NEW YORK (CNN/Money) -
How do you outsmart Wal-Mart? By not trying to.
It sounds counterintuitive. But a new report says the secret to retailers' survival in a Wal-Mart world isn't about attempting to outrun the 800-pound retail gorilla but about the ability to maneuver around it, according to a recent study entitled "Outsmarting Wal-Mart" from the global retail practice unit of New York-based consulting firm Bain & Company.
So who's thriving in a Wal-Mart (Research) world?
The report's authors, Darrell Rigby and Dan Haas, picked Best Buy (Research) in consumer electronics; Walgreen (Research) in pharmacy products; Wal-Mart's arch-rival Target (Research) in the discount arena; PetsMart (Research) in pet supplies; and privately held regional chains HEB and Publix among grocers.
The CEO of one successful Wal-Mart competitor was quoted in the report as describing his strategy as the following: "It's like the two outdoorsmen who wake to find a raging bear at their campsite," he said. "One camper slowly stands and backs away; the other starts to lace up his sneakers. 'You can't outrun the bear!' whispers the first. 'I don't have to,' replied the second. 'I just have to outrun you!'"
Competing with Wal-Mart, the world's largest retailer, on price alone is futile. Wal-Mart's mantra of "everyday low prices" may as well be written in stone.
That's how it pounded its rivals and built it $288 billion retail empire -- setting prices not just below the competition but close to rock bottom while still making a profit.
"Wal-Mart clearly wins on price, and to a lesser degree, selection -- but nowhere else," the report said. "Price isn't everything."
According to Rigby and Haas, these retailers have successfully managed to "co-exist and even thrive" in the same forest as Wal-Mart because they focused not just on boosting sales but on becoming the best in their arena in terms of quality, product selection, in-store service and convenient locations.
"Two-thirds of shoppers find Wal-Mart's assortments, middling product quality and limited services not worth the savings," the report said. "That means, regardless of Wal-Mart's proximity, there are plenty of customers looking for alternatives."
Wal-Mart learned that lesson this past holidays when shoppers snubbed the discounter after it not only scrimped on holiday discounts but also lacked an exciting array of hot products.
Bain & Company research, which was published in the Harvard Business Review, found four factors that have helped companies such as Best Buy or Target do well despite Wal-Mart's formidable presence in their market.
First, these companies have quickly captured market share by gobbling up less profitable competitors, or by buying the assets of dying rivals.
The report singles out Target as an example, saying the company was able to win over customers that were once loyal to now-defunct discount chains such as Bradlees, Ames and Caldor. More recently, Target has distanced itself from Wal-Mart through its popular offering of low-priced trendy, designer-created clothing and home products.
Second, even if Wal-Mart takes 30 percent of any regional market that it enters, that still leaves 70 percent of the market for other retailers to serve customers in better ways than Wal-Mart. Wowing the customer is one critical way to build customer loyalty, the report said.
Rigby, who is head of Bain's Global Retail unit, cites Best Buy as an example. "Best Buy outsmarted Wal-Mart by carrying a deeper assortment and better quality of products," Rigby said. "Additionally, the company differentiates itself from Wal-Mart by the services it provides to its customers, such as its in-house repair team called the 'Geek Squad."
It's the same story with PetsMart, he said. "The retailer offers more variety of pet products than Wal-Mart. Pet lovers probably also like the fact that they can bring their pets into a PetsMart, which is something that Wal-Mart would probably frown upon."
Third, even if they can't squarely match Wal-Mart on price, it's still important that retailers sharpen their prices to become more competitive. One way to do that, the report suggests, is for companies to train local store managers to identify pricing opportunities and challenges and quickly respond to them.
Finally, Rigby and Haas find that since market prices generally decline by about 10 percent when Wal-Mart enters a market, it's vital that companies playing in Wal-Mart's playground keep operations tight, reduce operating costs and eliminate supply chain redundancies.
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