Small Box is the New Big Box

Graphics by Lydia Qu

The BRB Bottomline: Retailers are increasingly turning to smaller format stores to survive in the digital age, with varying degrees of success. Target is a darling example of the potential of these “micro” locations in competitive retail environments; it’s not only been able to overcome challenges that have befallen competitors like Walmart, but also has successfully begun to seamlessly merge the digital and physical retail ecosystems.


If you’ve ever shopped at a Target store in Berkeley, you’ve probably noticed that they’re not your run-of-the-mill big box locations. They’re quite small in fact, part of a grand experiment of mostly urban-based small-format Target stores, individually referred to as “City Target” and “Target Express,” and collectively under the banner of “Flexible Format Locations.”

So what is a Flex Format store? They’re smaller Target stores carrying just a fraction of the products of full-line locations, with selections individually tailored to fit the specific needs of the surrounding community. Most include a CVS-branded pharmacy, an order pickup area, customer service, and a Starbucks-branded cafe. Clocking in at just 12,000 square feet, the Berkeley Shattuck location in particular is just 8% of the size of your average 145,000-square-foot Target store. The Shattuck location is one of the smallest in the chain, with typical Flex Format locations ranging from 25,000 to 40,000 square feet. Target seems to be heavily leaning into the Flex Format idea, as nearly all of its store openings planned for the next few years fall within the concept parameters. 

Although Target isn’t the first brand to roll out such a concept, it certainly appears to be having more success than many of its competitors. Walmart rolled out hundreds of similar Walmart Express locations and hundreds more Walmart Neighborhood Market stores in the past decade, before shuttering the entire Express chain as well as dozens of Neighborhood Markets in a mass closure of nearly 300 locations in 2016. Even stores whose traditional formats closely mirror the Flex Format model are struggling. Walgreens announced plans to shutter more than 200 locations months ago, CVS announced nearly 50 store closings in May of 2019, and 400 Family Dollar stores have liquidated or are slated for closure as of 2019. So when competing concepts—often in the same markets as Target Flex Format locations—are struggling to maintain relevance, why is Target able to surge forward successfully with the concept? What does the explosion of this concept mean for the retail ecosystem? And are we getting a glimpse into the future of retail?

Where the Competition Failed 

Have you noticed that you’ve never seen a Walmart store in NYC or LA? I thought not. Walmart has historically struggled to break into urban markets that could support small format stores, instead attempting a different approach. Most Walmart Express locations were constructed in small rural towns that couldn’t actively support a full-line Walmart location but were often near full-line stores in neighboring towns and municipalities. They also constructed locations in some college campuses, calling the concept “Walmart on Campus.” (Interesting enough, one store at the University of Arkansas survived the later purge of express stores. It is still in operation as far as I can tell.) The placement of these locations cannibalized traffic from nearby Supercenters; the intention was to supplement visits to full-line Walmart stores, but they instead stole market share and drove down the profitability of nearby locations. The few locations they managed to open in urban areas and in colleges didn’t face this particular issue, but with the vast majority in rural areas and near other full line locations, combined with other problems, still ultimately doomed the concept.

One of the most glaring problems with Walmart’s foray into smaller locations was that their existence was, in some ways, fundamentally at odds with the company’s supply chain strategy and overall business model. Walmart’s stores and supply chain are optimized for economies of scale that allow them to sell massive quantities at “everyday low prices.” But smaller stores didn’t support this model. Firstly, Walmart needed to raise prices in order to make up for the lower volume of these stores, but that went against Walmart’s reputation as the low-price leader in all categories of consumer goods. Secondly, Walmart had difficulty curating a store selection which resonated with consumers, often attempting to cram an entire Supercenter’s worth of variety instead of focusing on core departments that suited the surrounding demographics. Lastly, low volumes and inefficient supply chain logistics hampered profitability. Walmart’s supply chain was optimized for large stores, necessitating rapid restocks of large quantities of items over broad categories. For Walmart Express, the company had to adapt its supply chain for small format stores that needed comparatively few items, which was logistically inefficient. With these operational difficulties, poor location planning, and decreased profitability, it wasn’t particularly surprising that in 2016 Walmart announced the closure of the vast majority of its small format locations: 256 of these stores faced the chopping block, ending Walmart’s venture into the small format field. 

The exterior of a Walmart Express location before closure. Picture courtesy of Walmart Corporation.  

What Target Does Right 

Target entered the small-format store with a clear goal in mind: to continue to penetrate its most loyal and profitable customer demographic, middle to upper-middle-class younger people, who are more and more often residing in densely occupied urban areas. Most Flexible Format stores are in cities or other urban locations, with many of them within or directly surrounding large college campuses—all areas highly concentrated with this core demographic of customers. The selections at these locations are also tailored directly to the needs of the community they serve, with locations in college campuses stocking plenty of dorm essentials, food, and electronics, while stores in a suburban neighborhood with a lot of families focus more on toys, household goods, and clothing. This works perfectly for Target, as competitors such as Walmart have historically struggled in urban areas, leaving Target relatively unopposed in many of the nation’s largest urban markets. Target also tends to open these locations away from existing stores in order to prevent market cannibalization between locations, something that Walmart would fail to do in its foray into the small format world. 

Along with carefully chosen markets and store selections, Target also made several tangible changes to strengthen store performance and customer convenience. From a profitability standpoint, the added convenience of stores within key urban markets allows Target to increase prices on many items when compared to its full-line locations. Target doesn’t have to cling to the reputation of having rock bottom prices in order to drive traffic like Walmart, meaning their customers weren’t driven away from the prospect of slightly higher prices. They also managed to avoid the inventory issues which played a key part in the downfall of Walmart Express by having heavily invested in homegrown inventory control systems which accurately predict exactly how much stock of each item needed to be at each store at any one time. This allowed Flexible Format locations to maintain fully stocked sales floors without the massive inventory inefficiencies that smaller Walmarts struggled with. 

Higher comparative prices and smaller selections hasn’t hurt sales, however, as according to Target, Flexible Format locations can generate about twice the sales per square foot as their larger brethren. In fact, the store with the highest sales per square foot in the entire chain is a Flexible Format location in NYC. Target Corporation COO John Mulligan once commented that “[Flexible Format Locations] drive [higher] guest engagement and deliver strong financial performance, including much-higher-than-average sales productivity and meaningfully higher gross margin rates compared with our larger-format stores.”

In addition to being profitability powerhouses, these stores also play into Target’s overall digital strategy. They provide same day pickup, drive up (where orders are delivered to customers waiting cars), and ship-to-store services, along with nearby fulfillment points for one-day and same-day delivery services that Target has been steadily rolling out in key markets. These services are meant to blur the line between the online and in-store shopping experience, providing a gateway for customers who typically stay within Target’s digital ecosystem to interact with its physical one, and vice versa. 

A Flexible Format location in Herald Square, NY. Picture courtesy of Target Corporation.  

The Bottom Line for Consumers

In a sense, the rapid development and implementation of the Target Flex Format program is a glimpse into the future of retail itself, where consumers see the continued blending of the in-store and online shopping experiences. Service-based locations that focus on order pickup, shipping to store, drive up, same-day delivery, and other related services will likely continue to become more and more common. Smaller stores are already becoming a touchpoint for many companies, providing places for consumers to interact with the digital e-commerce environment and purchase essentials that they might need on a daily basis. In the end, Target Flex Format stores are a model of successful implementation of small format locations. We’ll likely see the boundaries between the digital and physical retail ecosystems continue to blur in the future, and Target will likely be at the forefront of this revolution if trends continue. The future of retail is going to be small, and that’s a big deal. 


Take Home Points

  • Retailers are increasingly shrinking store sizes in order to compete with eCommerce giants.
  • By focusing on everyday essentials for the communities they serve, they drive frequent store traffic and profitability.
  • These stores provide a location for the customer to interact with the retailer’s digital ecosystem, it drives online sales by providing services like online order pickup locations, customer service, returns, and free shipping from within the store.
  • Target has hit these key points and is seeing strong results from them, competitors like Walmart did not effectively utilize the potential of these concepts and scrapped their small-format locations in 2016.
  • Future retail concepts will likely see a continued blending of the digital and physical retail landscape.

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