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(originally published by Booz & Company)


Big Impact in a Small Format

Essentially, consumers will still patronize those large establishments, but many of them want to complement that shopping with frequent stops at more conveniently located establishments.

A second reason for rising interest in small formats is that economics and technology have shifted the value proposition. Smaller stores are no longer necessarily saddled with higher prices or lesser quality. Savvy operators of chains of smaller stores are able to achieve efficiencies of scale in procuring their merchandise and are then able to distribute those goods to specific stores through distribution channels that have been much improved by computerization and supply chain logistics.

Last, small formats offer retailers a more intimate relationship with customers and employees and therefore allow for genuine innovation in store design and even business model design. At Oxxo, for example, store operators are not just employees; as franchisees, they receive a share of the store’s profits. However, Oxxo frequently makes all of the necessary capital investments to ensure consistency across the chain, such as purchasing standard shelving, microwaves, and refrigerated displays. Oxxo’s store displays, layouts, and product assortment — with modern fixtures, lighting, and high standards of cleanliness — are much more appealing than those of traditional Mexican mom-and-pop stores. Oxxo’s parent company also drives intensive promotional and bundled offerings by, for example, offering Marlboro cigarettes with a free lighter or a bottle of Coke bundled with a discounted Powerade. The business model is novel — and effective.

Interestingly, the small format trend is widening in both Europe and Latin America, which have entirely different demographics and income levels. In Europe’s affluent economies, consumers are looking for convenience items, including meals, to suit the busy lifestyles of single heads of households. Retailing in Latin America, by contrast, is focused much more on low-income and larger families. Part of the explanation for why smaller formats are working in Latin America is that items such as dry pasta, cooking oils, milk, bath soap, and laundry detergent can be acquired in precisely the right quantities for daily use. The stores are, in effect, the customers’ pantries.

The big question is whether the U.S. market is ready for a shift toward smaller formats. In grocery, for instance, industry analyst Planet Retail and Booz Allen Hamilton have found that large format stores capture 80 percent of retail sales in the United States, a number significantly higher than in the vast majority of other markets in the developed world.

European retailers, such as U.K.-based grocer Tesco Corporation and German discounter Aldi, may be the first to test the U.S. market for its receptivity to smaller formats. Tesco, for example, plans to enter the U.S. market with 100 convenience-type stores of roughly 10,000 square feet under the Fresh & Easy Neighborhood Market brand. Those stores are slated to be opened in 2007 in Arizona, Nevada, and California.

We believe that for U.S. retailers like Wal-Mart, Home Depot, and Lowe’s to catch up with their international competitors, find the next spurt of growth, and escape the market saturation they are now suffering, they will also have to consider smaller formats as key channels in their overall retailing models. Wal-Mart is considering stores as small as 20,000 square feet, about one-tenth the size of its Supercenters, and other large retailers are rumored to be doing the same.

All the big box retailers need a more balanced approach to reach their customers and will benefit in important ways from what they learn about shopper preferences in smaller format contexts. Manufacturers of consumer packaged goods (CPG), too, can cash in on this opportunity, by working with their retail partners to mine the personalized data available and creating new products accordingly. The major players in the CPG industry are already reasonably sophisticated in how they adapt their product mixes from one geography to another and from one demographic mix to others, but using small stores to get close to their customers could foster a new wave of innovation in retail formats and in the products and business systems on which they rely.

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  1. Guillermo D’Andrea, Leticia Costa, and Fernando Fernandes, “Successful Retail Innovation in Emerging Markets,” Booz Allen Hamilton white paper, January 2007: A joint study between Booz Allen and the Coca-Cola Retailing Research Council shows that small format stores are a strong fit for Latin American markets. PDF download.
  2. Guillermo D’Andrea, E. Alejandro Stengel, and Anne Goebel-Krstelj, “6 Truths about Emerging-Market Consumers,” s+b, Spring 2004: This article focuses on the results of a Latin American study of emerging consumers and their shopping preferences, including their affinity for small format stores. Click here.
  3. Alonso Martinez and Ronald Haddock, “The Flatbread Factor,” s+b, Spring 2007: An in-depth look at how consumer products evolve in emerging markets. Click here.
  4. “Wal-Mart May Be Mulling Small-Store Strategy,” Dow Jones MarketWatch, April 30, 2007: A brief overview of Wal-Mart’s potential response to European competitors like Tesco that are adept at small format retailing. Click here.
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