Big Retailers Try Smaller Stores, Tailored To Succeed In The City

Investor's Business Daily

After taking the suburbs by storm all bulked up with megastores, many of the nation's top retailers have tweaked their real-estate strategies as they move to flex their muscles with the city crowd. "Small" is one of their tactics.

Giant chains, such as Whole Foods Market (WFM), Wal-Mart Stores (WMT) and Target (TGT) are making a push into the more densely populated urban markets as they look to enhance their revenue and tap into a new customer base in underserved communities amid both changing lifestyles and a changing retail real-estate landscape.

It has meant reworking their store models and merchandising with smaller formats and trimmed-down assortments, to better accommodate the needs of city dwellers.

The effort comes at a time when the older baby boomers and the Generation Y crowd are moving into more urbanized areas because they want more convenience with easy access to transit, shopping and restaurants, says Maureen McAvey, senior resident fellow for retail at the Urban Land Institute.

"There's so much more apartment and condo living in these densifying areas that from the retailer's standpoint, they can significantly increase their trade areas by moving to where the people are," she said.

By staking a claim in more tightly populated locales, retailers have the potential to draw bigger volumes.

"Typically, because urban locations tend to be surrounded by a much more densely populated consumer base, and thus, drive more customer visits than a suburban location, the corresponding sales per location also tend to skew much higher," said Lew Kornberg, retail tenant rep lead at commercial real-estate firm Jones Lang LaSalle (JLL). "It wouldn't be at all unusual for an urban location to average two to three times the sales volume of a traditional, suburban location.

There's a "day and night difference" between pricing on suburban retail space and high-end city centers, says Kris Cooper, managing director for capital markets at Jones Lang, as institutional investors are risk-averse and there's "tremendous demand for city centers and little product available.

Retailers see opportunity to fill a void in downtown urban areas. Take Whole Foods, which is opening its first small-format store location in Detroit's Midtown district in June. Whole Foods management began in 2009 to scope out communities that didn't have access to many grocers that specialize in fresh, healthy food.

New Food FrontiersWhole Foods pegged Detroit, a city fallen on hard times, as a place where it could help, says Walter Robb, the grocer's co-CEO.

The store will be 21,000 square feet vs. the average Whole Foods Market's 36,000 to 37,000 square feet, and will carry fresh, healthy foods and everyday pantry staples.

Robb says the selection may be a little different than a traditional Whole Foods Market, with more emphasis on less-expensive private-label products so the price points fit the community.

"This is our first effort in this respect," Robb said. "We have close to 350 stores and have room to try new things. Here, we have the opportunity to take next step.

He says the Detroit store should bring 75 jobs to the community.

The buck doesn't stop with Detroit. Robb says Whole Foods is also discussing potential store sites on Chicago's South Side and in Newark, N.J.

Wal-Mart, which opened its first small-format Neighborhood Market stores in 1998, now has about 230 of these stores across the U.S. They average roughly 40,000 square feet vs. 150,000 square feet for its average supercenter.

The company is also testing smaller 15,000-square-foot Walmart Express stores in Chicago, North Carolina and its home state of Arkansas. It has 12 of these stores, which carry mostly grocery and pharmacy items.

What Plays In PeoriaMost of the stores Wal-Mart plans to open companywide this year will be large stores.

"From our perspective, the larger-format store remains our engine for growth," said spokesman Steven Restivo.

But what has changed, he says, is that Wal-Mart has become more "flexible" in its approach to store size and merchandise mix so they reflect local needs and wants.

So it opened three small-format Neighborhood Markets in Chicago in January in densely populated areas of Little Village, Lakeview and Back of the Yards. The stores are about one-fifth the size of a supercenter. From a real-estate perspective it wouldn't make sense to open a large-format store in these areas, Restivo says.

Wal-Mart has been expanding in more downtown locales.

"There are lots of areas of urban communities that are under-served from a jobs and affordable groceries standpoint," Restivo said. "We feel our stores can be an affordable solution in this regard.

That includes a Neighborhood Market it plans to open in Los Angeles' Chinatown, near downtown areas where residents don't have a lot of affordable grocery options today, he says.

Same-store sales at Neighborhood Market stores were growing by the mid-single digits, said Bill Simon, CEO of Wal-Mart U.S., on the company's third quarter conference call in November 2012, citing year-to-date data through Nov. 15.

Target opened its first five small-format stores — CityTarget — in 2012 in Chicago, Seattle, San Francisco and two in Los Angeles. Three more are on the way in 2013 in L.A., Portland, Ore., and San Francisco.

"The economy of the past few years has offered a new opportunity for Target to take a closer look at urban center properties that currently have attractive rates," said spokeswoman Sarah Van Nevel via email. "It's about making it more convenient for our urban shoppers who are traveling outside their cities to find a Target store.

Urban residents have an "affinity" for the Target brand, she said. "They appreciate high quality, they are hip and chic, look for value, and they're design-focused.

The stores range 80,000 to 100,000 square feet vs. an average of 135,000 for a general-merchandise Target. They carry an edited assortment such as apparel, home design products, household basics and items suited for urban lifestyles. Van Nevel says Target is "happy" with CityTarget store performance.

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