It's hardly news that the retail industry is going through significant contraction of selling space as an uptick in bankruptcies and outright liquidations forces hundreds of locations to close en masse. In addition, dozens of struggling retailers continue to shutter outlets hoping to improve profitability or avoid a similar fate. In fact, there is a pretty good chance that the number of store closings this year will exceed last year's record pace. While there are plenty of new store openings, the net downsizing of retail space in certain categories is clearly significant (for a deeper dive I recommend this excellent report by Coresight Research).
Another factor that is starting to affect vacancy rates is that some brands are "right-sizing" their prototypical store, in what I affectionately label the "Honey, I shrunk the store" phenomenon. Some of this is a sure sign that the retailer has run out of ideas for the space it has and is hoping to shrink to prosperity. Good luck with that. Others are wisely optimizing their footprints to address the rise of e-commerce and other fundamental changes in shopping behavior.
What's new—and fundamentally more interesting for retail's future—is the rise of much smaller and very much reimagined formats from well-established brands. I first delved into this last year writing about Nordstrom Local, the storied retailer's new service-focused micro-concept. Nordstrom has since disclosed plans to open additional locations and hinted in its recent investor presentation that Local could be a key part of the company's portfolio strategy to drive market share on a city-by-city basis. Ikea joined Sephora, Target and others who are hoping to spur outlet growth by announcing a smaller format that holds the potential to unlock many additional urban locations by having fundamentally different economics and site-location requirements.
In some cases these retailers are dealing with the harsh reality that their concepts are maturing and it's becoming impossible to find locations where they can generate an ROI from their traditional format. Without reengineering their underlying economics, their store growth plans come to a screeching halt. In other cases they are mirroring aspects of the playbook employed by many digitally-native brands as they began opening physical stores: locate closer to where the target customers live or work, make services a key component of the value proposition, harmonize the experience across digital and physical channels, minimize inventory and use technology as a differentiator.
Over the years, many retailers have chased the notion of a smaller store as the key to spurring outlet growth. Where most went wrong was delivering a watered-down version of what the brand was known for. Saks' Main Street strategy is an expensive lesson in what not to do. The smaller box did encourage them to open in locations that could not financially accommodate a "real" Saks store. In theory, this strategy held the promise of increasing the luxury retailer's store count by some 50%. Unfortunately customers were underwhelmed by the offering, seeing it as a "baby" Saks. Eventually all the expansion sites were closed.