Photo: Walmart
Are big box retailers going too small with new store concepts?
Through a special arrangement, presented here for discussion is a summary of a current article from the IMS Results Count blog.
Before the age of Amazon, “big box” stores were the category killers that created the destination locations to draw the masses. Today, the big retailers are focusing on shrinking stores. The downsizing trend begs the question: How small is too small?
Some of the recent trends toward small store footprints include:
- Walmart is building 3,000 sq. ft. convenience stores called Walmart Fuel Stations. Walmart has also tested 4,000 sq. ft. Walmart Pickup with Fuel formats.
- Target plans to have 130 smaller, urban format stores ranging in size from 20,000 to 40,000 sq. ft. by 2019.
- IKEA’s typical stores are 300,000 sq. ft. but it’s opening smaller showroom locations – some under 10,000 square feet – in urban centers to reach city dwellers and supports online sales.
- Nordstrom’s is piloting a 3,000 square feet location that carries no inventory for sale and focuses on service and engagement.
- Finally, reports arrived last week that Amazon was setting a goal to open 3,000 AmazonGo locations – the first two have been 1,800 sq. ft. and 1,450 sq. ft. – by 2021.
Smaller stores are less expensive to open and fit in more neighborhoods while also more adaptive to customer’s varied omnichannel expectations particularly in the area of click and collect.
- Several key factors that make smaller stores possible and potentially more profitable:
- Virtual shelf technology reduces the need for large inventory in store;
- Click and collect also enables small stores to offer “unlimited” choices;
- Convenient local locations foster click and collect customer traffic;
- Small footprints reduce rents and enable more locations, particularly urban;
- Small stores enable curating assortments to local consumers tastes and needs.
The most important trend in bricks and mortar retail right now is finding formats to “right size” the store platform to fit customer needs.
Discussion Questions
DISCUSSION QUESTIONS: What do you see as the biggest challenges facing “big box” retailers that open smaller store formats? What factors will have the greatest impact on the ratio of big to small box stores over the next five years?
Poll
BrainTrust
Mark Ryski
Founder, CEO & Author, HeadCount Corporation
Lee Kent
Principal, Your Retail Authority, LLC
The experimentation by big box retailers to create new, smaller footprint concepts is fascinating to watch, but smaller doesn’t necessarily mean simpler or easy to execute. Retailers are discovering that one-size doesn’t fit all, and that creating smaller format stores that serve a different market in a different way can help extend their brand and reach new customers. The article nicely mentions many of the factors influencing the big-to-small movement, but I think the convenient local locations to foster click and collect customer traffic is one of the big ones.
Having the right assortment in a smaller store is key to making the format work, but I don’t know that this is really possible. The whole point of a big box format is to be all things to all people. If you cut some assortment (as you will have to), you may find it becomes a lose-lose situation.
That said, the trend to smaller footprints isn’t going to go away – retailers’ sales per square foot has been falling since 2007, and by some analyses have barely started to come back. This makes large store economics very difficult – and that’s not going to change any time soon.
Companies that operate larger format retail locations often find that operating smaller locations is not just the same thing on a smaller scale. Smaller format stores have all the potential advantages that these companies tout. However, they also have their own issues.
One example is when a person in a large format store doesn’t come to work, there may not be a need to bring someone else in as their work can be covered by another person. In a c-store size location that missing person may be one-third of the scheduled workforce.
The impact of this type of issues and others is largely dependent on the purpose of the smaller box stores. The more that the purpose is for the sales and payment process to be handled by the consumers, the likely the lower the impact.
I don’t think this is about “too big” or “too small” or “ratios.” Where is the market? What are the demographics? What is the right content for that market? It’s a little more complicated than cookie-cutter retailing but, hey, welcome to the new age of retailing. The new word seems to be curating. How about just editing to the local market? What’s the best use of space in that market?
Big box retailers are finding limited options in their traditional suburban sites where they can provide ample parking. Meanwhile, retailers like Target and Walmart have long realized that urban locations require a different footprint. This represents at least the near-term future of the so-called “big box” stores, especially when these small-format stores can double as omnichannel “fulfillment centers.”
In my mind, assortment planning becomes the biggest challenge. These stores simply don’t have the space to offer “all things to all people,” especially in terms of bulky products that shoppers can haul away in a car. It’s critical that these retailers figure out how to narrow their assortments and — just as important — to apply as much localized data as they can to the thought process.
The move to small is sensible for a number of reasons. The country is saturated with big box stores. A lot of growth is coming from urban areas where smaller stores are necessary. Our shopping habits are becoming more piecemeal and so we do more smaller shops. And the move to online means some stores don’t need to stock everything under the sun. That said, this is not universal – some retailers like RH (Restoration Hardware) are opening larger formats so they can create experiences.
The challenge for many retailers is how to translate the experience into smaller stores. How do they edit ranges? What do they leave out? And how do they tailor things like customer service and services? This is far from easy and even retailers such as Walmart have stumbled.
The challenges are not significantly different from other size stores. Retailers need to customize offerings to the target market and use technology to make up for the reduced inventory. Also, the customer interaction needs to be better managed. Factors going forward that will have the greatest impact include: enhanced technology: continued rebirth of inner cities and urban areas, aging of America and on the other hand the emergence of Generations Y and Z.
Inventory accuracy! With tight formats and lots more click and collect, no more loosey goosey with the inventory. Then there is the supply chain that is behind it all. And that’s my 2 cents.
Here is the big box companies’ challenge that I see when they are opening and operating smaller stores. The smaller high-turn stores, with the inability to carry larger amounts of inventory, coupled with the rapidity of their buyers’ actions, will require that these small footprints have more local control to move and flex for that particular market and customer. Will home offices condone and endorse that? I wonder.
Physical inventory turns are a key measure of retailer health. If the stores are too big for the revenue, product will sit and increase costs throughout the enterprise. Small stores that move the vast majority of SKUs swiftly with multiple deliveries per week, depending on the product category are a good indicator of fundamental growth potential.
Retailers need to carefully investigate and test which would be the right shop format and size to them. Should it be complimentary to their existing stores in the same catchment area (i.e. pick up point) or does the retailer wants to penetrate in smaller cities where it was not present so far due to its large current store format? Take the example of electronics in Europe. Many leading international/national tech retailers are testing new smaller formats, e.g. Media-Saturn in various countries, M.video in Russia or Darty in France. We will therefore see in the future quite a number of new additional formats of established retail brands arising.
If the smaller format store with a focused assortment can also act as a distribution point for product acquisition to quickly deliver on that endless aisle from the rest of the chain it may work quite well. Two-day delivery through the smaller store should be quite feasible, maybe even faster.
There’s a fundamental expectation problem with moving from big to small. All of these retailers have built customer loyalty and expectations based on the large and deep assortments possible in large stores.
As Mark Ryski observed, though, small stores reduce potential profit per store while maintaining nearly the same level of per-store operational challenges. Even worse, when the customer visits a small store, they are quite often disappointed in the brand — because the small store cannot go deep with assortment.
Can it be done? Of course it can. But it is not easy. Target seems to have the best start with their existing urban stores. That said, we had a small Walmart in our neighborhood … and it closed within 18 months of opening. Every time I drove by I wondered why it existed since it wasn’t a “real Walmart.”
Downsizing will continue until there is an elimination of open spaces and empty shelves. The maintenance and support costs associated within is measured in billions of dollars a week in the retail industry. The blood letting simply must remain a focus in this relentless draining economy.
Two hard scientific facts drive the advisability of smaller stores:
But for suppliers, every additional item helps buttress their own battle for shelf space — and possible shopper attention. And suppliers pay for that competitive space one way or another.
The one- or two-item purchases just confirm that stores have become neighborhood “pantries!” No need to have a fully stocked pantry at home when you pass several stores every day, where you can pop in to get your IMMEDIATE needs. Add in online and you have potentially infinite selection!
THIS is where retail is, and is going in an even more extreme form. Get your popcorn and watch! 😉
The growth of small format stores is not a function of big box stores replacing large format stores with small format stores. The catalyst for this trend is a growth strategy for big box stores to expand to markets that can’t support a large format store from a customer demand or real estate perspective. The real estate in metro areas is expensive, has lot’s of regulatory complications and is almost always within an existing structure which severely limits the size and configuration of a store.
Large format store will still have a role as a one-stop shop in areas where the real estate is stand alone and relatively free of regulatory hassles.
Customer demand will dictate how many small format stores are feasible for each market and big box retailers, including Amazon, appear to be rushing to benefit from the first mover advantage. Big box retailers, to be successful with smaller stores, need to modify/reinvent many of their technology, their organization structures and their processes as back rooms are typically tiny, space is limited, merchandise needs to arrive floor ready, merchandise needs to be back-stocked creatively and it needs to be delivered more frequently.
Whoever establishes customer loyalty in a market first will have distinct advantage, but there will always be competition.
I think big box retailers are reacting sensibly to changes in how customers live and shop. The post already lists plenty of solid reasons driving the growth in smaller format stores — convenience is the big one. A smaller, more local store can serve customers in their everyday needs more easily than a big box store that requires more effort (and reason) to visit. I also like how retailers are using small, local spaces to curate product offerings to carry what the local community wants. It’s another reason to encourage them to visit the small spaces, and then the big box stores when they have the need.
Before going further, I would point out there’s a big difference between opening a (customarily 100-200K sq. ft. retailer) 20-40K sq. ft. store, and a 3K sq. ft. store. The former is likely a tweaking of their traditional formula, the latter is something entirely different.
As I’ve said repeatedly, I don’t think much of the concept. Even if the experiments were fabulously successful in their own right — and they often aren’t, as Walmart’s repeated efforts over the years attest — they’re simply too small (compared to the traditional format) to do much more than juice results … these aren’t innovations, they’re “We’ve saturated the market, let’s try something!” ideas.
Really, these small store formats are a great development in retail, especially as the CPG industry becomes increasingly better at curating assortments in a very targeted manner. To do it right, brands and retailers really need to invest to understand their highest value shoppers and align marketing—products, price and promotion—to get the right products into the right retail outlets at the right time.
The trick is how to translate the big box brand into a small footprint. Everyone knows what to expect in a 7-Eleven, but what is the expectation for a big box store opening a small footprint location? Obviously Walmart can’t have the full assortment in a small store, so is it price? Private label? Also, can the supply chain optimized for big box handle small locations with limited local storage? Those are the questions retailers need to answer before just opening small stores for the sake of fitting in the area.
I see three related and significant challenges when big box retailers open small format stores.
First, the retailer must understand in forensic detail the needs of the shopper and continuously monitor how those needs evolve. This is not just what products they want, but information such as what type of trip do they plan to complete. Is it a “fill in” or a “stock up,” for example.
Second, they must get the assortments right to satisfy these shoppers. Getting it “right” doesn’t necessarily mean stocking the shelves with the highest margin products; indeed, if shoppers can’t complete their trip missions with everything they need and must head to another store, they will likely not put up with that very long.
Finally, retailers must get the technology right, whether it’s Click and Collect, enabling shoppers to order items not on the shelf from their apps in store, or an AmazonGo check out concept. There are many other challenges, of course, but I believe these are the three most significant ones.