BrainTrust Query: The Big Shrink

Mar 16, 2011

Through a special arrangement,
presented here for discussion is a summary of a current article from the
Emerson Advisors blog.

In recent posts, I’ve covered a major dilemma facing
many retailers, namely the glut of selling space relative to a weak and uncertain
demand. It appears that many retailers have begun to address the situation.

recent Wall Street Journal article outlined steps taken by some of
the bigger national players. These include:

  • Sears has gone into the sub-leasing business, leasing space to Whole Foods
    in one store as well as a Century 21 store in another. Sears is offering
    deals on its website for virtually all its locations.
  • Best Buy is venturing into new categories, including musical instruments
    and health and exercise equipment in its big box. They have also announced
    that they are slowing the growth of the big box format to focus on much smaller
    Best Buy Mobile locations.
  • Walmart is experimenting with Walmart Express along with much smaller (40,000
    square foot) traditional store formats.
  • Home Depot is selling off portions of its huge parking lots to fast food
    and auto repair shops.
  • Gap, which used its flagship to spin off separate formats (GapKids and
    Gap Body), is now reversing the process, bringing its spin-offs back under
    one roof.

Interesting. In addition, there was a story on CNet that Apple, one
of the most productive four-wall retailers, is lowering store inventory (and
working capital requirements) in order to increase the area devoted to customer
training for all the new iMacs, iPads, and iPhones they are selling. This is
not an entirely new idea nor is it restricted to electronics. Williams-Sonoma
offers cooking demonstrations, some golf equipment stores have extensive indoor
driving ranges with professional instructors, Home Depot offers courses on
various DIY projects, and CVS has added in-store clinics. In each case, the
brand and the shopping experience is extended and customer loyalty is built
while reducing space and inventory — no small matter in an environment where
building market share is the only real growth vehicle.

Is this a strategy that can be applied through other
channels and formats? Maybe. What is certain is that there is too much space
and inventory chasing too few customers and this imbalance is relentlessly
moving back to equilibrium. Just in the last month, Borders and Loehmann’s
have gone into bankruptcy. More are sure to follow. While this is a daunting
time for retailers, it is also an exciting one. There has never been a higher
demand for creativity and extraordinary new strategies. It will be fascinating
to watch this period of retail history unfold.

Discussion Questions: What do you think of the many steps retailers are taking to capitalize on underutilized retail space? Is the retail industry ready to kick its addiction to over-expansion?

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11 Comments on "BrainTrust Query: The Big Shrink"

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Dr. Stephen Needel
11 years 2 months ago

Got to love the creativity of some of these retailers in utilizing extra space while I can’t feel too bad for them–American excess at its finest. This is automotive industry lessons applied to retailing–bigger is not always better.

I doubt that retailers are actually going to get over their expansion addiction and not sure they should. A business should expand with demand (hopefully just a little bit ahead of it). The problem many retailers face (I’m thinking media in particular) is a failure to recognize that the need or desire for their products IN A STORE is dwindling.

Max Goldberg
11 years 2 months ago

If you’re paying rent on the space, you need to be maximizing the value of every square foot. Retailers need to come up with creative ways to use their space and bring customers into stores. Classes are a great way to do this. By giving away knowledge and using tools that exist inside the store to solve problems, retailers can build loyalty and sales.

David Biernbaum
11 years 2 months ago

Regional Malls, and suburban strip malls alike, are showing increasing levels of vacancies, empty spaces, and more of the oddball types of businesses occupying some of the spaces, than we would have ever seen in the past. One problem is that while existing malls are having vacancies, builders and developers are still building new malls across the street. Another issue is that with some of the major national retailers going out of business, the semi-anchor spots are going dark. There are many former sites for Linens ‘n Things, Circuit City, and now Borders that will not have new tenants anytime soon.

Doug Stephens
Doug Stephens
11 years 2 months ago

The U.S. has 46 square feet of retail space for every man woman and child. Canada has 23 and Sweden has 6! Is there a problem here???

As Bill rightly points out, there’s a massive contraction in store for U.S. retail and some of the examples he points to are clearly signs that retailers are awakening to the idea.

Couple this with the fact that online sales are growing at a double digit pace while retail remains relatively flat and it’s even more reason to rethink any notions of expansion.

The winners in this, if there are any, will be the solid one-store operator, looking to expand. Some Big Box space is going for as much as 70% off peak rates!

Bill Bittner
Bill Bittner
11 years 2 months ago
There are a whole lot of angles to this subject, but I think they all begin with the Internet. As younger, Internet savvy consumers move into the market place, energy prices continue rise, broadband access becomes ubiquitous, and the need to “be there” declines we will see more and more use of the “order online and pick up at store” business model. Just as small bank branches have replaced the towering edifice of large banks, local presence of online retailers will enable them to offer wide assortments along with economical and speedy delivery from a central distribution center. The biggest hurdle to all this will be the time it takes for everyone to adopt the new lifestyle. The unbanked, the Internet phobic, and the people entrenched in their current behaviors will all be slow to change. This cannot be underestimated because it means for quite a while retailers will have to be able to accommodate both paradigms. (Remember when they said computers would eliminate paper?) For some high-tech products it may be possible to move… Read more »
Cathy Hotka
11 years 2 months ago

Retailers will be smart to look at innovative ways to maximize revenue in over-stored America. One approach: pop-up retail. Halloween costumes for 6 weeks, Italian ice over the summer, Christmas trees and decor–all potentially lucrative short-term formats.

Larry Negrich
11 years 2 months ago

All retailers have to maximize return on floor space while balancing this against their ability to offer the ideal shopping experience for their target customers. Some very successful retailers offer an open shopping layout that benefits their in-store appeal, and they manage to eke out a profit: Nordstrom, Victoria’s Secret to name just two.

Undertaking space utilization initiatives that maintain or improve the in-store shopping experience should be piloted and extended if found to be successful. Americans may be thriftier and more technologically enabled shoppers but they are still looking for comfortable in-store shopping experiences, including a reasonable amount of space. Reduce the space too much and retailers may be pushing even more trade online–or to a competitor offering a better shopping experience.

Paul R. Schottmiller
Paul R. Schottmiller
11 years 2 months ago

In addition to the multi-channel and economic factors mentioned there are two demographic factors playing a role in the changing retail real estate landscape–urbanization, and the aging population.

Urbanization is concentrating customers in areas where smaller footprints are much more practical for a host of economic and operational reasons.

The aging population is also increasing the importance of physical convenience. Walking through large parking lots and large stores is less physically appealing for an increasing segment of the population. Note the increase in convenience items (grocery) being sold in the drug store chains.

Most of the smaller format expansion plans we are seeing from the traditionally large footprint players are consistent with these demographic trends.

Herb Sorensen, Ph.D.
11 years 2 months ago
It would be hilarious, if not so tragic, this misguided focus on wasted selling space. My recent Views. “If you build it, they will NOT come!“addresses the issue to an extent. But my comment here is focused instead on the 80% of shoppers time in stores that is wasted, which we first documented at least 10 years ago, and have written extensively about since. The point here is that, for sure, square feet of floor space is a valuable retailer asset. They measure and sweat and stew over every inch of it. But they are mostly ignorant of the far more important retailer asset, the shoppers time. They do not measure it as a matter of management, they have little knowledge of it, and disrespect it immensely, wasting it gratuitously. There is nothing irrational about this shopper-mindless behavior of the retailer. They do NOT sell to shoppers, they are merchants who manage real estate, expecting shoppers to take care of themselves (self service.) Their #1 source of profits is the tariff they levy on their… Read more »
Steve Montgomery
11 years 2 months ago

There has always been an issue of the growth being a measure of success. How many new stores do you plan to build this year? How many square feet did you build? The emphasis was long been on these metrics.

The build it and they will come mentality lasted far longer than anyone expected. Worked great until the housing crash and the economy shifted. Now the emphasis has become must more focused in bottom line (was always there but often obscured by the growth emphasis). As pointed out by some comments–the internet shifted the focal point. Physical stores were no longer need in order to make a purchase. This allowed the store to shrink just as drive thru allowed the QSRs to shrink their store size.

Creative retailers will find ways to utilize the space or get it out of their networks. Those that don’t change with the times will go by the wayside.

Jason Goldberg
Jason Goldberg
11 years 1 month ago
While we are certainly overstored in the U.S. It does not appear we are likely to pull out of it. The bulk of U.S. Retail square feet are owned by retailers traded on the public exchanges. Investor expectations are set based on new store openings, and then operators are stuck in the cycle of having to open more new stores to meet those expectations. The economic slow-down of the last few years was a perfect opportunity for major retailers to reset market expectations, but few seemed to try. Instead they raced out of the recession by announcing waves of new openings… effectively jumping right back onto the treadmill. NSO are certainly a sign of a healthy operator, as the US populations are now migrating back to city centers and living density is going up, we should see retailers opening downtown stores, but we should also see healthy retailers closing stores that shoppers are moving away from. I’m curious to see what retailers can/will do to try and monetize all the extra square feet. I note… Read more »

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