As if mall operators and retail real estate owners didn’t have enough to worry about with bankruptcies and liquidations, they have a new terror to face: stores getting smaller.
In a trend that began well before the pandemic but has now accelerated as shopping patterns change, retailers are looking at downsizing their existing stores and building new locations that are substantially smaller than their typical footprint.
It’s another Covid by-product that threatens to transform the retail landscape in ways that seemed unlikely in what has always been a bigger-is-better philosophy in the business.
Retailers like Target
and Ikea were already moving towards opening smaller stores as a way to penetrate inner city and other locations where their usual massive stores wouldn’t fit. But since the pandemic started others, including Macy’s
and John Lewis in the UK, are also exploring downsizing strategies. For the companies that own and operate shopping malls, strip centers and suburban retail real estate it’s one more threat to their business models they need to deal with.
Macy’s may be the best example of the trend. Even before Covid it had opened a compact 20,000-square-foot under the Market by Macy’s banner in Texas that featured well-edited assortments in some classifications and an emphasis on food. In subsequent reports from CEO Jeff Gennette he has talked about additional smaller format stores even as Macy’s continues to close more than 100 of its legacy department store format locations.
Macy’s is also believed to be looking at a proposal that would cut retail floor space at its Herald Square flagship in New York City with the addition of a tower atop the building. That plan could be impacted by the severe softening of the Manhattan real estate market but the reduction in selling space could still occur even if the tower is not built.
In the UK, department store John Lewis is reported to be looking at a 40% reduction in its Oxford Street flagship in London, with at least three floors being converted to office space. The retailer has not confirmed this report from the CityA.M. website but sources cited the same traffic slowdown in London as is being experienced in the U.S.
Other retailers were well on their way to downsizing their existing locations. Kohl’s has leased out space in several of its stores to the Aldi supermarket chain and Planet Fitness
. Ikea has opened urban locations in New York, Paris and elsewhere that are a fraction of the size of its behemoth stores in the suburbs. Nordstrom
is testing several Local stores in New York and Los Angeles that serve as satellite locations to existing full-line stores. And the JCPenney
“lab” store in Hurst, TX eliminated an entire floor of the former three-level store in its new format providing for a more compact shopping experience.
Target has probably been the further along with scaled back stores, now operating more than 100 such locations. Some are on college campuses while others are inner-city stores with smaller assortments and some departments eliminated. Target has said it plans to open as many as 30 such stores a year even as its expansion with full-size doors has slowed significantly.
The challenge for mall owners and other retail real estate operators is of course how to fill space that otherwise would have been used by full-size stores. In the case of Kohl’s, the retailer itself is subletting its space and Macy’s has cut back the size of many of its traditional locations by adding Backstage off-price store-within-a-store branches. But in cases where large retailers choose not to renew leases as they move to smaller locations or simply don’t open full-size stores at the pace they used to, real estate companies may have difficulty leasing out these spaces. Given the number of out-and-out shutdowns and closings it makes a bad situation worse.
As with many other things to do with the pandemic, this trend was already in process but has been accelerated greatly. More online shopping, less foot traffic and an economy that makes buying merchandise like apparel and fashion goods less of a priority are all contributing to a real estate headache.
It may not be fatal but like Covid, it’s very contagious.