Retail Titans Downsize To Rightsize: Major Players Embrace Smaller Stores To Meet Modern Shopper Demands

In a move that signals a shift in the retail landscape, major industry players are opening smaller-format stores across the country. Traditionally known for the sprawling stores, they're strategically pivoting to cater to evolving consumer preferences and adapt to the post-pandemic retail environment.

The shift comes as a response to the changing shopping habits of today's consumers, who value convenience, personalized experiences and a more localized approach to retail.

Companies like Macy's Inc., Nordstrom Inc., Kohls and IKEA are opening smaller stores around the country to find new ways to connect with their customers. Barnes & Noble also is starting to occupy smaller storefronts. The company leased a 15,000-square-foot portion of a former 22,000-square-foot Bed Bath & Beyond in Atlanta.

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"A smaller concept store may be easier to gear toward local tastes and culture, which can help create stronger connections with new and existing customers," International Council of Shopping Centers Vice President of Research and Public Relations told Urban Land.

This year, Macy's will open up to 30 small-format locations across the country. It already has nearly 15 small-format locations, which also include Bloomie's, a smaller version of Bloomingdale's. The company is steering away from shopping malls where it has traditionally located.

The buildout and operating costs for small-format stores are typically less. It also allows retailers to focus on how customers experience their stores.  The smaller stores are about one-fifth the size of its traditional stores.

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"Our small-format stores are efficient to operate, provide the customer with a shopping alternative within our omnichannel ecosystem and present a unique opportunity to target high-traffic shopping areas," Macy's Chief Operating Officer and Chief Financial Officer Adrian Mitchell said.

The impact on the retail real estate sector is notable. The average size of retail leases during the first three quarters last year dropped to a historic low of 3,200 square feet, according to CoStar. Retail tenants leased 191 million square feet of space through the first nine months of 2023 — about 9% lower than the levels seen over the same period in 2022.

A total of 800 new retail leases of more than 25,000 square feet were executed during the first three quarters last year, down from 1,018 during the same period in 2022 and below the five-year average of 967.

"While a strong consumer has driven a resurgent physical retail environment coming out of the pandemic, the bifurcated nature of the recovery in demand across retail box sizes is a stark reminder that shifting consumer preferences will continue to drive a wide range of outcomes in the retail property sector," according to the CoStar report. "In the current environment, bigger is rarely better in retail space markets."

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