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Do Small-Format Stores Have an Advantage in Retail?
The average store size in the U.S. is the smallest it’s been in at least 17 years, a finding the Wall Street Journal attributed to the “rise in e-commerce and a growing distaste for giant emporiums.”
CoStar Analytics reported that the average size of retail leases executed during the first three quarters of 2023 fell to a new historic low of just 3,200 square feet, reflecting change in the types of tenants and how certain categories of tenants are using their space.
The newer tenants include more outlets supporting in-person services and experiences such as nail salons, coffee shops, and yoga studios. Shopping centers are also seeing an increase in food and beverage concepts overall as Americans spend more time dining out and seek the convenience of drive-thru and curbside pickup.
According to the WSJ, rent prices are also rising, leading apparel and other traditional retailers to seek smaller spaces. Technology is being tapped to shrink inventory to local tastes.
The smaller box trend isn’t new. Walmart, Target, Macy’s, The Container Store, BJ’s Wholesale Club, IKEA, Meijer, and Sprouts are among chains that have been rolling out or testing smaller concepts in recent years. The stores help chains squeeze into urban centers or suburban towns, but they can also offer more opportunities for intimacy and storytelling.
Location analytics platform Plaicer.ai wrote in a study last year, “Retailers can tailor these small-format stores to target a specific demographic, create a personalized shopping experience, or experiment with a new brand direction. Small-format stores can also serve as fulfillment centers for click-and-pay shopping and as a location for returns, all while fostering brand awareness and customer engagement. And thanks to their smaller size, these stores can help companies expand their reach in urban centers and other highly-priced real estate markets while lowering overhead costs.”
Nonetheless, Costco is among the chains that continue to thrive despite its massive halls, and Target recently debuted a new larger-store that better supports same-day fulfillment services and the use of stores for digital fulfillment.
Zara and H&M are among fashion retailers opening fewer but larger stores that emphasize services such as beauty salons, repair stations, and coffee shops, digital features such as in-store navigating apps, and more spacious layouts to better highlight individual collections.
Dick’s Sporting Goods continues to find success with its experiential House of Sport concept at more than double the size of a standard 50,000-square-foot Dick’s store. The store features a climbing wall, golf bays with simulators, and multi-sport cages that can be used for baseball, softball, lacrosse, and soccer. Outside, a turf field with a track allows customers to try products and converts to an ice rink during the winter. Dick’s has said the stores enable the chain to attract new customers, secure better brands, and drive higher basket sizes.
Dick’s plans to have between 75 and 100 of these stores in operation by 2027. Lauren Hobart, CEO, said on the retailer’s recent third-quarter analyst call, “House of Sport stores are performing very, very well.”
Discussion Questions
What are the primary and secondary factors driving the shift to smaller-sized retail locations? Where is the opportunity still in opening larger stores?
Poll
Loading …BrainTrust
Liza Amlani
Principal and Founder, Retail Strategy Group
DeAnn Campbell
Head of Retail Insights, AAG Consulting Group
There’s a difference between the actual average store size – which is way above 3,200 sq ft – and the average size of leases executed on. However, the lease data are interesting as they show there is more activity at the smaller end of the market. That’s not surprising since so many big boxes like department stores are struggling with relevancy and therefore the economics of their stores don’t work. That said, the picture is nuanced: many retailers are also investing in larger formats to accommodate services and omnichannel capability.
Some retailers no longer seek big store footprints and high overhead.
Factors driving the trend toward smaller stores include:
– E-commerce growth
– Fewer department stores
– High rent, which makes space expensive
– Consumers’ shift from products to services and experiences
– Localization helps retailers target specific communities vs. accommodate the masses
Larger stores make sense for big chains to accommodate e-commerce fulfillment, BOPIS and BORIS. Multisensory experiences like in-store coffee shops and batting cages require space for customers to linger and test products.
Tom was right to point out that a lot of this may be due to compositional shifts (i.e. it may not be that stores are smaller, but rather that a larger percentage are sevice businesses that are inherantly small[er]).
But pointing out that the data may be more nuanced than it first appears doesn’t really tells us what to do with it, and I think most of us are really more interested in Big Picture questions like “If there was already too much retail space, isn’t the situation getting even worse?” or “So all these small-format/”neighborhood” stores are a good idea…right.”
To which I reply: “probably” and “NO!”, respectively.
There has been a growing trend for some traditional large format stores to open mid-sized, smaller footprint stores. In many cases, the strategy was driven by the expansion to smaller towns or urban areas where real estate is very expensive. As Lisa Goller noted, there are several dynamics that are driving the shift to smaller footprint stores. There will continue to be customer demand for large footprint stores for the mega department stores like Walmart, Costco and Target, but that may be an exception to the rule.
In my perspective, the move toward smaller retail spaces is primarily fueled by the surge in online shopping and a shifting preference for more personalized experiences. The key drivers in this shift include a growing demand for in-person services that caters to the convenience factor. Rise in rent prices are also nudging the traditional retailers toward opting for more compact spaces, and even the technology is playing a crucial role in helping retailers to customize their inventory to local preferences.
However, there are still opportunities for larger stores, particularly for brands like Zara and H&M, which are focusing on services like beauty salons and spacious layouts. Larger stores can thrive through experiential offerings, as exemplified by Dick’s Sporting Goods that attracts new customers and secures premium brands through unique and immersive concepts.
Newer mall stores have been downsized for years. In one example, a mid-range, two-story mall was build from scratch and opened in 2014. That had noticeably smaller footprints for all spaces already. The long-tail advantage that online has over bricks-and-mortar stores is just growing larger. Only stores with unique market positions—Costco or other big box clubs, outdoor lifestyle brands, etc.—will maintain huge stores.
What these brands in the smaller-footprint stores need to focus on is providing a truly memorable and brand-driven shopping experience. Retailers need customers, and the best way to capture them is to make yourself convenient for them to shop, browse, or return their purchases. Building a store in urban and suburban locations is fraught with regulatory challenges, while fitting into an existing footprint or smaller format requires much less scrutiny from the maddening bureaucracy.
Also, these smaller-sized stores need to be more and more integrated into the omnichannel world, too. Shopper shop wherever they are, and the shopper’s journey can start, continue, or end in a small store or big store. It really should depend on the brand.
There are so many aspects to this discussion it is hard to cover them all, and the contradictions in the primary subject are significant.
The U.S. still leads the world in retail square footage per capita. At 24.5 sq. ft., it is 50% more than Canada and twice as much as third-place Australia. Europe comes in at 4.5 sq. ft. While larger stores provide more efficient overhead, one wonders if the incremental square footage generates the same incremental revenues.
Online sales continue to grow, with apparel sales pushing 30%. With operation and overhead costs remaining the same, all profit is wiped out.
Several of my colleagues noted repurposing larger stores to attract the shopper. This repurposing demands a different look at the application of costs in the P&L. The immersive experiences should be treated more as an advertising and promotion cost rather than directly applicable to the here-and-now sale of goods.
Smaller footprints can indeed be an advantage, because first and foremost they recognize the shift of sales $$$ from physical to ecommerce. BUT, we also know the importance of physical stores supporting and driving ecommerce and all of the attending customer services that entails. The advantage comes in IF the retailer has the inventory editing and storytelling skills to properly execute in less space. Retailers love big footprints. That’s part of the reason we have too much square footage these days. Editing for efficiency of inventory and sales per square foot is difficult, really difficult. So smaller footprints can be a financial advantage. But in reality, the retailer now has to fit 4 pounds of inventory and services into a 2 pound bag. Many will struggle with that until new models are arrived at.
Inventory management, seamless integration across channel to allow for buying into products that are not assorted in the smaller location, and product curation is so critical for a small format store to actually work.
Jeff – I concur with your thoughts and will add that making certain the product assortment is in fact localized is so important. There should always be a reason for each product and the store to exist. Serving the customer in the most delightful way while closing the feedback loop in a timely manner will drive a great customer experience. Retailers should be solving for the customer while driving demand. The evolution of the physical store is inevitable. Retailers need to rethink and reimagine their stores and technology + product + people is all part of the winning equation.
Store format shouldn’t be one size fits all. The target audience should dictate the location, which will inherently play a role in size and whether or not it’s experiential. It makes sense Costco would still be doing well with the massive square footage while other retailers would need to downsize in order to play in a certain market.
Your opening sentence totally a bullseye Melissa. There is a “lemming mentality” in retail where one makes choices based on what worked for someone else. At first glance that seems like a good strategy, but really it could also be intellectual laziness. EG You can’t out-Costco Costco. This is similar to the “best practice” myth many businesses get caught up in. It really should be called “current practices” because the “best” is a moving target yet to be hit. Instead “What else is possible?” needs to be the first question in any new retail endeavor. Actually your second sentence is also brilliant. “What experience do you want your customers to have with you and you with them? I guess ‘form follows function’ (circa 1896) is still a truism today.
New store smaller store formats have emerged recently due to several factors. The main drivers behind this are the changing consumer behaviors, where the expectations are that retailers have localized assortments, plus getting in and out of a smaller store is far more convenient. Additionally, the costs to serve and goods sold are exponentially higher in a larger format store. Without a significant sales volume, the operational costs of running a larger store become unmanageable unless the foot traffic is there.
Another element driving the emergence of smaller-scale stores is that retail locations do not have to hold every single item in stock at every location. With the flexibility of various fulfillment options, including eCommerce home delivery, BOPIS, and next-day delivery from other stores and warehouses, the days of “stack it high and let it fly” are long behind us.
It’s not only the evolving consumer behaviors that have ignited the surge of smaller-scale stores. The overinvestment in seasonal merchandise has been a challenge for retailers for decades. Which led to overstock situations, the omnipresent discount racks in the stores, and opportunities for off-price retailers to take advantage of the aged inventory. Less is more as we enter 2024.
I recommend focusing on the target market & differential advantage the store size produces. It’s not about size, per se. it’s about function & marketplace demands or constraints. Certainly, one size never has & never will fits all.
Larger stores are suitable for suburban communities, while smaller stores are appropriate for more dense urban settings. The trouble with averages is that they don’t exist in reality. Store sizes cluster based on segment, format, and location. Take a typical mall; you’ll have hundreds of small footprint stores and a handful of large anchor stores. It’s more meaningful to look at this by geography, density, retail segment, and even by looking at a single banner’s past and future investments to detect trends.
Consumers are turning more to locally sourced and sold products and services, which suggests that the trend of thoughtfully designed smaller stores with curated products and services for local consumption can thrive.
A smaller grocery store has an advantage over large chains if they offer outstanding customer service and get to know their shoppers. It’s that simple.
Small footprints may be the new format du jour. However, repurposing any sized footprint to meet the needs of today’s shopper and omnichannel needs is what really matters.
Technology now enables brands and retailers to blend online and offline elements into smaller spaces more effectively. Small format locations are an important tool given the importance of personalization to the consumer — including at the community level. Getting products and brand presence as close to the consumer as possible is highly effective for boosting shopper loyalty, reducing operating costs and improving profitability.
This is an interesting topic, that seems to require a “one way or the other” response. The fact is that smaller format stores and larger format stores both have their role to play in the broader retail marketplace. Smaller store formats fit into locations that larger stores do not, provide access to brands that otherwise might not be available in such locations, and provide a cost-effective footprint in places where retail real estate is expensive.
Larger format stores offer a broader assortment, a convenient “one-stop shop” experience, and exposure to a broader array of products and categories.
In short, both models work in certain scenarios; I don’t one replacing the other any more than online replacing stores. The consumer likes choice and convenience. There are multiple formats for retailers to provide that service.
The shopping experience at big box stores is usually negative with some exceptions. Post covid people crave more of a personal experience. Big box will continue to dominate in communities that are “isolated”, but the resurrection of small store formats will continue.
Physical stores are increasingly becoming a destination to interact with items available for purchase. They are about creating a real-time experience for the consumer with less pressure on in-store inventory because customers are growing more comfortable with the actual purchase or fulfillment happening outside of the physical location. Smaller locations can focus on delivering this experience, which can draw in shoppers. Other factors that are driving the shift to smaller-sized retail locations include cost efficiency, urbanization and space constraints, the influence of e-commerce, and flexibility.
Customer experience is also an opportunity to expand to larger stores because bigger locations provide more opportunities for in-store events, demos, and other opportunities. Larger locations also provide more branding opportunities and the perception of market dominance.