Retail Trends: The Incredible Shrinking (and Expanding) Box
Food and e-commerce keep brick-and-mortar formats in flux
The story of retail for the past few years was about the big box getting smaller and the small box getting bigger, as mass merchants experimented with shrinking footprints and leading-edge convenience operators built 5,000-square-foot stores.
That scenario seems to have hit a wall, with pieces scattering in many directions, according to Todd Hale, a consultant for Nielsen and principal with Cincinnati-based Todd Hale LLC. Traditional mass merchants and department stores are clearly in trouble, but they’re still dabbling in smaller, more urban footprints that include convenience-fuel concepts, Hale told general-session attendees at the SOI Summit.
Conversely, the growth of traditional c-stores has remained steady but modest compared to other channels, with the energy seemingly focused on legacy transactions vs. building new, state-of-the-art sites.
At the same time, dollar stores and home-improvement centers are in hyperdrive, chasing the elusive goal of scale with myriad consumer trends fueling their momentum.
“[Retailers] are venturing out of their sweet spots,” Hale said. “[They want] to connect with shoppers a lot differently.”
The momentum behind many of these trends appears twofold: food and e-commerce.
Consumers’ eating habits continue to veer toward fresh food and eating away from home, while e-commerce is rewiring the old supply chain. The convergence has led to multiple dynamics:
- Mass merchants and department stores are retooling their formats as their old paradigms struggle.
- Retail channels are experimenting with foodservice, including “fresh” initiatives and ambiance upgrades.
- The digital age—everything from home-delivery to app-ordered pickup at the store—has shaken up retail, forcing players to rethink the fundamental sales transaction itself.
“When you look at what’s winning today, what’s working is e-commerce,” Hale said. “By next year, we’re not going to see Kmart.”
Large Formats Struggle
Hale described store sales growth across all channels as “less than spectacular,” at 1.8% on average over the past four years, with commodities within the food sector seeing falling prices and overall deflation. Similarly, stores have seen “slow or no unit growth.” (See chart, below.)
At the same time, stores are shrinking. Store count has risen 11.6% since 2006 to about 270,000 locations, but store size has seen a 3.7% decrease to about 10,100 square feet since a peak in 2009, according to Nielsen numbers. Dollar, convenience and drug channels are fueling the growth in store count, thereby driving down average retail store size.
The big daddy of mass merchants, Bentonville, Ark.-based Wal-Mart, has slowed growth of its Supercenters (although it is planning 35 in fiscal 2018), but it continues to dabble in smaller formats, intending to build 20 in fiscal 2018. Hale said the nation’s largest retailer is focusing on its e-commerce strategies and its foreign operations.
Target, on the other hand, appears fully focused on small formats, intending to build 27 new, mostly smaller-format stores in 2017. Executives with Minneapolis-based Target are chasing millennials and other demographic groups that have flocked to urban neighborhoods, Hale said, with the chain continuing to develop its online purchasing program and buy-online-and-pick-up model.
Kmart, on the other hand, has experienced difficult times. Year-over-year sales figures show a 6% drop, compared to Atlanta-based Home Depot and Mooresville, N.C.-based Lowe’s, which saw just more than 6% and 4% sales growth, respectively, in the same time. Hoffman Estates, Ill.-based Sears Holdings was set to close 108 Kmart stores as of this past spring.
And then there are dollar stores, which have expanded exponentially. Given the industry’s low-margin inventory, scale is a major driver, Hale said. Goodlettsville, Tenn.-based Dollar General is set to grow by 1,000 stores in 2017, with 900 renovations and relocations of stores also in the works.
Two chains dominate the dollar-store channel, with Dollar General at No. 2 with 13,319 locations and Chesapeake, Va.-based Dollar Tree at No. 1 with 13,961. By comparison, the nation’s No. 1 c-store chain, Irving, Texas-based 7-Eleven, has 8,369 U.S. stores. (That count rose dramatically with the announcement during the summit that 7-Eleven bought about 1,100 stores from Dallas-based Sunoco.)
The spurt of dollar-store growth is of special concern to convenience retailers, because the dollar channel has been dabbling in overlapping categories such as tobacco, fountain beverages and snacks, Hale said.
Channel-blurring activity seems rampant across the retail board, especially with foodservice, Hale said. Supermarkets such as Cincinnati-based Kroger and Austin, Texas-based Whole Foods have developed wine and craft-beer “island” concepts that act as stand-alone, full-service bars. The offer increases the customer experience and can transform the shopping space, Hale said.
Quick-service retailers, including Louisville, Ky.-based KFC, Atlanta-based Arby’s and Irvine, Calif.-based Taco Bell, are creating more sophisticated interiors using dynamic graphics and fixtures.
“We’re seeing innovation around [many] formats,” Hale said, asking c-store retailers, “How are you trying to stay fresh, relevant and clean?”
Inside retailers’ stores, the issue of relevance continues to swirl around the combination of food and freshness, Hale said. The perimeter of the sales floor, where coolers with food and beverages typically line the edges of supermarkets and c-stores, continues to draw the most customer interest. Produce, deli and alcohol are the top three categories purchased at all stores, including supermarkets and convenience stores, Hale said.
Nielsen numbers show nearly all categories in its “fresh foods” segment have experienced growth in sales and volume, including prepared food, fruit, vegetables and bakery. Meat was down in sales due to falling commodity prices, he said, but up in volume.
The concept of fresh extends even to consumer packaged goods. Many manufacturers and retailers are packaging semi-prepared food such as chopped fruit or meal kits and turning them into grab-and-go fare. Hale said the move takes advantage of the trend toward freshness, gives retailers a product that is easier to handle and even offers the opportunity to charge a premium price.
“The ‘appearance of fresh,’ with see-through packaging and plant-based products … is an innovation to make things look and appear fresher,” Hale said.
The Power of Disruption
Running parallel to the trend of fresh food is e-commerce, a phenomenon that’s threatening all levels of brick-and-mortar retail. Hale said e-commerce sales in the last quarter of 2016 accounted for 8.3% of total sales, with a year-over-year growth rate of 7.6%.
Since ramping up in 2008, Seattle-based Amazon is on track to grow sales to $380 billion by 2021. “They’ll be grabbing $242 billion dollars in sales from [whom]?” Hale said.
Home delivery and digital ordering is a segment of e-commerce that’s evolving quickly. Amazon is testing a checkout-free shopping experience, and Wal-Mart is offering free two-day shipping to compete with Amazon’s Prime delivery offer. Wal-Mart, Kroger and other grocers are testing online click-and-pick-up services.
Even Oakbrook, Ill.-based McDonald’s is preparing for online ordering, payment and delivery.
The growth of these services is leading some observers to predict that newly shut-down big-box locations could turn into “dark stores,” acting as distribution centers for home-delivery services.
Still, for retailers such as Amazon, reinventing convenience is merely the most visible threat to traditional retail, Hale said.
“Amazon is also about data and analytics,” he said. “They’re going to understand who their customers are, how they shop, what they’re putting in the basket. You may have to invest more in technology to understand who your customers are and how they’re shopping your stores.”