Not Too Big to Fail?

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Consumer Insights From MasterCard Advisors

The Emergence of the Small Store Format

\"RRWe’ve heard much talk about the waning era of the “big box.” In 2012, we saw many headlines relating to planned store closures by Best Buy, with similar stories for Sears and Office Depot, among others. More recently, of course, J.C. Penney made mega headlines. In all, from the announcements of just five Big Box retailers, anything from 1100 to 1350 big boxes could be shuttered over the next year or so.

Maybe this is not necessarily a bad thing. In some cases, we are seeing some of that big box space being reincarnated as two smaller stores instead of one. And from this, a pattern seems to be emerging, with growing retail buzz around how to make stores smaller, more selective, highly curated – in short, create a better customer experience.

Jonathon Graub, a principal in the Philadelphia office of A&G Realty Partners, specialists in the strategic consolidation and reassignment of store leases, confirms the smaller store trend. He attributes it in part to the lack of availability of large spaces in prime areas and the speed with which a chain can get to market when it enters with a smaller store format. But we must also factor in the continued growth of online commerce – Internet pureplays which desire a brick-and-mortar presence, while current brick-and-mortar chains may find there’s less need for larger spaces as their online businesses expand.

Certain types of data can be very helpful when retailers are assessing the best locations for these smaller stores, and it’s much more sophisticated and multifaceted than looking at foot traffic or demographics. At MasterCard Advisors, we look at three key aspects – geography, product categories and travel distances. Analytics that look at purchasing behaviors geographically enable us to understand the spend demand in a particular category and identify where the best prospects are located. When combined with modeled data sets on where people come from and how far they’ll travel to get to the new store location with product categories, we’re able to provide powerful insights into optimal store locations.

How Big is a Small Store?

Large retailers have found that they need to listen to the needs of their urban customers – after all, one in eight people in the US lives in either New York or Los Angeles – and so chains are planning their urban store growth strategy accordingly. What they have found is that urbanites want a mix of practicality and eclecticism – smaller packages that are easier to carry, smaller stores that are easier to navigate, and a narrower selection that gives at least the illusion of exclusivity or specialness – a kind of calculated quirkiness one finds in boutiques that gives the impression that you’re just not going to find this item anywhere else.

Retail giant Walmart originally planned that its smaller stores were going to be just 10,000 square feet (SF), though its city store prototype in Toronto weighs in at 90,000 SF. Still, that’s nearly half the size of a Walmart Super Center. With two formats, which it’s calling Neighborhood Market and Express, Walmart is trying to gain flexibility in a market where the only thing that’s certain is that each location will be different and will therefore need to be customized to its location and consumer base.

Office Depot is going to 5,000 SF for its neighborhood stores, with short (6-foot high) shelves and only half of the SKUs carried in their large store format – calculations that are speaking to a customer base interested in convenience and smaller packages. Like Walmart, City Target is half its big box size, at 80,000 to 100,000 SF, and though it still carries furniture, the selection and size are geared toward an urban market with balconies, not suburban decks.

The Benefits of Going Small

Going for the “Cliff Notes” version of War and Peace rather than the 1400-page original makes sense in a culture in which shortened attention spans and required instant gratification characterize the American consumer. Equally, trying to replicate the general store on Main Street opens up the possibility of greatly enhanced retail sales-per-square-foot ratio. A relative newcomer that jumped to the top-in-class leader in in-store retailing, Apple, maximizes its sales per square foot – doubling even Tiffany’s. According to a recent CNN Money survey, Apple’s sales per square foot stand at $6,050, while Tiffany, with its relatively static luxury offering, comes in second at $3,017; and Lululemon, with specialty yoga clothing, is third at $1,936. Apple’s foreshortened product line, as well as the brilliant interactive move of throwing in professional post-sale support for free, keeps customers not only buying, but coming back and waiting in line for more. Their stores may not all be small – they range from 5,000 to 40,000 SF – but each is treated as a unique architectural design project.

The Multichannel Connection

One facet of the smaller store format – that it can act, at least in part, as a showroom for companies that have a much larger presence online – brings us into the ongoing conversation about multichannel retailing. The trend toward smaller stores is central to the multichannel equation, as they supply a critical component to the blend of online and offline retailing. Multichannel often seems to amount to shopping (and usually paying) online, then picking up from or returning products to the store.

But there’s more to it than that. Let’s say you’re a big digital player – one poster child is the eyeglasses company Warby Parker, which sponsored many superhero movies and names their line of frames accordingly. You know empirically that you get a higher share of customer spend if you can connect across channels – and people do like to touch and feel things, and try them on, especially if they’re eyeglasses. Opening small stores suddenly becomes a way to achieve that multichannel connection. Other online centric retailers make distribution deals through pre-existing physical retailers, or open up some other kind of physical presence – pop-up stores or otherwise. It’s an art to know where and when to do that, and data analytics can help inform these moves. Brick-and-mortar stores are very different than online, and have a different, sometimes unpredictable, impact in local marketplaces. Understanding customer behaviors and preferences, using predictive modeling to anticipate demand, getting to grips with where geographically that demand will occur, is how to take the guesswork out of radically editing merchandise. It’s the difference between an informed choice and a good bet.

We’ve been able to use analytics based on MasterCard’s anonymous transaction data to edit down inventory in a way that suits the small store format, yet still have the right products in the store, appropriate to the region, climate, and so on. In the case of a retailer that attracts tourists visiting from a variety of other countries, analytics can provide merchandising insights. For example, if Brazilian tourists frequent a certain U.S. region or store location in the summer, it makes sense for apparel retailers to carry sweaters, since summer in the northern hemisphere is winter in Brazil.

Creating Scarcity Through the Small Store Format

The small store format is a way to get into the physical realm without the massive investment in inventory and real estate required by big-box brick-and-mortar retailers. Trader Joe’s is a great example of a successful small store – its highly edited and specialized selection creates a kind of treasure hunt for its customers. The churn or rotation of products – seasonal items, specialty items – in effect creates its own cycle of seasons, which, along with the occasional one-off pop-up item, keeps its regular customers coming back – and makes regulars out of first time customers in a big hurry.

The whole point of a small store is to move product as quickly as possible, creating turnover and strategic scarcity. Legendary merchant, Mickey Drexler, CEO of J.Crew is probably the biggest and most successful proponent of creating scarcity. Customers who have been trained to shop in these curated and experiential physical locations take it personally if a retailer runs out of a favorite product, or stops making it altogether. You can then see phenomena like runs on certain products, with customers stockpiling it while it’s there.

Overall, retail could have taken a serious wrong turn by seeking to provide an almost infinite selection of products. Maybe it’s not about having things en masse, but about having a special selection seemingly geared toward the individual customer’s wants.

It would appear that small store format is a big idea whose time has come, and in the search for a less hit-and-miss direction for merchandising, it makes sense to use data analytics to understand and support the new and growing market of smaller, neighborhood-targeted stores. Gaining an understanding of what’s going on outside of your own four retail walls, and what’s selling at stores with formats similar to yours, is essential. Understanding buying trends of an aggregated group of customers in a given location – what they buy, how much they spend, how often they shop, and other clues to their preferences – can offer a real leg up to success as retailers think through their highly narrowed-down merchandise selections. This type of hyper-localization – localized product lines, localized offers, and the concurrent ability to connect with the customer and gain knowledge at a store level and its surrounding geography – has to become the art form, if smaller store formats are going to work in terms of merchandising, customer experience and supply chain.



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