SLEEPING TOGETHER WITH ONE EYE OPEN

By: Fiorenzo Arcadi, Toronto Hockey Repair

It is amazing what companies will do to survive. Join with your enemy, fight the common foe and remain enemies.

In essence, they lie in bed with each other, paranoid, knowing full well that when they look each other in the eye ready to tear each other apart, an even larger, stronger common foe deters them from self-annihilation.

On the one hand, the independent sporting goods retailers measure their strength and destiny in the arena whereby familiarity breeds contempt. Unfamiliarity of a foe brings disdain tinged with smugness.

On its most basic level, business involves customers and products. If you have a one of a kind product, then you have a monopoly and you do not have to worry about competition. If you sell the same, or a similar product as someone else, then you have to convince the market that they should buy the product from you rather than your competition. You win some and you lose some, but your hope is to carve out enough of a niche to live comfortably. You are prepared to do battle on a level playing field, with competitors that are generally the same size.

But when the big box stores move in, like the neighbourhood bully, all of the other kids, despite their histories, will gang up to attack him. Each of the kids may still maintain their own particular and peculiar animosities, but they can be put aside to fight a common foe who threatens their very existence.

Although they are loathe to admit it, this union of the small independents fighting the mega stores has created an uncomfortable bonding among them. It is almost like a marriage of convenience.

The battle is having its effects on all parties. The mega-stores are trying to get as much air time and page space to show that they too have a "heart" and are changing the way they do business so customer service comes first. They no longer have sales' clerks, they have customer service representatives or associates. Products are no longer "used" they are "previously owned". They strive for a sense of family among their staff where none existed.

The stores are divided physically, to create a boutique atmosphere for each particular sport. In other words, they are trying to capture the feel of 40 or 50 small independent stores under one roof. A sort of organized, higher class flea market.

The mega stores still miss one vital point. For the independents, the owner is usually on site or not very far away. When you want to talk to the manager at an independent, you usually end up talking to the person who has put their neck out, taken all the risks and has everything to lose.

At a mega store, you have managers who still have something to lose (a job), but there is no invested pecuniary interest in the business. They may have stock options, but that is a plus. If the store doesn't make money, they don't get a bonus. They don't lose anything. For the independent, if the store doesn't make money, he doesn't make money and the consequences are much more dire.

When the mega stores arrived on the scene, given the history and business style of boxstores in the United States, the fear amongst the independents was palpable. The CEO of a Canadian mega store indicated there was only one road to follow. An attitude of "the bigger the better" did not bode well for the independents.

In fact, among the independents a cooperative strategy of attack surfaced to dismantle a centralized corporate infrastructure. It is not a unique phenomenon since in the United States, the Big 3 automakers have joined forces to battle the Japanese. However, what is unique is how a myriad of small independent sports stores both in Canada and the U.S. aligned in order to survive.

Jim Rennie's Sports Letter (the Bible of sports retailing) indicated that it was a tough year for independent sporting goods retailer because of more big box retail operations. The upside was that the better retailers not only survived they gained strength as a result of weaker players failing.

One key sporting goods supplier said that people will talk for decades about the strategies they used to survive and prosper in the mid 1990's. The CEO of one of the big box chains may have referred to the independents' attack on them as the development of a Spartican mentality (Sparticus was a Roman slave who led an uprising that continued after his death). At first the Spartican mentality amused the mega stores. Then it became a concern. Now they are fighting for survival.

It was interesting to hear from colleagues at the Montreal Hockey Show that the mega stores are pressuring bigger manufacturers to take back products simply because they couldn't unload it on the buying public. The word went out. The mega stores were relying on the independents to save face with the manufacturers. Buy it back and sell it at discount prices to the independents. They will move it.

On the other hand, the independents are unloading their existing inventories to the mega stores at full retail price. They use the credits to buy products that move in their stores.

Furthermore, 20% of the market share has been dislocated from the independents to the mega stores which is not enough to make the mega stores viable. The very concentration of big box stores in the same areas leaves lime room for establishing a repeat customer base. The very brutal retail tactics that were refined in the U.S. to eliminate their competitors are now being redefined as a counter-measure of attack. Even though the battleground between the mega box stores and the dissident independents is in Toronto, the battle is having serious repercussions in the U.S. where the mentality of the underdog is a lot more inspired.

The success of smaller retailers is documented in the U.S. The national sporting goods association has just completed a study showing that the new wave of smaller specially sports operators has done remarkably well against the proliferation of big box retailers. Return on net profit for small specially stores has climbed from 5.2% to a whopping 23.1%. More clear evidence that smaller specialized retail operations are doing best against the newer generation of big box retailers.

One of the largest manufacturers of hockey equipment in the world is trying to take a leadership role in providing stability and sensibility in the marketplace. He claims that cooler heads are needed to stop the haemorrhaging in the sporting goods industry. This manufacturer has the ear of the entire industry, unlike another major manufacturer, who according to the independents, betrayed them. The independents have their own way of dealing with people who may have treated them unfairly.

Shakespeare said that mercy is an honour to give and an honour to receive. The independents will stock three helmets to have a product representation in their store. The mega stores put the price of the helmets at $39.99, (which is less than the wholesale price the manufacturer charges the independent). The independents lower the price of the helmet to $9.99. In view of the price policy of the mega stores, the price of the helmet must be legitimized to $9.99 or even lower with double your money back guaranteed. In fact what will happen is that the second biggest manufacturer will have a devalued product. That product division will literally go bankrupt if the stores have to continue selling them below cost.

My colleagues must understand we may have won the battle, and ultimately may have won the war. Going after more blood reduces the independents to the level of the mega stores whose policy was to eliminate the competition. There can be a measure of compassion in revenge. There must also be restraint. If the independents use a scorched earth policy to rid the land of the mega stores, the taste of blood may be too sweet. Once addicted, they may eat their own. That is a battle that nobody wins. It is tough to look to the future when you have to focus on covering your back. Sleeping with one eye open is not restful.