Why big retailers are getting smaller

Big box retailers and department stores are going small.

Target said this week that it will open around 30 slimmed-down stores this year in cities like Los Angeles, New York and Washington, D.C. and on college campuses. These stores, which average about 40,000 square-feet, are one-third the size of Target's traditional sprawling stores.

The plan follows several other department stores that are opening smaller stores or downsizing existing ones to bring in urban shoppers and save money as online shopping takes over in the suburbs.

Small stores on city blocks and in college towns are a key part of Target's growth strategy because they help the company draw shoppers that would have been out of reach in the past. For example, Target opened a 60,000 square-foot store last year in South Burlington, Vermont, its first in the state.

"These stores help us enter new neighborhoods, where a full-size store wouldn't fit," CEO Brian Cornell told analysts during an earnings presentation Wednesday.

Winning new urban shoppers and college students with conveniently-located stores will be important for Target as it slows down building full-size stores. Target will open only two of its traditional stores in 2019. Rival Walmart is also slowing down new store openings. It plans to open fewer than 15 supercenters this year and will invest in remodeling stores and online growth instead.

Target has accelerated its small-store push after testing out different formats and designs. In 2017 and 2018, it opened around 30 of them a year. Target has 87 small stores today and will open its 88th this week in San Diego. The company plans to open around 30 new ones a year for the next few years.

Target stocks each store with different merchandise. Stores near campuses carry school gear and dorm room essentials, while others in New York offer more luggage for tourists.

Operating these small-format stores is difficult. Target's teams had to use smaller trucks to make deliveries on city blocks and figure out which merchandise to put on shelves. Target has stepped up its supply chain investments to meet the additional demand at small stores.

"Running a small store is not as simple as cutting down your assortment for less shelf space," said Tory Gundelach, analyst at Kantar Consulting. "Most retailers haven't figured out how to do a small footprint well."

Although real estate is often pricier in cities and around campuses, small stores are cash cows for Target. Target's Herald Square store in Manhattan earns more sales per square foot than any other of its stores in the country.

"They're our most productive stores in America," Cornell said.

Other retailers have also slimmed down in recent years to enter population-dense areas and gain traction with new customers.

Dollar General has opened DGX, about half the size of a regular store, in several cities. Goodyear opened Roll showrooms in October next to shopping centers in Washington, D.C. And Ikea will open up a 17,530 square-foot showroom in Manhattan's Upper East Side this spring. Ikea recognizes it needs to develop a fresh strategy to attract younger, urban shoppers who may want to visit a store, but don't own a car or want schlep out to the outskirts of cities.

Department chains are also trying to use their store spaces in different ways as more shoppers spend online. Macy's and Kohl's have cut down the sizes of some stores, while JCPenney CEO Jill Soltau told analysts last week that the chain was looking to reduce store space.

Kohl's has been among the most aggressive retailers to slim down its stores and has decided to lease out the extra space at a handful to outside partners. On Tuesday, Kohl's said it would lease out space to Planet Fitness next to 10 of its stores in 2019.

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