Big box panic: Americans have been afraid of chain stores for nearly a century, but independent outlets keep thriving.

• Author: Moynihan, Michael C.

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ON THE CORNER of Newbury Street and Massachusetts Avenue in Boston sits one of the famed architect Frank Gehry's least inspired creations. "360 Newbury" is a big box of a building--appropriate considering that its first three floors have long housed big-box record stores-famous only as Gehry's sole multi-tenant office building in the U.S. But for the third time in 10 years, its retail space sits vacant. Its last tenant, the British-owned music giant Virgin Megastore, broke its lease in 2006 after four unprofitable years hawking CDs and DVDs to local college students. A company spokesman promised "to seek an alternative location in Boston." It has yet to do so.

Virgin snapped up the space in 2002, when the failing music retailer Tower Records vacated the building ahead of its long, protracted descent into bankruptcy. Back in 1987, when Tower Records launched its single largest megastore in the Gehry building, the future of Boston's independent record store business looked grim. Vinyl merchants and industry experts predicted that most independent retailers would feel the pinch of the big box; megastores like Tower would have more stock on hand and, it was presumed, would offer significantly discounted prices. The three-story Tower Records &Video would pose a direct challenge to small, local stores like Newbury Comics, a comic book merchant turned record shop specializing in independent music, hard-to-find imports, and 7-inch records by local bands. To make matters worse, the new Tower store would be situated on the very same block as Newbury Comics.

But it wasn't just the specter of Tower that frightened small retailers like Newbury Comics. The music business was experiencing rapid growth in compact disc sales, and chain stores were expected to become the dominant players. Giants like Recordtown, Strawberries, Coconuts, Musicland, and Sam Goody--most of whom have now either disappeared or seen influence decline--would come to dominate the industry, The Boston Globe predicted. Among independent stores, the Globe wrote, a "panic" was precipitating Tower's arrival. So ominous was the thought of a big box music store in Boston that The New York Times covered the store's opening, suggesting that the independents might as well throw in the towel, since Tower "has virtually no competition in its league."

At the time, Newbury Comics co-owner Michael Dreese told the Globe that he too was "worried" and that when all the chains had settled in--the British giant HMV would soon open a megastore across the river in Cambridge and another in Boston's Downtown Crossing shopping district--"there is going to be blood all over the place." It would, presumably, be the blood of the independents. The Times spoke in the past tense, suggesting that the indies' demise was a foregone conclusion. "On the block where a punk-rock record store, Newbury Comics, once held sway;' the Times sighed, "a new Tower Records sells that kind as well as more mundane music and a wide assortment of videotapes. "The store would stock, a spokesman said, "60,000 cassettes and close to 50,000 CDS," versus the typical average of "12,000 CDs and 13,000 cassettes." Who could compete with that?

Well, Newbury Comics, for starters. "We had a huge competitive advantage knowing the local market" Dreese now says. Today Dreese and his partner, both MIT dropouts, preside over a mini-chain of their own, with 27 stores in five states, while HMV, Tower, and Virgin are all distant memories in New England. As the market changed, centrally controlled operations such as the Los Angeles-based Tower proved vulnerable to smaller, more localized competition. "Virgin and Tower were exceptionally poorly managed and made poor use of technology" he says. "Combine that with Virgin and HMV's very British arrogance when they entered the market."

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As the chains floundered in the face of declining music sales, Newbury Comics nimbly altered its business model without abandoning its core constituency of indie music fans. Today, compact disc sales account for just below 50 percent of Newbury Comics' revenue. DVDs are approximately 20 to 25 percent, and pop culture and sports tschotchkes--Boston Red Sox caps, Ozzy Osbourne action figures--cover the rest. Hiring a platoon of tattooed hipsters added an extra patina of authenticity to the shopping experience-0something Virgin, HMV, and Tower didn't offer.

According to Dreese, who spent much of his youth in London hanging around the original Virgin Record Shop's lunch counter, Newbury Comics challenged the big boxes by liberally borrowing from the big-box business model, making aggressive use of "loss leader" merchandise (pricing items below cost to entice customers into the shop), competitive pricing, and a refined distribution system that used vast online databases. It moved into the Internet early, selling merchandise through both its own website and third-party Web stores such as Amazon and eBay. Dreese doesn't worry much about downloads (iTunes, he says, has helped his business), and, as he recently told Boston Magazine, his focus remains on how to "keep beating Wal-Mart."

The inability to adapt to local tastes and the failure to anticipate technological market shifts have been the Achilles heel of many big box retailers. When Wal-Mart was forced to shutter its vast network of German stores, a mystified company spokesman told a reporter: "We thought everyone around the world loved Wal-Mart." (The International Herald Tribune quoted a baffled Wal-Mart shopper in South Korea, where the company has also abandoned operations, wondering, "Why would you buy a box of shampoo bottles?")The chain had made the mistake of assuming that full-spectrum retail dominance is achieved by virtue of size alone, without regard to cultural and regional difference.

That error is common not just among chains but among their critics. Market leaders do not always react in a timely and profitable...