Big Retailers Shrink Stores to Boost Sales

Fast-food chain Taco Bell's plan to open 300 new small-format restaurants across the country in the next four years is the latest by a slew of major national brands experimenting with smaller stores to cut real estate costs and cater to urban millennials.

Taco Bell, Barnes & Noble Inc., Whole Foods Market, Kohl’s Corp., Nike Inc., Target Corp. and Nordstrom Inc. are just a handful of major brands looking to increase market share and wring out more dollars per square foot of space in expensive urban markets by opening smaller brick-and-mortar stores.

The decision is a reflection of a rapidly evolving retail environment that is forcing retailers nationwide to reevaluate their real estate footprints. That scramble for space offers property owners and developers new opportunities to reconfigure properties and reshape their tenant mix.

"It’s not much different from what a lot of office users are doing right now. Everyone is trying to be smarter with their space and realize the savings that comes from that."

Sales at small-format stores outgrew those at larger stores by almost 400 percent in 2016 and now constitute more than a $1 trillion market, according to a 2018 report. It added that 51 percent of millennials - those between the ages of 22 and 37 -- say a store’s location is the top factor in a purchase decision.

In other words, the success of small-format stores also relies on convenience.

That's a driver behind fast-food purveyor Taco Bell’s plan to open 125, mostly small-format restaurants in New York City in the next five years. The company said it was under-developed in New York and wanted to tap into the city’s thriving urban market.

The Irvine, California-based company’s small-format restaurants -- called Urban In-Line and Cantina -- are tailored for "highly walkable areas" and have no drive-through windows. The smallest are just 1,200 square feet. The company plans to open 1,000 new restaurants across the U.S. in the next four years. Thirty percent will be smaller-format concepts.

"Boutique users, big-box retailers, your traditional power center line-ups are all trying to be leaner," Parsons said. "It comes down to maximizing square footage and cost-efficiency."

Many companies opening smaller stores are using technology to capture customer data and personalize the shopping experience.

Nike this year unveiled Nike Live in Los Angeles, a small-format, 4,600-square-foot store that coincides with the release of the Nike app designed to gather customer information and which allows shoppers to reserve items online, scan barcodes for product information and book personal appointments with in-store experts.

Nordstrom last year launched Nordstrom Local, a 3,000-square-foot store in Los Angeles’ tony Melrose neighborhood with no inventory. Shoppers can pick up items there and even order a drink. It plans to open more.

Target is opening small format stores in urban areas across the country, with an average store size of 50,000 square feet, compared to 170,000 square feet in its larger stores.

In an earnings call this spring, bookseller Barnes & Noble said it would begin opening smaller stores with 14,000 square feet of space, slightly more than half the size of most of its stores. Some Barnes & Noble stores occupy only 3,000 square feet of space, former Chief Executive Demos Parneros said.

Even Swedish retailer Ikea, which has opened 27 big-box stores across the U.S. the past 15 years, halted expansion plans in three U.S. markets this spring as it pilots a small store concept in Moscow.

The small-store trend "shows no signs of slowing, which will inevitably lead to continued growth of small format in 2018 and beyond," the Koupon report said.
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