Big-Box Retailers Reconsider Size; Saturation, Online Sales Affect Store Expansion Plans and Hiring Needs

Online shopping not only has state departments of revenue pulling their hair out over lost sales tax revenue, it also has retailers like Best Buy, Sears, KMart, and Home Depot questioning, the merits of the big-box mentality itself.

The Wall Street Journal reports As Big Boxes Shrink, They Also Rethink

Major big-box retailers have been shifting to smaller stores—and scratching around for more profitable ways to fill under-used spaces as they go about reinventing themselves.

Sears Holdings Corp. is letting prospective tenants browse an online list of Kmart and Sears stores with space to rent.

Sears reached a deal to lease 34,000 square feet of store space in Greensboro, N.C., to Whole Foods Market Inc. for a grocery store set to open in 2012.

Home Depot Inc. is selling off portions of its parking lots to fast-food chains and auto repair shops. Gap Inc. is reverting to a Russian nesting-doll strategy: after years of expanding by adding standalone stores such as GapKids and Gap Body, it is shrinking them and stacking them back inside its namesake Gap stores.

Best Buy Co. last week became the latest retail chain to go smaller, announcing last week that it was slowing growth of new big-box stores this year in favor of adding 150 Best Buy Mobile locations, focused on smartphones.

Wal-Mart Stores Inc. also said last week that it was accelerating the rollout of smaller locations—40,000 square feet or less—after it reported a seventh straight quarterly decline in sales at U.S. stores open at least a year. The retail giant, which rose to dominance with 185,000-foot Supercenters, plans to open its first Walmart Express store in the second quarter of this year, though it won't say where.

The miniature Staples carries just 1,200 of the retailer's most high-volume sales items, compared to 8,000 items in traditional stores.

Office Depot Inc., meanwhile, quietly began opening new shops the size of convenience stores in December. The new 5,000-square-foot Office Depot stores are barely a fifth the size of the company's traditional locations, yet still manage to contain the office supplies and copy and mail services that account for 93% of the bigger stores' sales, said Kevin Peters, Office Depot's North American retail president.

"Our box was just too big and didn't work for our customers," Mr. Peters said Wednesday. "We are reinventing Office Depot as a convenience retailer. Think CVS and Walgreens."

Key Word is Saturation

The "bigger is better model" that collapsed with residential real estate, has expanded to its big brother, commercial real estate.

The problem is not the size of the stores, but the sheer number of them. Areas that got by with a single Home Depot, now have 2 Home Depots, a Lowes, and a Menards.

If they all shrink, does it do any of them any good?

Store Advantages

• Those who need something and want it now
• Those who want to make comparisons and see a product in person

Online Shopping Advantages

• It's invariably cheaper online
• There is frequently no sales tax
• You do not have to waste time and money traveling
  

Online Sales Have States Furious Over Lost Sales Taxes

Cash strapped states are furious with Amazon.Com over sales tax collections. Several states passed laws or have sent Amazon bills. Amazon's response in every case so far is to leave the state.

For details, please see Amazon May Cut Ties to California Over Tax Issues; Texas Distribution Site Closed Over Similar Issues Last Month; Litigation Issues Move to Forefront

Last week I went to Best Buy to buy a particular cable I needed. They did not have it. I ended up ordering it from Amazon. If stores shrink, and they do not have what customers want, customers will just buy more stuff online.

Big-Box Decisions Affect Store Hiring Plans

I am wondering, do we really need "Walmart Express" at all? At best it is a sign of total saturation of big boxes and a turf battle for smaller cities and neighborhoods.

As such, think about store hiring plans now vs. store hiring plans in the midst of the big-box commercial real estate boom.

With the new "smaller is better" model, another commercial real estate boom remotely close to the build-out that occurred in 2005-2007 is not in the cards.

Moreover, residential housing is still dead.

Together, the picture just does not add up to the 200,000+ jobs a month many economists and market cheerleaders expect.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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