Big-box stores try to stay relevant by focusing on smaller stores

Two of the biggest names in big-box retail have boosted their bets on a growing trend for brick-and-mortar sales: smaller stores.

Best Buy and Macy’s this week announced plans to add small-format stores in a strategy that could help the companies cut costs while answering customers’ demand for convenience. They join Nordstrom, Target, Kohl’s and other national chains in scaling back their locations with tens of thousands of square feet anchoring malls and shopping centers, while focusing on more compact and efficient stores.

“Consumers use stores differently than they used to,” Moody’s Investor Services analyst Christina Boni said, adding that shoppers want stores nearby and accessible, and often see them as ways to complement their online shopping with pickups and returns. “All of those things merit itself to thinking about a box that’s different than what it was before.”

Small-format stores address a modern shopping experience, one very different from the days before e-commerce, Boni said. Consumers are no longer discovering products by browsing through 100,000-square-foot stores - they’re doing it on social media as well as on the brands’ apps and websites.

For example, Nordstrom is slowly growing Nordstrom Local, a store primarily focused on services including alterations, pickups and returns. In 2022, Kohl’s announced that it was adding 100 small-format stores that are about 35,000 square feet in size. Furniture retailer Ikea has at least 26 mini stores, including ones just for picking up orders and others to that resemble a showroom called “Plan & Order.”

The most recent example is Best Buy, which said Thursday that it will open small-format locations in new markets and downsize in existing ones, though didn’t specify where or how many.

That announcement came two days after Macy’s said it would close 150 namesake locations to focus on small-format stores under its Bloomingdale’s and Bluemercury brands. Fourth-quarter sales at Macy’s department stores fell 2.5 percent year over year, while Bloomingdale’s and Bluemercury sales rose 3.5 percent and 7.8 percent, respectively, the company said.

Chains embracing the small-format strategy are those in categories that “have been under more pressure,” said R.J. Hottovy, head of analytical research at foot traffic analytics firm Placer.ai. That includes home furnishings, department stores and consumer electronics. “It’s all these categories that saw a pull-forward in demand [during the coronavirus pandemic] and now are normalizing and maybe figuring out they don’t need as much square footage,” Hottovy said.

Store downsizing has been happening across the industry for years, but it accelerated in 2023, said Brandon Svec, the national director of U.S. retail analytics at real estate analytics company CoStar Group. New retail leases of more than 25,000 square feet fell 12 percent from 2022 and made up 22 percent of all new retail square footage - the lowest share since CoStar started tracking these metrics in 2006, according to Svec.

One notable large retail chain, Target, saw the average size of its new leases from 2021 through 2023 shrink 35 percent, Svec said.

Smaller-format stores can be more cost-effective because they have lower rents, carry less inventory and require fewer employees. But with that comes mounting competition for those storefronts, Svec said, as big-box retailers seek the same types of spaces as discount, off-price, and food and beverage tenants in a market with limited inventory. Over the past 15 years, there has been almost no new developments of open-air shopping centers, he said.

Downsizing brings a new set of challenges, said Katherine Black, who leads the food, drug and mass-market retail division at consulting firm Kearney.

“The real crux for these retailers is picking the right merchandise for these smaller-format stores and figuring out where that makes sense,” she said. “The more inventory they take out of stores, the more they’re almost forcing the consumer online.”

Some retailers - like Best Buy - are also looking to expand into new markets, leveraging the data they have collected on their customers to find small locations with higher consumer interest. Retailers see opportunities to follow customers who moved during the pandemic from large urban centers to rural and suburban areas, Hottovy said.

“All of a sudden, these markets with a population smaller than 100,000 people are a lot bigger,” he said. Placer.ai found that the majority of households that moved have a higher income, “so when you get these markets that saw a lot of growth and higher household incomes, it starts to present a pretty attractive proposition for a lot of retail brands.”