Shrinkage: Following the Economy, Stores Are Getting Smaller

Customers are buying less - so retailers are offering less.

With the recession entering its fifth year with no end in sight, consumers and businesses are saving more than they are spending. This trend is exacerbated by the aging population as older people traditionally spend less than they did during their peak earning years. In addition, the cost of owning and operating automobiles and the inability of young people, bereft of jobs and income, is fueling the urbanization mega-trend.

To provide more productive shopping solutions to their customers, retailers are reconfiguring stores so that less time is required, less space needs to be navigated - and fewer costs are incurred to operate them.

In addition to these changes, merchants are attempting to further reduce their operating expenses by offering space to related businesses inside their stores. This is not a new concept - Ralph Lauren's Polo brand was one of the first to provide sales boutiques inside larger department stores - but it is an innovation within the new smaller format stores. Apple is rumored to have signed a deal with Target to provide owned-and-operated spaces, which is consistent with the computer and phone maker's penchant for control.

This trend may be cyclical. It would not be a surprise to see store sizes expand in the future. But given the economic and demographic trends, this is the size that fits now and for the near future. JL

Susan Salisbury reports in the Palm Beach Post:

Despite predictions a decade ago that brick-and-mortar stores would die, that has not happened. Instead, smaller-format stores have debuted in response to competition from Internet sellers, rising costs and the economic downturn.
“It is the biggest trend. The most dramatic example would be Wal-Mart, obviously. It is 10 percent of U.S. sales. They are building smaller inner-city stores,” said Howard Davidowitz, president of Davidowitz & Associates, a national retail consulting and investment banking firm in New York.

“Best Buy, Kohl’s, Staples, Target and Office Depot are building smaller stores as well. Frankly, almost everybody is downsizing their stores,” Davidowitz said. “The overhead is less. The rent is less. The investment is less.”

Office Depot Inc. is revamping many of its stores, remodeling them into more compact and shopper-friendly versions. They range from about 5,000 square feet, one-fifth the size of a traditional Office Depot, to about 15,000 to 17,000 square feet.

“Customers say the smaller format makes sense from a shopping perspective,” Office Depot Chairman and CEO Neil Austrian told investors Tuesday. “I don’t think anyone in the retail business today can look ahead and say that a large box is what is going to make sense over time.”

So far, 41 Office Depots have been transformed.

On Tuesday, Office Depot reported a second-quarter loss of $64 million, or 23 cents a share, compared with a loss of $29 million, or 11 cents per share, a year ago. Total company sales for the quarter fell by 7 percent to about $2.5 billion. Its management team estimates that converting a couple of hundred stores to the smaller format could reduce operating costs by as much as $100 million a year.

Steven Schmidt, Office Depot’s International Division president, said competition is increasing globally, particularly on the Web.

“Category killers, just as in North America, continue to pop up all over the world,” Schmidt said. “We are seeing more competitors show up on the Web every single day. We have to provide a customer experience that is better than or equal to competition so customers want to do business with us.”

Office Depot has committed $30 million this year to remodel or downsize 30 to 35 stores and relocate 25 to 30 stores with expiring leases.

Leases on more than 60 percent of its North American stores — with 1,111 stores in the United States — are expiring within five years, Austrian said. The company’s strategy includes such options as retaining their format and location, downsizing, relocating within the same market or closing.

In 2013, more than 100 stores could be affected, Austrian said.

The smaller Office Depot stores, designed to serve on-the-go customers, feature colorful, clear signs; carpet; and a simple-to-navigate floor plan. All of the technology products are on one side of the store, and supplies are on the other. The Copy & Print Depot and cashiers are at the front.

The stores typically carry about 4,500 items, compared with 9,000 in a larger Office Depot. That might mean selling single pens rather than such stock-up items as a 25-pack.

Office Depot stores downsized so far have retained 90 percent of their business, the company said.

Office Depot began the initiative last year. Competitor Staples is making its new stores 11 percent smaller than previous stores, and has four 5,600-square-foot Staples Express stores. In 2008, OfficeMax launched its first mini-mart stores, Ink Paper Scissors.

Beth Azor, president of Azor Advisory Services in Miami and Fort Lauderdale, said Office Depot and Best Buy have contacted South Florida landlords about downsizing.

Best Buy Mobile stores are looking to compete with RadioShack, Azor said. In at least one location, Wal-Mart is planning a store 30 percent smaller than it had envisioned before the recession.

“I think that during the recession they maybe all took a look at their footprint and said, ‘Can we do with less?’ ” Azor said. “They found out they could and are re-merchandising and redesigning the store. It drops the overhead costs. Rent is one of their highest expenses.”

But the downsizing might not last as the economy ramps up and past mistakes are forgotten, Azor said.

“It wouldn’t shock me if in three to five years the retailers were getting larger again,” Azor said.