Small Formats’ Big Future in Retail

With the advent of a new year and decade, there’s no better time to address the topic of format as grocers continue to gravitate toward smaller store sizes, an accelerating trend. As the stage is set for what’s next, during 2020 we experienced increased preparation of meals at home, reaffirming grocers’ place in our lives. As we head into 2021, grocers will strive to intelligently implement planning from an omni-retailing stance, influencing the types of stores and how they’re networked. Here are considerations for how small formats are part of that future strategy. 

Why and What is Downsizing Format?  

As a trend over the past decade, retail footprints have steadily decreased in size. The average grocery store size is currently 38,000 square feet, with small formats ranging in size between 12,000 square feet and 25,000 square feet, and even smaller in urban markets. Retail as a whole has focused on reducing footprints for a decade, chiefly to manage cost and profitability. The cost of capital to develop and deploy grocery real estate is nearly double that of conventional retail based upon the fixtures, furnishings and equipment required to fit out a store. As work from home grows, it enables a move toward shopping closer to home. This shift in how we shop is an opportunity for grocers to re-evaluate their store portfolio, clustering network and formats, significantly leveraging new real estate opportunities.

The labor needed to operate and serve customers is higher, and grocers and equipment vendor partners are continually seeking ways to deliver fresh or prepared foods with greater efficiency and high quality. Other factors driving smaller formats include more narrowly designed brands targeting product offerings focused on specific segments, such as everyday low prices and fresh campaigns. Another consideration is larger grocers that target geography/demographics to serve urban markets.  

By concentrating on specific product categories, grocers are seeking to engage with customers in more authentic ways. Promotional food products and in-store merchandising techniques are becoming more critical. Sales loss for promotional products was accelerated in 2020 under increased pressure as shoppers re-evaluated priorities and e-commerce fulfillment reliance. The significant adoption of e-commerce will holistically transform store formats in terms of convenience and a frictionless experience.  

As we address the landscape of smaller, more flexible stores outlined above, let’s consider a shopping list of considerations in store design and planning — the nexus to delivering a profitable retail experience center in the design process. Let’s unpack some essential strategies and techniques with a focus on the design process.

Planning and Design: Considerations Checklist  

Three critical factors for any format’s success in driving engagement are assortment, value and convenience.

Assortment: SKU rationalization, also known as product optimization, is how grocers continuously evaluate which products are retailed or discontinued based on their profitability. It’s an essential practice for maximizing profitability and merchandising areas required to achieve smaller footprints. Trader Joe’s is well known for its select product offerings, as it offers roughly 4,000 SKUs, while typical grocers sell between 30,000 and 50,000 SKUs.

Value: Brands continued their successful strategy during 2020, including Aldi and Lidl, with limited or no service offerings.

Convenience: The basis of store format size is to simplify and expedite the shop. Adding to this basic premise are new technologies to enhance this shopper expectation.  

Smart Shopping Store Technologies 

Frictionless checkout: The checkout process remains the top retail pain point.  Beyond Amazon, this is a topic on the forefront that will transform the shopping experience and deliver the sales area back into the store, reducing and eliminating manual checkout processes.

Wayfinding/augmented reality is also on the horizon.

Buy Online, Pick up In-Store (BOPIS): Grocers are prepared for the second generation of click-and-collect, implementing multiple options anytime, anywhere.

Options for pickup include curbside, or dedicated food lockers such as multi-temperature smart lockers, which have been used in Europe for years.

Applications for “just-in-time” pickup enhance convenience by reducing wait time. Several companies are providers within this space.   

Consider These Equipment Technologies

Flexible intelligent fixtures and equipment: Manufacturers are delivering into the market an entirely new generation of equipment.

Smarter equipment leveraging data connected to the “internet of things” to monitor operational performance.

Energy efficiency: Energy consumption of equipment in the foodservice industry is five to 10 times larger than that of conventional retail. New combined cooking technologies reduce preparation time, deliver higher-quality food products and lower energy costs.

New equipment technology includes smaller footprints needed for compact formats and ductless applications, reducing capital costs.   

E-commerce: Beyond Today’s Manual Picking

Logistics automation is a central factor transforming all of tomorrow’s retail. Leading the retail automation available today are micro-fulfillment centers (MFCs).

Cube storage of MFCs’ automated storage and retrieval systems (ASRS) is dense, allowing grocers to store, pick and deliver a basket of groceries in five minutes and have a footprint that’s 25% of a conventional shelving area.

With grocery e-commerce’s explosive growth, MFCs are a means for grocers to reduce formats in tomorrow’s marketplace and remain competitive.

Remotely supporting food products through commissaries for prepared foods or ghost kitchens are tactics increasingly leveraged to reduce preparation square footage and deliver high-quality foods.    

Small formats are uniquely challenging. It helps to begin with the brand and solve for the factors discussed here to drive the process. It takes a collaborative and cross-functional team to successfully implement, and it’s paramount to remain relevant in today’s rapidly evolving food marketplace.

Final considerations for grocers include what are they doing to compete and stay relevant in the quickly transforming retail industry? Is your brand proposition relevant to the segment that you serve? Key elements addressed are supported by these myriad factors and tactics, as well as a compelling brand strategy. The marketplace is an expanding moving target where success can be determined by the ability to execute a smaller-format store.