Small-format Stores Going Big

Big-box US retailers are increasingly moving their brick-and-mortar strategy towards operating small-format stores.

Small is quite literally the new big, as it enables retailers to target a broader swathe of city-dwelling high-income shoppers looking for a quick, convenient retail experience. Players such as Target, Kohl's, Whole Foods, Sears and Lowe’s have jumped on the bandwagon, opening stores under 50,000 sq ft area (vs. traditional 110,000+ sq ft stores). This is helping retailers enter space-constrained, densely populated and underserved urban areas, while effectively combating online competition on aspects such as product range, convenience, turnaround time and delivery.

Not to mention, small-format stores are expected to generate higher sales per sq ft and more frequent footfall, compared with traditional stores. According to an interview in October 2016, with Chairman and CEO of Target, Brian Cornell, “Small-format stores produce 2–3 times more sales per sq ft than the company average. We are launching another 25 stores by 2018.”

Giving Customers What They Want

Leading retailers have realized that for small-format stores to be successful, the product range must be tailored to the local customer. For example, Target’s new small-format store in Cupertino, California (where Apple has its HQ) will feature tech accessories, while the one near the University of Cincinnati will focus on ‘dorm essentials’ and grab-and-go items for busy students.

Varying product assortments require dynamic store designs with innovative fixtures, while the reduced footprint of small format stores may necessitate high-density merchandising.

Take your Pick – Multi-channel Retailing Has Arrived   

As retailers are reporting a dramatic rise in online order fulfilment via stores (either directly through home delivery or customer pickup), they are increasingly focusing on omni-channel services to successfully drive the small-format concept. This is enabling them to compete with online behemoth Amazon. For example, most Target store openings scheduled for 2017 will offer mobile app (as mobile increasingly becomes a significant shopping channel) and order pick-up services.

Retailers are increasingly partnering with delivery companies to offer omni-channel services, while riding on the bet that growing e-commerce volumes will help drive sales. For example, Target has engaged on-demand grocery delivery service Instacart to offer home delivery in Minneapolis, Minnesota.

David Berliner, a partner at BDO USA  commented: “Retailers should evaluate the benefits of right-sizing their stores by reducing the square footage and updating e-commerce features. Successful retailers must develop an omni-channel strategy that complements brick-and-mortar store networks with a powerful online and mobile presence. To meet these expectations, retailers are increasingly adopting in-store pickups, self-serve kiosks and online returns.”

Tech: Enabling Smaller, Faster and Better Customer Experiences

Technology is the game changer in the small-format trend, not just for systems (such as self-checkout, digital signage, and the use of mobile apps for order fulfilment and payment), but also for newer avenues that have the potential to completely transform shoppers’ experience.

“It’s an urban-concept,” explains Lowe’s spokesman Michael Ricciardi. “We don’t need 120,000 square feet when we have a million square feet of product available (from) 10 surrounding stores through our selling system.”

As Nicole Lyn Pesce explained in the NY Daily News, in Lowe’s new concept stores in Manhattan, shoppers can buy products direct from a sales rep with a mobile device, similar to an Apple store and even though the store is a small format, shoppers have access to an extensive product range through state-of-the-art technology. 

Using the seven-foot-high “Next Aisle Over” touchscreen, shoppers can also access the full range of other models available, if the one they want is not on display in store.  Integrating the online experience with the in-store experience in this way allows a smoother customer journey, from potential shopper to hassle-free purchaser.  

Lowe's has installed numerous other touchscreens around their new small format stores, including an “Endless Aisle” monitor built into a stainless-steel tabletop, so customers can sit with interior designers and browse hundreds of lighting fixtures, carpet swatches and blinds beyond what is physically on display at Lowe’s. They can order the items for same-day or next-day delivery.

Watch Out! – Don’t Be a Walmart

But the concept of going small comes with some big challenges – such as the difficulty in achieving substantial sales volumes from the limited and expensive rental spaces available in downtown areas. This is evident from Walmart’s announcement that they will be closing all 102 Walmart Express outlets (small-format stores for urban areas) by the end of 2016.

According to Dave Marcotte, an analyst at Kantar Retail; “Walmart’s supply chain is optimized for the supercenter, which can work reasonably well for a store of 38,000–42,000 sq ft. But when you keep going down in size, eventually it’s going to become an issue.” 

So, what are the key issues that retailers considering a move to small format stores should keep in mind?:

  • Improve Supply Chain Agility: Distribution center capacity, catering to a particular region – where small-format stores are picking up – may need a revisit. Replenishment frequencies may need to be increased so a cost-effective transportation solution and optimized route planning is a must. Further, retailers looking to offer home deliveries will need to set up last-mile delivery capability.
  • Identify Right Location: Downtown rentals and operation costs are typically much higher than suburban stores. To offset the higher investment, the location must be lucrative enough to generate substantial sales volumes.
  • Leverage Data Analytics: To ensure a seamless customer experience, the product range offered must be localized and shelf space must be optimized. Using data analytics, retailers can now access the insight needed to make smart decisions and ensure store profitability irrespective of store size.

Merely downsizing can prove to be fatal, unless each aspect of the small format isn’t painstakingly thought through but the message is clear for retailers ignoring this new trend – Go Small or Go Home.

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