The “Big Box” may not always be better or profitable
Last week’s post was about the impact of the economy on the struggling US mega malls. But, even the successful “big box” retailers are aggressively exploring new smaller formats. What are the retail drivers and implications of the downsizing of retail space, and what is the right size?
Challenges of the Big Box mega retail space
The US suburban malls are the epitome of destination retailing. In the times of a robust economy, accessible credit and cheap gas, US consumers readily drove their cars to the malls as a destination for shopping and entertainment. The current metrics are showing not only a slowdown of consumer spending, but a shift in shopper habits away from suburbia malls.
The challenge is similar for major big box retailers. Like the mega malls, they have to be able to drive traffic and repeat trips. For the mass merchants like Target, this has meant an even greater shift to groceries and consumables. This creates a new challenge: the commodities drive traffic, but also generate lower margins, often on an increasing number of SKUs, which in turn, can impact SG&A and operating costs.
Two of the major challenges of running a very large store environment are: 1) the amount of people required (SG&A costs), and 2) the amount of SKUs and inventory required to stock the big box and get consumers to come evaluate the “breadth and depth” of the assortment. Both of these potential differentiators are also huge cost drives.
What if you are more of a “specialty big box” retailer like Best Buy or an Office Super Store? What do you do then to compete and drive traffic?
Testing the potential of smaller retail shops
The good retailers test concepts. The great retailers are always evaluating how to evolve stores to meet evolving consumer needs and behaviors. The current trend and best practice is toward evaluating smaller, more focused formats. Funny how the most successful retailers are also the most aggressive testers … obviously, the best don’t rest on their laurels! Here are just a few of the downsize concepts being tested:
Best Buy, the last big box CE specialist in the US, is aggressively rolling out new small format mobility stores. They continue to test new concept stores focused on women through their WOLF group.
Office Max, a big box office warehouse, is currently testing much smaller more focused stores called Ink, Paper, Scissors.
Radio Shack, not a big box retailer, but a very large retail chain with 7,000 stores located in a lot of malls, is testing some very targeted high end wireless concept stores.
Walmart, even the biggest of the big box retailers, continues to test a variety of smaller format and specialty stores, including Marketside, stores within stores, medical clinics within stores etc.
The advantages of smaller “test stores”
There are a host of advantages to testing smaller concept stores:
1. Lower entry real estate costs into new markets
2. Much lower capital, inventory and operating costs
3. Ability to move concepts and stores closer to consumers
4. Ability to focus on differentiation, both SKUs & services
5. Ability to quickly bail out at lower exit costs if doesn’t work
Winning formula? – Must balance the numbers
At the end of the day, if the retailer can find the right formula to drive enough traffic to a smaller format, there is a potential to lower operating costs and drive a greater profitability per square foot.
But, there are a lot of “ifs” to make smaller stores work … BIG IFs!
The power of the big box is the breadth of the assortment that drives traffic to the one-stop shop, where they can purchase it all at one stop, at attractive prices.
The smaller retail space must be very focused on consumer needs. There must be a differentiated assortment “deep enough” and with enough “value adds” that consumers are compelled to make a special trip to a specialty shop. Here in lies the art of “location, location, location”. It is far easier and more profitable to move a smaller store to a location to “harvest” natural consumer traffic, than to build in remote locations and attempt to drive traffic to a new store, despite the lure of “cheap real estate”. “Cheap” real estate is not cheap if there is no traffic.
At the end of the day, perhaps, the best metrics to evaluate smaller specialty retail formats are both SG&A (Sale General and Administrative – “operating costs) and Revenue per square foot (meter).
One only needs to take a look at the latest stat from the latest US retailer financials to see the winning combination of Apple combining the power leveraging focused assortments in small shops to drive revenue per sq. ft., which in turn and offset labor costs as percentage of revenue (SG&A).
Click picture to enlarge. Vendors must start executing category management!
Vendors don’t sell to retailers … they sell through retailers.
It is still a retail jungle out there, and it’s getting both more competitive, and more complex with increasing numbers of formats within retailers.
Account teams and category marketing must move beyond “selling in” a product line and programs to a retailer like Walmart or Best Buy. Walmart is no longer just a “mass merchant” … it is many different formats of stores: Walmart super centers, Walmart small box, Sam’s, Marketside, Walmart international, etc.
Far too many vendor teams are still focused on traditional retail programs, merchandising and product line reviews. Success with today’s retailers and the emerging formats will require SKU rationalization and category management by store format … all the way down to the store front.
Ted, thanks for your comment. I certainly agree with your analysis regarding testing smaller formats to explore niches. There is no question that commodization is driving prices and margins lower ... it is also forcing big boxes to go through SKU rationalization and lower inventory.
Chris Petersen
Posted by: Chris Petersen | June 12, 2009 at 03:48 PM
The real driver behind the move to test smaller store concepts lies in the Long Tail. Larger formats are struggling to maintain sales-per-square-foot as commoditization drives prices lower and erodes margins. Smaller formats allow retailers to explore niches and appeals that they can't with larger stores, while still seeking scalability.
Posted by: Ted Hurlbut | June 12, 2009 at 10:56 AM