'Category Killers' Stalk Small Towns;
U.S. regulators shrug at 'free-market' consolidation
By Jim Cullen
When Ann Gales was growing up in Chicago, she didn't think much about the
"mom and pop" businesses on the Main Streets of small towns around
the country. As an attorney in the antitrust division of the U.S. Department
of Justice during the Reagan and Bush administrations, Gales was told not
to concern herself with the problems of small businesses that complained
about predatory pricing and other unfair competition from chain stores.
But after Gales married, settled down on a farm outside a small Iowa town
and started raising a family, she came to appreciate the old-fashioned values
that are absent from national economic policy debate.
As a Justice Department lawyer in Chicago, she heard complaints that large
discount stores like Wal-Mart and Kmart would move into the outskirts of
towns, using their size and buying power to undercut local merchants and
draw customers away from the downtown retail district. But Gales spent most
of her time looking at corporate mergers, and unless there was evidence
of criminal conduct, such as two chain stores conspiring to force the little
guy out of business, "we just ignored it," and left the complainers
to file their own private lawsuits.
"It never came up with the Justice Department. In the first place,
it's so difficult to prove predatory pricing. And we were told that antitrust
laws were designed to protect the consumers, not competitors. So if the
competition was offering lower rates to the customers, the reasoning was,
that was good for the customers," Gales said. "Unofficially there
was pessimism among lawyers that you'd never sell a case like this to the
economists and the front office. When I'd get a complaint like that off
the street, I didn't have a clue how to deal with it."
Gales left the Justice Department in 1992, after six and a half years in
the antitrust division. "When Clinton came in they made some noise
about getting more consumer-oriented and less big-business-oriented, but
from what I hear, nothing has really changed," she said. The department
is still stuck with economists who are unsympathetic to the claims of small
businesses -- not to mention the judges who have cast a critical eye on
predatory pricing suits over the past 20 years.
"The economists in the Justice Department when I was there believed
that small businesses should be driven out of business because they are
less efficient than big chain stores. So Wal-Mart comes in with lower prices
and drives the mom-and-pop stores out of business; that is the free market
at work. They reasoned that in the event that Wal-Mart starts gouging, then
that will open the door back up to the mom-and-pop stores.
"The trouble is that I think the moms and pops get discouraged, or
they don't have the resources to get back into the market. ... [The economists]
think there are a lot of people out there with unlimited resources and ambition
to serve as a check to stores like Wal-mart."
The main problem she sees is that federal antitrust policy fails to consider
the community value of helping small businesses survive. "There is
something beyond the most efficient way do things. There were no values
factored into antitrust decisions," she said. "Also I think the
economists underestimated the ability of a company to engage in anti-competitive
practices. The entry barriers are usually higher than the economists would
Wal-Mart moved into Storm Lake, Iowa, a county seat of approximately 8,500
population in northwest Iowa, in 1990. A music store, a variety store and
two smaller discount stores have gone out of business in Storm Lake since
then, but many local merchants report that their businesses are doing well.
In fact, local business operators say the impact is probably greater on
smaller businesses in surrounding communities as residents of nearby Sioux
Rapids or Rembrandt drive to Storm Lake rather than shop at local stores.
A study done by Iowa State University Professor Kenneth E. Stone found that
the opening of a discount store in small to medium-sized towns may help
to expand local retail trade because it reduces the amount of "outshopping"
by local consumers and it brings more shoppers from the surrounding areas.
"Unfortunately, the discounters usually saturate the market with their
stores, which causes some towns' trade areas to shrink to a smaller size
than before," he wrote. Nearby towns without a discount store suffer
sales losses. And shopping habits change, as consumers buy more from discount
mass merchandisers and less from local merchants.
The Robinson-Patman Act of 1936, which is still law, prohibits predatory
pricing, where a vendor sells a product at below cost in order to drive
a competitor out of business. The law also says that sellers cannot discriminate
between buyers, so that independent stores ought to be able to make the
same deals as the chains. But in practice the chains demand volume discounts
and are able to run below-cost "loss leaders" in one department
to bring people in and sell goods in another department.
Wal-Mart is frequently accused of running the "loss-leader" marketing
strategy. Three pharmacies in Conway, Arkansas, won the first round of a
lawsuit that charged that this amounted to "predatory pricing,"
but the Arkansas Supreme Court in 1995 held the strategy was not anti-competitive
or illegal. Reversing the trial court decision in Wal-Mart Stores, Inc.
v. American Drugs, Inc., the appeals court determined that the use of loss
leaders was a "tool to foster competition and to gain a competitive
edge" and not "the sale of products at less than cost ... for
the purpose of injuring competitors or destroying competition," as
claimed by the plaintiffs.
Wal-Mart has not run any of the five independent pharmacies in Storm Lake
out of business. "Ever since they've moved in our business has gone
up," said pharmacist Tony Bedel, whose father opened the drive-in pharmacy
in 1955. "Once people figured out that they [Wal-Mart] don't do after-hours
prescriptions, they don't deliver and they don't let you charge, they came
back to us. If an independent pharmacy still keeps full service, it can
Wal-Mart apparently views its pharmacy as a loss-leader to get people into
the store to buy other products, Bedel said. "Wal-Mart's philosophy
is to take as much time as you can to fill the prescription so that they
can wander around and pick up other stuff while they are waiting. Maybe
you can save a nickel, but it takes you a half hour to fill a prescription
that we can fill in a minute and a half. And these people are sick, they
don't want to park a block and a half away and walk through the snow."
Bedel said some local hardware and variety stores have flourished in the
face of competition by emphasizing service. He added that Wal-Mart exaggerates
its community service. While his pharmacy donates thousands of dollars to
local churches and schools each year, he said, "If [Wal-Mart] gives
somebody a $100 check they want their picture in the paper."
"They come in extolling the virtues of Wal-Mart, and how they are good
for the community, but it turns out a lot of people who work there don't
get benefits and after they drive the competition out, then they start cutting
back on the service and people are cut back to part time."
Some communities have started to fight back to save their local downtowns.
At least 51 communities have rejected megastores or forced them to withdraw.
Many of these amounted to anti-Wal-Mart campaigns because that chain, with
2,265 stores and $93.6 billion in sales, has been most aggressive in targeting
small and middle-sized towns. But similar criticisms are raised against
other discount department stores such as Kmart and Target, membership warehouse
clubs, such as Sam's, Pace, Costco and Price Club, and "category killer"
stores such as Home Depot, Circuit City, Best Buy, Toys 'R' Us, Office Depot,
Sports Authority and others. Sarah Anderson, in the Progressive of November
1994, noted that local campaigns against chain stores generally fall within
five areas of concern:
Sprawl Mart: The chains usually build along a highway outside town to take
advantage of cheap, often unzoned land. This usually attracts additional
commercial development, forcing the community to extend service (telephone
and power lines, water and sewage services, and so forth) to that area,
despite sufficient existing infrastructure downtown.
The chains channel resources out of a community: Studies have shown that
a dollar spent on a local business has four or five times the economic spin-off
of a dollar spent at Wal-Mart, since a large share of Wal-Mart's profit
returns to its Arkansas headquarters or is pumped into national advertising
The chains kill jobs in locally owned stores: A Wal-Mart funded community
impact study debunked the retailer's claim that it would create a lot of
jobs in Greenfield, Mass. Although Wal-Mart had planned to hire 274 people
at its Greenfield store, the community could expect to gain only eight net
jobs, because of projected losses at other businesses that would have to
compete with Wal-Mart.
Citizen Chain? In at least one town -- Hearne, Texas -- Wal-Mart destroyed
its Main Street competitors and then deserted the town in search of higher
returns elsewhere. Unable to attract new businesses to the devastated Main
Street, local residents have no choice but to drive long distances to buy
One-stop shopping culture: In Greenfield, where citizens voted to keep
Wal-Mart out, Al Norman, who managed the campaign opposing Wal-Mart, said
he saw a resurgence of appreciation for Main Street. "People realized
there's one thing you can't buy at Wal-Mart, and that's small-town quality
of life," Norman explains. "This community decided it was not
ready to die for a cheap pair of underwear."
Anderson's father recently turned over the family-owned clothing store in
Litchfield, Minnesota, to her sisters. Litchfield, a town of 6,900 population,
60 miles west of Minneapolis, does not have a Wal-Mart, but the town is
losing business to four nearby Wal-Marts, each within 40 miles of town.
The closest is 20 miles away.
Over coffee at the Main Street Cafe, she wrote, local merchants placed as
much blame on cut-throat suppliers as Wal-Mart. "The big brand names,
especially, have no time anymore for small clients. Don Brock, who ran a
furniture store for thirty-three years before retiring in 1991, remembers
getting an honorary plaque from a manufacturer whose products he carried
for many years. 'Six months later I got a letter saying they were no longer
going to fill my orders.'
The psychology of discounts also hurts. Retired merchant Don Larson told
Anderson about a local resident who had driven 40 miles to get something
17 cents cheaper than he could buy it at the Litchfield lumber yard. Larson
said, "I pointed out that he had spent more on gas than he'd saved,
but he told me that 'it was a matter of principle.' I thought what about
the principle of supporting your community? People just don't think about
The town also is threatened by state plans to reroute the state highway,
which now runs through town. "Bypasses are also magnets for Wal-Mart
and other discounters attracted to the large, cheap and often unzoned sites
along the bypass," she wrote. The state transportation department has
shelved the plans, but no such highway project is ever truly dead.
Al Norman of Greenfield, Mass., started fighting what he calls the "box
stores" three years ago when Wal-Mart tried to move into his town about
90 miles west of Boston. He works full-time as a lobbyist for home health
care but he also consults with opposition campaigns and publishes a newsletter
called Sprawl-Busters Alert. He is trying to develop a national network
to fight the "big boxes" and the "category killers."
[Call 617-350-0990 or check the Internet at
"The first and most important thing to know is that these are very
local fights. Zoning is one of the few areas of local control that are left
to communities. People feel powerless at the federal and state level but
they can still have an impact at the zoning board," Norman said.
The coalition usually is a rag-tag group that is concerned about the quality
of the community and includes everybody from individuals and small businessmen
to environmentalists and citizen activists who come together because they
don't like the idea of a big store coming to town.
"I call them accidental activists because these aren't people who have
an intention of stopping anything until they find something at their front
door." He added, "It's not necessarily ad hoc, because after the
campaign they may notice some other things they hadn't seen before. Frequently
that leads to people wanting to run for office, once they get a taste for
politics. It's a real empowering thing, even if they don't win the battle."
One way to stop the big boxes is to put a cap on the size of buildings in
town. "A limit of 40,000 square feet, period, would do it," he
said. Another way is to create a growth boundary and prohibit retail activity
outside it. As long as the action is not arbitrary or capricious, it should
stand up to a court challenge, he said.
There is never a final victory, he added. "They [the developers] tend
to come back. They may come back two or three times, so you need to tighten
up your zoning regulation and keep an eye on the zoning board." He
added, "We defeated Wal-Mart, but we got BJ's Warehouse Club, because
the zoning board practices what I call the "Alice's Restaurant"
philosophy, that you can get anything you want."
Developers increasingly are taking the fight back to the people. This past
November Wal-Mart narrowly won a ballot question to allow a parcel of land
to be rezoned in the wine country of Windsor, Calif., after the planning
commission voted against the project. With a final vote of 3,834 for rezoning
(51.2%) and 3,659 against rezoning (48.8%), the $100,000 Wal-Mart spent
amounted to roughly $26 per vote to push its way into Windsor, the Sprawl-Busters
Alert noted. (Home Depot also is interested in that development.)
Anti-sprawl forces beat a developer in Tallmadge, Ohio, who proposed to
add 401,000 square feet of new commercial space, including a Wal-Mart, to
a community already saturated with malls. The developer didn't even try
the local zoning board, hiring a firm to gather signatures for a petition
to put the rezoning issue on the ballot. "Zoning initiatives ... are
very common," the developer told reporters, "and rapidly becoming
the preferred approach on rezoning matters." But local voters, mindful
of their goal of retaining the town's residential character, voted 77% against
"In his autobiography, Sam Walton said that if Wal-Mart's presence
created a fuss, 'I encourage us to walk away from this kind of trouble,
because there are just too many other good towns out there who do want us.'
" the Alert noted. "Wal-Mart no longer walks away from a community.
Today big box retailers are pushing their way into hostile territory, like
retail colonizers, trying to use the ballot box to bypass what DDR [the
developer in Ohio] called 'the long and protracted administrative process'
known as zoning. But there are many good towns out there that don't want
them. We should ask ourselves: What kind of a company would even enter a
town on the heels of a 49% vote against them?
Still, Wal-Mart has announced plans to open 185 new stores worldwide this
year, including 100 supercenters, which include groceries, in the United
States. "Even though Wal-Mart has admitted America has too many shopping
centers, they plan to add another 20 million square feet," according
to the Sprawl-Busters Alert.
Ultimately, people have to decide that small-town life and small businesses
are worth preserving, in the face of the conventional wisdom that small
towns and small businesses are things of the past.
"Nobody cares what happens as a result of big business taking over,"
Gales said. "Most people in the cities rarely shop at small businesses.
They don't care if their dry cleaner goes out of business. They'll just
find another dry cleaner. They don't know where their food comes from, or
they don't care," she said. "But we have to decide, do we want
family owned businesses, where people make a good living for their family
and are part of the community, or do we want the minimum wage jobs at Wal-Mart,
where the money is going out of the community? In order to help mom and
pop, the law will have to be values-oriented."
Gales now lives outside Bode, population 500, but does most of her shopping
20 miles away in Algona, whose population is approximately 8,000. Algona
has no Wal-Mart, but a local Kmart has contributed to the closure of at
least one longtime local variety store that already had been weakened by
the protracted farm crisis of the 1980s.
She grew up in Chicago and never considered the value of small businesses
until she moved to the hog farm, which has its own competition with corporate
farming. Now, with two children and another on the way, she appreciates
the sense of community values. "I just wasn't aware of small-town issues
and I wasn't aware of how most of the world lives. People in the cities
have no clue of what goes on out in the country. I value small-town life
a lot more, and people in the cities are crazy to think it doesn't matter
what lives between Chicago and New York."
Maybe as more people are downsized out of their own jobs, or as their friends
and neighbors lose their jobs, she said, they will consider the cost of
ignoring small businesses. "There are people who feel strongly about
buying products made in America, and you don't see foreign cars around here,
but these people are being victimized by the non-loyalty of others."
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