The Problem With Retail

My sister wants to open a small retail store in the "coffee-house" area of Louisville. While I always try to encourage people who want to start their own business, I think retail is a tough way to go. First of all, to be in a good location you will have high rent costs. Secondly, your cash flow suffers because you have money tied up in inventory (although she has thought of that, and there are agreements that can lessen that impact). But the biggest problem is that if you are successful, your model is easy to copy. Just look at what has happened to Kohl's.

Kohl's has increased sales 23% annually over the past decade by successfully straddling the area between discounters and department stores. The company cleverly siphoned off department store customers by offering some of its best selling wares–towels, linens, housewares, blue jeans and casual shoes at better prices. But now, its chief executive faces growing challenges as the retailer grapples with a midlife crisis.

Kohl's (nyse: KSS – news – people ) stores feature a racetrack format, shopping carts and centralized checkouts, much like a discounter, but at a fraction of the square footage. Shoppers loved the idea of parking close to the store and quickly clipping through the aisles. Average visit: 44 minutes compared to 1.25 hours at the typical department store trip.

But after years of watching Kohl's steal customers, department stores have wised up. They are fighting back with improved merchandising, well-edited assortments and even new store formats patterned after Kohl's small-box design. Despite its challenges, Kohl's is the only brick-and-mortar retailer on our list of the 25 Fastest Growing Big Companies.

In business you need some sort of competitive advantage. I think retail is a tough industry in which to find and defend a niche.

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