The end of the middle: Why small stores and big showrooms are here to stay

A growing number of retailers appear to be opting for smaller stores as a way to maintain their store presence and enter desirable locations amid rising costs.  

Retail giants including Ikea, JB Hi-Fi, Coles, Woolworths, IGA, Harris Scarfe, and 7-Eleven have all rolled out smaller store formats in recent years, as has Aldi, which continues to expand its “corner store” concept – part convenient store, part supermarket – in high-density areas.

But, how can retailers get this approach right, and what does the future hold with regard to smaller shops and spaces?

Bifurcation of retail

According to Jason Pallant, marketing academic and director of knowledge enablement at The Lumery, the trend toward smaller stores pre-dates the Covid-19 pandemic. He partly attributes this to the increasing popularity of online shopping, which means that retailers don’t need as much stock available in-store.

However, the pandemic – as well as the rising cost of living and other expenses – has accelerated the trend toward small stores, with brands considering how they can maximise every inch of space, while also weighing up whether to close extraneous locations.

But on the opposite end of the spectrum, Pallant said that brands are simultaneously doubling down on large-format stores as a means of enhancing their CX offerings.  

“Rather than being competing trends, what we’re seeing retailers do is be really smart about having a few, big experiential type stores [with] other, smaller-format stores filling in the gaps between them,” he said.

“The way forward for a lot of brands”

As part of this “bifurcated retail” approach, Pallant added that brands are removing mid-sized stores – which are relatively expensive to operate – from their retail strategy. This is also reflected in the current retail market, where mid-sized retailers appear to be struggling in comparison to budget and premium brands.

Meanwhile, Gary McCartney, owner and creative director of McCartney Design, identified two main reasons behind the downsizing of stores. They include the cost of rent relative to sales, and the sharp increase in fit-out costs. Other considerations include the cost of staffing larger-format stores, and the amount of inventory that is required to fill them.

“One benefit [to smaller stores] is definitely cost savings, and an increase in bottom line,” he said. “The other benefit is that with a reduced store [size], you can start to look at locations that were previously unaffordable but desirable in terms of demographic and traffic.” 

He added that brands can increase their footprint with this approach, without increasing their cost per store. 

Finding the sweet spot

According to McCartney, brands which are considering opening smaller store formats need to have clear plans in place to ensure that they are sufficiently stocked, without being overcrowded.

He added that creativity in the way that merchandising is displayed is critical in smaller stores to enhance the customer experience, while also increasing visitation and basket size. 

McCartney added that retailers can leverage digital innovations such as QR codes and endless aisle solutions, to highlight products without stocking them in-store.

“Location is just as important as size, so many large format retailers are trialling stores in mainstream shopping centres, using smaller stores to offset the higher rents,” he said.

“It’s a challenging equation to deal with but most retailers find a ‘sweet spot’ between location, size and rent.” 

An alternative to closing down

Meanwhile, Pallant observed that an increase in the number of people working from home has had a significant impact on inner-city foot traffic. This, in turn, has led to a growing number of retailers opening larger stores in suburban areas, where more people are based.  

He added that a benefit to smaller-format stores is that brands can maintain a physical presence while still being able to reduce costs. Downsizing, he noted, can

can be an alternative to closing down – the consequence of the latter being that customers are less likely to discover, and engage with a retailer, if it doesn’t have a store footprint. 

Pallant added that smaller stores often also serve important functions, such as providing hubs for click-and-collect and returns. 

Maximising touch and feel

Pallant also stressed the importance of clearly communicating to customers about what products will be available in smaller stores in order to manage expectations and reduce disappointment. 

However, he maintained that smaller stores present new opportunities for brands to offer a different customer experience compared to the usual offering. 

He also observed a shift in thinking regarding the convenience that can be found in a bricks-and-mortar retail experience. While online shopping enables consumers to make immediate purchases, delivery can be delayed, and the product might not be a perfect fit.

“Covid-19 showed us that, in many ways, stores can be more convenient [than online],” he said.

“When done well, smaller-format stores can provide a lot of convenience by being located near people, allowing them to get products delivered, and get service at the same time. There’s something [appealing] about needing a thing, walking in, and leaving with it.”

McCartney added that smaller stores are likely to become more common in an environment of rising costs, slimmer margins and greater competition.

“Retailers will start relocating to smaller spaces when their current leases expire,’ he said.

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