Big retailers are thinking outside the “big box store” concept to drive new revenue growth. Some of the biggest companies in the world, big retail loves big stores.
For the biggest giants in retail, though, same store sales growth isn’t driving profits. Walmart’s $400 billion in annual revenues means that it’s so big it’s practically a barometer for economic health. Target is finding the same trend in their income statement. And Best Buy sees that its huge stores simply don’t fit in a low-margin business.
I wanted to take a look at what each retailer is doing to weather the recession.
Walmart’s Smaller Stores
Walmart is thinking tiny. According to FastCompany magazine, the Walton’s money machine operates more than one thousand stores, each with an average size of 185,000 square feet. That’s huge.
In order to shed its big retailing image, the company plans on opening new “Neighborhood Market” outlets which will fit in a tiny 20,000 sq. ft. footprint. The company recently opened a 34,000 square foot store in Massachusetts.
Why it matters: Going small means that Walmart can achieve hyper-local targeting. In Chinatown, the company can better serve a first and second Asian demographic. In the inner cities, it can shift its supply chain to better target the emerging beginning and end of the month shopping patterns for those who receive government assistance.
Meanwhile, local grocers will be squeezed out. Walmart “tested” a Neighborhood Market in my town, only to send a local grocer into bankruptcy. Its Neighborhood Market store is literally 50 yards from the grocer, located on the same side of the street and everything.
Target’s Smaller Outlets
Target isn’t interested in hyper-local stores as its competitor. Then again, the company doesn’t have the same anti-union, monopoly image, either. The company plans to open new stores half the size of its current stores at 80,000 square feet, thinning shelves in a bid to boost profit margins. Target will remodel as many as 380 stores to fit the new goal.
Why it matters: Shrinking a store is a great way to force customers to accept smaller selections. Higher prices, lower overhead and thinner shelves mean thicker margins. In achieving closer proximity to its core customer, it can bring home the bacon.
Best Buy Mobile Bets on Cellular Sales
Who cares about aisles of LCD TVs, printers that retail for less than the included ink cartridges, or free-if-you’re-a-pirate CDs? Best Buy thinks it can drive new growth by going small, focusing on new “Best Buy Mobile” stores which sell only mobile devices—cell phones and tablets.
What’s so great about cell phones, you ask. Residual income!
Small stores are also a great mechanism for driving a competitor, Radioshack, out of business. Circuit City may have turned to dust, and Radioshack’s clearly off it’s 1980’s nerd course, but BestBuy has bigger competitors in companies like Amazon. By the end of 2012, BestBuy hopes to have as many as 375 “Best Buy Mobile” outlets in malls and shopping centers around the US.
Why it matters: Cell phones have a short life cycle (repeat business), customers are eager to purchase new phones, and margins are thick. Plus, AT&T is known for giving better deals to in-store customers over online purchasers. And when it comes to that brand new phone, customers just have to have it NOW. The company looks to use its size as leverage; it lined up exclusive deals with cell phone manufacturers for lower prices and unique colors.
As an investor, I think retail sucks—and I’m betting it will continue to suck.
Brick and mortar retailing is dead; there are few unique competitive advantages, and the supply chain makes for a nasty headache. I don’t own a single retailer in my portfolio, and won’t for the foreseeable future. That said, these smaller stores could be a boon for each of the companies above—all of the companies profiled need something new:
- Aldi is kicking the snot out of Walmart in New York and elsewhere.
- Target has a real estate heavy balance sheet that keeps the company’s stock tethered to commercial real estate performance.
- Best Buy sells a product to a demographic that is frugal, lazy, and internet savvy. Amazon trumps Best Buy on price, too.
It’ll be interesting to see how each new smaller store pans out for each company.