LiL' Things, big problems

Why no one is winning the battle of the baby superstores

LiL' Things' hoped to suck in parents of children under 6 and turn them into loyal customers. Those parents, the theory went, were still dictating what children would buy. (Unlike in the later years when elders, it is assumed, blindly purchase whatever their kids want. How else could one explain the Tamagotchi phenomenon?)

According to the plan, LiL' Things would offer the prices of a Wal-Mart and the variety of a higher-quality department store, including its own label of children's clothes.

A wide selection was key to the stores. In each shop, Steagall supplied customers with a choice of some 60 cribs, 40 strollers, 50 car seats, and 700 feeding and safety products. The aisles were extra wide so Mom and Dad could give Junior a wide berth and still keep an eye on him. There were also the LiL' Things' haircuts and photographic portraits--frills not available at a discounter like Toys R Us.

The store's one-stop-shopping concept caught on with moms. "The attraction," recalls Tracey Houlditch, a Plano mother of a 6-year-old who shopped at the store in her town several times, "was it was all under one roof. It was convenient." Houlditch recalls being able to find Diaper Genies, Duplo blocks for her son, and PlaySkool toys.

To test his ideas, Steagall tapped what he called a "council of moms." On the advisory board was Sherry Richardson Pate, a mother who, at the time, was overseeing investments for the H. Ross Perot family. She had bought a stake in LiL' Things for the pint-sized computer service magnate--a fact that LiL' Things didn't keep a secret and that probably encouraged others to pony up some cash. Among the suggestions the moms offered and Steagall adopted were Saturday home deliveries, a policy designed to accommodate working parents.

"He had thought it out pretty well," says George Michael, the founder of NBRK, the advertising firm LiL' Things hired. Steagall won approval from his investors, led by Phillips and Smith, and acquired $14 million in financing to open 13 stores.

But despite the careful considerations of Steagall and his backers, much of the planning became moot in fall 1993 when the LiL' Things team prepared to open its first store in Town East Mall in Mesquite and discovered it would have an unwelcome--and wholly unexpected--neighbor.

Steagall had selected the site because his demographic studies indicated that the area housed the greatest number of families with children under 6. But just a few weeks before the store opened, Steagall's team learned from commercial real estate contacts that Baby Superstores, at the time a small regional chain of children's goods stores based in Greenville, South Carolina, intended to open shop literally across the street. Not only was the rival several thousand square feet bigger than LiL' Things, but it was set to open on the very same day.

Steagall had known Baby Superstores existed, but hadn't regarded them as a direct competitor. Until then, the chain had operated much smaller stores and made no noises about expanding in the Southwest.

In hindsight, the LiL' Things team had vastly underestimated Jack Tate, an idiosyncratic Harvard-trained lawyer who owned the rival company. The Baby Superstores founder not only opened in Mesquite, but in what advertiser Michael describes as the closest thing to ruinous competition he's heard about since his college economics courses--where such a destructive rivalry is defined as one in which a big chain puts a mom-and-pop store out of business with deep, profit-gouging discounts---Tate started stores in more than half the markets where LiL' Things opened. His stores were not always across the street, but were usually nearby. In Plano, Tate's store was on Preston Road, while the LiL' Things outlet is located on the east side of town.

The rivalry pitted the chains against each other in a continual price war. Steagall could no longer fashion his chain as a big boutique for mother; he had to fight a discount battle--always on price points. "Anybody that was a bargain shopper knew they could get it cheaper somewhere else--just cross the street," says a mom who frequented the Mesquite store.

Tate, whose profits showed that he was thriving amidst the competition, seemed to relish the fight. "We think their site work was very intelligently done, and we agree with Mr. Steagall," Tate told The Dallas Morning News--tongue in cheek--the week the two rival Mesquite stores opened.

Steagall, for his part, viewed Tate as a menace.
"It wasn't something we could anticipate," Steagall says. "Logically, it couldn't have happened. He was operating irrationally." Venture capitalist Smith agrees. She says Tate "ruined the market for everybody. It affected the whole economic model. It reduced gross margins."

Steagall and Tate met once. A few weeks after the Mesquite stores opened, the LiL' Things founder decided to amble across the street and check out the competition himself. To his surprise, Tate stood at the doorway to greet him. "He saw me, and I guess he recognized me," says Steagall, who recalls his rival saying with a smirk, "Welcome to my store. If you want to copy down prices, no problem."

Now a millionaire many times over, the 53-year-old Tate has a reputation as an oddball. In a story about lifestyles of the wealthy, USA Today reported in June that Tate, since selling his chain, has re-entered college, studying Spanish and piano. When he started Baby Superstores, he got some notices in the press for his quirkiness--Tate bragged about his barebones staff and nonexistent office. According to USA Today, Tate lives in a $725-a-month apartment and shuns his $1.5 million mountain estate.

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