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Go ahead, locate next to Wal-Mart -- as long as you can compete on price, selection

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You know the charge: Wal-Mart kills small businesses. If one of the retailing juggernaut's Supercenters moves into your town, the logic goes, all the mom-and-pop shops that have faithfully served residents for decades will soon have no choice but to shutter their businesses.

But it doesn't always work that way. In some cases it actually makes sense for businesses to locate next to a Wal-Mart. You may be able to entice some of those throngs of bargain-hunters to stop by your establishment and spend a few bucks. But before you consider this strategy, be sure you can compete head-on with the retailing Goliath on price or selection.

I recently wrote about how Goodwill Industries -- one of the top thrift stores in the country -- is locating more of its stores adjacent to Wal-Mart Stores, Inc. (NYSE: WMT). In fact, that has become standard practice in the state of Ohio apparently. Why? Goodwill explained that both it and Wal-Mart serve the same types of customers ( or "demographic" as they call it in retail-speak). Sounds like a smart strategy to me.

But what about other retailers? From what I have seen, Wal-Mart Supercenters are retail anchors almost everywhere they are built. You see Blockbuster Inc. (NYSE: BBI), RadioShack Corp. (NYSE: RSH), Dollar Tree Stores (NASDAQ: DLTR) and chain restaurants like McDonald's Corp (NYSE: MCD) and Wendy's International (NYSE: WEN) pop up right next to Wal-Mart Supercenters. Why? Seems simple -- to get the traffic Wal-Mart has in and out of its parking lot.

What do these retailers have in common? They all offer either products and services that Wal-Mart does not provide or much deeper selection. Let me give you a few examples: AutoZone Inc. (NYSE: AZO) carries many of the same products that Wal-Mart's automotive departments stock. But AutoZone goes quite a bit further into product selection and other items that differentiate it from Wal-Mart's automotive offerings. Can Wal-Mart match the office supply selection of Staples (NASDAQ: SPLS) or the health and beauty products from Bed, Bath & Beyond (NASDAQ: BBBY)? Nope.

Same goes for Blockbuster Video (even though Wal-Mart did test several DVD-renting offerings), and even Dollar Tree, which targets the same core demographic as Wal-Mart. Those are customers who shop based on one criteria above all else -- price. Even Wal-Mart can't compete with Dollar Tree's "$1 for everything" strategy despite the fact that much of the product selection is very similar if not identical in some categories. I think Wal-Mart's main suppliers would go out of business if the world's largest retailer started trying to compete with dollar stores, even in limited categories.

So, the moral of the story, you may ask? While neighbors of Wal-Mart are there to feed off of Wal-Mart traffic for the most part, they also can serve niches for customers that Wal-Mart simply can't provide. And some of us thought Wal-Mart sold just about everything!

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Last updated: November 09, 2009: 05:21 AM

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