J.B. Beaumont, a convenience store operator in the U.K.’s East Midlands, saw less-than-stellar sales in its six stores — and recognized an opportunity. Changing demographics in the region, such as smaller families and more single-head households, were creating a valuable segment for a retailer that could provide a broad array of products in a format suited to these groups.

To cater to their needs, Beaumont began offering both takeout meals and meals that a family can prepare at home with minimum effort. It added cold beverages that can be consumed immediately; traditional grocery items, such as condiments, in smaller packages; and single-serving sundries such as aspirin. In short, it moved into the middle ground between, say, a fish-and-chips shop that can provide a meal but not much else and a grocery store that can meet all of a shopper’s needs but might also eat up an hour of her time. Beaumont’s new format did so well that it attracted the attention of giant J. Sainsbury PLC, which acquired the smaller retailer in November 2004.

The popularity of small format retail stores isn’t limited to Europe’s mature and affluent markets. The same trend is gaining traction in Latin America, where convenience store retailer Oxxo, for instance, has established around 4,000 stores in Mexico and is adding 300 to 400 stores there per year. The stores operate as franchises, usually owned by locals who are familiar with the micromarket in which the store is located and can customize service to the neighborhood’s needs. Stores in neighborhoods where residents return home late at night remain open 24 hours; other stores deliver to nearby areas with high numbers of elderly or affluent residents. Oxxo is building on the region’s traditional changarros, or mom-and-pop stores, by personalizing its service for its customers.

After years of hype about “big box” retailing, we see an increasing number of small format success stories, ranging from convenience stores, such as Beaumont in the U.K. and Oxxo in Mexico, to discounters, such as Germany’s Aldi and EKI Descuento in Argentina, which sell basic staples and key grocery items in a cost-effective neighborhood format. The interest in small formats may soon extend to the United States, as well, where big retailers including Wal-Mart and Publix already are experimenting with the idea.

However, the trend isn’t limited to purveyors of food items. Regardless of whether the smaller stores are selling groceries, electronics, clothing, or home goods, there are three major reasons that retailers should consider how small formats could work in their markets. One is that the consumer experience in massive retail establishments is becoming increasingly unattractive. The amount of time it takes to negotiate the seemingly endless aisles is a drawback to harried shoppers — and it's made worse when they hit the checkout and run into dozens of other people in a hurry. The size of the store also takes away from personalized service and doesn’t allow for a product assortment tailored to a particular demographic niche.

Lower-income shoppers, in particular, find that they are not comfortable in large stores because service is less personal and the broad assortment of products drives home how little they can afford. Furthermore, getting to large stores, which are often located far from city centers, is difficult for this group of shoppers, who have to spend money to get there and may even lose hourly wages if it’s truly out of the way. Going farther to a bigger store is only a good value, in terms of the total cost of purchase, if the big store offers substantially lower prices — and even then, the resulting savings are usually not enough to offset the cost of public transportation.

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.