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Are Retailers Making a Big Mistake in Small Stores?

Rich Duprey
April 12, 2011

If you feel like the walls are closing in around you, you're not imagining things. Retailers from Wal-Mart (NYSE: WMT  ) to Office Depot (NYSE: ODP  ) are abandoning the big-box concept in favor of stores with a smaller footprint. Where once the thinking was to wring as many sales as possible out of a given space, now managers are trying to squeeze every bit of margin they can out of just the most profitable parts of their business.

Dialing for dollars
This phenomenon might be best exemplified by consumer electronics giant Best Buy (NYSE: BBY  ) , which has seen sales of big-screen TVs falter while smaller, more profitable handsets soar. By focusing on what's keeping it going these days and opening up stand-alone stores to sell mobile devices, the retailer is hoping to reverse a decline in its operations.

At around just 1,500 square feet, Best Buy Mobile shops are significantly smaller than the 38,000-square-foot stores the electronics king previously preferred. At the end of 2009, Best Buy had 74 stand-alone Mobile stores accounting for 112,000 square feet; its big-box namesake stores number more than 1,000 in the U.S., and take up more than 41 million square feet. According to the analysts at Trefis, revenue per square foot for these stores has fallen from about $953 in 2006 to about $885 in 2010. It will be opening 150 new Mobile stores this year while keeping big-box square footage growth to less than 1%.

More paper, less clips
Office Depot is finding it necessary to scale back, too. It's shrinking from an average of 24,000 square feet down to 15,000-17,000, a 30% to 38% decrease. More dramatic is the 5,000-square-foot concept store it's also trying out. Rival and industry leader Staples (Nasdaq: SPLS  ) is also opening up smaller-format stores, and, taking a page from Best Buy, is expanding the selection of mobile phones it carries.

The ever-shrinking store is not limited to consumer product retailers. Restaurants are going smaller, too. Chipotle Mexican Grill (NYSE: CMG