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Big-Box Retailers Going Small To Target Urban Markets

The Williamsburgh Bank Tower and the Atlantic Terminal mall in Brooklyn, N.Y.

The era of 150K SF, warehouse-like stores in rural areas is over. To take advantage of growing urban populations and to compete with online retailers, brick-and-mortar players have opened smaller footprint locations near mixed-use developments and transit hubs.

Target, for example, plans to open 130 small-format stores around the country by 2019, including several across Manhattan, Queens and Staten Island. Falling between 20K SF and 40K SF, the new stores will offer a paired down selection of products and a greater emphasis on necessity-based services like grocery and pharmacy concepts. 

By reducing their inventory and tailoring it to the needs of customers within each submarket, big-box players hope to offer the convenience and instant gratification that e-commerce can’t.

“There’s a shift occurring,” Marcus & Millichap broker Daniel Corcoran said. “Retail is still strong but the way retailers are focused on their real estate has to do with necessity-based goods. It’s the difference between something that I need immediately and an item for which I can wait a couple of days. Where they place their retail locations has been a large part of their strategies.”

Corcoran is a member of Marcus & Millichap’s National Retail Group in the firm’s Manhattan office, where he advises clients on retail investments. He has seen brick-and-mortar retailers like Target, Kohl's and now Walmart look to restructure their real estate holdings to capitalize on urbanization. Over 85% of Americans now live in urban areas, he said, creating an unprecedented opportunity to engage with a larger consumer base. 

Smaller space, which comes at a premium in major metro areas like New York, requires greater efficiency with available merchandise. Rather than offering seven different choices per product, retailers are being more selective with their inventory, Corcoran said. Stores are now focused on what will sell the fastest. 

The reduced inventory comes as more consumer goods, ranging from clothing to electronics, are purchased online. Over 79% of U.S. consumers now shop online, choosing to buy items through an e-retailer that promises free shipping and the convenience of home delivery. 

Marcus & Millichap broker Daniel Corcoran

Despite the push toward e-commerce, there is still strong demand for physical locations that fulfill immediate needs. Drug, dollar and convenience stores outgrew large-format stores by 400% in 2016, and urgent trips now account for 61% of shopping trips and are done at small-format stores, according to a report from Koupon Media. Rather than compete with e-commerce, moving small-format stores closer to the consumer helps position them as locations designed to meet urgent shopping demands, from medication to coffee.

“I think what Target is doing is trying to mix in the necessity-based retail that is a little more Amazon-proof,” Corcoran said. “You are going in there to pick up medication at the pharmacy and come out with some products like beauty supplies or get your groceries.”

Retailers have responded by placing the pharmacy at the back of the store, keeping shoppers in the store longer. Visitors end up leaving with more in their bags than what was written on their shopping lists. The addition of well-known food and beverage chains, like Starbucks, plays into the demand for experiential retail.

Across its small-format stores, the retailer has also expanded its supermarket section. Kohl's adopted a similar strategy this year, reducing its merchandise by 60% and partnering with discount supermarket chain Aldi. Grocery stores close to consumers and with a reputation for discounts will continue to draw in shoppers in dense urban areas, Corcoran said.

Retailers have also started to use consumer data to determine where to place store locations and what to offer. Shopper headcounts and foot traffic help determine if a location sees enough activity to be economically viable. Locations like college campuses or suburban communities will impact the type of merchandise sold in each store. The former might offer student essentials, like dorm furnishings, school supplies and snacks. 

“Every decision that is made regarding the opening of new stores or even consolidating assets involves data,” Corcoran said. “The way that somebody shops in Brooklyn near the Barclays Center may be different from how someone shops in North Carolina.”

Within these urban areas, small-format stores near large multifamily or office development see the greatest success. Kohl's, Target or Whole Foods want to be situated near or even below the newest Class-A multifamily high-rise, because it offers a built-in consumer population. For residents of these communities, small-format retail is all about convenience. 

This feature was produced in collaboration between Bisnow Branded Content and Marcus & Millichap. Bisnow news staff was not involved in the production of this content.