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For Retailers, Best Things That Come in Small Packages Include Stores

Big Box Retailers and Supermarkets Roll Out Smaller Store Prototypes To Expand Market Penetration
May 16, 2007
Tesco, Publix, Krispy Kreme, Home Depot, DSW and Office Max are among the retailers with smaller-store prototypes
Tesco, Publix, Krispy Kreme, Home Depot, DSW and Office Max are among the retailers with smaller-store prototypes
With many if not most primary markets reaching a certain retail saturation point, a slew of grocery and big box retailers alike have announced plans to debut or test smaller store prototypes in hopes of tapping remaining under-served smaller and urban markets unable to accommodate or support their larger suburban formats.

The prevalence of this "Small is Beautiful" approach has sparked debate in the industry over whether this trend is passing fad or a fundamental shift in retail real estate strategy.

A quick query of CoStar Property Professional's analytic feature combined with U.S. Census Bureau population statistics reveals the issue driving this trend. Total U.S. retail square footage per capita has increased to 15 square feet per capita, a 5% increase over the per capita figure of 2000 and a 20% increase over the per capita figure of 1990.

The retailer responsible for creating the most buzz of late about small format retail is Tesco, the U.K.'s largest retailer and operator of more than 2,800 (primarily grocery) stores in 12 countries throughout Europe and Asia. The company is rapidly expanding internationally, both through organic growth and acquisitions, adding 376 stores last year.

To introduce itself to U.S. consumers, Tesco announced plans to open under the banner 'Fresh & Easy Neighborhood Market,' with a $400 million annual investment over the next five years. Following the opening of its first 14 stores in the Las Vegas area, Fresh & Easy plans to add approximately 50 more stores in the Phoenix, Los Angeles and San Diego areas. In addition, the company has established an El Segundo, CA headquarters and has a 500,000-square-foot distribution center under construction in Riverside, CA.

Fresh & Easy Neighborhood Markets are modeled after Tesco's 1,000 Express format stores it has open in seven countries. While the store prototype is 10,000 square feet, stores slated to open generally range 10,000 to 17,000 square feet, significantly smaller than the typical U.S. supermarket, but also two to three times the size of the typical U.S. convenience store. Tim Mason, CEO of Fresh & Easy stated in a statement announcing its U.S. growth plans, "The Fresh & Easy Neighborhood Market format is designed to draw customers back to their local neighborhoods by offering high quality, fresh and nutritious food at affordable prices."

Tesco says it has been successful in offering "everything from everyday staples to gourmet items" in the smaller store format with easily accessible aisles. Intended to be primarily a "healthy" market, Fresh & Easy will include produce, prepared foods, organic items, foods lacking trans fats and artificial colors, fresh flowers and more.

Tesco says its decision of what format and what metro areas it has chosen to open in the U.S. is the result of extensive customer research in local U.S. markets and that its market choices are based on high population growth areas.

Although Tesco may be the first to introduce a grocery store at such a small scale, it's not the first to introduce smaller store prototypes, whether designed to fit into urban markets or offer greater convenience to the customer. Last week, Pennsylvania-area grocery retailer Giant Eagle announced the opening of its first 'Giant Eagle Express' in Harmar Township, PA. The 14,000-square-foot store is less than 25% the size of Giant Eagle's traditional grocery stores and offers many of the same services with a reduced selection. In addition to the usual deli, meat and cheese counter, fresh produce and bakery, the stores include photo service, DVD rentals, a Café area, drive-thru pharmacy, a 16-pump gas station, a custom-order kiosk and a wide assortment of prepared meals.

Giant Eagle cited a study by Unilever that found the average consumer dedicates only 12 minutes to prepare the average meal, hence the reason for the easy-to-access prepared foods. The format isn't a huge departure for Giant Eagle, it already operates more than 120 convenience/fuel stores in PA, OH, WV and MD.

In Florida, Publix is well-known for making its stores fit the location rather than selecting sites based on an inflexible store prototype. While its suburban grocery store prototype is 61,000 square feet, Publix also has a 27,000 square-foot prototype (and several other prototypes in between) for locations it needs to squeeze into.

Maria Brous, Publix's director of media and community relations gave CoStar some examples of these stores. In Downtown Orlando, Publix is planned to open on the bottom floor of Paramount Lake Eola, a new mixed-use building and upper-level parking is an important feature of this store. In Atlanta, there is a Publix at Atlantic Station that is surrounded by shops and has an apartment building above. In South Florida, Publix has small format stores on Miami Beach, Surfside in Miami, and Las Olas, where stores are multi-level, parking is either located below or above the stores and customers are transported with their shopping carts on people movers.

"It's very common when you look at the landscape of where we operate in Florida and Georgia that land in some areas is becoming more scarce and unavailable," Brous explained. "We need to have store models to accommodate that, whether its parking above or below stores, etc. We want to serve every community and not have our prototype limit that. Smaller stores allow us to come into communities that need a grocer, some are walkable communities, some are high-traffic shopping districts. The bottom line is we want to provide value and convenience to our customers with every store location."

Supervalu has a category it calls "limited assortment" stores, which encompass two brands, Save-A-Lot and Sunflower Market. Save-A-Lot is a discount grocery that keeps cost down by eliminating complimentary grocery bags, displaying items on pallets, etc., while Sunflower Market is the company's brand-new "value-priced" organic grocery brand. Both stores stock significantly less products than Supervalu's traditional grocery stores, such as Albertsons, Shaw's and Shop-n-Save.

Supervalu plans to open as many as 105 new stores this year, 76% of those being among its Limited Assortment brands. With four stores slated to be open by the close of fiscal 2007, Supervalu's goal for Sunflower Market is to have 50 stores open by 2012, which should be easier to achieve on a construction-cost basis, as the store prototype is only 15,000 square feet.

We can't leave out Wal-Mart. Ten years ago, it was a big deal when the retailer announced it would open a store that wasn't one of its massive Supercenters. Since then, the company's much-smaller Neighborhood Market banner has grown to 112 stores across the country, with plans to add 15 to 20 more over the next year.

Wal-Mart recently modified the prototype of its Neighborhood Market store; the first of the new prototype opened in Tulsa, OK in January and the second opened March 28th in Naples, FL at Carillon Plaza. While the square footage of the new prototype isn't significantly different (40,000 to 50,000 square feet), it does involve several changes to ambience and offerings designed to appeal to female shoppers, which Wal-Mart says is the result of months of customer research.

Although this report remains unconfirmed, The New York Post recently reported that Wal-Mart may be considering a 20,000-square-foot prototype of its traditional Wal-Mart stores. Such a reduced-size format could also help overcome objections the retailer often faces in trying to open locations in smaller communities, some of which have banned so-called big-box store formats. Although stores that size would likely lose Wal-Mart's wide assortment of product, the chain's low prices would be maintained, driven by its economies of scale.

Several other big-box retailers have already introduced smaller-concept stores. In the San Francisco Bay area, Home Depot is testing a store format about half the size of its typical 70,000 to 100,0000-square-foot store, with five stores slated to be open in the next year. The format was born from Home Depot's 2005 acquisition of regional retailer Yardbirds, which operated two big-box stores and many neighborhood nursery-style stores.

The company said its primary intention of the acquisition was to gain the big-box stores and entry into the long-sought-after San Francisco Bay area market. However, the company is taking a stab at the smaller format, which it expects will appeal to California's vacationers and satisfy the state's anti-big-box shoppers. Similar to its Expo Design Centers, but on a smaller scale, the modified Home Depot is arranged with room displays, has lower ceilings and racks, eliminates building supplies and lumber, has several flooring options installed, and offers a broader range of high-priced appliances and fixtures, appealing to the demographics of that market.

In some regards, Home Depot is following its primary competitor, Lowe's, which in 2003 introduced a 94,000-square-foot prototype in its home base of Elkin, NC, about 20% smaller than it's traditional 116,000-square-foot prototype. Since then, the firm has adopted the format as one of its growth prototypes.

Lowe's says the smaller store makes sense in markets with less than 30,000 households. Although the look-and-feel of the stores are not significantly different, product assortment is reduced. In addition, the stores cost $5 million less to build, $1.5 million less to stock and require 25% less employees than the typical Lowe's; however, sales per square foot are about 84% of the typical store.

Traditional department store retailer J.C. Penney recently announced long-range growth plans to open 250 new stores over the next five years. The company has been in the process of an improvement strategy that not only involves revised marketing, product offerings and a more loyal employee base, but also relies heavily on a modified real estate strategy.

J.C. Penney is one of several retailers placing preference on off-mall locations and is now an anchor tenant at several of the largest open-air lifestyle centers and power towns under construction or planned across the country. One of the biggest differences in J.C. Penney's lifestyle center locations is that most are one-story and average 85,000 to 105,000 square feet, as opposed to two to three-story malls stores that average 100,000 to 165,000 square feet. A Chicago-area J.C. Penney district manager told Chain Store Age that these off-mall stores "fit the shoppers' lifestyle of not wanting to park in a mall parking lot, but to park at the store, run in, do their shopping and go home."

Big-Box shoe retailer DSW recently unveiled a new, 19,000-square-foot prototype, 76% of the size of its standard store size. The company plans to add 30 new stores annually in the foreseeable future and has adopted the smaller prototype in its go-forward real estate strategy. Doug Probst, DSW's EVP and CFO said, the company "is not losing any product assortment with the smaller format, but is gaining stronger locations with easier returns due to lower capital costs." Probst further explained that even though rents may be higher at these lifestyle centers, landlords typically contribute $30 per square foot in tenant improvement allowances and the stores produce better returns. In the New York market, DSW is seeking even smaller stores, in the range of 14,000 to 18,000 square feet, via tenant representative Northwest Atlantic Real Estate Services.

Office supply retailer Office Max has been fighting to gain market share from competitors Staples and Office Depot, and a flexible real estate strategy has been key to its plan of opening in locations competitors wouldn't normally consider. The company announced it would open 60 new stores in 2007 via three store prototypes. Office Max's full size prototype is now 18,000 square feet, compare this to Office Depot and Staples typical 20,000 to 25,000 square-foot stores.

Office Max's full-size prototype is built for markets with a population of at least 70,000; its mid-size 13,000 to 14,000-square-foot prototype is built for urban or dense inner-ring markets, and its Express prototype of 3,000 to 5,000 square feet is built for downtown areas and dense business submarkets. Staples has a similar Express concept, which it operates in Boston, New York, Philadelphia and Washington, DC; Staples reduces its product offering at these stores to 5,600 of its best-selling products.

Serving a similar customer base to the office supply category, FedEx Kinko's recently announced the rollout of a smaller store prototype in order or achieve its five-year goal of 2000 locations by 2012. The new prototype is 1,800 square feet and designed to expand FedEx Kinko's footprint in local markets. The company says these stores will offer more services and products than its existing stores, which average 6,000 square feet. Citing the need for increased convenience to a copy-print provider and shipping station, the new prototype puts FedEx Kinko's in locations closer to its business customers. The company expects to have 200 stores open in this size next month. The smaller store model is designed more efficiently to display more office products, adds notary services, and a better pack-n-ship area.

In the quick service restaurant category, American donut favorite, Krispy Kreme, has made progress over the past year in resolving or improving several corporate issues. In its fiscal 2007 results call, Krispy Kreme management stated that the company is now in the position to expand its store base once again through franchisees.

In re-evaluating its former 3,000-square-foot freestanding store, the company's primary real estate strategy will be one it has tested with success in dense Asian markets, a much smaller, approximately 1,000-square-foot prototype store. President and CEO Daryl Brewster stated the small store concept addresses, "our top consumer issue, convenience and has the potential to meet this need, as well as the franchisee need in terms of an economic business model."

Convenience and location remain the overwhelming reasons retailers are pursuing smaller-prototype stores. A reduced-size prototype allows the retailer to choose the optimal location, instead of settling for second-best because of an inflexible prototype. It also enables retailers to better cater to an increasingly time-challenged American consumer.

From a real estate persepctive, smaller-store prototypes offer reduced construction, real estate acquisition, inventory stocking and employee costs, as well as a reduced timeline from ground-breaking to opening. Among big-box retailers that have already grown to have a place in every major market across the country, a reduced store footprint can help continue domestic expansion through third and fourth-tier markets, as well as urban markets.

For the retail leasing broker, smaller format stores increase the retailer's ability to locate in lifestyle centers and urban or downtown locales, which typically carry higher rental rates. The creation of flexible real estate models demonstrates the importance of prime locations to a retailer and most are willing to pay for that advantage. For landlords and developers, smaller format stores can translate into the ability to include more high-profile retailers in a development, thereby boosting a center's image and foot traffic.

Do you have a comment on this article or the CoStar Advisor newsletter? We welcome your insight. Reach Sasha Pardy at spardy@CoStar.com

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