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Trend Watch - Smaller Formats

Growing Your Business Smaller

May 9, 2012
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walmart express store front blue newExploring the role of private label within new, small format stores.

Now that there’s a big-box store of every variety on just about every corner, it’s hard to remember a time when the neighborhood General Store was where people went for all their shopping needs.

General stores started out as rural or small town stores that carried a broad range of merchandise (usually food staples such as milk and bread, as well as household goods such as hardware and electrical supplies), most of it coming from the town and surrounding local areas. In these stores, you told a salesperson what you wanted and they brought it to you—but people soon tired of waiting.

Enter the self-service supermarket concept, which was introduced in 1916 by Clarence Saunders through his Piggly Wiggly stores, then was tweaked to perfection in the 1930s by Michael Cullen and his King Kullen supermarkets.

Then Sam Walton came along in the 1960s, bringing with him the notion of the “big-box store,” and the rest is history. In 1980, the average SKU count for stores was 15,000; today, the average SKU is around 45,000.

But with all the nostalgia generated from a “simpler time,” and a business opportunity to better target specific audiences and their geographic, demographic and psychographic needs (as well as their buying behaviors and spending power), retailers are going small again.

In recent years, a crop of small-format stores have popped up, and they are starting to give the large-format stores (as well as both established and slow-evolving C-stores) a run for their money. Why? For a variety of reasons:

• The consumer experience in massive retail establishments is becoming increasingly unattractive.

• Lower-income shoppers, in particular, find that they are not comfortable in large stores because service is less personal, and the broad assortment of products drives home how little they can afford.

• Large stores frequently are inaccessible, as they are located far from city centers.

• Economics and technology have shifted the value proposition.

• Population growth in urban areas had necessitated the need to build stores where the people are; unfortunately, urban areas can’t support the large formats.

What can a small format store do for a large format store?

• They offer retailers a more intimate relationship with customers and employees, and therefore allow for genuine innovation in store design and even business model design.

• They have the ability to tap into new demographics and locate and build sites more quickly in saturated markets.

• They provide a less intense drain on capital resources compared with the supercenters and hypermarkets that drive the bulk of the revenues at many of the world’s largest grocery operators.

But when mega-stores such as Walmart, Kroger, Safeway and Target go from formats with 40,000 SKUs down to those with, say, 10,000 SKUs, what products stay and what products go? How can these smaller stores create an ownable, and lucrative, private label strategy? And how should they brand their experiences to mark this profound shift from the larger format arena?

First and foremost, retailers should consider the purpose of their endeavor. Is it a convenience play, a specialized offer? What role will the banner play in the portfolio? That business raison d’etre will inform the next question.

How will they brand their store? Does their small format store need a new name or variation of the existing brand name? Can it use the same name?

For example, Walmart has two small format stores, Walmart Express and Walmart Marketside. Giant Eagle has Giant Eagle Express and Giant Eagle Get-Go, and Target has City Target. Successful store names tend to leverage existing equities and provide a clear, motivating and brand relevant message to the consumer.

The next consideration is the private label strategy—the makeup of the brand’s private label portfolio. Before a retailer can determine the composition, it again needs to identify its differentiating strategy and how that might be applied. Is the differentiator value, fresh, or value-added? Is it a premium or value play?

Small format stores such as Aldi, Fresh & Easy and Trader Joe’s illustrate why a strong strategy is essential.

Aldi is a small format store that is strictly a value proposition. The store locations, the footprint, the layout of the selling floor and the product assortment all support the brand proposition. But in general, most small format stores tend to be more about convenience than value … and customers definitely are willing to pay a small premium for that convenience.

Aldi successfully leverages an extensive private label program over national brands at a discount to support its position in the marketplace.

Fresh & Easy is all about being fresh (and, well, easy), and by sticking to this doctrine, it has created a strong fan base.

Trader Joe’s is all about providing a unique, value-added proposition. It offers private label items such as “cat cookies,” “pot stickers” and dried fruits and nuts to which customers are extremely loyal and know they can only buy at Trader Joe’s.

Here, too, Trader Joe’s leverages innovative packaging, branding and significant private label presences to make its brand experience unique and ownable.

As more and more retailers are getting into the small format store space, they should consider three possible strategies for using private label:

1. Make the majority product mix private label. This means commitment to building a relevant branded environment and product development, as traffic will be driven by the brand propositon, e.g. the Trader Joe’s of the world.

2. Keep the private label focus on fresh food and meal solutions. Drive traffic and margin with these offerings; they can even be branded solutions to create a proprietary look and feel.

3. Develop a few unique private label offerings found only in this small format that target your consumer wants and needs. Take a page out of Duane Reade’s DeLish brand, which lets private label serve as a unique, well-positioned driver within the national brand portfolio (in other words, have your cake and eat it, too.)

In some ways, it would be really nice and easy to go back to the industrial-age days of “build it one way, build it big and utilize leverage” to drive the business. But we’re in a different time, one where technology and evolving needs have altered both consumer expectations and the buying experience.

Consumers now seek out custom solutions that benefit them through badge value, quality, price and/or convenience. By strategically assessing these wants and needs, and delivering against them as Piggly Wiggly and King Kullen did back in the days, retailers can harness the concept of the old General Store and turn small formats into strong, sustainable business concepts. 

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