August 7, 2011 5:10 pm
Big US chains begin to ‘shrink’ their stores
By Barney Jopson and Andrea Felsted
Walmart wants to open 15 to 20 Walmart Express stores by the end of next year
American shops are getting smaller as retailers seek to reach consumers through new compact formats in the face of a stagnant economy, demographic shifts and a growing demand for convenience.
Retailers including Walmart, Office Depot and Best Buy are introducing smaller stores in urban areas, a departure from the “big box” stores on which they built their success at out-of-town sites in the past three decades.
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Tesco, which has forged into the US with stores that are smaller than traditional supermarkets, is shrinking its format further with convenience stores that might be dubbed “micro-boxes” by US standards.
“The cookie cutter, one-size-fits-all doesn’t seem to work that well any more,” says Ira Kalish, director of global economics at Deloitte Research, who links the shrinking of stores to the diversification – or fragmentation – of consumer profiles and preferences.
But the convergence of so many retailers on small formats is creating stiff competition and exacerbating the difficulties of operating on expensive and unfamiliar plots, squeezed between the offices, car parks and apartment blocks of big cities.
Walmart, the discounter that dominates US retail, has opened three Walmart Express test stores in recent months and says it wants to open 15 to 20 by the end of next year.
At about 15,000 sq ft, the Walmart Express stores are just 8 per cent the size of Walmart’s trademark Supercenters, which are 185,000 sq ft and cover the same ground as two-and-a-half standard football pitches.
Tesco of the UK began its move into California under the Fresh & Easy brand with stores of between 7,000 sq ft and 10,000 sq ft. But to push deeper into urban areas it plans to open stores as small as 3,000 sq ft, roughly the size of a UK convenience store.
“We are always looking at different sizes of stores,” says Tim Mason, chief executive of Fresh & Easy.
The shrinking of stores is partly borne of the “age of convenience”, says Ken Berliner, president of Peter J Solomon, a boutique investment bank. “Consumers want more choices. Retailers need to offer whatever the consumer wants to buy, however they would like to buy it, whether in stores, through a catalogue or online.”
Cash-strapped shoppers are also less willing to fund long drives to big boxes given high gas prices.
That helps explain the post-crisis popularity of small-format dollar stores – Dollar General, Dollar Tree, Family Dollar and 99 Cents Only – which between them already have more than 20,000 stores. They, too, are building more.
Consumers’ expectations for convenience have been raised by online shopping, an option that has harmed Best Buy, the US’s biggest traditional electronics retailer.
Part of its response has been to create small-format Best Buy Mobile stores, which sell telephones and tablet computers and will expand in number this year by 150 to 325.
Target, a Walmart rival, is next year planning to open five experimental City Target stores, which will be between 60,000 sq ft and 100,000 sq ft, compared with the typical 135,000 sq ft.
The downsizing also signals that retailers are adjusting to a higher concentration of people in urban areas – one result of the housing bust, which emptied new developments in the Sunbelt states of the south-western US.
John McIlwain, senior resident fellow at the Urban Land Institute, says two deeper demographic trends are also at play.
First, people in their 20s and 30s are living in urban areas longer than previous generations because they are marrying and having children later.
Second, baby boomers are moving back into city centres because they want to be able to walk to shops and entertainment.
But, in spite of retailers’ plans, city-centre stores are “typically not their first choice”, says Mark Keschl, national director of retail at Colliers, a property agency.
Retailers can run big-box stores off a single blueprint for inventories, staffing and fixtures.
But in each city location, they must adapt to a different set of constraints, ranging from narrow lanes for their trailer trucks to the existence of labour unions, he says.
Some retailers are not keen on the idea. Safeway, a grocery chain whose typical stores are half the size of a Walmart Supercenter, has two small shops in California but they are “a labour of love”, says Melissa Plaisance, head of investor relations.
“We are profitable in both, but it’s very hard … Hard to do enough volume to cover the costs.”
Copyright The Financial Times Limited 2011