Enterprise Big Business Success Lurks in Small Towns

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Many entrepreneurs dream of striking it rich in the big city--or at least in the big markets. But small towns are typically underserved, and many offer a friendlier environment for a small business.

Hey, city slicker, maybe you should take your business idea and head for a small town. And if you're an aspiring entrepreneur already living in a rural or exurban area, you might want to stay put and start your business right there.

Focusing on smaller markets worked for Sam M. Walton. Free of intense competition from big-city retailers Sears, Roebuck & Co. and Kmart Corp., his Wal-Mart Stores Inc., Bentonville, Ark., was able to rapidly develop a low-cost model that turned it into the world's biggest and most successful retailer.

And it worked for International Dairy Queen Inc. -- a post-World War II boom story out of Kankakee, Ill., that mostly bypassed cities in favor of the boonies. "We don't have any in Manhattan," Dairy Queen spokesman Dean Peters says of the 5,900-outlet chain, which is now a Minneapolis-based unit of Berkshire Hathaway Inc. "Rural areas -- that's where we made our mark."

Many entrepreneurs dream of striking it rich in the big city -- or at least in the big markets. But small towns are typically underserved, relative to urban areas, by retailers and other businesses. With less competition, there's less pressure to be cutting-edge and a wider margin of error for entrepreneurs. Real-estate costs and wages are lower, too.

In all, it can be a friendlier environment for a small business. Chambers of commerce, economic-development agencies, and municipal and state governments can all offer information on business conditions in their areas. Be wary, though. They're in the business of boosting their town or region. Ask not only about businesses that have opened in the area, but those that have closed as well.

You need to research the town just as you would the business you plan to start. Talk to local merchants and businesses already in a town. Bankers often know the local business community, and because their business involves managing the risk of lending, they may be willing to share discouraging information. For instance, has a major employer left town?

Common sense also applies, of course. So, if you're thinking of opening a late-night nightclub or a gourmet paté shop, a small town might not be the right place. And whatever geographic market you choose needs to have enough people in it to support your business.

But it may take fewer people than you think. Movie Gallery Inc., Dothan, Ala., operates 1,936 stores, many of them small and most of them in small towns, with populations as low as 3,000 people. The company is the nation's third largest movie-rental chain in terms of revenue, after No. 1 Blockbuster Inc., with about 8,500 stores, and No. 2 Hollywood Entertainment Corp., with about 1,800 outlets.

If you dwell in New York, Los Angeles, Chicago or most other big cities, chances are you've never heard of the chain. But small-town residents may spend quite a bit of time in Movie Gallery stores. "What we find is the per-capita consumption of movie rentals is higher in our markets," says J. Steven Roy, chief financial officer of Movie Gallery.

The chain competes mostly against mom-and-pop video stores. But the broader mix of entertainment in small towns is, well, not so broad. "High-school football. Dairy Queen. But not much else," Mr. Roy says.

Movie Gallery has smaller stores, somewhat narrower video selections and slightly lower prices than Blockbuster and Hollywood, Mr. Roy says. Some 165 of its stores are in Alabama and 66 in Arkansas. The chain opens its own stores and also buys up smaller chains to convert into Movie Gallery stores.

Last year, revenue rose 43% to $529 million. Net income rose 45% to $20.9 million, or 67 cents a diluted share, from $14.4 million, or 53 cents, a year earlier. Nearly all of that growth was due to acquisitions and new stores; sales at stores open a year or more rose 3.2%.

"We run across mom-and-pops who close up fairly soon after we enter a market. And we run into mom-and-pops who are viable competitors," Mr. Roy says. But only in one-third of the chain's markets does it run into a big outlet.

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