Small-Format Explosion Is Coming
NATIONAL REPORT -- Walmart’s new convenience store concept, Walmart to Go, may seem like it was a long time coming, but it’s more like a natural evolution of the giant retailer’s growth into one of the few remaining retail segments ripe for big-chain expansion.
Walmart's first real convenience store format is also much more than just the company's latest attempt to crack into the c-store business; it's part of a larger evolution taking place in the retail industry.
“The small store segment in the United States is the least consolidated of all the retail channels,” Dan O’Connor, an expert retail analyst and founder and CEO of RetailNet Group, a Waltham, Mass-based global retail intelligence resource, told CSNews Online.
According to O’Connor, Walmart’s move into small formats has been going on for several years and actually reflects a global trend that has seen giant retailers such as Carrefour in France and Tesco in the United Kingdom become dominant players in the small store segment in their markets.
O’Connor’s company defines the small store segment as consisting of stores of less than 35,000 square feet and breaks them down into two segments: food relevant, which includes convenience stores, discounters like ALDI and Dollar General, quick-service restaurants, express/superettes and drugstores; and specialty/nonfood, including apparel, consumer electronics and hardware stores, among others.
Currently, 39 percent of North American retail sales growth is coming from stores that are 35,000 square feet or smaller -- and more than a third of small-store growth is coming from stores that are 5,000 square feet or smaller, according to RetailNet Group research.
Between now and 2017, RetailNet Group projects that 95 percent of net new store growth in North America will come from small format stores, and more than half of the net new small stores will be under 5,000 square feet in size. Nine of the top 10 segments ranked by store growth from 2014 to 2017 will have a segment average store size less than 10,000 square feet, according to the firm.
“There are many different types of ownership models in the small format group. They are the most entrepreneurial types of businesses, and the economic models are very different,” O’Connor explained in an interview with CSNews Online.
“Globally, the United States is following the trend,” the retail analyst continued, citing examples of Marks & Spencer, Tesco, Carrefour and Casino in Europe.
In the U.S., quick-service restaurants, convenience stores and drugstores are leading the way in store growth among the small format retailers, RetailNet Group research shows.
But O’Connor outlined a number of factors that are now driving big-box retailers such as Walmart, Target and others to ramp up investment in small store formats.
FOLLOWING THE CONSUMER
First, “there’s an impact from zoning and real estate availability,” he said. It is getting increasingly difficult for retailers to open big-box stores in their current highly saturated markets.
Secondly, retailers are reacting to demographic shifts, especially urbanization trends. “In North America, 83 percent of people live in urban agglomerations, and that will increase to 85 percent by 2017,” said O’Connor, describing the typically large populations living around major metropolitan centers.
“The workforces of the 1980s and 1970s were forced out of urban centers into the suburbs,” he noted. “Now, empty nesters are moving back into the cities, new corporations are going into downtowns again, and young consumers are returning to urban and exurban communities.”
The small box trend is the logical extension of retailers’ growth plans following the consumer.
“Small stores allow you to get into deep urban markets,” O’Connor said. These high-density urban neighborhoods provide less flexibility for retail development so large retailers are using smaller stores.
“Look at London, England. It’s a city filled with small boxes: Tesco Express, Marks & Spencer Simply Food, Morrison’s Convenience Stores, Sainsbury’s Local," he continued. "Small stores fit where people are and solve the congestion issue."
Any big-box retailer you can think of -- from Target to Tesco -- are all looking at how they can experiment with smaller stores, whether that be through a new format or a smaller versioned box, added Hannah Donoghue, senior analyst for small format retailing at RetailNet Group.
The trend also makes financial sense to a big company with limited growth options after saturating the country with its large stores. Walmart’s comparable store sales in the U.S. have been flat or down for several quarters. This year, the retailer announced it would open up to 300 small-box format stores, including up to 200 Neighborhood Markets and up to 100 Walmart Express units. The company has not announced expansion plans publicly for Walmart to Go.
“The notion of convenience today is constantly being redefined,” said Donoghue. “We are seeing and expect to see even more channel blurring across proximity, small format retailing.”