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From Big-Box to Small Format

An increasing number of big-box retailers are exploring smaller, high street formats. We look at some of those who have been successfully testing this format, why they are doing it and what this means for the future of bricks-and-mortar.

The retail industry has long been dominated by big-box, large-scale stores. Recently however many retailers have been downsizing, moving away from stores with huge footprints to smaller format sites. This shift is a direct response to changing consumer demand for convenience (driven by online and urbanisation), quality and innovation: with bricks-and-mortar, retailers are being forced to think small.

Reducing in size because convenience is king

Big-box retailers are contesting with one familiar challenge: how to avoid a perceived loss of relevance with consumers. Many retailers are concluding that convenience is king, and on this basis alone the appeal of testing smaller format stores is understandable, but there are several issues to navigate for it to be a success.

Veronique Laury, chief executive of Kingfisher has been very clear in saying that smaller format is the direction of travel for some brands within the group, believing that changing customer behaviour and urbanisation lies at the heart of this change. Both B&Q and Screwfix have already experimented with sites, with Laury telling this year’s World Retail Congress: “ultimate convenience [is] to be where people want you to be and to be as close as possible to where people live.

“The big impact on that is urbanisation. Everywhere in the world more people are living around cities. It’s about how you get to those people, as close as you can.”

Kingfisher has experimented with a B&Q on Holloway Road in London and Screwfix in Bayswater, and Laury’s comments suggest this will be tested further.

For DIY brands, the appeal would seem logical. Click and collect is an option at the Holloway Road branch, but largely it is for customers who may be in the middle of a project who may have a sudden need for a saw, hammer or Polyfilla.

Similar to Kingfisher, Ikea see the small format as a key strategy to mitigate the impact of any possible decline with its out-of-town warehouses and adapt to an urban and digital shopping experience.

Jesper Brodin, Ikea’s chief executive, said last year that the retailer would try different store formats as it sought to conquer city centres across Europe: “We are eager to claim the city centre… We are testing new formats. We have penetrated parts of the city centre but we are mostly outside so the opportunities are there.”

In reality, the costs for small format stores is higher than larger format, but with increased footfall sales density is often improved. The comments from both Laury and Brodin highlight their belief that in taking their stores to where people actually live, the up-front investment is worth it.

This appears to be reflected internationally. Encouragingly for those retailers testing the format in the UK, there are several examples where the small format has been leveraged to strong effect, including Walmart, Nordstrom and Kohl’s, among others.

Most notably Target, the US discount retailer, continues its push into small-format stores, expecting to operate around 130 by next year. Its small format stores are significantly more profitable than traditional stores, according to CEO Brian Cornell, and opening in urban locations is a key part of the retailer’s turnaround strategy.

Reducing in size to access the connected consumer

In addition to urbanisation, Ikea is also leveraging the small format as a way of experimenting with new ways to attract customers, having already opened around 20 small-format stores with digital capabilities across Europe since 2015: “We are basically creating structures in a way that we can test many aspects in many places. They are test laboratories to figure out the new world of Ikea,” Brodin said.

Similarly, Topps Tiles is another brand actively targeting the small format as part of a ‘strategic focus on world class customer service and multichannel convenience’. Topps says that convenience for its customers means a “seamlessly integrated shopping experience across all available channels - stores, online, mobile, telephone and also the important integration with their tile fitter”.

The tile retailer says that its customers journeys often start online, but nearly always visit the store at some stage. So whilst it is clear customers visit the website to research projects the store forms a key part of the buying process.

With around 370 stores, there are around 25 ‘boutique’ stores, and company research suggests this has created a ‘halo’ effect, bringing customers to larger stores to complete the purchase.

Other examples in the UK testing to a similar effect include Decathlon, which last year opened a mini-store in London without overly compromising on range, and Jessops, which last week launched a new photo website for customers to create photo books, canvases and print, to coincide with the launch of a new store format to meet a growing demand for personalisation.

Reducing in size to showcase quality and innovation

Whilst convenience is a natural driver for testing small format, another strategy behind moving to fewer, high profile locations is the opportunity to refine a brand’s store portfolio and take greater control.

In the context of struggling department stores, this has logic. Whereas previously the department store was a low cost way for brands to get in front of customers, luxury brands in particular are seeing the benefit of moving into their own stores, often into high end, high footfall locations, such as Carnaby Street in London.

Some brands, including online retailers, are also beginning to view the small format store as an opportunity to ‘showroom’ their propositions with customers. Made.com and loaf.com both have a selection of small sites (named ‘shacks’ in loaf.com’s case) where they regularly rotate products and layout within the space. The rooms then also become a form of advertising, creating a curation and projection of the brand in one space, inspiring their customers’ imagination.

Reducing in size to add value to the multichannel portfolio

In summary, smaller store formats add value in the multichannel portfolio in several ways:

• Change the economics – as long as customers can still access the full range online or via fast delivery or click and collect, a small format store can showcase the brand and trigger customers’ imagination

• Access new customer segments and higher footfall – those who are less likely to travel to inner city or out of town destination stores

• Provide an agile test bed for new innovations and designs, with lower trading risk

• Leverage investment in the fewer, larger brand showcase stores which benefit from customer relationships developed via the smaller format stores

• Provide more opportunity to interact directly with customers to facilitate the delivery of a personalised experience

Are small formats the way to go?

We anticipate that conveniently located smaller format stores will be the most prevalent continuation of the bricks proposition in future (which does not necessarily mean on the high street as convenience for the target audience will be the primary driver of location). To persuade customers to visit frequently the smaller space will need a combination of regular newness in the proposition and joined-up end-to-end customer experiences that extend beyond product and service interactions and include digital components to provide the appropriate personalisation.

With the high productivity small format likely to incorporate click-and-collect, in-store digital technology and a focus on enhancing the customer journey at all touchpoints, it will require a new skillset for frontline staff, equipped for the digital age. Investing in team capabilities will therefore be essential, including the softer skills of how to build rapport with customers quickly and surface their underlying needs and behaviours so that the service interaction can be fully tailored.

This need for team investment has been prioritised at Topps Tiles as it looks to make the online and in-store customer experience ‘as inspirational and complementary as possible’ It has focused on engaging with staff, recently launching a new learning management system enabling team members to increase their technical product knowledge. It sees customer service as ‘critical to our success as customers continue to value it highly’. Store teams need to have all the product information available online to hand, to which they can add the wisdom and experience that can’t be acquired by the customer in this way.

What does this mean for big-box?

While some category killer big box stores will still remain as destination showcases, it is inevitable that there will be a contraction of retail space over the next few years. This can only be achieved with the right level of give and take between property owners and retailers, and potentially some changes to legislation. The number of CVAs is now challenging the property owner economic model in tandem.

We can anticipate some innovative local solutions emerging for high streets, which are not only dealing with excess retail space but also the flight of the banks to reflect customer preference for online banking. If profitable smaller formats can be developed by retailers and leisure companies, the landing will be softer for everyone and customers will still be able to choose how they want to interact with brands.

Visiting shops as a leisure activity will still be a pleasure for the many, but innovative small format stores conveniently located will be the destination of choice.

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