How This Small Town Retailer Thrived by Avoiding the Retail Goliaths

The mantra "bigger is better" isn't always right. Smaller players have managed to hold their ground against larger, national competitors despite the lack of scale. One example is Stage Stores (NYSE: SSI  ) , a leading small town retailer. In fact, there are striking similarities between Stage Stores' business model and that of other successful niche consumer companies such as Hibbett Sports (NASDAQ: HIBB  ) , The Fresh Market (NASDAQ: TFM  ) , and Carmike Cinemas (NASDAQ: CKEC  ) .

Small town monopolist with limited competition
Stage Stores calls itself "America's leading small town retailer," and it is truly deserving of this title. Two-thirds of its stores are located in towns with a population under 50,000; the same towns contribute about 60% of Stage Stores' revenue. Within the vicinity, Stage Stores is typically the only one offering brand name merchandise targeted at the entire family from parents to kids. The alternative for Stage Stores' customers is for them to drive out to regional malls that are typically more than 30 miles out, which is very inconvenient.

It is possible to draw parallels with Carmike Cinemas here, which touts itself as "America's Hometown Theatre." Carmike Cinemas operates in small- to mid-size non-urban markets where there are usually less than 10 theaters in each state. Furthermore, it has a better chance of obtaining blockbuster films because any movie is generally allocated to only one theater within a three to five mile film-licensing zone. Also, there are fewer competing forms of entertainment such as restaurants and major sporting events in these markets.

Both Stage Stores and Carmike Cinemas have thrived by avoiding crowded markets, where competition is far more intense than their current niche markets.

Feeding off big brother
In shopping malls, anchor tenants such as supermarkets are usually given preferential rental rates, as they help to draw in significant foot traffic. Similarly, Stage Stores enjoys a synergistic relationship with the big brother of retail, Wal-Mart. About 87% of its stores are located in strip shopping centers where Wal-Mart stores dominate. Interestingly, Hibbett Sports also has a high proportion of its store base (79%) in strip shopping centers. In fact, there is an average ratio of one Hibbett Sports store for every three Wal-Mart stores in the states that Hibbett Sports operates.  

More importantly, Stage Stores intentionally stocks up on branded merchandise that isn't found at either Wal-Mart or any of its competitors in the vicinity. As a result, Stage Stores feeds off Wal-Mart's foot traffic, with no worries of cannibalization. Along the same line, Hibbett Sports focuses on the localization of its apparel and footwear associated with the local community and sports events.

Small-store format
Stage Stores works with an average store format size of approximately 18,000 square feet, which is smaller than its department store peers. Interestingly, organic-food retailer The Fresh Market also prefers a small-box format, with an average store size of 21,000 square feet that makes its stores the smallest among peers such as Whole Foods Market and Sprouts Farmers Market.

A smaller store format means that it is easier to find suitable retail space, as more potential locations will meet the space requirements. Stage Stores opened 29 new stores in 2013, growing its net selling square footage by 3.8%. In 2014, it has set an ambitious target of 35 new stores and a 4% increase in net selling square footage. If achieved, this will mark the most significant square footage growth for Stage Stores since 2008. Similarly, The Fresh Market sees itself eventually expanding to more than 500 stores from its current 150-plus store footprint.

Foolish final thoughts
Stage Stores, like its fellow consumer peers, has achieved success by avoiding competitive markets, leveraging on traffic from anchor tenants, and expanding with smaller store formats. However, at January's Annual ICR XChange Conference, Stage Stores indicated that while it will continue its small town expansion strategy, it is also exploring the possibility of a larger store format in bigger cities. This is something that investors should monitor closely, as this may change the dynamics of its favorable small town retailer advantage.

Do any of these tiny retailers have what it takes to be the king of retail?
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  • Report this Comment On February 10, 2014, at 5:49 PM, 45ACPbullseye wrote:

    Hi Mark, interesting article. It made me want to look up SSI, and I was a bit surprised to see how poorly the stock has performed. They have reduced guidance, and Mr. Market does not seem to like that at all. (I felt your article was fairly upbeat about the small town, small footprint strategy). If the 2/3 of SSI stores in small markets are only generating 60% of sales -- SSI's larger market stores are actually outperforming -- it leads me to question SSI's retail strategy.

    The USPS will deliver packages to every rural address in the U.S. Online shopping is certainly more convenient than a 30 mile trip to a regional mall. I suspect Amazon is not "limited competition" and represents a threat that may be difficult for SSI to overcome. Best, Bill

  • Report this Comment On February 10, 2014, at 7:45 PM, DavidTheJust wrote:

    The problem with investing in a small-town strategy is that small towns tend to become big towns and then cities over time. The population of the U.S. has grown 60% over the last 20 years.

    A company like TFM can perhaps thrive in a more urban environment. It's smaller footprint opens up more opportunities in terms of real-estate and it operates at among the highest ROICs in the the supermarket space. But TFM isn't even a small town business right now. It can't just put stores in small towns it needs to put them in affluent small towns where people are willing to pay up for quality.

    So, while there is nothing wrong with investing in companies that are currently targeting small towns we would be wise to avoid those whose business model won't allow them to compete in urban areas. Like it or not, America is becoming more urban not less so and we should invest accordingly.

    BTW - I think TFM is a good value at current prices and just purchased some last week.

    Sincerely,

    David

    long TFM

  • Report this Comment On February 20, 2014, at 3:05 PM, kyrifles wrote:

    "I suspect Amazon is not "limited competition""

    For clothing?

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