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Whoever said location, location, location are the keys to successful retail business never considered the software trade.

In this industry, one factor must be added: store size.

The emergence of computer superstores, with loads of titles and lower prices, is threatening the role of small-space software retail chains, which once dominated the business.

"There's no question that the category killers or mass merchants are going to become significant players in the software industry," says Bruce Fredricksen, president of Channel Tactics, a market strategy company. "Today, if [a software marketer] can get into Sam's [Club] and the price point is correct, it's tantamount to a real victory."

In the 1980s, mall- and strip center-based retailers like Babbage's, Egghead Software and Software Etc. were the primary destinations for consumers looking for software.

With the emergence of retailers like CompUSA, ComputerLand Corp. and Tandy Corp.'s Computer City, the smaller, mall-based retailers have found formidable competition. Not only do these superstores offer hardware, they also have space for thousands of software titles.

"The term category killer is not an accidental term," says Jeffrey Tarter, editor and publisher of the industry newsletter Softletter. "The days of a small, undifferentiated store in a market are passed."

In addition, general-market mass merchandisers are making their mark in the field. Although chains like Wal-Mart Stores, its Sam's wholesale outlets and Price/Costco might have limited selection, they're able to capitalize on lower price points than the smaller software retailers, says Mr. Fredricksen.

These changes bode "significant" problems for smaller retailers, he says.

But there's still hope for them, mostly through smart, opportunistic merchandising.

"If they can keep themselves lean and mean," Mr. Fredricksen says of the smaller retailers, "I wouldn't predict their demise."

Mall-based chains, which sell both software and entertainment cartridges like Nintendo and Sega, traditionally have had location on their side.

Location in retail centers lets these outlets draw from mall browsers and shoppers and helps keep down the need to advertise.

But the chains have to make the most of that, sources say, and some have flunked marketing in the past.

The computer retail industry as a whole is "profoundly uncreative in how they spend their marketing dollars," says Mr. Tarter.

Aside from coaxing vendors to underwrite their marketing plans and promoting "cookie cutter" solutions, Mr. Tarter adds, "Their marketing budget consists of spending extraordinarily high rent."

For example, he says, a chain like Babbage's focuses on a mix of merchandising, store location and some consumer entertainment.

"All Babbage's has to do is create an interesting window display. You put a store like that in a shopping mall and you're going to attract a lot of business," Mr. Tarter says. (Babbage's declined to comment for this story.)

Some, though, do engage in traditional marketing.

Egghead Software, which last summer underwent a major corporate restructuring after a prosperous 1980s, has continued with its in-house produced direct mail catalog as its only advertising, says Peter Janssen, VP-merchandising and advertising.

To reverse falling profits, Egghead discontinued poor-selling titles, improved customer service and instituted a price cut that brought their prices more in line with their competitors, Mr. Janssen says.

The restructuring so far has been successful. The 190-store chain achieved 18% comparable store growth in the third quarter of 1993, Mr. Janssen says.

"Since we made that move, our business has been pretty good," he says.

The recent price cuts, which he characterized as being "at about our pain level," will have to do for a while, Mr. Janssen says. Lower prices will come only from manufacturer price cuts-which may occur with increasing competition among software publishers.

Also on the smaller outlets' side: limited growth options for the superstores, says Mr. Tarter. Many communities aren't large enough to support multiple superstores, which need a large population base within reasonable driving distance.

"Those combinations don't work in smaller or geographically diverse areas," says Mr. Tarter. "There are still niches [for the smaller stores]."

The market will continue to change even more dramatically in the coming years with the anticipated move from floppy disks to CD-ROM, says Mr. Fredricksen.

Competition also will arise from a company on the horizon: Blockbuster Entertainment Corp. The movie rental giant in February opened six video-game rental and sales test stores in the Southeast and some anticipate it will move into PC software in the future.

From Blockbuster to superstores, current and future markets remain a challenge for the chains. Seymour Merrin, a computer retailing consultant, predicts superstores' share of PC goods sales will grow from 8.4% in 1993 to 22% in 1996.

"It becomes a question of where do you go to buy your computer software," says Mr. Janssen. "The competition will become more ubiquitous and those lines will continue to blur."

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