Franchise Name No Advantage For Small Retailer Facing Big Rival

January 31, 1998

COLUMBUS, Ohio -- If you’re a small business battling a giant national retailer, having an affiliation with a trade-name franchise may not give a competitive advantage, a new study suggests.

The small retailers that survive and prosper in such a competitive environment tend to be independent stores and focus on providing knowledge-intensive service to their customers, according to researchers.

In a study of 307 small hardware stores in seven metropolitan areas, results indicated that independent stores were more likely to successfully face the challenge of strong competition, said Alice Stewart, co-author of the study and assistant professor of strategic management at Ohio State University’s Fisher College of Business.

“The franchises didn’t seem to respond with the most effective strategies when threatened by a big-box retailer,” Stewart said.

Stewart conducted the study with Reginald Litz, a professor of management at the University of Manitoba. Their findings appear in the current issue (March 1998) of the Journal of Business Venturing.

The stores involved in the study were in Atlanta, Miami, Long Island (N.Y.), San Diego, Chicago, Minneapolis-St. Paul and Kansas City.

Some of these hardware stores were competing with a nearby Home Depot store. Home Depot is the nation’s largest home-improvement retail chain.

The study found that small stores affiliated with trade-name franchises -- such as Ace, True-Value and Servistar -- tended to do better than independent stores in terms of total sales per square foot when they didn’t have to compete against Home Depot.

But among the small stores that were competing against Home Depots, the independent retailers reported better total sales.

“When there is no major competition, being a franchise is an advantage because of the brand-name recognition of names like Ace or True-Value,” Stewart said.

But when there’s a Home Depot in the market, the small franchise hardware store loses that advantage because it is competing against another well-known brand name.

Faced with competition against Home Depot, independent stores were more likely to find an effective way to compete. The study showed that these independents focused their efforts on providing knowledge-intensive service for their customers. For example, they would help customers with difficult home improvement projects such as rebuilding faucets.

“The independent stores go beyond the usual definitions of customer service,” Stewart said. “Employees at these stores have a lot of knowledge and expertise about their products, and also a personal knowledge of what their customers need. They provide a depth of individualized service that a large store like Home Depot can’t.”

Meanwhile, the study found that franchise stores tend to try competing against Home Depot by offering more products, but not increasing the number or types of services offered to customers.

“This suggests that the franchise is attempting to go head-to-head with the big-box retailer by offering a wider variety of lower-cost products,” according to Stewart. “But they usually can’t beat Home Depot with this kind of strategy.

“The franchise stores are counting on their brand name to carry them against Home Depot, because that was their advantage all along. But it’s the independent stores that seem to find the best way to compete successfully.”

Surprisingly, the small stores that were competing against Home Depots were not only surviving, they were thriving. Results showed that stores in the high-competition environments tended to have higher sales on average than those in the low-competition environments.

“There is a survivor effect, where the stronger stores are the ones that stay in business in the face of competition,” Stewart said. “These are the stores that were willing and able to make the changes necessary to compete That’s why their bottom lines are better.”

Ohio State University

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