Target (TGT) has 1,797 stores in the U.S. One thousand seven hundred and eighty-nine of them are standard issue: usually built from scratch, located mostly in the suburbs, and averaging 135,000 square feet in size. The other eight are something else altogether—smaller, more urban, less uniform. These CityTargets, as the company calls them, are an experiment in scaling down; they could one day be an important way for the $73 billion retailer to keep expanding domestically.
Urban markets are the last American frontier for big-box retailers such as Target. Cities are growing faster than suburbs and exurbs for the first time in decades, and they’re generally filled with younger, more free-spending residents, as well as college students and tourists. Smaller stores also make economic sense in the era of online shopping. “Everybody from Staples (SPLS) to Kohl’s (KSS) is downsizing,” says Howard Davidowitz, who runs a retail consulting and investing firm in New York.
Getting small and urban, however, can be more difficult than getting big. Case in point: British big-box retailer Tesco (TSCO:LN). It spent more than a billion dollars on its 200 smaller U.S. stores before admitting defeat last year and selling or shuttering them. Finding the right locations in downtown areas is more challenging than in the wide-open suburbs. The logistics of stocking stores without massive loading docks are complicated. Merchandise has to be selected carefully to fit smaller spaces. And there’s little or no parking. For mega-retailers, “operating smaller stores is like starting a whole new business,” Davidowitz says. “They have every good reason to do it, but it’s not so simple.”
Target’s cheap-chic cachet would seem to make it a natural fit in any big city’s shopping district. But Target is often a cautious company. Wal-Mart Stores (WMT) has been experimenting with smaller stores for more than a decade; Target opened its first smaller city store 18 months ago in Chicago. The company’s bull terrier mascot, Bullseye, and the city’s deputy mayor were among the guests at the grand opening. Since then, the company has opened stores in Seattle, Los Angeles, and Portland, Ore. The last of the eight opened in San Francisco in October. Target won’t add any others in 2014.
The company always planned to build just a few city stores and then take some time to figure out what’s working. “We’re really pleased with the results,” said John Mulligan, the chief financial officer, at a Sanford C. Bernstein (AB) conference in May. Now Target plans to persuade shoppers to visit more frequently, he said, and spend more. “The real question for us is how small is small. As we get the store smaller, the number of real estate options becomes much broader.” CityTargets range in size from 89,000 sq. ft. to 124,000 sq. ft., vs. 174,000 sq. ft. for an average SuperTarget. The retailer has had some urban stores for a while, though they aren’t as centrally located as the new ones.
During an August earnings call, Chief Executive Officer Gregg Steinhafel said the company was analyzing the CityTargets’ results to determine “where in the stores we have the ability to reduce space even more.” Since then, Target’s rapid expansion into Canada, its first foreign market, hasn’t gone as well as expected. “Getting Canada straightened out is a priority,” says Cowen Group (COWN) analyst Faye Landes.
Wal-Mart, meanwhile, has opened almost 400 smaller stores, ranging in size from 15,000 sq. ft. to 39,000 sq. ft., and announced plans for at least 400 more over the next three years. Not all of those are in big cities, though. Executives said in November that comparable-store sales at its smaller Neighborhood Markets grew 3.4 percent in the third quarter; the chain’s total comparable-store sales declined 0.3 percent. Wal-Mart sees its smaller stores as a $12 billion market. For Target, too, “the potential is huge, and they are taking their time to get the format right, the logistics right, and location, location, location,” says Poonam Goyal, a retail analyst at Bloomberg Industries. “But they shouldn’t be so cautious.”
The Chicago CityTarget is located on two floors of a landmark building on the corner of State and Madison, the geographic center of the city. Louis Sullivan, the American architect known as the father of the modern skyscraper, designed the building for the Carson Pirie Scott department store in 1899. Its two main floors sat empty for almost four years before Target leased them in 2011. The 124,000-sq.-ft. store is light and cheery, with shelves painted a bright shade of white Target doesn’t usually use. There are mannequins in the clothing departments, something its other stores don’t have. The shopping carts and checkout counters are more modestly sized than at suburban locations.
John Griffith, Target’s executive vice president of property development, says there are plenty of ways the Chicago CityTarget differs from a regular store. There are fewer maternity and kids’ clothes, and the automotive section is smaller. “We’re not going to stock our shelves with 12- or 18-packs of paper towels, because you can’t get that home on the bus, and you really don’t want to haul that.” Still, the Chicago store isn’t just aiming for grab-and-go shoppers. It does sell an eight-pack of Giant Bounty paper towels ($13.99), as well as a 30-pound bag of Iams dog food ($20.19) and a 152-ounce box of Tide Pods ($19.19). There are 20 brands of coffee, 6 kinds of Cheerios, and 9 flavors of Annie’s Mac & Cheese. The store offers baby strollers, 30-gallon storage bins, even camping gear. “Small is a misnomer,” Griffith says. “There’s been a lot of talk about size, size, size, size. But it’s also true that the guest we’re going after already knows who we are. We’re making it even more convenient for her.”
For the Chicago Loop store, Target had to improve its customer service, because shoppers have many other choices nearby. When someone asks for an item, “we walk the guest there,” says Ray’n Baker, the store’s head of human resources. “If they’re buying a gift, we get the wrapping paper and a card.” She wants employees in the grocery section to be able to pair cheese with wine. There are operational differences, too. “We can’t bring a full-size semitrailer downtown,” Griffith says. Target had to rethink its logistics so smaller trucks could make more frequent deliveries and unload overnight.
He says the retailer is working to secure real estate in several of the nation’s largest cities. At some point it’s likely that CityTargets will get even smaller. Shrinking to grow in town, as hard as it is, has to remain among the company’s ambitions.