Biggies bet on to go smaller.

Office Depot, other retailers pushing big to go smaller

Supersizing is out, and when it comes to retail stores, smaller is better.

Despite predictions a decade ago that brick-and-mortar stores would die, that has not happened.

Instead, smaller-format stores have debuted in response to competition from Internet sellers, rising costs and the overall economic downturn.

“It is the biggest trend. The most dramatic example would be Wal-Mart, obviously. It is 10 percent of U.S. sales. They are building smaller inner-city stores,” said Howard Davidowitz, president of Davidowitz & Associates, a national retail consulting and investment banking firm based in New York.

“Best Buy, Kohl’s, Staples, Target and Office Depot are building smaller stores as well. Frankly, almost everybody is downsizing their stores,” Davidowitz said.

“The overhead is less. The rent is less. The investment is less.”

Boca Raton, Fla.-based Office Depot Inc. is revamping many of its stores, remodeling them into more compact and shopper-friendly versions.

They range from about 5,000 square feet, one-fifth the size of a traditional Office Depot, to about 15,000 to 17,000 square feet.

“Customers say the smaller format makes sense from a shopping perspective,” Office Depot Chairman and CEO Neil Austrian told investors this week.

“I don’t think anyone in the retail business today can look ahead and say that a large box is what is going to make sense over time.”

So far, 41 Office Depots have been transformed.

On Tuesday, Office Depot reported a second-quarter loss of $64 million, or 23 cents a share, compared with a loss of $29 million, or 11 cents per share, a year ago.

Total company sales for the quarter fell by 7 percent to about $2.5 billion.

Its management team estimates that converting a couple of hundred stores to the smaller format could reduce operating costs by as much as $100 million a year.

Steven Schmidt, Office Depot’s International Division president, said competition is increasing globally, particularly on the Web.

“Category killers, just as in North America, continue to pop up all over the world,” Schmidt said.

“We are seeing more competitors show up on the Web every single day. We have to provide a customer experience that is better than or equal to competition so customers want to do business with us.”

Office Depot has committed $30 million this year to remodel or downsize 30 to 35 stores and relocate 25 to 30 stores with expiring leases.

Leases on more than 60 percent of its North American stores — with 1,111 stores in the United States — are expiring within five years, Austrian said.

The company’s strategy includes such options as retaining their format and location, downsizing, relocating within the same market or closing.

In 2013, more than 100 stores could be affected, Austrian said.

Retailers see smaller outlets as the next big thing.

Bigger is not always better. Just ask the biggest retailers in the country — and their customers.

Neng Yang, left, purchases a new phone at the Best Buy Mobile mini-store at Independence, Mo., with her brothers Cheng Yang and John Yang, right.

 Neng Yang, left, purchases a new phone at the Best Buy Mobile mini-store at Independence, Mo., with her brothers Cheng Yang and John Yang, right.
KANSAS CITY, Mo. — To Neng Yang, the Best Buy store in Independence, Mo., is just too overwhelming — so much so that she only shops there once a year, at the holidays.

So when she needed a new cellphone, she bypassed the 55,000-square-foot store with its many departments — appliances, big-screen TVs, computers, cameras, car audio, video and music. Instead, she stopped across the street at the Best Buy Mobile store.

The slimmed-down 850-square-foot sister store concentrates only on mobile devices.

“I ask about a thousand questions, and this is more personalized, more one-on-one attention,” said Yang of Blue Springs, Mo.

Yang bought a white Droid Razr, and her brother John Yang picked up a black one.

Bigger is not always better. Just ask the biggest retailers in the country — and their customers.

The recession and the growth of online shopping have conspired to cut chains down to size. One strategy they’ve employed has been to close underperforming stores. But Best Buy and an increasing number of companies are trying another strategy too — going smaller.

Among the retailers testing smaller concepts are Blockbuster, Ann Taylor, Gap, Kohl’s, Lowe’s and Sports Authority. RadioShack even is trying a “store-within-a-store” format in several OfficeMax stores in California.

Lower square footage makes for lower construction and remodeling costs, and that also tends to make them easier to finance. The smaller locations have less overhead costs and can be manned by fewer employees.

The small size also gives the chains more flexibility in locations, allowing them to squeeze into heavily developed urban centers, and compact spaces in airports, college campuses and strip centers. If the location isn’t successful, the chains can close the sites with less financial fallout.

“For a decade it was ‘build it and they will come,’ ” said Candace Corlett, president of WSL Strategic Retail in New York.

“It’s definitely a correction for retailers as well as restaurants, a direct result of consumers not having as much to spend on the extras. The strategy has to be to reduce your costs to offset less traffic. Usually that means less rent, shrinking retail and restaurants,” Corlett said.

Jeff Green, president of Jeff Green Partners, Phoenix-based real-estate consultants, has long criticized the “bigger is better” movement.

“They think the bigger they are the more exciting they are and that’s not necessarily the case, as Apple has proven,” Green said.

“Consumers like the smaller stores, like to be part of a ‘happening,’ and smaller stores have that feel.”

When retailers like Ann Taylor, Chico’s and the Gap opened larger stores, they didn’t necessarily see an equivalent rise in sales, if any rise at all, that would justify the added expense, Green said.

“Any retailer that is opening larger and larger stores, I question their long-term viability,” Green said. “Costco and Sam’s Club defy that theory. That’s because consumers really perceive them as great values and value trumps the inconvenience of size.”

One of the latest retailers to embrace small stores is Cabela’s. On Feb. 16, the outdoor-equipment and sporting-goods retailer said it would open its first Cabela’s Outpost Store this fall in Union Gap, just south of Yakima; up to three more are planned for next year.

The Outpost stores will be significantly smaller than traditional Cabela’s: about 40,000 square feet compared with, say, the 185,000-square-foot Cabela’s in Lacey, Thurston County.

Cabela’s also has plans to open an 110,000-square-foot store this year at Quil Ceda Village on the Tulalip Tribes Indian reservation. And it will target smaller markets — 250,000 people or less with a high concentration of them already Cabela’s customers.

Best Buy introduced its mobile locations in 2007 and there are about 260 nationwide, including the Independence Best Buy Mobile store, which opened in August. Best Buy has about 1,100 full-size stores.

“The customer wants a different shopping experience. We don’t work on commission, and we carry everybody,” said Kyle Cochran, manager of the Independence store, which is tucked between two specialty stores on the lower level of the Independence Center mall.

Still, consumers who have come to know a brand as a “category killer” might be confused by the new concept.

The Wal-Mart Neighborhood Stores are designed to provide shoppers with a quick, convenient stop for fresh produce, dairy items, and pharmacy products at low prices. The grocery stores are about 29,000 square feet compared with a 142,000-square-foot supercenter.

But some grocery store shoppers still expect to see the large selections of products Wal-Mart is known for.

Carolyn Shaw of Shawnee, Kan., was disappointed in the holiday selection at a Wal-Mart Neighborhood store earlier this month during a morning stop in a snowstorm.

“They didn’t have many Valentine’s items,” Shaw said. “Now I’ll have to go back out this afternoon to a bigger Wal-Mart.”

Boston Pizza drafts smaller stores for smaller markets

One of Canada’s biggest casual restaurant brands is warming up expansion plans for smaller cities and rural communities with the launch of a smaller-store prototype.

Boston Pizza International’s new smaller-scale store design, at about 4,100 square feet, is expected to make it “more affordable than ever to own a Boston Pizza franchise,” the company said in a statement Thursday.

The new store template is an opportunity “perfect for markets that were previously challenging due to market size or real estate availability,” said Ken Otto, the Toronto-based chain’s chief operating officer.

“One of our core pillars is a focus on franchisee profitability. This new prototype delivers against this by offering a reduced size model that is perfect for smaller communities.”

In terms of occupancy, the new space would allow for 140 seats with a 50-seat patio and would include both the “welcoming family restaurant and… lively sports bar” now seen in the chain’s larger outlets.

By comparison, the typical Boston Pizza building currently takes up 6,000-6,500 square feet, with capacity for 180-225 seats plus patio seating for 50-75.

“We believe a multi-channel approach to real estate and development is the best way to expand the Boston Pizza brand and extend our dominance in the casual dining category,” Otto said Thursday.

The company in recent months also made moves to expand its presence beyond the suburban landscape where it’s most often now seen, by developing stores in “prime urban locations” across the country and in “non-traditional” sites such as hotels, sports venues and strip malls.

“We are looking at building on the success of our urban prototype in Toronto in other major markets as well as growing through the opening of new stores in smaller, more rural communities that we haven’t entered yet,” Otto said.

Born out of an Edmonton restaurant, Boston Pizza and Spaghetti House, in 1964, the company — which then included 44 stores — was bought in 1983 by then-franchisee Jim Treliving and partner George Melville, who oversaw its expansions into Ontario, Quebec and Atlantic Canada.

The chain, which booked gross sales of $853 million in 2010, also began southward expansion in 2000 under the name Boston’s The Gourmet Pizza, now including about 50 U.S. outlets and three in Mexico.

Let the speculation begin about Walmart Market

Walmart is moving forward with what could be characterized as a roll out of its Neighborhood Market format nearly 13 years after the first unit opened in the fall of 1998. Just don’t call it a Neighborhood Market.

The company has rebranded the small format food and drug combo store as Walmart Market  and as Bill Simon, president and CEO of the company’s U.S. stores division made clear during an investor presentation yesterday, the financial returns are now comparable to those of the company’s supercenters. That has encouraged the company to move faster with expanding the based of 155 domestic Walmart Market stores.

“There are 180 that have been approved through our real estate committee,” Simon said during a presentation at the William Blair & Company Growth Stock Conference. “We expect to have about 300 of them by 2013. The number for next year is approaching 100 that we’ll be able to put in.”

Now the guessing game can begin about how many of the approximately 40,000-sq.-ft. stores the company might ultimately be able to open and the time frame in which the expansion could occur given Walmart’s resources, available real estate and an army of assistant store managers who have undergone the retail equivalent of Navy Seal training by working in Walmart’s supercenters.

Simon said the company was also encouraged to move fast because the smaller stores have a shorter development timeline than a supercenter, which means a significant number can be added more quickly.

The ramp up in expansion has been a long time coming. When the first units opened in the late 90’s the concept was viewed as a growth vehicle, and there was considerable conjecture around how quickly the concept could be expanded. However the operating model was never quite right and there were abundant supercenter projects in the pipeline. While Simon asserted that supercenters remain the company’s primary growth vehicle in the U.S. the tipping point would appear to be at hand where within a few years ground up new supercenters will become increasingly rare and small-store openings more commonplace.

Simon referenced providing more details on the Walmart Market expansion in October, which is when the company holds it annual investor conference and reveals it capital expenditures budget for the coming year along with details around square footage expansion and stores openings by format type. Simon broke with tradition a bit by revealing 2012 growth plans for the Walmart Market but these days investors are clamoring for information on how the company expects to growth given the two year slide in same-store sales. In addition to the significance of the expansion news, the timing of the disclosure is noteworthy as well. Just two weeks earlier Walmart held its annual shareholders’ meeting, which was followed by a two-hour meeting with analysts where divisional presidents and CEOs and Wal-Mart Stores president and CEO gave brief presentations and fielded questions.

Twist in retail tale: Kiranas partner giants

MICROFINANCE PUSH

IT’S a nagging, almost decade-old doubt that has kept foreign direct investment (FDI) in retail at bay: will the entry of Big Retail hurt the six million kirana stores? As the nation grapples with the question, a series of interesting pilot projects are demonstrating how the giants and the dwarfs can co-exist, and even fuel each other’s growth, thanks to a little help from microfinance institutions (MFIs).

Biggies like Wal-Mart, Metro Cash & Carry and the Future Group have forged partnerships with microfinance and financial institutions to sell merchandise on credit to rural kiranas. The MFIs not only provide credit, but also double up as valuable intermediaries that collect orders from the kiranas, source the merchandise from big retailers and deliver it at the kirana’s doorstep. What’s more, the MFIs do not charge any interest on the credit extended to the kiranas. Instead, they receive a commission from the retailers, for whom this is a small price to pay in order to win new markets and grow faster.

While Metro has been running a pilot with SKS Microfinance in Hyderabad for a few months now, the Future Group has just inked a similar deal with SKS. Bharti Wal-Mart, an equal joint venture, has a partnership with Kotak Mahindra Bank for cards that offer ready credit to the kiranas. RPG-controlled Spencer’s Retail too is keen to explore such opportunities.
If these experiments click, it could enable large retailers to pry open vast rural markets, help kiranas become more efficient in their sourcing, give consumers the benefit of lower prices, and build a thriving retail ecosystem where the lambs can indeed sleep with the lions.

It might also soften the resistance to FDI in retail. If kiranas are empowered to source more effectively, they may be able to co-exist meaningfully with organised retail if and when FDI is opened up. Though foreign retailers are allowed to set up cash-and-carry formats, FDI is not allowed in supermarkets, etc.

“This will open up a completely new rural distribution model and help us in understanding rural consumers,” says Future Group CEO Kishore Biyani. “This is probably the first time the Indian retail sector is targeting the rural market in such a big and strategic way.”

Future Group has started to sell staples, dry groceries and FMCG products through SKS’s network to some kiranas in the North, including a few in the National Capital Region. It also plans to supply its bouquet of private label products through this network. ‘Partnership a win-win one’
IT’S a win-win partnership as we can use our sourcing strength and SKS’s huge network of kirana clients to supply products to them at competitive rates. Eventually, we can include other products as well,” says Biyani.

SKS provides interest-free working capital loan to its kirana clients. The kiranas use this to purchase their inventory from Metro and Future Group at wholesale prices. The loan amounts range from Rs 5,000 to Rs 25,000. SKS, in return, receives a fixed commission from Metro and Future Group for the total purchases a kirana makes.

“Kiranas access superior quality products at very reasonable prices, delivered right at their store, thereby increasing their productivity,” says SKS Microfinance COO MR Rao. SKS has 2.72 lakh kirana store owners as its customers (4% of its total of 68 lakh members). Industry estimates suggest that only 35% of the 6 million-odd kiranas in India are properly serviced by consumer goods companies and distributors. The remaining 65% is serviced by a multi-layered distribution network that is often inefficient, but still adds a substantial amount to the product cost.

German wholesaler Metro Cash and Carry India plans to scale up its Hyderabad pilot nationally soon. The company is also helping rural kiranas with tips on effective use of working capital and strategies to serve their catchments better. “We could have launched this as part of our CSR programme, but we chose to make it a part of our core business plan as the potential is huge,” says Metro Cash & Carry India director (customer management) Ajay Sheodaan.

Kotak Mahindra and Bharti Wal-Mart have rolled out a “business card” which offers credit to kiranas starting from Rs 8,000. The credit is free of interest for 14 days after the purchase and an interest rate of 1.5% per month is charged after that. Kiranas are now making transactions ranging from Rs 15,000 to Rs 1 lakh on this card.

Kotak Mahindra Bank executive VP and head (credit cards) Subrat Pani says the customer acceptance for this lowticket working capital funding is growing on a daily basis. “We have around 700 members from Amritsar and Chandigarh. Within six to seven months, we have been able to drive almost 9-10% of the total sales at Bharti Wal-Mart. This could potentially go up to 12% in the next three months,” he says.

Enthused by these initiatives, RPG Group vice-chairman Sanjiv Goenka says Spencer’s Retail will also study such possibilities. “Any new model which expands penetration is good for the industry,” he says.

However, Retailers Association of India CEO Kumar Rajagopalan responds cautiously. “The real potential for modern retail lies in the top 100 cities. Some companies may be experimenting on newer models, but we need to see how much business it can generate,” he says.

Big bazaars score over kiranas

EARLYthis year, when escalating prices were crunching household budgets, modern retailers were more responsive in cutting or holding prices of day-to-day products than traditional retailers, thanks to their ability to check operational costs bargain hard with suppliers and launch private labels.

According to a study by The Nielsen Company, modern retail dropped prices by more, or increased them by less, for more product categories than traditional retailers, or kiranas, between the last quarter of 2009 (Oct-Dec) and the first quarter of 2010 (Jan-Mar).

“The power of modern retail lies in the scale and efficiencies which we have built over the years,” says Kishore Biyani, CEO of Future Group that operates retail formats such as Food Bazaar, Big Bazaar, Pantaloon and KB’s Fairprice stores.

The Nielsen Shop Census study compared prices of 47 commonly used items including toothpastes, washing powder and confectionery. Modern retail dropped prices by more, or increased them by less, than traditional retailers for 29 product categories while traditional retailers did better in 18 categories.

It collected data from 16,000 stores (11,000 urban and 5,000 rural, in both modern and traditional retail) in 462 towns and 1,427 villages.

During this period, the rate of inflation, as measured by the Wholesale Price index, was hovering around 10% and food inflation was more than 12%.
In the past two years, modern retail has been able to significantly cut operational costs related to real estate rentals, energy costs and increase persquare-feet productivity of employees leading to savings in people costs.
They also launched private labels to get a better grip on selling prices and profit margins, and some savings were passed onto customers.

Higher collaboration with small and medium suppliers as well as distributors of large FMCG companies helped them cut costs in transportation and logistics.

Efficiencies of scale helps one source the goods closer to the manufacturer says Mr Biyani. In 2009, Big Bazaar sourced 26,000 tonnes of rice, 4 crore pieces of clothing, 20 lakh suitcases, 36 lakh mixer-grinders, 45,000 manufactured beds, 20 lakh bedsheets and 19,000 LCD TVs. Each of these figures will be higher by a minimum of 30% for the year 2010, he says. “Such large sourcing allows us to get better prices directly from manufacturers and producers.”

Big Bazaar is the largest player in the segment contributing over 33% of modern retail sales. Other top retail formats competing with traditional kirana for essential purchases include Reliance Retail, Aditya Birla Retail’s More and Spencer’s Retail.

Kumar Rajagopalan, CEO, Retail Association of India, says strong sourcing power helps modern formats offer better prices. “They have done away with the extra level of intermediaries,” he says.

Meanwhile, grocers too are working on protecting their turf by leveraging on their strengths such as customer relationships, home delivery, credit facilities and expanding their product portfolio.

Top FMCG companies such as Hindustan Unilever, Procter & Gamble Marico and Godrej have begun adopting kiranas, teaching them category management and effective merchandising to counter big retailers and their private labels.

Bharatiya Udyog Vyapar Mandal (BUVM), the biggest national-level association of mom-and-pop stores, has formed city-centric associations that negotiate directly with manufacturers such as Unilever and P&G and do away with any middlemen.

This helped kiranas offer 5-20% discounts on MRP of branded products like detergents, shampoos soaps, oil and atta.

“When prices rose due to inflation some kirana stores offered customers the option of paying in instalments apart from extending them credit for a month,” says Vijay Prakash Jain, secretary general of BUVM that comprises 17,000 state and district-level associations across 27 states.

Interestingly, kiranas managed the prices of items such as detergent bars toilet soaps, shampoo, packaged tea and iodised salt better than modern retail, according to the Nielsen study.

Currently, traditional retail, both grocers & chemists, constitute over 95% of total sales in the country.

Modern trade at just 3-5% of the total national industry sales, had grown aggressively at over 35-40% contributing to over 15-25% sales for most consumer goods companies last year.

Casual Male to launch superstore concept

Canton, Mass. ( July 8, 2010 ) Casual Male Retail Group said it will open Destination XL (DXL), a new men’s superstore concept catering to the bigger and taller man. The initial DXL stores are planned to launch in Chicago, Houston, Memphis and Las Vegas this summer.

The new format will feature a wide range of clothing, shoes and products under one roof, with collections of good, better and best products merchandised by lifestyle. With a 12,000-sq.-ft. footprint, the stores will carry product assortments in a range of very broad sizes starting at XL in tops and a 42-inch waist in pants for the bigger customer and a 38 inch waist for the taller customer.

The Casual Male superstore concept was created following a six-month consumer research study conducted by L.E.K. Consulting that found that big and tall men are looking for more options in a “one-stop-shop” environment and are willing to travel longer distances for a place that caters to their specific needs.

“DXL is a new and innovative retail concept that is attuned to our customers’ needs,” says David Levin, president and CEO of CMRG. “Our target customer wants choices, value for their dollar and the convenience and unique shopping experience DXL offers. We are confident that our new lifestyle superstore concept will offer the unique shopping experience that many big and tall men have been seeking.”

The DXL superstore concept also will be supported by an all-inclusive e-commerce site, launching in 2011, which will offer the same breadth of apparel and products.

Currently, Casual Male Retail Group operates 454 Casual Male XL retail and outlet stores, as well as 19 Rochester Clothing stores.

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