Why are Target’s small stores much more productive than its big boxes?

Discussion
Photo: RetailWire
Aug 21, 2017
Matthew Stern

Target is one of those retailers whose name is synonymous with huge, suburban big box stores. But its recent attempts at small, urban formats are proving to be quite a successful endeavor. In fact, the success of this concept raises the question: Would Target be better served focusing almost entirely on developing smaller stores?

Target’s small stores have demonstrated productivity double that of larger locations and have shown double-digit comp growth, according to Neil Saunders, managing director of GlobalData Retail, in a MarketWatch article. The chain plans to open more than 100 small-format stores in the next three years.

The success of the small formats come at a time when Target has been struggling to redefine its identity. The retailer has made numerous efforts to clarify its value proposition and brand image in recent years. In 2015, Target launched an initiative focused around four key areas of business — style, baby, kids and wellness — as part of a “transformation roadmap.”

Perhaps the most notable changes to its mainline stores thus far have been in the area of wellness. Target announced the replacement of some sugary snacks at the checkout with granola bars and has experimented with a “connected health” section in some stores to capitalize on the emerging trend of IoT fitness trackers.

With 100 new stores on the horizon, Target appears wise to the value of continued investment in their new, smaller stores. But management has also been putting effort into finding a new look and feel for its big box stores.

Last year, Target began piloting themed, department-store style displays at the entrances of some of its stores. And earlier this year, it announced the impending debut of a split-format big box store.

The first of the split-format stores is slated to open in October in a Houston suburb, according to the Minneapolis/St. Paul Business Journal. The concept is 124,000-square-feet and features two entrances: one takes customers to the section of the store focused on lifestyle shopping and apparel; the other is focused on groceries and quick trips.

DISCUSSION QUESTIONS: How do you account for greater levels of productivity in Target’s small stores compared to its big boxes? Do you ever see Target moving away from its big box stores to focus almost exclusively on opening smaller locations?

Braintrust
"The increased productivity is likely due to localized merchandising, convenient locations, improved shopability and reduced staffing requirements."
"Target’s smaller store format could be another harbinger of the death of the prototype."
"Each store size fits a different community and Target will have a store size to fit that community."

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26 Comments on "Why are Target’s small stores much more productive than its big boxes?"

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Mark Ryski
BrainTrust

While there are many potential factors to explain this, one of the more likely reasons is shopability. Large big box stores are notoriously difficult to navigate and this can impact conversion and consequently productivity. Also small stores afford Target the ability to open in markets that simply can’t support big box locations. While I don’t see Target moving away from big box stores altogether, I do expect to see Target open more smaller stores in the future.

Charles Dimov
BrainTrust

Great point, Mark. We can often get carried away thinking that shoppers want bigger and more, more, more. Sometimes a smaller footprint store is what a shopper want to get in and out quickly, focusing on a few goods they want rather than the widest array possible. Convenience and speed should not be overlooked.

Lyle Bunn (Ph.D. Hon)
BrainTrust

Branding is a constant marketing challenge and retailers that “target” (no pun intended) their identity within an overall brand identity are a credit to this primary business function. Pop-up, store-within-store and small footprint locations all deliver their own value proposition as the brand and retailer tells their story, sells their story and involves consumers in it. As in all omnichannel retail, every presence should drive engagement in other aspects of the business. Physical or online, big or small, let’s shop them all! That is the promise of vitality in retail.

Max Goldberg
BrainTrust

Target’s small stores are more successful because they experience fewer of the problems that plague their larger stores: out-of-stocks and lack of reason for being. Target management has been searching ineffectively for years for ways to compete with Walmart and Amazon. They seem to have struck gold with the small-format stores. Rather than trying to be everything to everyone, the small stores are more focused and therefore more successful.

Dr. Stephen Needel
BrainTrust

The answer may depend on what they mean by productivity. If it’s sales or profits per space allocated (square foot, linear foot, etc.) then their tendency to overstock a small variety would be abrogated by less space.

Charles Dimov
BrainTrust

Target is not likely to move away from big box stores … but pushing a hub and spoke model for their brick-and-mortar stores makes sense. Clearly the size variation (smaller and larger) is a winning combination. In fact, leveraging Target’s in-store pickup capabilities means they can deploy more “spoke” — small format stores — yet still service their customers at the same level with the same large array of products. Good idea, keep it up Target!

Shawn Harris
BrainTrust

The increase in productivity is most likely due to focused localized merchandising, convenient locations, improved shopability of the stores and reduced staffing requirements. Target will likely use location + return on invested capital (ROIC) to determine the right format.

Naomi K. Shapiro
BrainTrust

Shawn, you said it all, succinctly and accurately.

Art Suriano
BrainTrust

I think smaller stores will be the way of the future for many retailers. I also see the day that we see the item in the store and then it’s delivered because the store only carries samples, especially as we perfect fast home delivery. The big box store of the future will be the browsing store for new products, giving customers ideas of what they may want to try, but the smaller stores will be the practical ones that consumers visit to see something before purchasing it.

In both cases, retailers of the future will not have a significant store-level inventory. That, plus smaller stores that will cost less to operate, will help retailers compete.

Joanna Rutter
BrainTrust
1 month 2 days ago

A samples-only store? That’s a fascinating prediction, one I haven’t heard before.

Dick Seesel
BrainTrust

Locating smaller-format stores in higher density areas (especially city neighborhoods) should drive more productivity. If these stores aren’t generating much higher sales per square foot, they are unlikely to be profitable given the higher occupancy costs (rent, loss prevention, etc.). So Target needs to hold these stores to a higher standard in the first place.

That being said, the focus on fewer categories and tightly edited assortments probably doesn’t hurt, either, and might be a lesson learned for the full-sized Target stores.

Lee Kent
BrainTrust

Location, location, location! Finding square footage for a big box requires moving out into the suburbs while small stores can go right where the consumer is everyday. Including on campuses and other such targeted locations. Today’s shopper is all about convenience and if she has to go out of her way to buy something, she is going to weigh that against buying it online. And that’s my 2 cents.

Steve Montgomery
BrainTrust

The Target small format has several factors that make it successful. Generally these locations are in areas of high population density and, in some cases, areas where there are few if any retailers offering similar items in the same price range. The stores have a top-selling items inventory meaning the items people are likely looking for are easy to find. Their size also makes them easy to shop.

Adrian Weidmann
BrainTrust

Smaller stores translate to available real estate and the opportunity to focus your inventory to the local community. With a manageable amount of square footage, Target is able to align its stocked items with the needs and expectations of a shopper community that lives in a much smaller radius around that particular shop. Target’s focus on health and wellness (influenced no doubt by the CVS partnership) also establishes the foundation for a store that’s a hybrid of the old local pharmacy.

Neil Saunders
BrainTrust

There are several factors behind the better productivity.

The stores tend to be in areas of higher population density, so transaction numbers are strong; this is aided by a higher frequency of visits with customers coming in regularly for top-up shops.

The use of space is far more efficient; Target has had to edit down ranges for the smaller format, so slow-selling lines have been cut and wasteful practices like multi-facings have been addressed. Prices are also marginally higher than in regular Target stores — even on known brands and own-label items.

The stores also work better for customer flow, and early indications suggest there is more cross-department shopping than in larger stores. Better placement of departments like beauty, the improved grocery format and more inspiration and more disciplined apparel offerings have also had a positive impact on sales.

Gene Detroyer
BrainTrust

I am not sure what they use as the definition of productivity here. But I am sure on many fronts, labor, rent, traffic, inventory, a smaller store can be more productive.

My colleagues here have hit on all the reasons. But I will refer to a comment made on another discussion today by Jackie Breen, “Regardless of the channel being shopped: convenience + happy customers = increased sales.”

Brandon Rael
BrainTrust

Simply put, the sales per square foot performances in the smaller-scale Target stores are maximized due to the smaller scale of the stores. Additionally, unlike their bigger box formats, the smaller Target stores will enable consumers to penetrate more higher-traffic cosmopolitan areas and will naturally have more foot traffic. However, this model is an add-on to their already well-established big box store formats.

The smaller-scale Target stores will enable the company to experiment, test market and more easily measure the retail and consumer KPIs in a more seamlessly shoppable format.

Harley Feldman
BrainTrust

Target’s small store growth shows the power of the brand in new and convenient locations. This is part of a trend toward smaller stores that cater to specific consumer needs as opposed to consumers having to visit a big box store with a massive footprint and huge number of items to sort through.

In many cases, consumers perceive the time spent walking through a big box store as a waste of time when looking for one or two specific items. Target is probably being successful in dense population centers such as college campuses with the small store concept as consumers can walk there and shop for their most pressing needs. Rather than needing a huge space for millions of items, Target can focus on a smaller set of items that represent common needs in a dense community which is why the store productivity for these stores is higher.

Target will not move away from the large store format. Each store size fits a different community and Target will have a store size to fit that community.

Herb Sorensen
BrainTrust

It is a fiction that these giant rat maze warehouse “stores” are built to serve the shopper. They are built to serve the supply chain but retail is, after all, an industry accustomed to lying to itself about why it does this or that. Actually, there is nothing wrong with building stores to serve the supply chain, as long as the unpaid stock-pickers (shoppers) don’t mind. Many retailers remind me of the little boy swinging a rope around and hitting his little sister and telling his mother, “But she LIKES it!”

Given the same size giant store with only 4,000 items in it, sales will be several times greater. Check Costco with 4,000 SKUs in comparison to Walmart with 100,000+ SKUs. The bottom line is: The Problem: “Parked” Capital.

Ed Rosenbaum
BrainTrust

I do not see Target completely moving away from the big box concept. It is in their DNA. So unless there is a total management turnover it is not going to happen. But I do see a huge opportunity to get ahead of the competition by going more to the smaller box concept. It makes it easier to get in, get what you want and get out. It also allows Target to open in smaller and secondary markets. That could be huge.

Doug Garnett
BrainTrust

This is fascinating and I applaud Target for doing these small stores. That said, we must avoid applying the logic error that I see manufacturers make with online sales.

Double the growth from something small is excellent — but still small. The key question for Target is whether these stores can contribute enough to their total bottom line to pay for the added overhead of more leases per dollar, more store management per dollar, more stocking locations per dollar, etc. …

It’s been incredible to me to hear manufacturers was poetic about online sales only to confess they’re talking about less than 5 percent of their sales (depending). It takes a LOT of 50 percent growth on 5 percent to become significant.

Dave Nixon
BrainTrust

Being in the data analytics and insights business, I’d like to think it is because of a clearer vision into product assortment and efficient merchandising decisions due to the demographics of the store itself, but I am going to assume it is because these stores are easier to navigate and find what is NEEDED, versus designed for casual shopping. I’m a big advocate for designing smaller stores to only cater to the product that works for that store and that set of shoppers. But brands like Target will need to have an increased level of understanding of their shoppers and merchandise to pull it off. It can be done.

Craig Sundstrom
Guest

The articles are rather vague as to what is meant by “productivity.” Is it sales? Profit? Something else? Whatever it is, the answer isn’t mysterious: they’re likely more productive because Target filled the stores with their best sellers.

But the question is misleading: smaller is usually more profitable on a per foot basis — think kiosks — but the business as a whole maximizes profit with size, and economies of scale (it amortizes fixed costs, obtains buying clout, etc.). That having been said, it’s possible the larger stores could be trimmed and made more productive; food comes to mind, although there are claims that is actually one of their stronger areas, so I hesitate to say much more.

Ricardo Belmar
BrainTrust

I suspect a large portion of the success simply comes from the stores’ location. Target, like many large retailers, want to reach more urban areas as a source for growth. Big box formats just don’t work that well in most urban areas so the smaller format makes it easier for for shoppers to access. With a smaller format, it also forces Target to more closely look at the product assortment in that area and should result in more localized merchandise. Having more of what people want, when they want it, and in a convenient location goes a long way to promoting sales. While I don’t see Target giving up on the large format, I would not be surprised to see their future store count growth to come from these small format stores in urban areas to maximize their reach and utility for those shoppers.

James Tenser
BrainTrust
Target’s smaller store format could be another harbinger of the death of the prototype. While some powerhouse retail chains have been built based on the replication of the same store format across the landscape, the paradox of scale eventually takes hold. Retailers already know this in their guts. More than a few have made efforts to tailor store assortments to match local demand. This helps to a degree, but the return on these efforts may be limited by rigid store formats and leases. Over a period of years or decades, a host of local market conditions can change — demographics, competition, digital alternatives. It can be uneconomic to move or close older stores, so retailers stick to merchandising and cosmetic remodels within the same four walls. Tailoring new store formats to match local market conditions is arguably a more agile strategy. This could prove especially effective in urban environments where the big box format won’t fit and the population and local economy may tend to change in just a few years. Existing large format stores with long leases create significant inertia, however. Whether a handful of highly productive smaller stores can make a material difference to Target’s total financial performance… Read more »
Darren Knipp
Guest

Completely agree with location, convenience, and shopability being key factors for small-format success. Given their history is mostly in large-format stores (greater than 10 lanes), Target will need to carefully consider how they drive payroll productivity in these smaller-format locations while still ensuring exceptional customer experience. It seems automation of background processes will be key to enabling staff to focus on higher-value tasks.

wpDiscuz
Braintrust
"The increased productivity is likely due to localized merchandising, convenient locations, improved shopability and reduced staffing requirements."
"Target’s smaller store format could be another harbinger of the death of the prototype."
"Each store size fits a different community and Target will have a store size to fit that community."

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