Forget “go big or go home.” Retailers these days are opting to dream small.
With digital competition, shifting consumer spending habits and hefty rents all weighing heavily on traditional brick-and-mortar players, many of them are finding new hope in a size reduction.
Target Corp. today became the latest to firm up plans for smaller stores, announcing that it will use the strategy in New York’s Upper East Side, Staten Island and Astoria neighborhoods.
While modestly sized locations have previously been a go-to for retailers looking to expand in urban areas and large cities — with limited space and high rents — Target’s move is also part of a larger effort by the company to rethink its stores in the digital age.
“The advantages for retailers are obvious — smaller stores cost less money, use fewer workers, can fit in the fast-growing urban areas where real estate is pricey and allow for easier pickup and delivery services,” The NPD Group Inc., retail insights firm, said in a report. “The advantages for consumers are pretty clear as well — more locations closer to where folks want to live translates into a faster and more convenient shopping experience.”
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By the end of 2019, Target said it will operate more than 130 small formats. Meanwhile, it continues to put investments behind making its stores operate as online fulfillment centers, cutting out shipping costs and providing shoppers with incentives to visit physical locations and make incremental purchases.
“Even as we reimagine our existing stores, we’re continuing to find opportunities to bring an elevated experience to new guests, and we’re doing that with our small-format stores,” Target EVP and COO John Mulligan told investors about the concept during a March earnings conference call. “The flexible design allows us to open in areas where our traditional big-box footprint simply wouldn’t fit — city centers, dense neighborhoods, even college campuses.”
Here are five other retailers testing this concept and rethinking real estate.
Arguably the department store sector’s leader in staying on top of digital shifts, Nordstrom was among the first in its class to announce plans to test smaller and more experiential spaces for its guests.
In September, the company unveiled Nordstrom Local, a customer-focused concept that focuses on services rather than stocking inventory. The locations will occupy a space of 3,000 square feet, while the typical Nordstrom department store is about 140,000.
The company opened its first such store in West Hollywood, Calif., last year.
The Menomonee Falls, Wis.-based chain — among the retailers whose struggles to navigate retail’s evolution has been well-documented — is in the midst of shrinking hundreds of stores from their standard size of 90,000 square feet.
“If you believe you can leverage your stores optimally to fulfill customers’ demand online, then having more stores is better than having fewer stores,” CEO Kevin Mansell explained to investors last month during a conference call. “Now, at the same time, our stores are less profitable, right? … You can’t ignore [that] fact … so running them more productively becomes the priority. As we’ve thought about this, our strategies are driven by this idea to maintain our store portfolio — maybe even have more stores but [make them] smaller.”
The company is running hundreds of its 90,000-square-foot stores like small-format stores to test the idea. As it tracks the success of the concept, it plans to physically shrink those locations — and in some cases lease or sublet the remaining square footage to retail partners such as Aldi.
The retailer this week debuted its first small-format Walmart Supermarket in China’s Shenzhen’s Bao’an District. Customers will be able to shop more than 8,000 items in a store that, at 13,000 square feet, is around 10 percent of the size of a regular Walmart Hypermarket, made to better accommodate shoppers in residential areas.
Domestically, Walmart has also slowed some of its brick-and-mortar expansion, focusing more on optimizing the stores it does have for e-commerce. It preceded many of its retail peers in 2011 when it launched smaller stores, dubbed Walmart Express, but that concept failed quickly for the firm, which has since closed most of them.
Lord & Taylor
Facing increased pressures from an activist investor that criticized its lagging profitability, Hudson’s Bay Co. in October sold its Lord & Taylor New York flagship to office company WeWork for $850 million. By 2019, the 650,000-square-foot building will be transformed into office space for all but a remaining 150,000 square feet, which will house a pared-down store.
While the sale sees HBC move to leverage its real estate portfolio to improve its top line and reduce its debt load, it also shows that the firm — which owns Saks Fifth Avenue and Hudson’s Bay department stores in Canada — is open to reducing its retail footprint as consumers express increased malaise toward sprawling shopping spaces.
The department store took its first big bet on small stores in 2015 when it revealed its off-price offshoot, Macy’s Backstage, averaging 30,000 square feet in size. Since then, CEO Jeff Gennette has said the firm intends to further expand the successful concept and take it even smaller, to an average of 10,000 square feet. In 2017 alone, Macy’s opened 30 Backstage off-price stores and now has more than 50 such locations.
At the same time, the retailer — which has closed 100 of its main doors since August 2016 — is reevaluating facets of its real estate portfolio, selling off large segments of its mainstay buildings to developers.
In February 2018, Macy’s signed an agreement to sell floors 8 through 14 of its State Street store in Chicago to a private real estate fund sponsored by Brookfield Asset Management. That same month, it also said it would sell 240,000 square feet of its Union Square building in San Francisco. Macy’s had already sold its standalone men’s store in August 2016 and said it would fold that into the main store — another move that shows the firm is attempting to do more with less.