Results Count ... everything else is conversation.: Will retail stores need to shrink to be profitable?

Big Box stores might not be better … or more profitable

Image: Wikimedia Commons

Before the age of e-commerce, retailing became a game of scale. Large “big box” retailers gained an advantage through broad assortments and efficient supply chains moving products to the masses. But today, even the mighty Walmart is rapidly expanding smaller format stores in order to cut costs and enter urban markets. In the expanding age of online retailing, will big box stores need to shrink to survive?

Triple whammy = Recession + Gas prices + Online sales

While some stats have improved slightly in recent months, retail store sales are only up slightly, while costs related to operating stores have not declined. In fact, most costs as reflected in retailers’ SG&A (Sales General and Administrative expenses) have continued to rise. Coupled with the recession, gas prices have forced many consumers to make fewer trips and shop closer to home. Even Walmart has struggled to increase comp store sales year over year.

In these tough economic times retailers are looking for ways to cut operating costs. They have closed unprofitable stores and have shifted toward consumer preferences to do more shopping online. Big Box retailers are also re-evaluating the size of stores. Many are now launching new smaller format stores to reduce labor and operating costs.

Retail Trend – Big Box Shifts Toward Smaller Stores

In the days of a robust US economy, Big Box retail stores were king. Whether it was mass merchants like Walmart or Target, or CE specialty retailers like Best Buy … bigger stores were perceived as “better” in terms of offering great selection, experience and value.

Today, the most basic commodities like diapers and soap are being sold online by e-commerce powerhouses like Amazon. As discussed in; "Can you buy in “cheaper” online or in store?” Even Walmart, the epitome of Big Box mass merchant retailers, is rapidly building out very small format Neighborhood Market stores tailored to suburban and urban markets.

Some Major Retailers currently shrinking their footprint:

Best Buy – Shrinking store size at new and existing locations and opening much smaller, specialty mobile stores

Office Depot & Staples – Reducing traditional store size by as much as 38% plus opening stores as small as 5,000 sq. ft.

Sears – While not exactly shrinking or building new stores, Sears is turning real estate into cash by reducing store size via leasing out space to Forever 21 and Whole Foods who are building stores within Sears stores

Target – Cutting traditional superstore sizes of 180,000 sq. ft. in half, plus focusing on smaller CityTargets for urban markets

Walmart – New much smaller Walmart stores of 30,000 sq. ft. versus the 195,000 behemoth superstore, plus new Express stores of just 15,000 sq. ft. for convenience items

Retailer benefits of shrinking retail stores

The most expensive aspects of retailing are labor, inventory and the costs of the location. By shrinking store size, retailers can fit stores into more locations, with the potential to reduce rent or building costs. Just as importantly, smaller stores take less labor to operate.

It is however the inventory that is the unseen cost of large big box stores. The large superstores often stock as many as 180,000 individual items. Each SKU requires appropriate back stock available for immediate consumer purchase. The cost of inventory for large format stores can run into mega millions.

The current retail strategy seems to be that smaller format stores are lower cost to build, operate and therefore will be more profitable.

Risks – Will smaller stores be a winning retail strategy?

Image: David Castillo Dominici; Freedigitalphotos.net

On paper, smaller retailer stores look attractive and could be more profitable. But there are some BIG caveats before retailers can begin counting their profits from shrinking stores. Said another way, you can’t simply expense yourself to profitability and ignore the consumers who are the essence of retail. Some of the retail store size caveats include:

1. Build it small and they might not come

Shrinking store size to improve profitability is not new. Circuit City did that very effectively by building The City stores which were substantially smaller, more efficient and more profitable to operate. But if consumers are unwilling to shop a retailer for whatever reasons, the size of the store simply does not matter.

2. Sales require products for purchase

The definition of retail is that consumers buy products one at a time off the retail shelf. Shrinking store size means substantially less inventory and diversity. This in turn, requires retail merchants to have much greater precision on customizing assortments that will appeal to local consumer needs. If consumers can’t find what they are looking for in the smaller store, they will go online and might never be back.

3. Retail profitability requires market basket

Online retailing continues to drive down prices and erode margins for many items. To increase profitability requires retailers to add on to the initial sale and increase both the size and profitability of the total market basket. The paradox of a smaller store with small inventory will be having enough of the right SKUs to generate a profitable market basket.

4. Consumer experience matters

Consumers go to stores for an experience beyond product at a price. There is a danger with smaller format stores that merchandising and product demos will be short changed since space is at a premium. If the service and quality of the staff are not way above average, smaller stores may only survive if they achieve super convenience. This is extremely hard, if not impossible, to do in the age of Amazon.

5. Retail is detail -It’s all about execution!

Big box retailers have won on the basis of breadth of assortment, plus the supply chain expertise to offer competitive prices. Much smaller retail stores cannot compete on the same basis. Retailers will have to execute with great precision on: superior consumer experience, store level customized assortments, SKU rationalization, very rapid replenishment, and even have the capability to use online retail as a “virtual shelf” to fulfill consumer demand in smaller stores.

So will smaller format stores be the wave of the future?

Results Count … and consumers will rapidly vote with their wallets, plastic or smartphone payments at the checkout.

So who do you think will succeed with much smaller stores?

Click on ONE of the following to vote: