×

Small-Format Stores Are Changing Retail — But Are They Still Viable?

As the retail landscape undergoes a seismic evolution, one of the most noticeable changes adopted by scores of retailers has to do with the size of the store itself.

Pre-COVID, brands and retailers like sportswear giant Nike Inc., big-box chain Target Corp., as well as department stores Kohl’s Corp. and Macy’s Inc., had been making moves to go small when it comes to their store square footage. This has allowed them to expand in urban areas and large cities — particularly those with limited space and high rents. Smaller stores are also designed to be more curated than their larger counterparts and can offer hyperlocalized products and services that could boost customer acquisition and retention.

However, these small-format locations have some limitations: Not only are they hindered in their ability to carry inventory, but they could also prove disadvantageous in COVID-19 times. Many consumers are still reluctant to interact with other shoppers, let alone store associates, and tight spaces can make social distancing difficult, if not impossible. What’s more, the United States already has too many stores — and some experts argue that retailers need to rightsize their fleets of existing outposts before they can expect to turn a profit with smaller-sized spaces.

“Small-format stores are an important and exciting piece of the retail puzzle for many brands, but they are just a piece of that wider puzzle,” Placer.ai VP of marketing Ethan Chernofsky told FN. “The real key for brands leveraging multiple format types is to define where and how to use each specific format in the ideal way to maximize the benefits they provide.”

Finding purpose

Just last month, Macy’s announced the opening of a second Market by Macy’s — a smaller-format outpost, spanning approximately 20,000 square feet compared to the retailer’s usual 200,000-square-foot spaces — in the Dallas-Fort Worth area. (The first location debuted in the Texas city of Southlake early last year.) The launches were part of Macy’s three-year turnaround strategy, unveiled at its investor day last February, which included trimming 125 stores from its total footprint.

However, according to researchers at Placer.ai, going small isn’t a cure-all for retailers — especially those that struggled before the pandemic hit the U.S. They noted that the Market by Macy’s store in Southlake drew big crowds when it opened in February before the pandemic, while average weekly visits trended upward in the weeks from Nov. 2 to Jan. 11 to coincide with the holiday shopping rush. Still, during that same timeframe, Market by Macy’s saw nearly 64% fewer visitors per week on average than a baseline group of traditional Macy’s locations.

But the key objectives of small-format stores may have little to do with driving foot traffic; rather, they can be experiential and service-oriented, used to build a connection with shoppers that goes beyond just a transaction. Take, for example, Nordstrom Inc.’s Local concept, which offers services like in-store pickup for online orders, alterations and tailoring, as well as takes fashion donation dropoffs and provides gift-wrapping. In its Upper East Side location, the store also has a children’s play and coloring area, plus a coffee counter that serves pressed juices and kids’ drinks.

“The concept that small is the new big — I think service is the new big,” said January Digital CMO Sarah Engel. “Small format needs to offer something really unique in terms of service and in terms of personalization. The only thing it’s offering if it’s just smaller format is less merchandise for the customer to look at, and that’s not the win.”

In order for smaller-format stores to thrive in this day and age, they must offer speed as well as a more convenient and curated experience than their larger counterparts. Retailers can also leverage their small-format stores as distribution centers: Instead of stocking shelves with more product, the store can be used in tandem with e-commerce to fulfill online orders through buy online, pick-up in store or curbside pickup services.

“A small-format store can work for organizations that really understand their customer and take what works for their large-format stores, their digital presence and their mobile presence — then combine the best of breed from all of those channels,” Engel added. “If they can take all of those elements and create an experience in their small-format stores, that can be really compelling even with less or different merchandise.”

According to recent data from advisory firm BDO, the U.S. retail real estate market is currently “over-stored,” with an average of 24 square feet per person, compared with Western Europe’s four square feet per person. Still, the advisory firm reported that 39% of retailers are increasing their investments in their physical stores — including small-format outposts, even though they might see lesser foot traffic versus their bigger counterparts.

“Foot traffic doesn’t necessarily mean conversion,” explained Natalie Kotlyar, partner and national leader of BDO’s retail and consumer products practice. “Obviously, foot traffic is important, but retailers should be focusing more on conversion rates. If you have high conversion rates and low foot traffic, you’re still in a win-win situation. [Plus,] smaller stores’ foot traffic may appear to be smaller because they cater to BOPIS or curbside pickup.”

What’s in a Location

Ultimately, though, small-format stores won’t win on convenience and curation alone. According to experts, location is also a huge factor in the success of these kinds of stores.

Because of the health crisis, consumers are largely moving away from shopping at traditional malls and favoring open-air outposts. “When you look at small-format stores in suburbia, you see them off-mall, which we know tends to do well,” explained Jane Hali and Associates retail research analyst Jessica Ramirez, due to their ease of access for customers and often lower overhead costs for retailers. “It’s a good strategy, and it gives bigger stores like Target and Macy’s the ability to have a very concentrated inventory.”

Gap Inc., for example, unveiled a strategy back in October that involved the closures of approximately 30% of its namesake and Banana Republic stores in North America by the end of fiscal 2023 as it moves to a business model driven by e-commerce and off-mall locations. It shared that it expects about 80% of its outposts to be outside of malls within three years.

Similarly, Kohl’s Corp. has noted that 95% of its more than 1,100 stores are located off-mall and in other areas away from enclosed shopping centers. It has also been strategic about where it opens both traditional stores and smaller formats, ensuring that they are “conveniently located where customers live and work,” according to the company.

That doesn’t mean it’s all bad news for anchor stores and big-box locations. After all, chains like Walmart and Costco allow customers to buy in bulk, which generally saves them both time and money. Some consumers also prefer to shop in spacious stores to avoid interacting with other shoppers and store associates. But because it remains unclear when people will flock to stores once again, experts note that retailers who bet small now could actually win big sooner rather than later.

“I do think that, as retail makes a comeback and we feel comfortable going back into stores, the winners will be small stores,” said HRC Retail Advisory president Farla Efros, adding that they’re “easier to navigate, quicker to get in and out of, [as well as] have the line of sight and the ability to control the number of people in stores. I believe that small stores will be the entry into larger formats when we are comfortable.”

joor Sponsored By JOOR

JOOR Preps Digital Passport for the Hybrid Trade Show Era

JOOR Passport incorporates elements from the virtual trade show experience into returning in-person events.
Learn More

Access exclusive content