Mom and Pop Stores Can Compete with Web Giants

Forbes

Online sales--$136 billion in the U.S. last year--still account for
just 3.2% of total retail spending, according to the Census Bureau. But as we
get lazier--and as the price of speedy Clarkson University. He has started several small
businesses, received multiple patents and is the founder of mysmallbusiness101.com, a
small-businesses support seminar series.

Twelve years after the "browser wars" between Netscape and Microsoft (nasdaq: MSFT - news - people ), the Web continues to roil the retail landscape. But a recent online-shopping expedition for my daughter's birthday reminded me that bricks-and-mortar can still hold their own. When her big day came, the gear I ordered for her horse was still en route. Good thing a quick trip to the local tack shop four miles away yielded all we needed--and for $20 less before shipping. So much for convenience and lower prices.

Indeed, there are throngs of traditional mom and pop shops making a fine living in the real world (as opposed to the virtual one). All they need are a little courage, creativity and attention to detail.
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The Bookstore Plus, in Lake Placid, N.Y., just celebrated 35 years in business and is still going strong. How does owner Sarah Galvin compete with the likes of Amazon.com (nasdaq: AMZN - news - people ) and the online units of Borders Group (nyse: BGP - news - people ) and Barnes & Noble (nyse: BKS - news - people )?

First step: educating her customers--for example, letting regulars know that the weekly book order goes out on Sunday. "If a customer lets us know about a special order on Saturday night, we can have it in the store by Wednesday," explains Galvin. "But if you let us know Monday morning it's going to take 10 days."

Next, she focuses extra hard on choosing the right inventory. "With only 2,400 square feet of floor space we have to make sure that every book that we stock deserves the space it takes up," says Galvin. "Our staff regularly reviews every single book in the store."

This takes time and money. Monthly book buys from the nine major publishers require several hours of catalog research, followed by three to four hours on the phone processing the order with each publisher. "I personally cannot dedicate that much time to just ordering, so I have one employee that handles about half of our reps," says Galvin. "But that means dedicating 25% of our payroll just to order processing."

But the work doesn't end there. Just because a book found its way into the store doesn't mean it gets to stay. "Our publishers have a pretty liberal return policy," adds Galvin. "I have trained employees to notice books that are not getting attention; if we made a bad pick, we get it out of inventory as quick as we can."

Finally, there's the customer service. "We don't just put up signs that say 'If you liked this you will like that,'" says Galvin. "If Web sites can ever do that, we are in trouble."

After 85 years of selling nails, paint and garden hoses, Evans and White Hardware, in my hometown of Potsdam, N.Y., started to feel the pressure from online merchants.

"We started to see our bread and butter customer being more and more price sensitive because of the access to giant retailers on the Web," says co-owner Bill Evans.

He's not talking about the random batch of nails to finish the back deck--he's talking about higher-margin, bigger-ticket items that can make or break a bottom line. "We saw a pretty obvious reduction in sales of higher-end products--like power tools, sporting goods and electronics--and knew that we were going to have to change the way we do business," he says.

Solution: equipment rental. Evans' customers now are able to rent everything from a handsaw to a tractor. He will even deliver the tractor right to your house. "We invested over $150,000 in rental equipment and dramatically changed our staffing to accommodate for the knowledge required to enter the rental market--and it really paid off." Indeed: Annual revenues per-square-foot have jumped 15%. With inventories slashed by 20%, Evans hasn't touched his line of credit, resulting in a $10,000 savings on interest expense.

Bruce Quale, owner of Quale's Electronics in Twin Falls, Idaho, goes up against Web-savvy big boxes like Best Buy (nyse: BBY - news - people ) and Circuit City (nyse: CC - news - people ). The electronics market changes so quickly that most consumers don't know the difference between a coaxial cable and a DVI-to-HDMI video-converter cable. That's where Quale comes in: "We capitalize on the newness and confusion of consumer electronics," he says.

But selection is only part of it. "Installation is scary for most people," says Quale. "When our customers buy from us the sale isn't complete until everything is working perfectly."

Example: flat-panel video screens. "We have found that customers paying $2,000 for a television have no problem spending $100 more for us to deliver it and set it up so it works perfectly," he says. Such lucrative installation work pushes overall margins on flat screens to approximately 25%, making them the most profitable items in Quale's shop. Better yet, "Online merchants like Best Buy that offer 'White Glove' services are outsourcing this and splitting the profit with the installers," adds Quale. "We take it all."

Quale still has to squeeze every penny to compete, of course. One cost-cutting trick: sourcing inventory through a buying cooperative called Brand Source--basically, a giant warehouse that lets thousands of small stores enjoy lower, bulk pricing. (Small groceries, hardware shops and pharmacies have used cooperatives for years.) "If we bought direct we would have to accept a 5% to 7% margin," says Quale. "By using Brand Source, we can get back to 15% [on many lines] and be competitive."

Entrepreneurs have but one choice: sell to customers any way they can. The Web is one increasingly important way, but bricks-and-mortar are far from dead--and they can even thrive if run the right way. These little guys are living proof.

Marc Compeau is the director of innovation and entrepreneurship at Clarkson University. He has started several small businesses, received multiple patents and is the founder of mysmallbusiness101.com, a small-businesses support seminar series.