Why Smaller Stores Are Going to Rule

More than 10 years ago, when I predicted that the Internet would become the conventional retailer’s best friend, I was thinking in terms of managing the business, particularly inventory optimization. I underestimated the boon the Internet would become to actual transactions. And I certainly never imagined that mobile devices were destined to play a sales role, or that social networking would prove to be a useful marketing tool. And we have only just begun. The Internet is only going to grow in importance.

Yet, the magnitude of the change wrought by the Internet is still not fully appreciated. Most retailers report comparable-store sales as separate from Internet sales, even though there are no guidelines as to how to classify sales of merchandise ordered online from home or a mobile device for store pickup, or merchandise ordered from a store online for home delivery. And why should retailers care? The consumer doesn’t. Today’s consumer expects to have the same choice from a store as from the Internet, and with the same level of service, including credit, delivery and return privileges. The customer isn’t thinking in terms of “the store” or “consumer direct,” which itself is a misnomer. Aren’t all retail transactions direct to the consumer?

The Whole Picture Is What Counts

Retailers need to think of serving the customer in whatever manner the customer chooses. Such an approach requires getting the entire organization to think of the Internet as a customer service tool and an integral part of the store’s organization. For starters, there should be a central fulfillment center with real-time information as to inventory availability by SKU in every location, accessible to everyone remotely involved in merchandise. Used properly, the Internet can enhance the brick-and-mortar stores’ business by stretching the breadth of the offering available at retail and by reducing lost sales from out of stocks. And the Internet can help the customer locate an item that is needed immediately. And so what if the Internet cannibalizes the stores? Stores that carry less inventory don’t need as much space.

But Smaller Stores Were Coming Anyway

We’ve been through an era of ever bigger stores, which tend to be more efficient to operate. But big stores create neighborhood voids for smaller ones, and smaller stores can collectively obtain a competitive advantage with their convenience to the customer. With reluctant sales growth in recent years, retailers have been looking at productivity and investing in new software. They have found that more targeted inventory by location and merchandise lifecycle management can enable higher sales and lower markdowns, often with less inventory. Furthermore, now that most big boxes are almost everywhere they can conceivably go, their owners are looking to conduct business in less space as they move into both more densely populated areas and smaller markets.

Smaller Stores Will Rule

With Internet fulfillment playing a pivotal role in rounding out a store’s offering to the customer, making available a much wider variety of merchandise than could ever be justified in a small market location, such markets become more viable for new stores. Yet, at the same time, and for the same reasons, really large stores become less necessary in more important markets.

With less square footage, retailers can pay less rent, and with shopping center developers needing less space for each retailer, the centers can accommodate more individual stores. This situation, in turn, enables a center to seek out interesting new tenants, to distinguish the property and to enhance its value to all tenants, as well as to the customer.

Everybody who can play wins with smaller stores integrated with an Internet offering.

Margaret A. Gilliam is president of Gilliam & Co., an independent research and advisory firm that specializes in retail and selected consumer products. For more information, go to www.gilliamco.com.