How Small Format Stores are Redefining Retail

The retail industry has long been driven by the philosophy that bigger is better. If we take a look at the largest retailers in the U.S. by sales volume, the results are not surprising: Walmart, CVS, Target, Home Depot - the list goes on.

There's one thing that these retailers all have in common; they are characterized by massive store locations featuring endless aisles of merchandise. Even Amazon, the king of e-commerce, arguably qualifies as having the biggest square footage of all, albeit behind the scenes.

So, why is modern retail currently experiencing the shrinking of floor space and the rise of the small format store? And what effect does it have on retail supply chains. Let's dive in.

What are small-format stores?

Small format stores refer to retail spaces with a much smaller footprint than traditional big box or department store formats. These stores offer consumers a more curated selection of product in-store within a smaller storefront, typically within the realm of 75 - 500 square feet - significantly less than the standard 150,000 - 200,000 square feet for standard stores.

Small-format stores bring consumers a more localized experience that maximizes convenience and efficiency, especially within more urban areas or densely populated neighborhoods, where space for larger stores is limited and expensive.

Why are big-box retailers pivoting to smaller stores?

Department stores and big-box retailers have long embraced the idea that more square feet - and therefore more inventory - makes them more attractive to consumers. Yet there is currently a big shift underway that is seeing major retailers including Target, Macy's, and Walmart pivot towards a small format for their new stores. Far from marketing a more conservative approach, these brands are going bigger - by going smaller.

Contrary to first impressions, these smaller stores aren't giving customers fewer options or less flexibility. Small-format retail is helping brands overcome the long-held perceptions about big-box retail: cluttered storefronts, too many choices, and long treks to a location.

The advantages of small-format retail

Lower overheads

Big-box stores have long been resource-intensive to build and operate. This is only increasing as expectations grow for more customer engagement opportunities like product demonstrations, pop-up shops, and even experiences like fitness classes or restaurants.

Finding the right mix of products and experiences to cover all of that square footage - in addition to running costs like utilities, labor, and set-up - comes with a high price tag that may not be sustainable for many retailers, especially during slowdowns in consumer spending.

Smaller format stores are cheaper and quicker to set up, require fewer employees to operate, and provide fresh opportunities to experiment with a new brand direction before rolling it out to bigger stores. This gives retailers more ability to take risks with new neighborhood locations and store concepts, pioneering a more nimble approach that keeps pace with consumer expectations for unique, evolving store experiences.

Barnes & Noble has struggled in the age of e-commerce, with online giants such as Amazon turning book shopping into an online activity. A recent overhaul has seen the bookseller move away from giant storefronts, which many consumers found overwhelming due to the lack of curation and difficulty finding specific volumes. These smaller stores give staff the ability to arrange inventory according to the tastes and preferences of local consumers, while also cutting down on less profitable product assortments such as toys, games, and electronics.

A bigger presence in untapped markets

One of the drawbacks of large store formats is that this limits where brands can expand their store network. Real estate is both expensive and can be difficult to obtain, especially within built-up city centers. Moreover, many urban areas in the U.S. feature spread-out populations that are difficult to serve via a handful of large format stores, as this requires consumers to travel a significant distance to reach a location.

Small format stores offer the advantage of flexible designs that can fit into more places. This opens up more potential store locations within urban neighborhoods that don't warrant a full-size store, but feature a captive audience looking for inspiring shopping experiences. In sum, retailers can achieve the same brand awareness as they can with larger stores, but with a smaller footprint that brings the brand closer to untapped locations in less time.

Example: Target

One of the first big-box retailers to adopt small format stores, Target has seen considerable success with opening locations close to campuses to college target students, a demographic often neglected by large format stores. These micro-stores stock common essentials such as bedding, dorm room decor, school supplies, toiletries, convenience food, and more. These smaller stores have seen higher year-over-year growth in store traffic than full-size Target stores, proving that well-targeted small-format stores can leverage captive audiences very effectively

Expanding pick-up and delivery capabilities

The rise of online shopping has presented a mix of benefits and drawbacks to department stores. While sales opportunities are virtually limitless, grounding e-commerce growth with the right infrastructure to support services like curbside pick-up, BOPIS, and rapid home delivery is an ongoing challenge. Small format stores allow retailers to enhance their omnichannel ecosystem by spreading the load between more localized customer meeting points.

Routing online orders throughout a more widespread, smaller format store network creates a more concierge approach, where customers can receive their goods faster. Instead of fighting through endless aisles to find a far-off pickup site or kiosk, a small format store is much easier to navigate while giving more attention to local customer needs.

Example: Market by Macy's

In response to less than favorable reviews of its traditional store experience, Macy's has embraced small format stores as a way to streamline the shopping experience and make it easier for customers to leverage the power of Macy's digital shopping ecosystem. Around one-fifth the size of traditional stores, these small format stores offer a more localized mix of private label and national brands, as well as a range of O2O services including in-store pick-up and returns. These smaller stores have already shown promise, with Macy's reporting that smaller stores that have been open for at least a year are achieving comparable sales growth to full-size stores. The retailer plans to triple its network of small-format stores by 2025.

More targeted shopping experiences

While a smaller format store means carrying a tighter selection of products, this doesn't have to be a weakness. Selecting the right inventory assortments is notoriously difficult for larger stores. Even with detailed demand forecasting and historical sales data, traditional stores are faced with the challenge of trying to appeal to anyone who walks through the door. But in practice, this can mean appealing to no one.

Because small-format stores force retailers to target a specific demographic, reduced store size can actually mean a more efficient sales strategy. Smaller format stores in places like college campuses, vacation towns, and airports don't just offer customers convenience, but provide more a personalized shopping experience by localizing product assortments in line with a specific target audience.

Example: The General Store by Walmart

As consumers come to expect a more catered experience at each storefront, retailers are searching for new ways to target these much more defined audiences. Walmart's latest collaboration with health and wellness company Getaway resulted in the small format spinoff shop The General Store, which has launched in select vacation towns across the country. The General Store carries a carefully curated mix of items catering to holidaymakers, including hiking gear, travel accessories, leisure activities, and more.

What is the key to small-format stores performing well?

From the examples above, it's clear that smaller is only better when retailers have the following aspects locked in:

The right audience. Knowing who your small-format store caters to is essential to choosing the right brand concept at your storefront, and creating it from the ground up.

The right product assortment. Less square feet means less inventory, so stores need to select SKUs carefully based on what is relevant to their target market and demographic.

Keeping allocations narrower and more thematic is the key to reducing reliance on mass clearance events.

The right location. Successful small stores tend to be located in areas where it's difficult for large format stores to find a sustainable home, such as dense urban neighborhoods. In this context, small-format stores maximize convenience for local shoppers.