Just like bell-bottoms and leg warmers, mom-and-pop retailers are back. Not long ago, it seemed like they would be permanently relegated to some dusty attic space, a relic fighting for relevancy.
Big-box stores put them there. Between 1992 and 2014, the share of U.S. retail stores owned by companies with fewer than 500 employees fell 13%.i That’s because big boxes promised lower prices and a wider assortment, points brought home by large mass market advertising campaigns.
But in the past few years, consumers have begun to realize that mom-and-pops are actually pretty cool again. This isn’t just some twee local movement that works only in Portland and Williamsburg; it’s happening around the nation. In fact, this year, the number of retailers with fewer than 500 employees started to show meaningful growth for the first time in 25 years — with a 1.1% combined annual growth rate from 2011-14.
Indeed, consumers are once again converging on local retailers. According to a Kurt Salmon survey of over 900 consumers conducted in September 2014, 29% of consumers said they are shopping more at neighborhood stores now vs. three years ago. The survey also found that roughly half of consumers say local stores now account for at least 50% of their shopping trips.
There are two primary reasons why these local retailers got their groove back: an evolving consumer mindset that is reshaping their perception of value, and technology that is helping to revolutionize the retail landscape and level the playing field.
Evolving Consumer Mindset
Coming out of the recession, the initial surge in local retailers’ popularity was fueled by consumers’ desire to support local jobs and business owners.
But since then, three other sustainable consumer psychographic trends have joined that local economic sentiment: consumers’ thirst for artisanal and locally produced products, exceptional customer service and greater authenticity. In short, consumers have had enough of the cold, concrete box and are shifting how they define value — it’s now much more than just low price.
Three dynamics are driving this artisanal and locally produced product trend. First, consumers are increasingly interested in understanding a product’s origins, based on the idea that if you can trace and break down a product into simple components, it’s likely to be healthier or more humanely produced. Second, unique items help consumers feel like they are expressing their individuality. And last, but not least, artisanal and locally produced items are often perceived as higher quality.
Local retailers have also done a better job at providing top-notch customer service. While this starts with store associates who are in tune with the needs and wants of their target customers, it also requires deep product expertise and the ability to ask their customers the right questions to enable quality engagements. Unfortunately for big-boxes, customer service was often the first to go in their quest to make products cheaper to compete with Amazon and other e-tailers.
Consumers are also seeking more authentic experiences from retailers, including a unique store environment, employees who are subject matter enthusiasts — making customers feel like they’ve found a new group of potential friends or people they aspire to be one day — classes, events or other elements that create a personal connection.
Technology Leveling the Playing Field
In addition to changing consumer preferences, technology is helping give mom-and-pops a new advantage. Over the past five years, the Internet has reshaped the retail landscape by both putting pricing pressure on big-box retailers and creating platforms that allow local retailers to more effectively compete.
Creating a Retail Vacuum
Big-boxes are now finding themselves falling out of fashion because of the same reasons they initially shot to success. They drew consumers away from local stores with lower prices and a wider assortment, but now Amazon and other e-tailers have taken these features to the next level. The Internet has also fundamentally changed consumer preferences by digitizing products like videos, music and books, therefore making the big-box approach in these categories more or less obsolete.
We’re all familiar with the results of these two dynamics: Borders, Blockbuster, Tower Records, Circuit City, to name a few. These store closings have left a brick-and-mortar vacuum for local stores to fill, and due to their smaller footprint, local retailers don’t need to generate as much traffic or sales to turn in healthy margins.
Providing Scale and Reach
The Internet helps democratize the retail landscape in multiple ways. First, it has provided smaller businesses access to online platforms and marketplaces — like eBay, Amazon and Etsy — that expand their capabilities and reach with minimal investment.
The Internet has also helped small businesses gain far greater exposure and reach consumers around the world without expanding their retail footprint by leveraging the power of social media and targeted marketing. One 15-year tracking study of small businesses found that more than one-quarter of local stores are planning to spend money on digital marketing campaigns in the coming year and almost half currently buy online advertising.ii
Thinking about what lies ahead, not all local retailers will have their chance to become cool again. In reality, the market is now at an inflection point at which the good local operators are winning, while the hobbyist local operators are continuing to get squeezed out.
Ultimately, the local stores that are set up for long-term growth are effectively leveraging a mix of artisanal products, great customer service, authentic experiences and a sense of community as a recipe for success and differentiation. These retailers are operating more effectively and efficiently than ever and have strong tailwinds at their disposal — favorable consumer trends and a relative power vacuum in the brick-and-mortar space — to help turn back the clock and reestablish themselves as the hippest option on the block.
i U.S. Bureau of Labor Statistics
ii BIA/Kelsey’s Local Commerce Monitor
iii 2014 Specialty Bicycle Retail Study, BicycleRetailer.com
iv Nielsen SoundScan
Dan Goldman is a senior manager in Kurt Salmon's private equity and strategy practice. He can be reached at [email protected].