Two very disparate events have rocked the retail world to its core, requiring the biggest players in the field to re-think their business models. The explosive growth of e-commerce and the recent recession have created a new reality for retailers, as more and more people purchase online and fewer people purchase, period.
E-commerce changed the retail landscape forever and the big box concept, so powerful 20 years ago, has taken the heaviest blow. Sales per square foot – the measure of a retailer’s productivity – peaked in 2007 at $454 per square foot, according to the real estate research firm Green Street Advisors. By the end of 2009, the average had fallen to $401, wiping out five years of progress. During this same time period, the Gap, the country’s largest apparel retailer, saw its sales per square foot drop 40% to $329, while its store size jumped 62%, according to the Wall Street Journal.
The recession that began in the fall of 2008 was the first wake-up call for retailers which suddenly began scrambling to unload real estate and shrink stores to meet the new economic reality.
"The old joke is that Best Buy is Amazon's showroom. Many consumers still prefer to ‘touch and feel’ a product while making up their minds but go online to actually make a purchase," said Scot Ciccarelli, a senior retail analyst at RBC Capital Markets.
To counteract these economic and behavioral forces, big box retailers have embraced e-commerce as never before while introducing stores with much smaller footprints – all to reflect the new consumer buying patterns, enhance the customer experience and prosper in lean times. The likes of Walmart, Target, Best Buy, Staples and Office Depot have all announced smaller store footprints for their new stores and many are downsizing or subleasing space in their current locations, all to reduce overhead in a tight economy and to appeal to a more urban demographic.
'Endless Aisle' Opens New Horizons
To compensate, in comes the concept of an “endless aisle,” or selling items that are not actually located in the store. This strategy allows retailers to find a better balance between inventory and customer demand. Utilizing the endless aisle model, retailers can reduce physical inventory while enhancing the customer experience, and increase product assortment while decreasing floor space. In many cases retailers can arrange for manufacturers to ship directly to customers. In product categories where the product is large, requires long lead times or is highly customizable, retailers save money and space by not having to purchase, warehouse or display the item before it is sold.
Retailers are turning to in-store computer terminals that allow customers to shop and purchase from a company’s entire inventory. These kiosks have proven to be real money makers for retailers.
Consumers are leading the charge toward online shopping with retailers scrambling to find profits in this new paradigm. They are doing it by making their entire inventories available online for customers to shop, so whether in the retailer’s warehouse or the manufacturer’s warehouse, the experience is seamless to the customer. As a result, stores are smaller and house less physical inventory but offer a much broader selection and a higher level of customer service. Retailers are learning that they can, in fact, grow their business by shrinking their stores.
Brian Kinsella is senior director of product management at Manhattan Associates