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Category Killers’ Concerns: Overgrowth and Extinction

NEW YORK — Could category killers go the way of department stores and become the next retail dinosaurs?<BR><BR>It’s a premise that seems premature, considering the viability of Best Buy and PetsMart. But Toys ’R’ Us is fading...

NEW YORK — Could category killers go the way of department stores and become the next retail dinosaurs?

It’s a premise that seems premature, considering the viability of Best Buy and PetsMart. But Toys ’R’ Us is fading fast, Wal-Mart and warehouse clubs are stealing market share, and even the most successful of category killers, such as Home Depot and Barnes & Noble, are getting overgrown.

That’s the portrait painted by retail journalist Robert Spector in his latest book, “Category Killers: The Retail Revolution and Its Impact on Consumer Culture” (Harvard Business School Press). “Ultimately, you will have only two big players in each category. It’s becoming a mano a mano game,” said Spector in an interview.

The book provides a comprehensive history from the rise of the category-killer phenomenon in the Seventies, to an outlook on a future rife with uncertainty, and the controversy, cultural implications and shopping innovations brought on by the sector, notably “the grand age” of everyday low pricing and self-checkouts, which are still experimental. “The theory is that it frees up [workers] to be able to give advice or help move things. It’s interesting to see how much consumers really respond to self-checkout. It isn’t any faster. It’s more of a psychological thing,” he said.

Category killers now blend into the retail landscape as much as malls and parking lots, though Spector chronicles much of the community backlash that dogged their ascension. He cites sources condemning category killers as “cut-rate competitors” ruled by “soulless corporations” and destroyers of mom-and-pop businesses and free enterprise. He also invokes the late Louisiana governor Huey Long, who once said he’d rather his state be inhabited by thieves and gangsters than chain-store operators.

Spector himself takes a “very agnostic view” on category killers. “If consumers didn’t like them, they wouldn’t shop them. I don’t see them as good or bad. I see them as a reflection of the marketplace,” he said in the interview.

Category killers are entrenched, though a robust future isn’t guaranteed. As Spector writes in the book: “How are category killers going to find and keep good people by paying them a living wage at the same time that they are selling products at low margin, everyday low prices?” 

This story first appeared in the January 6, 2005 issue of WWD.  Subscribe Today.

Finding employees who are motivated; finding locations that don’t cannibalize existing stores; the Wal-Mart factor, and figuring out growth vehicles other than just opening more stores, are the biggest challenges, Spector said. “Growth is the paramount concern. As these chains go up against bigger and bigger numbers, and try to find places to open new stores, they get hit in the face with trying to get enough people who want to give some semblance of service, are motivated, and want to have a career with the company.” 

It’s as if certain chains intentionally expand with the knowledge that cannibalization will occur, Spector suggested. “Starbucks does that all the time,” by opening stores, sometimes as close as a block apart. “Home Depot and Barnes & Noble understand they are going to cannibalize themselves. It’s a matter of knowing that if they don’t get that space, then a competitor is going to grab the turf instead. With Lowes and Home Depot, and Barnes & Noble and Borders, it’s a little dance that they do.”

It’s not all about growth by grabbing real estate. “Home Depot started out as a do-it-yourself business, selling hammers, nails and drills,” Spector noted. “Now they also sell refrigerators and stoves and have a home decorating business….Home Depot and Lowes are taking away share from Sears’ home appliance business, which is still important but doesn’t have the same overwhelming share it used to have.”

In the future, “I think there will be different kinds of category killers. Some will morph into other things,” and get even more specialized, like The Container Store. Spector also believes that pet supplies could be a bigger player in the sector. However, “Most of the basic categories have already been covered. I can’t think of one that has not had a  dominant [retail] player.”

Spector said he likes how Staples has gone from being “all over the place in terms of products and who they were aiming for,” to becoming “a lot sharper in their inventory and geared for people who have home offices.” He also commended Staples, as well as Best Buy, for excellent signage, good layouts and knowledgeable salespeople, and “concentrating on the shopping experience.”

Of the three major office supply chains, Staples, OfficeMax and Office Depot, “only two will be left. Probably OfficeMax will go.”

Most category killers have just about peaked,” Spector observed. “Certainly, Barnes & Noble and Borders are not seeing the kind of growth that Wall Street wants out of them. All of these concepts are starting to reach their upper limits. They’re looking for ways to make profit beyond just opening stores,” including providing new categories and private label offerings, such as Barnes & Noble publishing its own line of classics.

“There is no future for Toys ’R’ Us,” Spector said. “The problem is that they are not set up to compete on a year-round basis with Wal-Mart or Target. The toy business is driven by the hot new toy. If there is no hot new toy, there isn’t a whole lot to bring people in. Toys ’R’ Us is trying to be a low-cost retailer, but you can’t on a consistent basis duel with Wal-Mart on price.” To survive, “Toys ’R’ Us would have to change its entire way of doing business. It was the original category killer. All the others really were inspired by Toys ’R’ Us. It’s about providing lots of inventory, big selection, not fancy stores, sharp pricing, and get people in and out and on their way.”

Moreover, “A lot of these category killers follow the original Toy ’R’ Us. They’re not fancy, not particularly inviting and just have a lot of stuff selling at a low price. The category killer is coming close to the close of its era, just as people feel the same way about department stores,” said Spector.