The swift emergence and dominance of international superstores in Thailand over the past several years has virtually swept mom-and-pop shops out to sea.

This alarming trend finally prompted the Commerce Ministry to put its foot down and order superstores immediately to halt further business expansion until it had a chance to study how to protect local retailers and define a fair-market environment.

But as the ministry contemplates an appropriate policy, it must recognise the need to stimulate competition and support progress and not fall victim to preserving the past for sentimental reasons. In the process, local merchants must learn to adapt, by providing consumers with differentiated benefits and services that cannot be duplicated by their juggernaut competitors.

In the early 1990s, Thailand was besieged by international superstores like Tesco Lotus and Carrefour. These retailers brought with them business models, technologies and supply-chain know-how that enabled them to offer Thai consumers extraordinary value in the form of vast choice and cost savings. The market was receptive, and many of these retailers experienced strong growth throughout that period.

Within a few short years, these superstores began carving chunks of market share from local retailers. In response, the government enacted laws preventing them from opening their superstore format in urban locations, thus protecting smaller local competitors. With this umbrella of protection, these retailers felt less sense of urgency to redefine and differentiate themselves.

But clever superstores improvised their giant-store format with smaller variations that fell within city zoning ordinances. For example, Tesco Lotus introduced Tesco Lotus Express, its 300-square-metre outlets. These smaller formats - similar to the ubiquitous 7-Eleven convenience stores - stock the right products and provide an attractive shopping environment. They have quickly gained acceptance among urban consumers, demonstrating the power of international retailing brands.

To counter superstores, successful local retailers knew they had to provide consumers with more than just a low price. The challenge was defining a profitable niche and defending it. Witness the case study of one local Thai retailer, Villa Supermarket. Its owner, Surapong Poosanakhom, started his business in 1974. Over the years, international retailers have tried to expand and steal his customers by offering volume discounts, but Surapong has maintained steady growth.

By carefully defining his customer segment - upscale Thais and expatriates - adapting his merchandise and providing high levels of service, Surapong differentiated Villa Supermarket as a place people could purchase "hard-to-find items".

While Surapong's prices may not be as competitive as the superstores, he knows his loyal customers are willing to pay a slight premium for the right products and fast service. Even today, Surapong's strategy continues to work. Within the next six months, he will open three more stores - two in Bangkok and his first Villa Supermarket in Phuket.

Failure to differentiate based on consumer needs has tripped up even the most successful retailers. Take, for example, Wal-Mart's experiences in Germany and South Korea. In both instances, Wal-Mart tried unsuccessfully to apply its retailing low-price and hands-on service formula.

In Germany, where consumers are foremost concerned with price, Wal-Mart stumbled when it tried to introduce certain service standards that were successful in other parts of the world. For instance, German consumers found it odd that Wal-Mart employees bagged their groceries as they checked out. Paying extra for a service they did not need did not make sense.

Consumers' alternative was to seek even lower prices with local retailers, who did not add unnecessary service bells and whistles.

In South Korea, Wal-Mart also failed to adapt to local consumer needs. Its standard category of drink and food selections, for example, was never in tune with what consumers there preferred.

Mitigating local retailers' problems here in Thailand by halting the expansion of international superstores will offer only a temporary solution. Until local retailers differentiate themselves by targeting specific consumer niches and providing them with exactly what they want, they will be fighting an uphill battle.

nLarry Chao is managing director of the Chao Group Ltd, an international organisational-change training and consultancy located in New York and Bangkok (www.chaogroup.com).