Catch-22

Already squeezed on all sides by a weak economy, the slowdown inconsumer spending, and the rising costs of health insurance andother services, small retailers face another challenge. Themegastores--Sam's Club, Target, Wal-Mart and others--thatcompete with small retailers have increasingly becomeentrepreneurs' main suppliers, putting many small storescompletely under the thumb of the giants.

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