In soft economy, big retailers think small

In a shrinking economy, store footprints appear to be shrinking as well, as retailers, most notably Lowe’s, look to find ways to capture new market share.

Lowe’s will try smaller box sizes, some as low as 60,000 square feet, a trend echoed throughout the home improvement channel and retail market as a whole.

Next year, Lowe’s said it will open 75 to 85 stores in 2009, fewer than the 120 stores the retailer opened in 2008. The store also plans to shrink some of its store footprints, part of an initiative to go small in a tough economy.

“We’ve been working to size our footprint closer to the opportunities in our large- and mid-sized markets,” explained Greg Bridgeford, executive vp-business development for Lowe’s, at the company’s annual meeting. “We’ve been utilizing the 103,000-square-foot store format in a number of size-constrained metro sites over the last few years and found the customer gave us the same good high marks for shopping environment and product presentation as in the larger stores.”

And Lowe’s has seen success in even smaller formats, including an 80,000-square-foot box with a drive-through lumberyard, that has “proved to be a winner,” said president and COO Larry Stone.

“At the same time, we think that in some markets there’s even opportunity to go even smaller. So, we’re opening a 66,000-square-foot store with a drive-through lumberyard in December of this year in a small North Carolina market,” Stone told investors.

Several signs point to a long-term trend toward smaller boxes in smaller markets, with new formats not only from Lowe’s, but from a variety of large retailers, including Walmart and Best Buy. Experts polled by HCN said that the trend offers a better return on investment for those retailers. And despite an economic pullback, time still is an equal if not more valuable commodity for a large swath of consumers—therefore, those customers still seek convenience over savings.

Jeff Green has served as a retail consultant for big-box and smaller specialty retailers nationwide as president and CEO of retail real estate consulting firm Jeff Green Partners, based in Mill Valley, Calif.

“This trend of larger, larger, larger started to make absolutely no sense,” he told Home Channel News. In the long term, he said, smaller, pared down, convenient shopping has emerged as the greater trend.

Green said as we enter an economic downturn, it’s true that many consumers will view money as a greater commodity than time. But in planning for the retail future, convenience will again become the key factor in where consumers decide to shop. After about one or two years of money-savings focus, he predicted consumer sentiment will return to a time-saving focus.

“Once we get through this, it’s still going to go back to smaller formats. What retailers saw as they put in larger formats, they weren’t getting the sales per square foot. And this was offering a not necessarily more convenient opportunity for the consumer,” Green explained. An overabundance of skus, although necessary for some big boxes to compete against each other on brand differentiation, also sometimes stands in the way, he added.

“For example, if you took out all of the underperforming skus from Menards, you could have 60,000-square-foot stores,” he said.

Several retailers have taken their “small-box” cues from European retailers, such as U.K.-based Tesco, which recently entered the New York market. Home Depot employed Tesco’s consumer research firm, Dunnhumby, to find out how to best target-market to consumers and reduce or reevaluate skus. In its entrance into the small format, convenience box arena with Marketside stores, Walmart also eyed increasing competition from Tesco.

Tim O’Connor, vp at retail research group RetailNet, and Keith Anderson, a senior analyst at RetailNet, agreed that the smaller box trend will continue. For several years, they’ve watched big-box chains like Walmart move toward smaller store footprints. In October, Walmart launched its first Marketside stores in Arizona, a small, “fresh food” retail box that also sells a limited supply of kitchen items and housewares. That format and Tesco’s stores are, in some ways, a bellwether for how retail trends in the United States will evolve, they said.

“Tesco was really the first prominent retailer to be a totally consumer- focused marketer,” O’Connor explained. The retailer was one of the first to use club-discount cards to gain consumer insight and target-market to individual consumers, for example. “They made a point of being very responsive to what consumers want, as opposed to just putting it out there to see if it flies.”

The concept of “putting it out there to see if it flies” has been, in some ways, the mantra of the big box, Anderson added. That appears to be changing.

“I think the biggest thing is that you see other big boxes building a department portfolio—a management strategy that basically involves identifying a category they want to win in, want to place in and want to show in.”

And if a retailer is not, like Lowe’s, planning on launching a whole new small format to deal with a scaled-down strategy such as this, they will be editing their assortments to reflect a more targeted approach, Anderson said. “Across the landscape you see retailers are trying to offer more meaningful choice, editing their assortments.”

In the end, it’s all about finding a better return on investment and sales per square foot, which Green had observed as diminishing as big-box stores grew ever larger. The trend now is to bring the retail battleground from the outerbelts and traffic hubs where big boxes flourished throughout the 90s and early 2000s, back to smaller markets and in-store strategy.

“Because they were pursuing this strategy of market density, you would see the Home Depots or Walmarts sacrificing per-store sales for the sake of share,” he said. “We think there’s sort of two separate issues, a trend toward smaller pro to type stores and scaling back, opening fewer new stores, in the marketplace in general.”

Back at Lowe’s, Stone appeared to agree with these assessments.

“The smaller box helps us reduce our capital investment versus the 117,000-[square-foot model], which will allow reasonable returns in lower-volume markets and at the same time give us the opportunity to drive project business using the drive-through yard concept,” he said, adding that using the smaller concept was also advantageous in gaining market share by having the “right-sized store” appropriate for its individual market.

Not only that, but Stone explained there are other considerations, including Lowe’s sustainability in store building efforts, as well as perhaps the most current, notable advantage of building small:

“Now the other obvious benefit—and it’s huge—is cost,” Stone said. “An average reduction in total capital outlay of almost $2 million. Ongoing expenses of heating and cooling and maintenance cost also benefit.”

In such a tough market, when there’s no such thing as “small change,” that’s something Lowe’s can bank on.