Look Who's Thinking Small

Mega-retailers are finding Main Street may be paved with gold

Next month in East Brunswick, N.J., in a building that once housed a locally owned hardware store, a new hardware retailer will open. Its owner: Home Depot Inc.

What's the superstore doing in a shop that could fit inside the plumbing department at the usual Home Depot store? Called Villager's Hardware, the new store is one of four smaller shops that Home Depot will open this year on a test basis. And Depot's not the only one. A slew of pint-sized shops are popping up courtesy of the same retailers that brought consumers giant warehouse stores and superstores.

With America chock full of those hulking emporiums specializing in everything from books to pet food, the big-box retail chains are scrambling to find new formats to fuel growth. The latest theory: By shrinking their stores and rolling them out in small towns, tiny shopping centers, and even once-shunned Main Streets, they'll tap into a new pool of shoppers. Most promise small-town service and superstore low prices. Everyone from Home Depot to warehouse club leader Costco Cos. to Blockbuster Inc. is giving scaled-down stores a try. "Some of the same major retailers that rushed to create one-stop shopping environments are now realizing that there is growing opportunity for the small stores," says Wendy Liebmann, president of New York-based retail and marketing consultant WSL Strategic Retail.

SLOWER GROWTH. And a new opportunity is what the giant retail chains need. For many of these chains, profits and stock prices have been fueled by continually slapping up more of their giant stores. But retailers who made it big with the stack-it-high-and-sell-it-cheap formats are running out of room to build new stores. Last year, superstores selling food, for example, accounted for only 12.2% of new stores, down from a five-year high of 31.4% in 1995, according to the Chicago-based Food Marketing Institute. With fewer superstores going up, many big chains have found their growth slowing.

That's made them reconsider the smaller towns and shopping centers they once disdained. But it's also raising questions. Retailers are finding tough new obstacles when they compete on Main Street. And analysts wonder whether the small stores can ever be robust enough to serve as growth engines for these huge companies.

Retailers at the leading edge of this trend say the strategy gets them into communities once considered out of reach for a super-sized store. Staples Inc., the office-supply superstore chain, began life as a suburban phenomenon but has since eased its way into urban centers. It first launched Staples Express in Boston's financial district almost 10 years ago. It now has 21 Expresses, and plans another opening in San Francisco this summer. Express stores range in size from 6,000 square feet to 10,000 square feet and carry some 6,000 office products and a full-service copy center. Traditional Staples stores average about 24,000 square feet and carry 8,000 items. Richard A. Neff, senior vice-president of Staples' western division, says Staples Express is "very profitable." Competitors have noticed: Last year, OfficeMax Inc. launched a small-store format called PDQ. These stores are not for major purchases, says CEO Michael Feuer. "This is a store to satisfy an immediate need," he says.

The lower cost of small stores is also a powerful lure. Cheaper land attracted Costco to four small towns in the Pacific Northwest. There, the company built half-sized warehouse clubs for about $8 million each, vs. the average $20 million cost of buying land and building a full-size version. In these demiclubs Costco stocks the same spectrum of goods but with fewer choices. Blockbuster Video says its 50 half-size outlets, with their cheaper leases, are just a good business proposition. The smaller stores stock the full array of new releases, but only about 20% to 40% of a regular store's old movie collection. About 200 more such stores are planned for this year, says CEO John F. Antioco.

The rush to put up scaled-down stores is also a response to a mini-backlash against superstores. While millions of shoppers enjoy the vast selection of cavernous stores, a growing number of consumers complain of their inconvenience--especially the huge, packed parking lots, crowded aisles, and excruciatingly long checkout lines. "There's a lifestyle change under way that's driving people toward smaller stores," says Carl Steidtmann, chief retail economist at PricewaterhouseCoopers. "People don't want to drive across town to get to the big box when they can get what they want at a small box right in their neighborhood."

That's Home Depot's thinking. Villager's Hardware stores will carry a little more than half the items housed in the Depot's warehouse-style stores. The selection will be skewed more toward repair jobs than large projects. At Villager's, shoppers will find tools, nails, paint, and garden supplies, but no kitchen, bathroom, or building materials, and very little lumber. "A lot of people working on smaller projects are looking for a quick in and out. They don't really have time to spend in anybody's store," says Robert J. Wittman, Home Depot's senior vice-president of business development. Prices on most items will be the same at both stores, he says. "We feel this is an opportunity for us to reach that customer."

But success in a smaller format requires more than just shrinking down the superstore. Just ask CompUSA Inc., which has spent the past 18 months tweaking and re-tweaking its small-store concept. While it hopes for as many as 400 in the future, today, CompUSA, whose full-size stores average 27,000 square feet, is working out kinks in everything from product assortment to staffing to advertising in its first seven. An experiment with touch-screen kiosks was a bust. And leaving out amenities like corporate sales, training, and tech support--all of which are available to consumers in regular CompUSA stores, but were originally omitted from smaller ones--didn't fly, either. "What we've learned is that the computing needs of the people in small towns is exactly the same as the computing needs of people in big markets," says J. Samuel Crowley, CompUSA's vice-president of operations. How to serve those needs in a small town on a smaller operations budget is a challenge, he says.

That has most chains still firmly in the experimental phase of their small-store programs. Costco says it is focusing new growth programs on big stores in the U.S. and abroad. Wal-Mart Stores Inc.'s four scaled-down Neighborhood Markets face stiff competition from local grocery stores. Company officials say they're happy with the format, but so far only one more is planned for this year. There are few signs small will replace huge as true growth engines any time soon. Mega-retailers are learning they can't just take up less space, says Liebmann. "They have to act small," she says. That means focusing more on service, reacting to local retail competition, and not assuming the big brand name will draw shoppers in, she says. That's a new lesson some big retailers are hustling to learn.