Small formats bring big payoff

Now is the time to downsize.

It's been a banner year for the little guys. Some of the largest names in retail announced launches of smaller format stores in 2015. Big-box brand Target announced an expansion of its urban presence with CityTarget and TargetExpress (both recently rebranded under just the Target name). Starbucks introduced smaller, on-the-go stores to cater to professionals heading into work. And Walmart revved up expansion of all small-format stores this year, namely its Neighborhood Market format, which is absorbing the former Walmart Express stores.

Other retailers that have introduced a smaller store format in just the last six months include Shoe Carnival, Ikea, Raley's and Kmart.

So why the rush to get small? Retailers have experienced several big changes in the last few years that have pushed formats to downsize. For one, the growing popularity of e-commerce has played a large part in the transition. With more consumers choosing to make purchases online, there is no longer such a need for large, showroom floors, where retailers traditionally displayed a wide range of products and brands. Now, assortment can be viewed, researched and purchased all through digital channels.

The rise of digital

The more frequently consumers research and shop online, the more data retailers are able to collect.

    Crystal Spence

"Digital is really impacting the entire value chain from sourcing to purchase and building the customer relationship," said Crystal Spence, senior consultant, Vivaldi Partners Group. "Retailers have the ability to understand and predict their attitudes and behaviors based on data profiles, which makes it easier to serve them. So, for both parties, the payoff of optimizing the digital and more streamlined shopping experience exceeds the payoff in larger physical layouts."

Technology in general has decreased the need for a large store space. Inventory has always been a challenge for retailers, so with improved technology and data collection, retailers are better able to understand what shoppers want and predict the demand, which leads to streamlined inventory and huge cost savings, according to Spence.

The apparel industry, for example, is filled with retailers forgoing physical stores altogether.

"The fact that 100 percent of their investment is in optimizing their digital platforms is putting them ahead of the curve when it comes to data management and innovation around the service experience," Spence said. "These online-only retailers are also at an advantage should they decide to eventually open physical locations because they are building physical locations on top of digital platforms, whereas the Macy's and Best Buys of the world are layering digital platforms on top of a preexisting retail strategy. It's a flipped approach, which totally changes the game and the way you think about growth and cashflow management."

U.S. urbanization

The urbanization of the U.S. population is also playing a role in the downsizing of retail. If there is less traffic in suburban areas, there is not as much need for large stores, and consumers' shopping carts are smaller simply because people don't have the storage space in city homes.

And in a busy city, retailers naturally have to scale size down in order to afford rent.

"Box size for retailers is the proverbial Goldilocks problem," points out Lance Eliot, Ph.D., VP of information technology at Interactions, a consumer experience marketing firm. "Just as Goldilocks found the porridge to either be too hot or too cold, many retailers are experimenting with a wide range in box sizes, anywhere from mega size boxes to small neighborhood-like formats, and struggling to find the size that is just right."

And don't forget shelf real estate. All retailers are doing massive cost cutting in general and the increased scrutiny puts more pressure on retailers at all levels. Therefore, if a product isn't pulling its weight, it will simply be discontinued. "Shelf space, placement and price per sq. ft. are going to become even more important vetting mechanisms for product performance—and it's a bit of a self-fulfilling prophecy," Spence said.

In agreement, David Bozin, VP of business development at Bindo, points to a growing abundance of consumer-centric craft and small businesses as shoppers are drawn toward niche product stores. In general, only about 5 percent of all merchandise is bought on a regular basis. The remaining items are only bought from time to time, on an as needed basis. Therefore, shelves stocked with an abundance of selection do not always mean more consumers or more dollars earned.

Finally, there is also something to be said about less confusion. Shoppers in 2015 are hurrying to get in and out of a store. A larger format, with many aisles stocked and a wide range of brands, makes finding the product and picking out the appropriate brand more time consuming. Smaller means get in, purchase, and get out.

Who is driving the trend?

It seems both the consumer and the retailer are driving the trend to downsize store size. For the retailer, the smaller size means less capital expenses for leases and store space, and less liabilities on fixed rent, sales per sq. ft., and the ability to find appropriate real estate, said Keenan Baldwin, COO and co-founder of SiteZeus. On the consumer end, there is the greater drive toward online and mobile, increasing the amount of store purchases for delivery and pickup. 

       David Bozin

"Consumers do not really enjoy walking through a giant warehouse of products (unless they intend on buying in bulk, like at Costco)," Bozin said. Instead, a consumer seeks out the enjoyable experience that a smaller shop allows. "Smaller, more personalized and specialized for the specific products that I am looking for; that is what I want if I go to a physical store," he added.

Plus, the smaller format accommodates the growing consumer need for a more personalized experience. In the world of ever expanding personalization, the one-size-fits-all model does not apply anymore, and retailers need to be available in every size, model and channel. Mary Beth Keelty, chief marketing officer at PM Digital, cites Starbucks' new Express Store as an example. "Starbucks is able to capitalize on the literal path a commuter walks to pick up coffee on the way to work, a time when convenience is of high importance," she said.

At the same time, the retailer is hoping to create a seamless experience. "If a person wants to order online, but pick up in the store, a retailer should be able to accommodate that preference. Essentially, marketers must make the experience as accessible as possible to meet the ever-evolving preferences of customers today," Keelty said.

Customization and convenience is high on consumer priority lists. "It's easier to execute in a smaller store size. As retailers localize their product assortment, which is in essence personalizing or curating products for specific neighborhoods and regions, smaller stores are a good way to make that simplicity and personalization feasible on a larger scale," Spence said.

The future size of retail

So what does the size of the retail store of the future look like?

"We have seen the death of several large retailers coming out of the recent recession such as Circuit City and Borders," Baldwin said. "It has been interesting to see what retailers/segments backfill these spaces. Thus far, we are noticing a surge in specialty grocers like Trader Joes, Sprouts and Lucky's Market. With the likes of Amazon, the big-box retailers are having a difficult time surviving and leaving opportunities for more niche, 'consumer experience' driven operators. Less is often more."

According to Spence, the size and layout is going to depend on the retailer and where the store is located. Most importantly, the format will be centered on the customer experience.

"Consumers are forcing brands and retailers to stand for something, and brands that fail to offer a unique promise will find themselves struggling to differentiate, which we are starting to see in the case of retailers like Sears and Gap," Spence said.

"As a result, stores will have to continue to evolve in order to align themselves more and more closely to the consumers that surround them. A store outside of Denver is going to be a lot different from a store in New York City, and we are going to see retailers continue to pull their individual locations apart from each other as they get smarter about their segments of shoppers and their needs."

The store of the future will most likely be smaller, more specialized, and marry physical with technology to provide a highly personalized experience for each consumer. 

"Smaller format increases the potential for efficiency, and promotes specialization, allowing for a highly targeted experience for consumers," concludes Bozin. "You won't be able to make everyone happy, but those that are happy will remain loyal."