Big changes for big-box landscape: Large national retailers go small

Big changes for big-box landscape: Large national retailers go small

By IBISWorld industry analyst Janet Shim

General retail sales

Despite concerns about rising gas prices, IBISWorld projects that sales generated from big-box stores will remain steady in the coming months.

Big-box stores like Walmart and Target provide one-stop shopping and discounted prices for daily household needs. Though they are generally located in urban areas, consumers will drive out of their way to reap the benefits. While gas prices are expected to increase, these stores offer savings that more than offset the high costs. Furthermore, as big-box retailers progressively enter new and urban markets with their smaller store formats, more stores will be closer to consumers, thus attracting shoppers that value convenience in addition to savings.

Instead of higher gas prices, online competition presents the main threat to big-box stores. E-commerce offers a vast array of goods and the added convenience of at-home shopping. As such, websites have been eroding sales from traditional brick-and-mortar retailers. Big-box stores are adapting to this trend by establishing their own websites, and most national retailers have an online front for consumers to browse items, make purchases and check the availability of store stock.

The following are a few examples of big-box stores and their latest strategies:

Walmart and Target

Walmart is the largest mass merchandiser in the nation. In fiscal 2010, the company earned US revenue of $258.2 billion, which is estimated to represent 28.4% of the Department Stores industry (NAICS 45211) and 57.9% of the Warehouse Clubs and Supercenters industry (NAICS 45291).

During the past few years, Walmart has been progressively phasing out its general discount stores and converting them to the supercenter format by adding an extensive line of groceries. Since groceries account for about 51% of the firm's total revenue, the transition toward the new format is expected to bring in a larger share of the consumer dollar while providing the added convenience of one-stop shopping.

On the other hand, Walmart announced in late 2010 that it will open up smaller stores (i.e. 20,000-square-foot stores compared to their average of 108,000-square-foot discount stores) as part of an aggressive push into urban markets like San Francisco and New York. Such practices will accelerate store growth and make Walmart more accessible, thereby attracting consumers more frequently.

Similar to Walmart, Target, which earned consolidated revenue of $65.7 billion in fiscal 2010, has also been adding a full line of groceries to its stores to entice high-frequency shopping and to increase their appeal as a complete one-stop shop. Rather than converting its stores into SuperTargets, the company has invested an estimated $1 billion into remodeling 350 regular stores to add mini-grocery stores (known as the PFresh layout) in 2009, thus keeping individual store sizes to a minimum. This trend also falls in line with Target's urban expansion strategy, which will involve opening small, convenience store-like shops in densely populated cities.

Staples and Office Depot

Staples and Office Depot are the two largest office supply stores in the United States, generating $9.5 billion and $4.9 billion, respectively, in fiscal 2010. As such, Staples is estimated to account for 46.3% of the Office Supply Stores industry's market share, while Office Depot is estimated to represent 23.3%. These two giant retailers have also scaled down their operations in the past few years: Staples reduced the average size of their "Dover" store from 24,000 square feet to 18,000, designed 10,000 square-foot stores for urban markets, and introduced small stand-alone copy and print centers that carry 1,200 of the retailer's most high-volume sales. Office Depot adopted a strategy toward a convenience retailer by opening new 5,000-square-foot stores in December 2010, which are one-fifth the size but carry office supplies and services that account for 93% of the firm's traditional stores.

Best Buy

Best Buy, which accounts for 41.3% of the Consumer Electronics Stores industry's market share, announced in February that it plans to focus the company's profitable growth on new openings of 150 Best Buy Mobile stores in fiscal 2012. In comparison, the retailer only plans to open six to eight larger stores over the year, resulting in square-footage growth of less than 1% (in the last three years, Best Buy increased its square footage at an average annual rate of 5.0%). This change in expansion strategy also follows the trend of big-box stores' transition to smaller stores; however, the company's strategy is different from aforementioned retailers in that its new stores do not provide a one-stop shop. Since goods sold at Best Buy are large, it is virtually impossible to provide a wide selection of goods in limited space. Therefore, the retailer has narrowed its best-performing operations...click here to read the full report on big box stores.

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