The 40-aisle boutique

Consumers who favor neighborhood niche shops over mega-retailers confront a fact of modern retail: Increasingly, 'mom-and-pops' buy the goods they sell from the giants.

Consumers who decry what they see as the rising dominance of mass retailers like Wal-Mart - and go out of their way to patronize mom-and-pop retailers instead - may be in for a reality check. Over the past few years many small, neighborhood stores have changed the way they do business.

The new reality: Mom-and-pop shops are stocking up at Wal-Mart.

Consider the business of one independent convenience-store owner in south-central Maine. The retailer, who asked that his name be withheld, goes to Wal-Mart three times a week to stock up on soft drinks, lunch meat, and cigarettes.

He recently purchased a flat-bed truck on which he plans to load large wooden crates of goods directly from the Wal-Mart's warehouse. "I'm doing it more and more," says the store owner. "You would find there are a lot of local guys who do what I'm doing."

Three years ago, the store owner used a nearby Pepsi distributor to stock his shelves with soft drinks. Over time, however, the price for a case of soda at Wal-Mart fell well below the distributor's.

Now, Pepsi charges the store owner $7.50 for a case. And Wal-Mart? It's $4.97, on sale, he says.

Because there is nothing illegal about reselling most products, the store owner does not think twice about turning to Wal-Mart. "If you're going to make money in this business, you have to hustle," he says.

Managers of specialty boutiques, mom-and-pop stores, and convenience marts across the country are increasingly buying a large percentage of their merchandise from a handful of giant retailers that, ironically, are also their top competitors, say experts. The trend is evidence of a new retail environment in which the actions of big players like Wal-Mart dictate how manufacturers and retailers do business. "We clearly are moving quickly to an era where superstores wield most of the power in retail," says Eric Johnson, a professor of business administration at Dartmouth University.

The power shift was evident at last month's International Toy Fair in New York. Traditionally, toy manufacturers have used the occasion to pitch their products to small stores and large chains. But the top 5 toy retailers now have so much influence, they did not even attend the show. Instead, they were able to hold private meetings with toymakers weeks in advance. "Toy Fair is not that important to the big toymakers anymore because so much volume is in the hands of so few companies," says Mr. Johnson.

The influence of large toymakers is directly proportional to their skyrocketing sales over the past decade.

During the 1980s, independent toy stores accounted for more than 75 percent of toys sales in the US. Now, more than 55 percent of the market is controlled by the big five merchants: KB Toys, KMart, Target, Toys 'R' Us, and Wal-Mart.

Toymakers "now sell more to Wal-Mart then they do to some Western countries," says Eugene Fram, a marketing professor at Rochester Institute of Technology.

This shift has led toymakers to define much of their business in terms of how much of their product they can get on the shelves of the giants. The narrow focus limits their interest in selling to smaller retailers. "The big guys [like Hasbro and Mattel] are less and less interested in dealing with small stores," says Johnson.

Their reluctance is primarily a question of logistics. Since big retailers demand large deliveries in a short amount of time, big manufacturers have overhauled their warehouses and delivery operations to accommodate them. Machinery and trucks are now designed to handle enormous wooden pallets. Factory personnel are paid based on a model of large deliveries. The result is a dizzyingly efficient supply chain that ships enormous volumes of goods, keeping prices low.

The system thrives among large manufacturers and retailers. But it can hobble smaller players. For many major toymakers, delivering a few games to an independent toy store is like the Navy using an aircraft carrier to ship a single tank.

"It's not an efficient way for most of them to operate," says William Grenoble, director of the center for supply- chain research at Penn State University.

To do business with the major manufacturers, small stores are often required to place minimum orders that drastically exceed what they can hold in storage.

Hasbro requires stores to spend a minimum of $5,000 on an order, says Gabriel Vega, owner of The Name of the Game, a game store owner in Camarillo, Calif.

That price is too steep for Mr. Vega. So every October he goes to the local Toys 'R' Us and buys $1,000 worth of classic Hasbro games, like Life and Monopoly. "We will probably carry more and more Hasbro games as long as I'm can sell them at what Toys 'R' Us can," he says.

Buying stock from a competitor is a desperate move, observers say. But the tactic has been used before. When the first supermarkets opened during the 1930s, for example, small grocery stores were not able to offer competitive prices. Many store owners resorted to buying up sale items at supermarkets. "They survived by going in on occasion to the supermarket, taking it back to their stores, marking it up, and selling it," says Mr. Fram. To stop this practice, supermarkets eventually imposed a limit on the number of items one customer could buy.

But there is little concern among today's small shop owners that Wal-Mart will hinder them from stocking up on sale merchandise. "From Wal-Mart's perspective, if it's money in the door, who cares where it comes from," says Ira Kalish, chief economist for the retail consulting firm Retail Forward.

"We don't ask our customers about what they use our products for," says Sharon Weber, a Wal-Mart spokesperson.

In addition, Wal-Mart is growing so quickly that it probably is not concerned with local competition. "You're dealing with a train that's running down the track at a very rapid rate," says Fram.

The company generates more sales than any retailer in the world. Retail Forward estimates that Wal-Mart could double its size in five years, growing by the size of an entire Kmart corporation every year.

The store is likely to begin selling more upscale apparel, home appliances, and consumer electronics, as well as used cars, says Mr. Kalish.

As toymakers did, manufacturers of these products will need to reinvent themselves to do business with the big players. "Those companies that do not have a compelling strategy for doing business with Wal-Mart or ... for doing business without Wal-Mart as a customer, will fail," according to a recent report by Retail Forward.

Amid all this reshuffling, can small stores continue to compete? Most observers say they will have a hard time winning over customers if they define their main business as selling products.

Even boutiques and specialty stores will no longer be able to win enough business from consumers looking for unique merchandise, say experts. "We understand that if there is something really good, you can go on the Internet and get it anywhere in the world," says Meryl Gardner, a marketing professor at the University of Delaware.

Mass retailers also are beginning to sell more upscale products. Target has a propriety line of Italian-designed kitchen tools. Wal-Mart exclusively offers certain model General Electric appliances and Levi's jeans. The wholesaler Costco sells diamond rings and laptop computers.

The fate of the small store, then, might be as more of a destination than a place to make purchases. "I think there will always be a place for a place," says Ms. Gardner. "Candle stores can't keep just selling candles. They have to give you great service, make you take a deep breath, stop and smell the candles."