The Secrets to Small-Format Retail’s Success

Start with a low supply of new space, and then add labor costs plus a desire to be in certain locales

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The high-quality home furnishings chain Arhaus sells its wares out of showrooms that average around 16,000 square feet.

Lately, the chain has also unveiled a Design Studio format that shrinks the footprint to around 5,000 square feet, including a 5,300-square-foot location that opened last month in Greenwich, Conn., and two last year in Asheville, N.C., and Naperville, Ill.

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According to R.J. Hottovy, head of analytical research at location analytics company Placer.ai, Arhaus’ smaller locations have enjoyed nearly twice the visitation volume of the company’s larger stores — not per the square footage, but overall.

These results would be surprising if they were not reflective of the popularity of smaller-scale locations across the retail landscape.

The number of companies complementing their traditional locations with “studio” stores is growing. Ikea, Whole Foods, Best Buy, target, Ethan Allen, Bloomingdale’s and Macy’s are just a few of the companies placing their products in smaller stores across the country.

Hottovy references two of the especially well-trafficked, boutique-sized spinoffs: Market by Macy’s and Bloomie’s.

“On a year-over-year basis, most of the locations there have outperformed the chain average. So Market by Macy’s has outperformed Macy’s, and Bloomie’s has outperformed Bloomingdale’s,” said Hottovy. “Smaller-format stores are often in smaller markets where maybe they haven’t had that retailer before, so it creates a lot of excitement about the brand. We continue to see the trend that small-format stores, on a year-over-year visitation basis, have outperformed [larger formats of the same brand] on a visit-per-square-foot basis.”

Part of the rationale for the embrace of smaller spaces is the nationwide dearth of new supply for retail locations. A report from Colliers (CIGI) noted that the first quarter of 2024 saw 9.4 million square feet of newly delivered retail supply nationwide, but that “less than a quarter of this newly delivered space was available for lease by the end of the first quarter, highlighting the swift absorption rates and the ongoing appetite for premium retail spots.”

“Over the past 10 to 15 years, new supply to the market within the U.S. has lagged considerably,” said Anjee Solanki, Colliers’ national director of retail services and practice groups. “A lot of times, the cost of construction and labor doesn’t pencil even when you’re trying to create smaller shopping centers that are 200,000 square feet or so. This lack of supply has created a strong demand in core markets, coastal cities and the Sun Belt, where we see a lot of expansion among new retailers, existing retailers with new store formats, or new [quick-service restaurants] looking to expand, but who are challenged because there’s not enough space.”

In addition to solving a challenge, the shift toward smaller formats also provides an opportunity for retailers to establish their brands in locations that may have been otherwise untenable, or that allow them to reach consumers who previously had contact with them only online.

“If you look at the last two to three years post-pandemic, retailers have been looking to get out of the malls and into open-air, mixed-use shopping centers that are closer to consumers in the suburbs, where people are spending a lot of time working from home,” said Clay Parnell, president and managing partner at retail and consumer goods consultancy The Parker Avery Group.

Ripco Vice Chairman Richard Skulnik notes that a retailer’s online sales can help them site with some precision the best location for a new store, and it’s often in a locale without the kind of large footprint a big-box store would require.

“Online sales can pinpoint where the customer base is that’s not being served with a physical store,” said Skulnik, “and sometimes a retailer will want to be in a certain market, but the nature of the physical building [required] does not exist.”

Parnell notes that retailers also see smaller locations as allowing for greater control over the retail experience and a smoother path toward satisfied customers.

“If you think about it from a retail operations standpoint — what will their assortment be, how much inventory should they have, and how do they create the most shoppable experience for consumers — all of that is contributing to retailers wanting to get into smaller spaces,” said Parnell. “They’re able to control the consumer experience better. When they have big space, they feel like they have to fill it up or it looks anemic. And that has helped contribute to inventory overages.”

There are also more practical implications, such as lower costs.

“Smaller footprints require lower operating expenses, lower rent, lower electric bills, and less labor,” said Chase Welles, a partner at brokerage SCG Retail. “It forces retailers to become more centralized and efficient with their distribution.”

The point about labor is significant. As retailers across the country struggle to find quality employees, smaller physical footprints allow for smaller staffs and, accordingly, smaller payrolls.

“It’s harder these days to find enough labor that’s willing to work for a certain hourly wage in the store,” said Parnell. “So if you’ve got a smaller space, you can get by with a smaller workforce.”

Skulnik sees this not as a passing trend, but rather as a fundamental change in how retailers will do business. This is driven in part by a growing need to fulfill a comprehensive omnichannel strategy.

“Retailers have to have a digital and a physical footprint. You can’t just be one or the other,” said Skulnik. “This is the way to blend the two by putting smaller stores in front of your customers.”

A strong omnichannel strategy, including smaller physical locations, helps ensure that a rising tide lifts all boats for retailers. A recent report by trade group ICSC found that opening a new physical location, whatever the size, led to a 6.9 percent increase in online sales in the same trade area as well as an increase in the amount spent per transaction.

“A brick-and-mortar presence can help drive sales both offline and online by creating additional touchpoints with consumers,” said Stephanie Cegielski, vice president of research and public relations at ICSC, who also considers the opening of smaller locations further evidence of retail’s current strength.

“Store openings continue to outpace store closings, which is a strong indication of the strength of retail,” Cegielski said. “Small-format stores show that even as business strategies and consumer behaviors change, retail real estate remains an essential asset for brands. The demand for omnichannel has only strengthened the retail industry, and consumer behavior shows that stores remain crucial for fostering meaningful connections and driving brand loyalty.”

According to Colliers’ Solanki, the rise of small-format versions of big-box retail outlets is indicative of how the very nature of retail has changed over the past several decades, requiring retailers to be more nimble, flexible and responsive to up-to-the-minute fluctuations in the wants and needs of their customers.

“So much has shifted,” said Solanki. “We’re seeing wage increases and the cost to operate stores going up while margins are shrinking. One thing we hear from retailers is that they’re much more flexible in their store formats. Back in the day, it was very cookie-cutter, where they had a single prototype that they completely fitted out and would replicate in all markets. Today it’s much different. You’re seeing a variety of store formats from a single brand, and they’re also merchandising the store differently depending on market demographics and dynamics.”

This flexibility is likely to continue, as retailers forge deeper connections with a wider range of consumers who seek the combined convenience of everything that both online shopping and physical showrooms have to offer.

“I think some consumers may want the space of a larger store,” said SCG’s Welles. “But I think far more of them will appreciate the convenience, the quicker in-and-out opportunity, and the ability to have the store in their own neighborhood instead of having to go find it someplace else.”