Catch-22

Already squeezed on all sides by a weak economy, the slowdown in consumer spending, and the rising costs of health insurance and other services, small retailers face another challenge. The megastores--Sam's Club, Target, Wal-Mart and others--that compete with small retailers have increasingly become entrepreneurs' main suppliers, putting many small stores completely under the thumb of the giants.

Entrepreneurs like convenience store owners have always sourced some products from larger stores. "Small shops used to get some of their goods from Sears in the 1930s. The owner would buy items, send his aunt and uncle in to buy more items and resell them at his store," says Eugene Fram, a marketing professor at the Rochester Institute of Technology in Rochester, New York. Recently, the trend has become more pronounced, as megastores have targeted small-business clients and used economies of scale to undercut wholesalers that historically supplied small companies. At the same time, major suppliers have required small companies to place minimum orders, pushing even more entrepreneurs into the arms of megastores. Gabriel Vega, owner of The Name of the Game, a toy store in Camarillo, California, can't afford to spend $5,000 at one time-the minimum order major toy companies often require. So Vega buys toys at local megastores and resells them in his shop.

Some small retailers worry that sourcing from large companies will put the giants, who are expanding their market share, in an unassailable position. But for others, the megastores provide the best solution to a tough problem. And those who aren't comfortable with the big-box retailers have another option: "There are still small suppliers who don't insist on minimums and who can't supply a superstore because they can't handle the volumes and just-in-time delivery," says Fram. These suppliers will offer good deals to entrepreneurs.