Fresh Produce Discussion Blog

Created by The Packer's National Editor Tom Karst

Monday, February 8, 2010

Wal-Mart, Target seek big returns in small stores - Reuters

Wal-Mart, Target seek big returns in small stores - Reuters

Retailers like Target Corp (TGT.N) and Wal-Mart Stores Inc (WMT.N) have expanded since the late 1980s by opening stores as large as three U.S. football fields.

In the last few years, they began to plan for smaller stores that fit in urban markets. That strategy is gaining urgency now as retailers look for new growth and seek to meet the demands of a shopper looking to buy and spend less.

Target and Wal-Mart have both told analysts they are creating smaller stores that could fit in the heart of densely packed cities where they have no presence. But analysts warn that creating a small store doesn't just mean shrinking a big one.

Big box retailers need to whittle their merchandise to suit shoppers who live in smaller spaces, use public transportation and prefer eating at coffee tables to large dining sets.

They also need to figure out how to make money if they cannot stock as many high-profit margin goods, like clothes, to offset brisk sales of low-margin items, like pasta sauce.

"When you have a big box mentality, your orientation is toward lots of SKUs (items
across lots of categories," said Leon Nicholas, director of retail insight at Kantar Retail.

"When you try to move into a small box the question then becomes do you cut SKUs or do you cut categories so far ... that you loose that one-stop-shop kind of mission?"

Or, he said: "Can you be Wal-Mart in a small box?"

SHIFTING SHOPPERS, SHIFTING STORE STRATEGY

Wal-Mart and Target's massive stores can combine a grocery store and a discount store under one roof.

Building huge stores made sense when suburban landscapes were wide open and baby boomers were moving away from cities. Easy access to credit fueled customer demand for larger homes and all the trappings that went with them.

But trends are now colliding to make big stores less attractive. Baby boomers are scaling back, moving into smaller homes closer to urban areas. The housing market crash means new neighborhoods are not springing up to support retail centers.

Meanwhile access to credit has dried up stalling consumer spending. And the worst U.S. recession since the Great Depression has left consumers with a frugal mindset.

"There's a general movement in America to close stores, to reduce the size of stores, to slow down expansion because of what has happened over the last 20, 25 years," said Allen Questrom, a Wal-Mart director.

"That's a challenge that we're going to be seeing over the next 10 years -- the reconfiguration of stores."

Big box retailers are already found in many cities. Home Depot Inc (HD.N) and Costco Wholesale (COST.O) operate in Manhattan, and Target is set to open a store there this year.

But many of these stores, sometimes built on the outskirts of a city, look similar to their suburban cousins. Target's Manhattan store will be 174,000 square feet -- bigger than its average general merchandise store size of 128,000 square feet.

With the latest urban focus, retailers are expected to invent formats that differ dramatically from current ones.

Gilford Securities analyst Bernard Sosnick expects Wal-Mart to test a 10,000 square foot store featuring financial services, like check cashing. The stores could also offer Wal-Mart's entire merchandise through site-to-store, where shoppers buy online and have an item sent to a store.

"There's a place for a store at every bus stop, at every subway station," he said of the small store potential.

Wal-Mart is emphasizing the success it is having running smaller stores internationally, especially in Mexico.

"There's a trend around the world toward small stores ... and we're already operating them and operating them profitably," Wal-Mart International CEO Doug McMillon told analysts in October.

Analysts expect Target's smaller stores to be 60,000 to 100,000 square feet. Target is already testing a new "assortment approach" in three stores, where it is offering 50 percent fewer items to see how customers react.

"We believe the smaller prototype will be a critical strategy to help mitigate the lack of new commercial real estate projects currently underway," wrote Piper Jaffray analyst Jeffrey Klinefelter in a note.

SUCCESS NO SURE BET

Success on a small scale does not come easy.

Wal-Mart opened convenience-sized grocery stores called Marketside in 2008. But the concept is on hold, and its website touts Marketside branded food and not the four-store chain.

Wal-Mart also faces opposition, especially from unions, to entering many cities. Questrom expects that will dissipate in the next decade as consumers, accustomed to finding these stores in the suburbs, expect to see them in cities.

The two retailers will need to follow different approaches in seeking small store success, analysts said. Wal-Mart might focus on necessities, like financial services or food, that shoppers buy frequently, while Target will need to recreate the "treasure hunt" shoppers have come to expect in its stores.

"Wal-Mart is much better at replenishment" shopping, said Nicholas. "Target is .. better at, 'Hey look what I found today, I found this new designer.' It's more of a discretionary trip."

Either way, analysts said small stores will be crucial.

"The trend toward small box retailing makes all the sense in the world," Nicholas said. "It lines up with demographic trends, it lines up with how people want to shop."

0 Comments:

Post a Comment

Subscribe to Post Comments [Atom]

<< Home