More than 5,000 retail stores closed this year. This figure might be an all-time high. During the worst year on record (2008), there were about 6,000 stores that closed. In contrast, forward-thinking retailers opened about the same numbers of stores that others closed. One winning example is Aldi – the German grocery chain – which announced it would invest $3.4 billion to expand its U.S. store base. Another good example is Amazon, aggressively growing its physical presence through acquisitions (Whole Foods), partnerships (Kohl’s), pickup lockers, pop-up stores, pickup stops and completely cashier-free stores, among other innovative retail formats.
In my prior notes, I emphasized the importance of embracing what I called a peripheral retailing model, which combines the benefits of the traditional pipe business model with the platform one (matchmaking) to successfully compete in this new age.
In this article, I will refer to the emerging shift from great big and giant physical stores to smaller retail formats. In this regard, Target is planning to open dozens of new urban small stores and Nordstrom recently announced the launch of a 3,000 sq. ft. location instead of the typical Nordstrom box size of 140,000 sq. ft.. There are three fundamental forces supporting this move: the rise of the zero waiting time shoppers, the end of the shopping mall as we know it, and the surge of a new generation of technologically-rich retail stores.
The Rise of the Zero Waiting Time Shoppers.
The new shopper doesn’t enjoy the level of patience shown by prior generations. Research indicates that rapid service is one of the attributes highly valued by them. We recently learned that Amazon is planning to use unmanned airborne warehouses – landed by drones – to be able to deliver their orders in 30 minutes or less. In this scenario, the rapid gratification advantage enjoyed by physical stores versus online retailers – where you can visit the store and grab what you want instead of waiting a couple of days or more for the product to arrive at your home – might vanish. A round trip to a physical store located more than 10 miles away from the shopper usually takes more than 30 minutes without considering the time spent at the store. Visionary retailers will have to open more stores closer to the consumer to remain competitive. There are some retailers that are already prepared to compete in this scenario like Wal-Mart and Target, which have stores located within a median distance of about 5 miles. However, most retailers are not in the same situation and they should consider an aggressive expansion to remain competitive. To make this expansion economically viable, they will undoubtedly have to consider the launch of smaller retail formats.
Online information has changed the way consumers shop and this shift is negatively affecting the relevance of the traditional shopping malls. Analysts predict that between 20% and 25% of shopping malls will close within the next five years. In the past, consumers used to visit places with a high concentration of brick and mortar stores to peruse the different options available. Today, this has drastically changed. A significant percentage of the consumers research online instead of visiting multiple stores as prior generations used to do. To remain competitive, the new shopping malls are devoting more space to recreational activities and less space to the stores. They need to provide a level of leisure that can’t be experienced online. An example of this growing trend is the recently opened Ponce City Market (www.poncecitymarket.com) in Atlanta, Georgia. This shopping destination was designed with the vision of becoming an entertainment venue filled with dining options at the heart of the mall. However, more leisure space usually comes at the expense of higher operational costs and less space available for the retail stores. Due to these two factors, rents generally tend to be more expensive and consequently smaller retail formats need to be considered to compensate for increasing operational costs in an industry that has low net profit margins compared to other sectors.
The New Generation of Technologically-Rich Retail Stores.
The intersection among artificial intelligence, machine learning, sensor fusion, computer vision, augmented reality and architectural robotics is offering infinite possibilities for retailers to develop smaller stores without sacrificing the quality of the shopping experience. Amazon Go – the prototype cashier-less grocery store located in Seattle – is the first good example of using some of these technologies to offer a superior shopping experience in a small store: 1800 square feet. Amazon Go is leading the generation of technologically-rich retail stores, but this initiative will surely be followed by many other retailers soon. In this regard, I had a conversation with Alberto Rizzoli, who is the co-founder of Poly (www.aipoly.com) – a San Francisco based startup that offers a solution for cashier-less retailing. He categorically indicated to me that his company wants to be the supplier of choice of the most reliable and easy-to-use cashier-less technology for retailers around the world.
Robotics is also contributing to the development of smaller stores. On this matter, Best Buy (www.bestbuy.com) management indicated to me that they developed an innovative automatic system that retrieves products from shelves, contributing to provide a superior customer service but also saving a significant amount of space in the stores.
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Dr. Evaristo Doria worked as an international marketing executive for leading multinationals in Latin America, Asia and the U.S. for more than two decades. Currently, he teaches international business at one of the largest public universities in the U.S. He is also a business consultant helping foreign middle-market companies and startups to successfully expand their businesses into the U.S. market. Dr. Doria is a frequent keynote speaker on topics related to business strategy invited by trade associations, universities, and other institutions from across the world. You can reach him at email@example.com