As Target and Fellow Retailers Shrink, their Challenges Grow

FacebookTwitterLinkedIn

Of the 15 new stores Target plans to open in 2015, the majority will be the smaller format TargetExpress and CityTarget stores. Meanwhile, Walmart, Office Depot and Best Buy are also adding smaller format stores to their fleets.

This makes a lot of sense for retailers that have maxed out their suburban presence and are looking to urban areas to add stores. Expanding into underserved markets is a business basic, even if those opportunities can seem few and far between.

But the challenges of being small are not small. Unlike Starbucks or Dunkin’ Donuts, which can build stores within throwing distances of current locations without cannibalization, these larger retailers face a different “zero sum” marketplace. More locations do not translate to more consumption—or sales.[more]

Sales volume must be obtained from other sources, which can include e-commerce sites, same-day delivery services and even entrenched local retailers.

What to sell

The challenge with smaller stores is getting both the breadth and the depth of the merchandise assortments right. A big-box store’s reason for being is to be a one-stop shop for everything in the category, the classic “category killer”—or in Walmart’s case, a super-center providing virtually everything in abundance.

Downsizing assortments and eliminating categories is messing with the recipe. And it is not a matter of proportionately reducing everything to fit. There is an interdependency of merchandise that can make or break the concept, and some categories that need space because of fast inventory turn can crowd out slower turning but essential categories. Having enough bottled water or printer cartridges can mean too little frozen food or backpacks. The trade-offs can ruin the store’s overall appeal.

Assortment is not the only challenge. There is also the constraint of transportation. The number and size of items a shopper in an urban context will buy are impacted by how much they can carry. Purchases are smaller but visits are more frequent. More footfall is required to see similar sales per square foot performance, which is a dynamic many retailers are not used to managing and can take some experimentation to master.

The brand is a mixed blessing

Often these smaller stores betray the brand expectations, or create new store types that shoppers have difficulty assimilating into their shopping repertoire. Retailers like Aldi and Trader Joe’s, who are inherently smaller, have unique, differentiated propositions and products that shoppers value and know how to fit into their lifestyles. A small Best Buy, however, can be confusing. Is it a great place to shop for a big screen TV, or a convenience store for cables?

For the big stores that want to re-scale to smaller stores, opening under the banner of their larger namesake is a blessing and a curse. While they do offer familiarity and tap into the broader promotion and marketing engine, the risk is over-promising and under-delivering. Communicating the nuance of store size and store promise is a brand naming architecture challenge, with names like “express” or “neighborhood” that are often lost on shoppers in this short-attention-span world.

Tesco’s failed small-format Fresh & Easy experiment in the US is a great example of the challenges faced by even the best retailers. Creating retail concepts derivative of the parent can be a big risk but is a necessity, especially considering the retail saturation in suburbia.

A requirement, however, is starting from scratch with the store idea for the urban environment vs. adjusting the existing recipe. In the end, the best-situated retailers are the drug chains that already reside in the urban landscape. Urban-friendly, innovative stores like Walgreen’s and CVS may never carry big screen TVs, but they will certainly continue to update themselves over time and prove to be formidable competition to urban invaders.

—Bill Chidley is a Partner and Co-Founder at ChangeUp. Follow him on Twitter and LinkedIn.

FacebookTwitterLinkedIn