GRASS-ROOTS BUSINESS

Helping the Little Guy Fight the Big Guy

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LONG BEACH, Calif. -- For two decades, Michael Sheldrake was the coffee king of Second Street here. With virtually no competition within 20 miles, his Polly's Gourmet Coffee dominated the market in the affluent Belmont Shores section of the city.

	Kim Kulish for The New York Times
	Bob Phibbs, left, who helps independent businesses cope with chain-store competitors, talks with Michael Sheldrake of Polly's Gourmet Coffee.

But Sheldrake's idyll, like those of many other small-business owners, was disrupted by the coming of the "category killer" chains. In his case, he found himself up against arguably the most formidable mass retailer of this decade, Starbucks. Polly's sales fell 10 to 15 percent when a Starbucks store appeared a few blocks away in Long Beach in 1994. And in 1998, another Starbucks opened just 78 yards from Polly's.

"We were getting despondent," Sheldrake said. "We were just trying to hang on. We had a chain problem and didn't know what to do."

Perhaps no phenomenon has more profoundly transformed American Main Streets in the 1990's than the "chain problem." From tony Annapolis, Md., to the Melrose district of Hollywood to bohemian Harvard Square in Cambridge, Mass., retail streetscapes have been steadily homogenized as heavily marketed national chains have outgunned and displaced locally owned rivals, whose resources and organization generally pale in comparison with the likes of Starbucks.

But the way Polly's responded to the chain problem demonstrates that resistance is not futile. In a turn of events that suggests some hope for small-scale retailers, Polly's fought back, and has managed to grow and thrive even with two Starbucks in its neighborhood. Sales rose 40 percent in 1998 and are on a pace for a 30 percent rise this year.

With help from a retail consultant, Bob Phibbs, who specializes in helping independent businesses cope with chain-store competitors, Polly's decided to take aim at Starbucks in two ways: beating the chain at its own game by operating even more efficiently, and exploiting the inherent vulnerability of many chains: "The problem with a chain is that it's like a mall: it's all mechanical, and there's no relationship with the customers," said Phibbs, 41, whose other clients have included independent hotels and pet stores. "I think people are getting sick of the megastores. People are disaffected."

In the case of Polly's, Phibbs advised the company to stress the fact that the store roasts its own coffee on site, which is impractical for a sprawling chain like Starbucks, and to emphasize the wider variety of coffees Polly's offers.

Starbucks, considered trendy by many of its customers, was derided in Polly's local advertising as a mere purveyor of "ordinary" coffee.

But Polly's resurgence was built on more than positioning. Phibbs urged the store's management to adopt the chains' best organizational and management ideas, like putting an end to a plethora of special arrangements between employees and longtime customers for free or cut-rate services and tightening cash management procedures. Employees attended mandatory classes to improve their sales skills.

"The advantages of the chains are their procedures and administration," Phibbs said. "If an independent doesn't learn how to be just as efficient, they're going to be dead, fast."

Many retail experts say the chains' organizational advantages and economies of scale will eventually overwhelm most independent businesses, even if a few, like Polly's, swim against the tide for a time. Yves Sistron, a principal at Global Retail Partners, a venture capital company based in Los Angeles that invests in aspiring chains, observed that mass retailers are continually invading once secure small-business preserves, even in areas like cosmetics, educational toys, watches, fruit juices and Chinese food.

To Sistron, who has invested in successful chains like Jamba Juice and P. F. Chang's China Bistros, it is only a matter of time before well-financed and managed chains gobble up just about everything on Main Street. "Who gets beat up?" he said. "The smaller independent stores, the mom-and-pops. I'm not saying it's not dreary. But it's true." In the future, he said, if shoppers want to find anything like a traditional Main Street, "it's going to be Main Street, Disneyland."

Certainly, the continuing success of Starbucks lends credence to Sistron's view. The company's sales at stores open at least a year were 8 percent higher in September than they were in September 1998, and it has bought out one smaller competitor after another; it now has 2,500 stores, up from just 11 a decade ago. Starbucks' chief executive, Howard Schultz, has spoken of growing to 20,000 outlets, rivaling McDonald's 25,000 stores for sheer ubiquity.    ET it is Starbucks's concentration on growth, Phibbs said, that gives companies like Polly's their opportunity. The bigger Starbucks gets, he said, and the further afield it goes, the more trouble it will have maintaining consistent high quality in its products and in customer service.

The chain's expansion into other kinds of drinks, including sweetened iced coffees, and Schultz's Internet ambitions to turn the Starbucks Web site into a dominant "premier life style portal" have not yet excited much enthusiasm on Wall Street, where analysts are concerned about a perceived lack of focus. Translated into Main Street terms, Phibbs said, Starbucks risks squandering its cachet as an upscale coffee house. "Starbucks is not a coffee business any more," Phibbs said. "It's a drinks business -- a McDonald's of the 1990's."

Starbucks doesn't see itself as Goliath to the independents' David. It says it doesn't look at competition on a neighborhood-by-neighborhood basis. "We couldn't be happier that this guy is doing great business," Arthur Rubinfeld, Starbucks' senior vice president for store development, said of Sheldrake and Polly's, because it enlarges the market for everyone: "More people are on the street looking for a coffee experience, and the higher end coffee ends up doing better." But he took issue with the claim that in-store roasting give Polly's a quality advantage over Starbucks. "It's not relevant in this day and age. We source and roast the best quality beans," he said.

Still, for entrepreneurs like Sheldrake, any weakness that might appear in the strategic focus of a powerful chain represents a chance to survive and thrive.

But given the chains' marketing muscle, Sheldrake said, he knows that independents like Polly's can never afford to backslide or become lazy.

"A small business can stand up to a chain," Sheldrake said. "But you can only do it if you have procedures as good as theirs -- and better coffee, too."