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Small is big: Why retailers are ‘downsizing’ and ‘right-sizing’

Artist's impression of David Jones, Barangaroo Sydney‘Right-sizing’ and ‘downsizing’ will be the two most frequently used terms in retail boardrooms in 2018.

Last year the retail industry witnessed a significant number of retail store closures, internationally and here in Australia. Sadly, 2018 isn’t looking any better.

Much of the finger pointing has been directed at Amazon, the surge in online shopping, as well as the entrance of global players into the Australian retail landscape.

However, if you scratch the surface a little deeper it is evident that high retail rents, a lack of prime real estate, increasing inventory costs and wages are also major contributing factors.

Retailers have responded in two ways. ‘Right-sizing’ their fleet of stores – simply closing under-performing and unprofitable locations, as Myer have done, or ‘downsizing’ – shrinking their footprints. A number of established firms, as well as retail start-ups, are opening smaller stores.

Smaller stores allow retailers to maintain a bricks and mortar presence but at a more affordable rate. A number of established brands have started trialling smaller formats, slowly moving away from giant flagship stores, like Australian department store David Jones and more recently UK retailer Debenhams.

It’s not just big department stores experimenting with smaller footprints, the trend is evident in supermarkets like Sainsbury’s in the UK, and Woolworths and Coles here in Australia.

Even US retail giants Walmart and Target are ‘getting smaller to grow bigger’.

A growing number of retailers are also cleverly using smaller bricks and mortar shopfronts as ‘click and collect’ points for their online customers.

Smaller stores also mean smaller rents. When one of Australia’s leading retailers Solomon Lew flags store closures as a result of spiralling rent costs, it is no wonder other retailers are looking to downsize. Retail rents are charged ‘per square metre’, meaning the bigger the store, the higher the rent.

Location, location, location

Location, location, location – as CBRE analysts noted last year, “with the current environment characterised by a lack of premium retail investment offerings”, retailers are finding it difficult to snap up ideal locations.

Going smaller opens up more opportunities for retailers to capitalise on premium locations, particularly in sought-after highly populated suburbs.

Less space means less clutter. Inventory is certainly the biggest cost for retailers and the costs associated with excessive inventory lead to higher wages, insurance, poor cash flow and obsolescence. Less inventory also means less discounting and can create ‘FOMO’ (fear of missing out) which drives sales.

Finally, the second biggest cost for retailers, wages, decrease as the size of the store decreases. Fewer staff, less cleaning and maintenance, less inventory to manage, less recovery.

Small stores appeal directly to a growing number of affluent baby boomers and millennials who want personalisation, special services and quality products.

Because small stores allow retailers to be more nimble they can provide shoppers with convenience and accessibility. Micro retailers have less inventory and so they are able to turn stock over, replenish and refresh products at a faster pace than their larger rivals. The promise of new items arriving in store at shorter intervals and the lure of ‘newness’ are all very attractive prospects for shoppers.

Research shows that customers are increasingly suffering from choice overload, also known as the ‘tyranny of choice’. This is particularly so for online shoppers and for those browsing the aisles in superstores, department stores and large chain stores. A limited product offering, in a much smaller space, assists consumers make decisions more easily.

Are they here to stay? We think so. In 2018 and beyond retailing will continue to challenge. Retailers have always had to adapt to meet changing consumer demands, advances in technology and the like.

Despite the claims that bricks and mortar retailing is ‘dead’, many, many stores continue to flourish and physical retail remains the number one choice for around 90% of Australian shoppers. Another sure sign that physical retail is alive and well is evident in the growing number of pure play online retailers that are opening physical stores to complement their online offering.

Just as pop-up retailing has cemented itself as part of the retail landscape, small stores are also likely to transition from ‘flavour of the month’ to a more long-term proposition for the retail industry where it is now big to be small.

Written by Associate Professor Gary Mortimer from Queensland University of Technology and Dr Louise Grimmer from the University of Tasmania.

 

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