'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 predict."

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 make it."

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 campaigns.

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 basic goods.

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 that, though"

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 for information.]

"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 the development.

"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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