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SLIMMING DOWN

Smaller stores and prototypes help large retailers squeeze into big markets

By Rodger Brown

If pink is fashion’s new black, and 50 is the new 40 for perpetual-youth-seeking baby boomers, it’s fair to say that small is the new big for retailers seeking new strategies for growth.

In the past few years, big-box retailers, high-end luxury brands and even fast-food restaurants have embraced the “small is beautiful” mantra to grow in saturated markets.

“There are two totally different things going on here,” said Jeff Green, a retail feasibility consultant and president of Jeff Green Partners, of Mill Valley, Calif. “First, many of the larger, fully stored companies have to find a way to grow. There are all these other secondary markets that can’t support the big box, so it’s important for these stores to roll out with smaller stores. They can’t just go in with their prototype stores.”

That trend of the shrinking big box began in the late 1990s when Wal-Mart unveiled its Neighborhood Market concept with a layout that is half the size of its typical 100,000-square-foot store. The tactic has lately been adopted as well by the likes of Best Buy, The Home Depot and Lowe’s.

Home Depot garnered attention for its urban strategy when it opened half-size stores a few years ago — 80,000 square feet in Brooklyn, N.Y., and Chicago’s Lincoln Park area. Lowe’s followed with a slim-fit version targeting small markets in 2003, and last year Wal-Mart signaled a renewed commitment to its Neighborhood Market concept when it opened four stores measuring about 39,000 square feet each on the same day in high-growth areas of Las Vegas.

These smaller layouts offer multiple benefits to retailers. “Not only do they open up new markets, but a side benefit is that, for Wall Street, it helps them increase sales per square foot,” said Green. “The smaller the box, the higher the sales per square foot.”

Even Burger King has rolled out a smaller template, occupying a half acre rather than a full acre and citing land costs. But the chance to enjoy flexibility in an increasingly demanding marketplace and to test new concepts makes such smaller formats attractive to chains seeking ways to stay competitive.

Another trend involves the adoption by luxury brands of these smaller concepts or boutique stores, says Green. “These formats are easier to play in choice malls where there aren’t so many available large spaces, and they help target new markets,” said Green. “Barneys Co-Op is a great example of a ‘boutique-y’ approach that appeals to a younger customer.”

The smaller Co-Op concept is an essential component of Barneys’ aggressive expansion plans since its emergence from bankruptcy in 1999. This year Barneys opened a flagship store in Boston and said it would open an additional 60,000-square-foot store in San Francisco next fall. The company also has full-size stores scheduled to open this year in Dallas and Las Vegas. But it is the company’s smaller, lower-price Co-Op stores, which range from 6,000 to 9,500 square feet and target hip urbanites with sportswear and premium denim, that have caught the attention of other high-end fashion retailers. In June Barneys announced its 13th and 14th Co-Op stores, to be built in Austin and Los Angeles.

Barneys’ success with a small-store format that targets a younger clientele has not been lost on companies like Neiman Marcus, which announced its own boutique format, called Cusp, in July. “It’s a necessary strategy for Neiman’s to keep up with its competition and go after that younger customer,” Green said.

Neiman Marcus is being cautious with its new launch, however. Customers will be able to use their Neiman credit cards at the store, but there will be no other branding that links the parent company to Cusp, with its eclectic look of exposed duct work, polished concrete floors and flea-market finds scattered about, all intended to appeal to people between 25 and 45. Heaven forbid that anyone should associate the store with those emporiums of polished marble and fine art that cater to Neiman’s traditional 45-to-55-year-old.

Ginger Reeder, Neiman’s vice president of communications, says the company views the roughly 10,000-square-foot stores, the first of which opened in July at Tysons Corner, in McLean, Va., as “laboratories” and will accordingly be monitoring them carefully. Two more are to follow in Los Angeles and Washington, D.C., by next year. “We’re planning a very soft launch,” Reeder said.

Fashion-forward apparel is not the only retail sector that needs to cultivate the younger demographic. Consumer electronics giant Best Buy, too, is pioneering new concepts that target niche markets. The consumer electronics giant opened its first scaled-down store in 1999 — at 30,000 square feet, as opposed to its typical 45,000-square-foot store in urban markets — to help it fit into cities with populations of 200,000 or fewer. Last year the chain also began experimenting with 3,500- to 5,000-square-foot Studio D (a boutique for women) and Escape (catering to young technophile urbanites) stores.

At the National Retail Federation convention in New York City in January, James Damian, the senior vice president of Best Buy’s “experience development group,” said the smaller, targeted stores allow a strategy that takes the shopping experience to the next level. “We want to embrace the senses,” Damian said. “With the five senses lies the heart of the consumer — why they buy and how they shop.” Hence Studio D’s homey feel and classes in digital photography and scrapbooking, and Escape’s inventory of leading-edge gadgetry, faux-nightclub feel and sponsorship of video-game competitions at local bars.

Some experiments are bound to fail, of course, but if so, better a smaller store, sources say. “The great thing about adding a smaller store like Neiman’s Cusp is that there’s less risk,” said Green. “You’re only subsidizing 9,000 square feet, not 150,000.”

Sizzling discount fashion retailer H&M learned that lesson the hard way. The Stockholm, Sweden-based company opened a store on New York City’s Fifth Avenue in 2000 and caught fire with its affordable fashion. Then ambition seems to have gotten the best of the company. In 2004 CEO Rolf Eriksen told Fortune magazine that the company had bought into the bigger-is-better philosophy but quickly realized its mistake.

“The Fifth Avenue store in Manhattan was such a success, we thought that we could open bigger stores in the U.S. than in Europe,” Eriksen said. “The first seven or eight mall stores we opened were too big, but after that, we opened smaller stores.”

That nimble response served H&M well. Last year the company used the small-store strategy in launching its first stores west of the Bloomington, Minn., Mall of America. The company opened a 35,000-square-foot store in San Francisco and a separate 10,000-square-foot store aimed exclusively at women.

Green says American malls and shopping centers are following trends of the scale and mix of international malls.

“If you look at other shopping centers around the world, there might be a big department store in one of the major malls, but most of the larger shopping centers have a mix of smaller stores,” said Green. “And that’s what’s happening here. For so many years, the rest of the world tried to emulate the U.S. And now we’re becoming more like the rest of the world.”