What happens when a discount chain comes to town?

``It was devastating the first year,'' says Ken Warren, store manager at Aubuchon Hardware on Main Street in Derry, N.H. ``People would stop, roll down their windows, and yell: `Where's Wal-Mart?' ''

That was in the summer of 1992. But Mr. Warren has discovered that discounters are not invincible. ``We've bounced back,'' he says.

Aubuchon has risen to the Wal-Mart challenge by offering free home delivery, staying open longer, preassembling bicycles and lawnmowers, and increasing the variety of the product line.

The little hardware store, which is part of a New England chain, is using the right tactics, according to Iowa State University economics professor Kenneth Stone. He gives up to 100 seminars a year around the United States on how small businesses can compete against the discount giants.

Among his suggestions:

* Find holes in the discounter's merchandise mix. For example, discounters tend to be weak in athletic apparel and brand-name footwear. Drop items for which you can't compete and beef up other product lines.

* Longer hours. ``Would Wal-Mart make it by closing at 5:30 p.m.? If you're not willing to stay open extra hours, you're giving the mass merchandiser 40 percent of your business,'' Professor Stone says.

* Accept returns. Discounters have a very liberal return policy; local merchants often don't. ``Over a $5 item, you can lose a customer for life, and he'll bad-mouth your store to others,'' Stone says.

* Better service. Offer free delivery. Train staff on the products. ``Wal-Mart usually has nobody who can explain to you the difference between choosing one item over another,'' Stone says. ``Wal-Mart gives the impression of better service by having a `Greeter' at the front door. And each employee is taught to take you to an item, not to point at it. Local store employees sometimes get busy and don't even acknowledge the presence of a customer.''

* Sell for less. Local merchants often have better prices. ``The impression is the opposite because Wal-Mart is a master at variable pricing,'' Stone says. ``Out of 75,000 items, only around 500 to 600 are actually cheaper than the local competition. People wrongly assume that if the most visible items are less expensive, everything sells for less.''

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