Changing Sizes Makes RETAILERS FIT
Retailers no longer want to be boxed into a single store format. Superstore chains will give up some of their mega to gain market share. Drug or variety stores will take on more variety to ring up a higher total at checkout.
"In general, retailers have realized they should move from a one-size-fits-all to a many-size-fits-all approach, with a set of formats," says Steve Riordan, partner at Kalypso, a global consulting firm with U.S. offices in Beachwood, Ohio.
With U.S. population growth concentrated in fewer cities, retailers have good reason to find formats that fit the most competitive markets. In 2014, the Census Bureau estimates, 10 of the 20 fastest-growing metro areas were in Florida and Texas.
Neighborhood Market stores are especially suited for urban markets.
For chains like Walgreens and Dollar General, the opportunities make bigger better. "It's not necessarily real estate as a barrier anymore," says Michelle Grant, global head of retailing for Euromonitor International. "Commercial real estate in certain areas might actually be pretty reasonable.
"For those companies that are going smaller, it is about pushing into environments that they don't have a presence in," Grant says. "So you have Walmart and Target in particular, which built their empires on big boxes and had very little urban or even suburban [inner] ring presences. As they've built out their big boxes, they're looking for new opportunities, so they're going to the urban format."
Urban dwellers tend to be wealthier, something not lost on retailers. "So you have the opportunity where you don't have a lot of competition for your brand," Grant says. "But then you can appeal to the wealthier, urban, and in some cases, younger consumer, which you weren't reaching previously."
SMALL GROWS FAST
Small formats also have been outpacing the 2 percent growth of supermarkets and hypermarkets, Nielsen says in its May 2015 New Retail report. Drugstores grew 6 percent year over year, while small supermarkets grew 5 percent and traditional stores 4 percent.
"So it's definitely about growth opportunities, getting into spaces that you weren't in previously, and to do that, you have to shrink the box to meet the needs of an urban environment," Grant says. "It's more expensive to operate in the city, but they can stock more higher-margin items."
Three trends challenge even the most successful store models. "First, since about 2012, when the recession finally ended, retailers have been operating in a protracted slow- to no-growth environment," Riordan says. "As a result, retailers are getting more aggressive and creative about ways to drive growth.
"For those companies that are going smaller, it is about pushing into environments that they don't have a presence in."
"Second, e-commerce and mobile sales have drained sales volume out of the traditional store base by 5 percent to 20 percent in some cases," Riordan notes. "Sales per square foot has been dropping in most retail stores due to the redirect of revenue to e-commerce and mobile sales—there is not enough numerator for the denominator in the sales-per-square-foot equation.
"Third, retailers have significantly more fact-based insights about consumer segments and associated wants and needs from leveraging big data and analytics," he says. "This allows retailers to deploy smaller versions of traditional formats to target consumer segments and their associated wants and needs, including underserved geographies in which the economics of a bigger store just don't work. These smaller formats also solve the denominator problem in sales per square foot."
SHRINKING THE BOX
The findings can greatly shrink a big box. Walmart Neighborhood Market stores average 42,000 square feet, or about one-fifth the size of Walmart's supercenters.
Walmart continues to open Supercenters—they've increased in number from 1,471 in 2004 to 2,388 in 2014. But Grant notes that the rate of growth has slowed.
"They're kind of saturating the market there," she says. "It was growing by double digits from 2005 through 2007, then single digits, now about 4 percent growth. So the Supercenter model is not quite dying, but it's definitely pretty mature, so they're looking to the smaller formats to gain entry into places that they haven't been."
Walmart opened 131 small format stores in 2014, growing the Neighborhood Market stores in a 10-year period from 64 to 407. Meanwhile, it closed midsized Walmart discount stores, reducing the count from 1,500 to only 508.
While a traditional Target store ranges from 80,000 to 160,000 square feet, the Target Express format launched in 2014 is 20,000 square feet. In October, Target began rebranding stores of all sizes simply as Target, including CityTarget stores of 80,000 to 100,000 square feet.
Target removed the CityTarget and Target Express names from its smaller stores in October, including this CityTarget in the Westwood neighborhood of Los Angeles.
The product mix in smaller stores can vary greatly. "Effective assortment planning at the store level is critical in the smaller store formats," Riordan says. "Advancements in assortment planning and space planning technologies have improved retailers' ability to provide these curated assortments."
Some smaller stores, conversely, have been expanding their footprint to gain customers.
"Retailers are creating larger store formats to expand their offerings into adjacent categories or services that they have identified via rigorous analytics," says Kalypso's Riordan. "They are betting that they can take customers, and therefore market share, away from retailers already serving these adjacencies to drive better sales-per-square-foot performance."
"Effective assortment planning at the store level is critical in the smaller store formats."
Dollar General has expanded its grocery offerings, increasing its cooler count by 50 percent since 2008. CEO Todd Vasos told analysts on an August 2015 conference call that "a basket with a perishable item is nearly 50 percent higher than the chain average." The traditional Dollar General store is 7,300 square feet.
In 2016, Dollar General plans to open 900 stores. A prototype for new stores and remodels expands health and beauty offerings, and adds registers for a faster checkout. The chain estimates its average customer completes a shopping trip in less than 10 minutes. There were 11,800 stores in January 2015, with plans to open 730 stores and relocate or remodel another 875.
The chain bulked up on perishables in 2012 with its 10,000-square foot Dollar General Plus concept, and added meats and produce in the 16,000-square foot Dollar General Market. Frequently purchased items such as bread, milk and juice were placed by the store's entrance to retain convenience buyers.
"Dollar General opening the DG Market and the DG Pluses is an interesting example because they have found such great success in their small-box, general merchandise stores that they're opening the market version in order to act more like a supermarket or a discount supermarket," says Euromonitor's Grant. "So they're moving into a bigger space that comes with new products which are meat and produce. The fresh foods category is low margin.
"The DG Plus is about adding coolers so getting more into chilled food," she adds. "It could be a strong differentiator if it's in a food desert where there's not a lot of competition anyway. So they're really serving the local population that doesn't have a choice, which is where they're putting a lot of the Dollar General Markets as well."
Walgreens is also going bigger "for branding purposes," Grant says. More than a dozen "flagship" stores have opened in cities such as Chicago, New York and Los Angeles. They include such features as juice bars, coffee bars with baristas, and sushi. A greatly expanded beauty department includes an "eyebrow bar" and "nail bar."
"The margins in prescriptions are going down for a variety of reasons, so they're really focused on driving the front-of-the-store sales and, in particular, beauty," Grant says. "Beauty is very competitive. Ulta and Sephora, the specialists, really created strong brands for themselves with high levels of services and supply from the strongest manufacturers. So in order to compete with that, Walgreen had to mimic going to beauty specialists within a drugstore, and to have that type of environment, they've had to go bigger with their stores.
"The hope is that these flagships introduce Walgreen and distinguish it as a brand where you want to spend time in," Grant says, "and that it does have great beauty products in an environment in which you want to try them on."
Bigger sizing poses logistical challenges for the chains. "The multiple store formats drive more operating complexity," Riordan says. "Retailers need to invest in designing processes and technology to scale up a more complex operating model."
As retailers work to get the product mix and inventory controls right, they risk alienating their most dedicated shoppers.
"You have to merchandise appropriately for that core customer, and that introduces complexity in the supply chain," Grant says. "Keeping those stores in stock is a different process, and Walmart struggled with it with its Neighborhood Market brand.
"The turnover is so much quicker in a smaller store in an urban area, and then on top of that, you have less space in the back to keep excess inventory," she notes. "Target is still working on trying to fix their stock problems, and Walmart has finally figured out how to really stock its smaller stores better."
Bigger formats pose similar supply chain issues in stocking unfamiliar goods. "There tends to be a struggle to try to figure out how to adapt your current system to this new model because it is different, so there are teething pains," she says.
"You need to be able to get a lot of things right in order to make those stores viable and successful," Grant adds. "It's a deviation from what you as a company have been doing for a long time. And with that comes cost."