zealand, for $94 million.
When consumers get enough of not having the selection and price options they want, the cycle begins to shift back towards smaller specialty stores. New independent specialty shops begin to surface offering a wider selection of goods and services with better customer service than the larger super chains offering consumers what they want and more. From 1990 to 2010 the number of small businesses grew by 8 percent while large corporation growth remained relatively even seeing minimal growth, according to the U.S. government agency the Small Business Administration. In 2002 the Global Entrepreneurship Monitor’s annual survey of 37 countries that represent 92 percent of the world’s Gross Domestic Product found that 12 percent of the surveyed countries’ workforces were either starting or running an upstart small business. According to the Australian Bureau of Statistics, in June of 2012, 96 percent of businesses in Australia were small businesses.
These global statistics indicate that a cyclical trend is beginning to make full-circle back towards smaller independent businesses that offer specialized products and services rather than large businesses that tend to dictate to the consumer what is available through their minimized SKU counts. This trend back towards smaller businesses can also be attributed to:
• Unemployment – As larger companies strive to meet their strict bottom lines and profit margins through layoffs and mechanizing workers begin to start new businesses out of necessity to provide a livable wage.
• Expanding Geographic’s and New Technology – As developing countries begin to become more developed and compete in the technological world, new avenues open up providing small business opportunities within and for these regions.
• New Demographics – As the world economy becomes more and more interlinked new demographics emerge creating new markets for small businesses to develop.
The cyclical business world generated by supply and demand continues to perpetuate the business circle of life through a small business dominated economy being taken over by large corporate giants who can provide the lowest prices; only to be recycled back to small business domination due to customer demands for choice and quality. Although consumer demands are not the only reason for the cycle due to things such as unemployment, expanding Geographic’s and new technology, emerging demographics, etc., consumer choice demands at reasonable prices is a key factor in the evolution of business size domination.