Target (TGT), Ulta Beauty (ULTA), and Macy’s (M), among many others, are shifting more of their focus toward small-format stores.
Small-format stores are scaled-down versions of big box retail stores that offer consumers an efficient, convenient, and localized shopping experience. According to R.J. Hottovy, head of analytical research at Placer.ai, there are several reasons why retailers are pursuing smaller-format store strategies.
“First, smaller-format stores tend to be less expensive to operate than larger-format stores in terms of rent and labor needed to staff the stores,” Hottovy told Yahoo Finance. “Smaller-format stores [help] retailers to streamline operations and focus its merchandise and staff to its best customers. Also, as we've seen many consumers move away from urban areas to more suburban and rural markets, smaller-format stores allow retailers to more efficiently reach these potential customers.”
A customer shops for holiday gifts in a Target store on Dec. 21, 2023, in Austin, Texas. (Brandon Bell/Getty Images) ·Brandon Bell via Getty Images
According to Placer.ai, other reasons for the shift in strategy include the ability “to target a specific demographic, create a personalized shopping experience, or experiment with a new brand direction.”
“We expect a continued movement toward smaller-format stores for many retail categories in the future because they tend to be cheaper to operate and allow retailers to access many smaller, high-growth markets,” Hottovy said. “However, some retailers like mass merchants (which have been expanding stores to increase their grocery assortments) and sporting goods (some of which are relying on larger format experiential concepts to drive visits) will continue to evaluate retail formats across a range of store sizes.”
A move away from traditional shopping
Target is one example of a retailer that has made smaller-format stores part of its strategy.
Its average store is around 125,000 square feet, and out of its 1,963 stores across the US, over 170 are considered small-format. Those stores are a third of the regular size, under 50,000 square feet.
Target said it will continue to add small stores where there is an opportunity; however, the company noted that it has shifted its focus back to building larger stores.
“We feel really good about the returns of small stores," Target COO Michael Fiddelke said on an earnings call in March. "But as we step back, and look at what that pipeline looks like in total, it's actually the big box stores ... that are bubbling to the top in terms of where we expect returns to be strongest. And so we'll lean in to that shift over time."
Ulta Beauty, a cosmetics retailer whose partnership with Target includes a small-store concept within the larger retailer, has also seen success from the small-store business model.
The beauty retail giant plans to expand in the US by opening 10 small-format stores, each around 5,000 square feet, in 2024.
During Ulta’s fiscal second quarter earnings call in August, Ulta CEO Dave Kimbell told shareholders, “I've shared before in previous calls the work we're doing with our small-format store; that's performing well. So we're going to lean in more there. And so we're confident that again, we will work through these competitive pressures, and we want to make sure we're reaching as many beauty enthusiasts in all parts of the country as possible with our new stores.”
Ulta already has seen traction in its mini "shop-in-shops" in Target locations.
“It’s also really key that nearly 4 million guests have linked their Ulta Beauty and their Target circle loyalty programs together,” Ulta COO Kecia Steelman said on the earnings call. “We do see this as another way to just continue to connect with that guest and engage them back into the Ulta Beauty home store.”
Declining traffic
Earlier this year, Macy’s announced it would close 150 underperforming stores, with 50 shuttering by the end of 2024 and the remaining 100 over the next few years. By 2026, the company is expected to have just 350 stores in total.
At the same time, Macy’s is standing by its decision to expand its footprint in small-format stores. In 2023, the retailer announced it would open up to 30 more small-format stores throughout 2024, nearly tripling its current count of 15 by 2025.
This is a big move for Macy’s, according to Morningstar senior equity analyst Dave Swartz, as it is known for its vast real estate portfolio, including the coveted Herald Square location in New York City.
“It’s a move away from traditional shopping malls to strip centers,” Swartz told Yahoo Finance.
Like many retailers, Macy's is experiencing a slowdown due to a variety of factors, including unrelenting competition, a lack of innovation, a surplus of inventory, and the shift to online shopping. With declining store traffic, there’s less of a need for a 200,000-square-foot store.
Plus, the shift toward buying online has taken sales away “permanently,” Swartz said, which is why many small-format stores offer an order online and pick-up in-store option.
The shift to smaller-format stores is “risky … but has to be made because the department store model just isn’t working anymore,” he said.
Brooke DiPalma contributed to this post.
This post was updated to include additional context about Target's strategy regarding its big box and small-format stores.
