More Downsizing?

It doesn’t really surprise me anymore when I hear about another national brand rolling out a smaller store format or compact new prototype. Recognizable names like Target, Walmart and Best Buy have all had some success with smaller formats, particularly when it comes to penetrating new markets. But I think the fact that Kohl’s has now joined the crowd is a little bit different — and a little bit more interesting.

Kohl’s CEO Kevin Mansell announced last May that the department store would be moving away from its customary 90,000-sq.-ft. to 100,000-sq.-ft. stores to layouts around 64,000 sq. ft. for most of their new locations. They’ve already followed through on that plan: Last month, Kohl’s announced the grand opening of eight new stores in seven different states; seven of those stores are this new smaller model.

The downsizing of Kohl’s is especially important and interesting for a couple of reasons: First, it represents a pretty big shift away from a formula that Kohl’s has clung to for quite some time. They have had the same basic prototype for at least 15 years and have been successful. Second, I see this as a fundamentally different situation than with brands like Walmart or Best Buy, who have used smaller layouts primarily as a way to be more flexible and break into new, more urban markets. While it’s true that Kohl’s first experimented with the new format as a way to get into smaller markets, they clearly saw something they liked. Now, they aren’t just opening smaller stores in smaller communities; they’re opening them in all types of markets.

The natural first question to a curious retail analyst like myself is always why? Kohl’s has maintained their success even through the toughest recent years, so there isn’t an obvious indication that they need less space. I think it’s actually more straightforward than that: according to Mansell, the smaller formats have simply been performing better.

The details of how to make a permanent structural shift like this are always interesting to me, as well. As of now, while they will be making renovations and updates, they won’t be downsizing any existing stores — but Kohl’s has obviously figured out a way to fit their merchandise into a smaller space. It’s a combination of more efficiently merchandising a store as well as perhaps cutting out lower performing categories. I wonder if Kohl’s will cut back somewhat on space hogs like home furnishings, which don’t deliver the same sales-per-square-foot punch as apparel? All retailers are focused on their four-wall value and maximizing their sales-per-square-foot, so I’m interested to see what happens.

So what could this mean for retail real estate and big box leasing? If this trend continues, I think we definitely might see some of the biggest boxes a little slower to rent, but for now I don’t foresee a dramatic impact. With these format changes, we may actually start to see some absorption: For every downsizing Best Buy, retailers like Kohl’s can now come in and take over that 65,000-sq.-ft. space.

What do you think? Are you surprised to see Kohl’s join the list of downsizing retailers? Why do you think they are moving toward a smaller format? What do you think about the smaller format? Please make a public comment below or feel free to e-mail me privately at jeff@jeffgreenpartners.com.


 

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