Big-box retail dominance may end; Walmart, Best Buy eye small stores

Written by Bloomberg | Updated: Mar 31 2012, 07:45am hrs
When Best Buy said on Thursday it was closing 50 big stores and opening 100 smaller ones, the worlds largest electronics retailer was adjusting to reality: The era of big-box retail dominance is coming to an end.

The new mantra is small box. While Best Buy, Walmart Stores and Target are still opening large stores, all are putting increasing emphasis on smaller ones. Best Buy plans to double the number of its smaller Best Buy Mobile stores by 2016. Walmart is building as many as 100 small-format stores this year, while Target is opening five City Target locations.

After 50 years of putting mom and pops out of business, big-box retail is having a mid-life crisis. A slow economy has hurt same-store sales, narrowing margins at big stores. Meanwhile, consumers, armed with price-comparison technology, are visiting more stores seeking deals or exclusive merchandise rather than making one-stop, fill-the-cart excursions.

Were undergoing a seismic shift, said Natalie Berg, an analyst with Planet Retail in London. People are still cutting back. People are buying more products online so there is a real case for downsizing stores.

Big-box retailers essentially come in two flavours: so-called category killers such as Best Buy that focus on one type of merchandise, and discounters like Walmart and Target, which sell a broader range of goods.

Since the recession, big-box retailers have struggled. Until its third fiscal quarter last year, Walmart had posted eight consecutive quarters of declining sales at stores open more than 12 months. Best Buy posted five straight quarters of profit decline before reporting a $2.6 billion loss on March 29, while analysts forecast declining same-store sales and profit for Target this year.

Since June, 2009, when the recession officially ended, Walmart shares have advanced 26 percent and Best Buy has dropped 26%, both trailing the 39% gain for the 32-company Standard & Poors 500 Retailing Index. Target shares gained 47% in that time.

Big-box retail was born in 1962. Thats the year that Wal- Mart, K-Mart and Target all opened their first large discount stores. As they grew, the new big boxes began offering broad selection and low prices to a growing population of suburbanites who had left the cities in their new cars, searching for their piece of the American Dream.

Big boxes boomed in the go-go 1990s. Fuelled by an inflated stock market and loose credit, Americans expanded farther into the suburbs and filled their new homes with appliances and consumer goods, said John Lupo, a retired Wal-Mart executive who now sits on the board of AB Electrolux. The housing boom propelled the big-box retailers into the new millennium. Then came the crash and consumers pulled back.

Other forces are conspiring against the big-box model. Baby Boomers no longer have kids at home and dont need to stock up on food and packaged goods. Their kids are marrying later and delaying having their own children, meaning fewer are buying houses that need to be updated and furnished.

Right now you have a trough in the need for big-box retail, Gildenberg said.

Hence the rush to open smaller stores. By 2016, Richfield, Minnesota-based Best Buy plans to have as many as 800 Mobile Stores, up from 305 now. Its part of chief executive officer Brian Dunns plan to generate revenue from warranties, accessories and connections between phones, tablets and other electronics. The increasing emphasis on smaller stores still leaves room for big stores, according to Dunn. We see those stores as an important part of a network in conjunction with our small-box stores, our online capabilities and our on-phone capabilities that allow customers to reach us anytime, anywhere, anyhow they choose, he said.