Store of the Future   //   November 28, 2022

How big-box retailers are revamping their store formats

Heading into the new year, big-box retailers are making more significant investments in their store formats, as post-pandemic shopping patterns normalize.

Earlier this month, Target announced it will roll out massive 150,000 square-feet stores — 20,000 square feet larger than their average store footprint — to better focus on in-store fulfillment of online orders. Target plans to debut the store layouts over the next few years. Meanwhile, beauty giant Ulta is reorganizing how it displays products in more than 40 stores to hone in on theme and trend, rather than price point alone. And this summer, Best Buy opened a first-of-its-kind, small-format store with more digital features like mobile self-checkout, as well as an interactive display that tells customers what new products are in the store upon entry.

Brick-and-mortar retail has come a long way from the early days of the pandemic, when company upon company temporarily closed their doors due to lockdowns. Now that the temporary spike in e-commerce sales has settled down, retailers have a better sense of their shoppers’ long-term preferences, and with it, new challenges. While more shoppers are returning to stores, fulfillment options like buy online, pickup in-store remain popular. At the same time, retailers must also compete for the attention of more budget-minded shoppers while being stuck with excess inventory linked to supply chain disruptions going back to 2021.

To adapt, big-box and specialty retailers alike are consulting their bag of tricks and giving stores a refresh.

“I think we can expect more significant change in 2023 as retailers restart investment streams that were paused or slowed over the past few years,” Tiffany Hogan, director of retail insights at Kantar, told Modern Retail in an email. “These changes will reflect new ways of operating and driving efficiencies, as well as new ways shoppers approach the categories a given retailer sells.”

Making way for inventory

Target says its new larger store layout will allow the company to better meet demand, offer more merchandise and support same-day services. It’s also banking on its larger stores to serve as hubs for digital fulfillment. Target’s new stores will have a backroom fulfillment space that’s five times larger than previous stores of a similar size. This will allow stores to “fulfill more than 95% of the retailer’s digital orders and same-day services accounting for more than 10% of its overall sales,” according to a press release.

“With the continued evolution of multichannel and omnichannel retail experiences, getting product closer to customers’ point of purchase has always been a goal,” Matthew Katz, managing partner at global advising firm SSA & Company, told Modern Retail. “And so with customer expectations of immediacy or deliver later, deliver tomorrow, moving inventory closer and closer to end use is important.”

From an efficiency standpoint, keeping fulfillment in a store also cuts down on the number of steps (and amount of gas) needed to put items in shoppers’ hands. It’s also beneficial financially, giving companies the ability to “gain millions of dollars annually in incremental revenue,” Mike Hughes, vice president of customer experience at Aptos, a unified commerce solutions provider, said.

Customers who come in to pick up an item might be moved to make an impulse purchase, Hughes told Modern Retail in an email. Delivery, he said, “can typically save a sale that might have been lost if not for exposing the store inventory to customers shopping online.”

“It allows retailers to distribute most of their inventory out in the stores (versus having to keep an excessive amount of back stock in the warehouse to fulfill omni orders), which increases the retailers’ chances of selling the items at full price versus having to mark down excess inventory,” he said. Hughes added that “the cost of shipping can be reduced and the item can reach the customer faster” by pulling inventory from a nearby location, rather than an across-the-country distribution center.

Overhauling product groupings

Retailers are also changing where merchandise is located within stores. Hogan said that as many retailers are still saddled with too much inventory in certain categories, rethinking merchandising displays has become top of mind for more retailers.

“Creating a cohesive selling floor from what they have too much or not enough of has been a challenge, and we’ve seen more flexible and temporary structures come into play,” Hogan said.

Ulta, meanwhile, is fundamentally shifting how its beauty products are displayed in more than 40 stores this year. According to WWD, these locations will group products by theme, such as bath and body care, “clean” brands and travel products and trial sizes. Stores will have a “Cue the New” section at the front of the store to promote brand launches, while their “Beauty Bar” will host events and activations. The left side of the store will have a larger skincare area, while makeup will be on the right side.

“We always want to reimagine and rethink and, most importantly, look at what our guests are sharing with us,” Monica Arnaudo, Ulta’s chief merchandising officer, told WWD. “We wanted to bring like categories together — what we call intuitive adjacencies — and create aspiration for our guests when they walk in the door.”

Grouping merchandise differently within stores is not new, Katz explained, but companies’ motivations for doing so can change. “Retailers are always on an evolution of product display and mix and assortment,” he said. “And consumers evolve as well. And so where some consumer years back might have wanted to shop on price, their current consumer today may want to shop more on use, more on category or more in a social environment with friends.”

Ulta’s new layout is “more reflective of how shoppers actually shop beauty,” Hogan said. And, like in-store fulfillment, it could increase sales as well. “Bringing entire categories cohesively together creates more opportunities for ‘mass migration’ as Ulta calls it — or encouraging shoppers to trade up into prestige products,” Hogan said.

Experimenting with store sizes

It’s no secret that the coronavirus pandemic crushed large swaths of the commercial real estate sector. Within the U.S., retail property sales valued at $2.5 million or more plummeted 83% from May 2019 to May 2020, the National Association of Realtors found. A record 12,200 U.S. stores closed in 2020, Fortune wrote in early 2021. 630 companies — including Neiman Marcus, JC Penney, J. Crew and Brooks Brothers — declared bankruptcy in 2020, according to an analysis by S&P Global Market Intelligence.

Today, shoppers are returning to brick-and-mortar storefronts, and companies are in expansion mode. “We’re seeing the pendulum swing the other way right now, which is store growth and store build,” Katz said.

In the past, “it used to be important for retailers to have a certain particular-sized store, because that’s how they operated that business best,” Katz explained. Now, “many are figuring out that having different sizes at different locations is really a competitive advantage if they can make the mix right.”

For many large stores, this means experimenting with smaller store sizes. In July, Best Buy announced the debut of its first small-format, digital-first store. The space, at 5,000 square feet, opened in July 26 in Monroe, North Carolina and is one-seventh of the size of a typical Best Buy store. It features a curated selection of products, offers Geek Squad services and “encourages customers to do everything from shop, select your product and get advice digitally while in the store,” the company said in a press release. There are also pick-up lockers outside the store, “for around-the-clock pick-up options.”

Some retailers, especially department stores, are also experimenting with stores within stores to boost sales and draw in customers. Sephora, for example, aims to have a presence in at least 850 Kohl’s locations by 2023, while Lowe’s has opened Petco shop in shops in select locations. Other companies, such as Glossier, are bringing a community-based strategy to their stores, while grocers including Hy-Vee and Whole Foods are investing in third spaces like bars and patios.

No matter the type of retailer, “I think what you’re seeing is just an evolution of the shopping experience,” Katz said. “We don’t have the answers today. And that’s the fun of retail, which is constant experimentation and constant evolution of both product and display — ultimately culminating in human interaction.”

Correction: An earlier version of this story misstated the number of new large format stores Target planned to open. This story has been updated to note that Target has said it will roll out its new larger store formats over the next few years, but has not given a specific number.