The Regional Advantage

Retailing is a tough business for regional chains in the best of times, having to compete against giant national companies with purchasing power and marketing budgets to match their coast-to-coast networks of stores. With consumers tapped out and finding even window shopping too spendy, these are definitely not the best of times.

So how is it that three family-owned, locally-based chains-Seattle-based Bartell Drugs, Bellingham’s Haggen Inc. (which owns the Haggen and Top Food grocery-store brands) and Renton’s McLendon Hardware-operating in the toughest economy in decades and in two retailing sectors dominated by huge national companies, are not just surviving but looking at growth opportunities?

Bartell Drugs, for example, plans to open its 57th store by the end of 2009, having added or replaced several locations this year. George D. Bartell, the company’s chief executive and grandson of the founder, says the firm is working on deals for next year as well, although he notes there’s no specific number the company tries to add every year. “If we have the cash, we’ll consider them,” he explains.

Haggen, meanwhile, last added a new store when it took over the former Larry’s Market in Redmond, although it has been remodeling existing stores (it currently has 33 stores in Washington and Oregon under the two brands). “Financing’s a little bit of a challenge now,” says Haggen Chairman Dale Henley, but the company is looking at opportunities and has properties under option for development.

“We would love to expand,” says Mike McLendon, vice president of the namesake company, which currently operates six stores. “We’d like to be a 10-store chain eventually.” For the moment, expansion plans are on hold, but McLendon says the company hires and trains with the expectation the new employees of today will someday be managers at those new stores.

And both Haggen and Bartell say their companies are doing well financially. Asked if Haggen is profitable, Henley says “we’re doing fine.” Asked the same question, Bartell says, “We’re profitable, not as profitable as we’d like to be. We’re pretty happy with where we are.”

While size can be a competitive disadvantage in retailing, regional retailers try to make the disparity work in their favor.

“We’re not as bureaucratic” as the national chains, Henley says. “It’s easier to make decisions and to get them done. We’re probably a lot closer to our people in the stores. I get out and see them all the time. It’s pretty hard to do that if you’re in Cincinnati [headquarters of Kroger, parent of Fred Meyer and QFC] or someplace else. It’s the people in the stores that are really our secret weapons, that are closest to our guests and what they’re looking for.”

Bartell says larger players do have advantages in technology investment and dealing with regulation, since they have a larger base over which to spread those costs.

The big retailers also get a lot more attention from vendors and suppliers. “One of the problems we face is that some companies may have entire offices in Bentonville, Ark., for dealing with Wal-Mart, but they can’t seem to afford to send someone to see us twice a year,” Bartell notes. “When they don’t call on you, you don’t have the up-to-date information. You don’t know what new products are coming out. You’re not aware of what their promotional plans are. You just have to be nimble and pick your spots and work with companies that do work well with you.”

But Bartell also says “on some things I think the economies of scale are overdone. On brand-name prescription drugs, the prices are set by the manufacturers; a good share is sold only through distributors, so it just depends on what kind of deal we can work out with the distributor.” On advertising, Bartell is “helped a little bit because we have a pretty good share of the market where we operate,” he adds. “We can’t buy cable TV [ads] at the rate the other guys can, but we can advertise in the newspaper and on radio pretty effectively.”

With so many retailers-Costco, Wal-Mart, Target, Rite Aid, Walgreen and the national grocery chains-carrying so much of the same merchandise, Bartell tries to differentiate itself with its photo service, and by featuring products from Northwest companies like Liberty Orchards, Uncle Woody’s popcorn and Theo Chocolate.

For Henley, it’s a matter of staying close to customers. “We’re more nimble,” he states. “We’re able to adjust to the trends and the things that [customers] want.”

For McLendon, the difference between a national and local chain comes down to “Do I have the ability to change something right now?” That can mean adjusting the hours a store is open, or stocking an item at just one store that customers have been asking for. “We try to find niches our competitors are not looking to pursue,” he says. “The reaction time is much quicker.”

Another significant difference between the big national retailers and successful regional chains: financial management.

“Family firms tend to be less willing to take on debt because it’s not being leveraged through a corporation the same way,” says Catherine Pratt, assistant professor and associate dean at Pacific Lutheran University’s (PLU) School of Business. She also works with PLU’s Family Enterprise Institute. “A certain amount of risk is required or else your firm’s not going to grow. It’s just, are you betting everything? I would imagine each of these firms has done that. It’s just how frequently they’ve done it. They have to have done it certainly at startup and at each major growth spurt, but it’s just the frequency. … Everybody has different comfort levels with risk.”

Bartell concurs. “We’ve kept our leverage rate low,” Bartell says. While financial theory might suggest a higher rate of leverage for a higher potential rate of return, “We just don’t go there. Perhaps we accept lower rates of return just to be safe. We want the fate of the business to depend on us, not on a bank or vendors or whatever it is.”

Regionally-based, family-owned retailers also are free from the demands of Wall Street. While the families that own the businesses do want to make money-“We need to be accountable, and I’m accountable to our owners,” Henley says-they can also exercise more patience.

“Family firms tend to have a longer horizon,” Pratt says. “Because of that, their planning and their preparation are not quarterly oriented. That helps them be prepared-one hopes-for more difficult times like we’re in right now. They’re not so much worried about this quarter, although that’s there; it doesn’t go away.”

The character of the region may also contribute to the success of regional chains too. “In the Northwest, people here are loyal to local businesses,” McLendon says.

Growth does matter for the regionals; aside from providing a return to owners, expansion gives “our talented people a place to go and have a future,” Henley says.

But he’s also much more comfortable about growth over the long term. Haggen, he says, has had a compound annual growth rate in sales of 13.5 percent since 1984. Even in this economy, revenue will be up about 1 percent this year even if in the short run, the national competitors are posting much fancier numbers.

The slow-and-steady approach has proven to be better protection than sheer size or speed.

During the recent downturn, Henley says, “A lot of those guys growing faster in the short term got into trouble or out of existence.”