The biggest challenge facing small retail outlets in the U.S. is “competing against Wal-Mart.” At least, that’s what a colleague said at lunch today.

He recently left a position as head of marketing for a distributor of specialty dry goods and craft supplies for small retailers. In that role he’d spent a large portion of his time identifying which locations had nearby Wal-Mart stores, analyzing and comparing the product lines carried by Wal-Mart, and then determining the product mix most likely to sell successfully.

Offering a larger selection, and carrying unusual or higher quality products, were key ways his retailers competed against the big guys.

Andrea Learned, in her Learned on Women blog, has a piece that echoes this refrain. She points out that Wal-Mart is taking an ever-growing share of the grocery market away from supermarkets. But the Wal-Marts of the world fall down in the area of customer experience. They can’t match the warmth, the niche focus, the customer service of smaller local retailers.

– So while the headlines scream that Wal-Mart is driving small retailers out of business, I think the less obvious — but equally important — story is the way Wal-Mart is forcing a change in the nature of small business retailing.

The smart small retailers know they can’t beat Wal-Mart at Wal-Mart’s game. So they change the game. Increasingly small retailers are becoming niche-focused. They strive to create a memorable, pleasurable experience for the customer. They offer levels of personalized service that the Wal-Marts simply can’t match.

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