While the “retail apocalypse” narrative is nonsense, it’s clear that we are witnessing a major contraction in traditional retail space. Store closings have tripled year over year and more surely loom on the horizon. The “death of the mall” narrative also tilts to the hyperbolic, but in many ways it is the end of the mall as we know it, as dozens close and even larger number are getting re-invented in ways big and small.
While the shrinking of store fleets gets a lot of attention, another dynamic is becoming important. Increasingly, major retailers are down-sizing the average size of their prototypical store. In some cases, this is a solid growth strategy. Traditional format economics often don’t allow for situating new locations in areas with very high rents or other challenging real estate circumstances. Target’s urban strategy is one good example. In other situations, smaller formats allow for a more targeted offering, as with Sephora’s new studio concept.
By far, however, the big driver is the impact of e-commerce. With many retailers seeing online sales growing beyond 10% of their overall revenues–and in cases like Nordstrom and Neiman Marcus north of 25%–brick & mortar productivity is declining. It therefore seems logical that retailers can safely shrink their store size to improve their overall economics.
Yet the notion that shrinking store size is an automatic gateway to better performance is just as misunderstood and fraught with danger as the idea that retailers can achieve prosperity through taking an axe to the size of their physical store fleets. To be sure, there are quite a few categories where physical stores are relatively unimportant to either the consumer’s purchase decision and/or the underlying ability to make a profit. Books, music, games and certain commodity lines of businesses are great examples. But brick & mortar stores are incredibly important to the customer journey for many other categories, whether the actual purchase is ultimately consummated in a physical location or online.
Often the ability to touch & feel the product, talk to a sales person or have immediate gratification are critical. In other cases, lower customer acquisition and supply chain costs make physical stores an essential piece of the overall economic equation. Shrinking the store base or the size of a given store can have material adverse effects on total market share and profit margins. For this reason, retailers are going to need (and Wall St. must understand) a set of new metrics.
The worst case scenario is that a brand makes itself increasingly irrelevant by having neither reasonable market coverage with its physical store count nor a compelling experience in each and every store it operates. Managing for sheer productivity while placing relevance and remarkability on the back burner is all too often the start of a downward spiral. Failing to understand that a compelling store presence helps a retailer’s online business (and vice versa) can lead to reducing both the number of stores and the size of stores beyond a minimally viable level. But enough about Sears.
In the immediate term, we may feel good that by shooting under-performing locations and shrinking store sizes through the pruning of “unproductive” merchandise we are able to drive margin rates higher. Alas, increasing averages does nothing if we are losing ground over the long-term with the customers that matter.
A version of this story recently appeared at Forbes, where I am a retail contributor. You can check out more of my posts and follow me here.