CHALLENGES FACING INDEPENDENT OPERATORS

David Merrefield

Commonly held wisdom in the industry is that in-market, independent operators have a considerable advantage that should assure their future, assuming they can properly exploit that advantage.

And that wisdom is backed by a lot of actual fact. After all, market forces that have driven large-scale food retailing toward concentration are now resulting in chain stores that are more and more homogenized in their product, look and marketing efforts. So, in-market operators can use the very fact of the similarity of their chain competitors as a means to trade on their differences, such as their locally targeted product and merchandising strategies, and their community involvement. Much has been written in the past few issues of SN about what independents can do, and are doing, to thrive.

It must be acknowledged, though, that current market forces are ushering in substantial change as compared to how things were just a couple of years ago. The chief reasons for change include not just retailer consolidation, but the cooling of the economy in general. The effect of change is even greater than it might appear since change sets in motion a snowball effect. Here's how: Consolidation and the economy conspire to weed weak operators from a market, which makes survivors stronger since they fall heir to market share. The big get bigger by default.

On top of that are some developments that go right to the fundamentals of independents. Much has been written in the past few issues of SN about those too. Let's look at them: ENTREPRENEURS: Maybe one of the biggest challenges facing independent operators concerns the will to continue with the business, and the will to create new business. In the instance of established family operators, the question is whether the next generation wants to continue to run the business or cash out of it. That has long been a concern. But of just as much importance is the question of new enterprise formation: How many people are there who are clever enough and motivated enough to start food-retailing enterprises? More important, how many qualified people will want to do so when they carefully examine the competitive climate, and make realistic projections of return on capital?

CAPITAL: And, concerning capital, it's becoming increasingly difficult for entrepreneurs interested in food retailing to obtain startup capital. As was outlined in a recent issue of SN, banks and other lending institutions themselves have consolidated, which suggests they are moving away from knowledge of the communities in which they operate. That means capital will become more difficult to obtain, especially for low-margin enterprises that might be difficult for lenders to comprehend.

WHOLESALERS: But there has long been another source of capital for independents, namely wholesalers cast into the role of bankers of last resort. That role might be to rescue underperforming retailers who can't get capital elsewhere, or as the provider of seed money to start new enterprises. The wisdom of this had long been under discussion since it tends to expose wholesalers to the full downside of failure, but doesn't allow wholesalers to enjoy the full upside of success.

Additionally, many wholesalers are turning their attention to supplying retailers in other trade channels, or developing their own retail formats. So how long will wholesalers want to provide capital?