Retailers like Target and Nordstrom are rethinking their approach to small-format stores

In 2023, Target closed four of its small-format stores in Washington, D.C., Minneapolis and Philadelphia, citing declining foot traffic as the primary reason for the closures, Business Insider reported at the time. “It’s an action we take only after multiple years of working to improve performance,” a Target spokesperson told the outlet.

It’s not entirely clear in every case why some of these locations are closing. However, industry executives and analysts have admitted that while retailers still see the benefits of expanding into new markets where they otherwise wouldn’t be able to fit a big-box store, the locations may present drawbacks for shoppers and operational challenges for retailers. Small-format stores also only offer a limited selection or, in Nordstrom Local’s case, have no dedicated inventory and only offer services such as personal stylists, in-store pickup and returns.

Anne Mezzenga, who formerly worked on Target’s store of the future initiative and is the current co-CEO of Omni Talk, told the Minneapolis/St. Paul Business Journal in 2024 that larger stores with more space for warehousing and logistics are better for handling sortation and shipping from store. Last March, Target’s chief growth officer, Christina Hennington, said the small stores were a challenge to open, requiring the company to dramatically cut SKU counts and study the microenvironment of competitors in that space.

“We’ve learned a lot. I mean, these boxes are small, they’re difficult to operate,” Hennington said in Target’s March 2024 earnings call. However, she added, “this ability to formulate the right assortment strategy for that community has taught us a lot about the potential to expand that further into our larger-size boxes.”

In that same call, Target CEO Brian Cornell said that while it would maintain its existing urban locations, the company has moved on from its focus on smaller stores while instead working on bringing full-size stores to new areas where it hadn’t competed in the past.

Walter Wahlfeldt, who leads Midwest retail and national retail corporate services for real estate firm JLL, said for retailers who have built an internal machine of people such as architects, designers and transaction managers, it can be difficult to pivot to an entirely new concept with less space, multiple floors and elevators.

“Everybody has done their best to refine the one offering as best they can, so it’s always going to be tough,” Wahlfeldt said. “It’s very challenging to say, ‘OK, let’s go with a totally different prototype that has a different inventory selection, a different design, a whole different customer experience. … I think they’d all love to say, ‘Oh, I can just keep stamping out the one that I know works best.'”

While some doors close, others open

Still, that doesn’t mean small-format concepts aren’t in the toolbox of Target or other retailers.

Ikea plans to open eight new small-format Plan and Order Point stores this year where customers can order products for pickup or delivery. And it just broke ground on its first ground-up small-city store just outside of Dallas. The furniture retailer also plans to open an 80,000-square-foot location anchoring a new office tower in Manhattan set to be open for tenants by 2028. Grocers including Whole Foods and Meijer have also opened small-format stores in recent months. Even Target still sees some potential in its urban concept moving forward.

“If the right opportunity can be fit with a 25,000-square-foot box that brings us closer to a college campus or an urban center, we know how to do that; we like the returns, and we’ll lean in there,” Target COO Michael Fiddelke said last year. “But as we step back and look at what that pipeline looks like in total, it’s actually the big-box stores where we’re able to bring the best of Target that are bubbling to the top, in terms of where we expect returns to be strongest.”

And for some, the decision to close certain small-format stores seems to be tied to rightsizing the entire fleet. In January, Macy’s reported it would close four of its small-format stores in 2025 alongside 62 full-size stores. Still, Macy’s annual report in March said that part of its $800 million in capital expenditures for 2025 is meant for opening more small-format stores.

In 2023, Macy’s announced it would open up to 30 new small-format stores from 2024 through fall 2025, in addition to 12 small-format Macy’s and Bloomie’s locations that had already opened. The stores are about a fifth the size of full-size Macy’s stores with a smaller assortment and are aimed to expand into new areas or replace unproductive stores in existing markets. It’s unclear whether the company is on track to open all 30 of the new stores it promised two years ago. A company spokesperson did not respond to a request for comment.

Wahlfeldt said that with limited big-box space and high construction costs, some will continue to look to small-format as they seek different options in existing, available spaces to reach new markets. “Everyone wants to grow, and there are limited target areas out there,” he said.

Even Walmart has abandoned small-format

This isn’t the first time a big-box retailer has tried and then pivoted away from small-format.

In 2016, Walmart shuttered 269 stores of its Walmart Express concept that aimed to bring the company to win market share of “fill-in trips” with dollar store-sized spaces in both urban and suburban areas where larger stores wouldn’t make sense. The company said many Walmart Express shoppers would still visit Walmart Supercenters or Neighborhood Markets anyway, so it instead chose to focus on the larger stores, according to MarketWatch.

Rebekah Kondrat, founder and managing partner of brick-and-mortar agency Rekon Retail, said applying the Walmart model to a small Aldi or Trader Joe’s-sized store doesn’t work because Walmart is more of a self-service model. “A smaller format maybe makes customers think this is more like a boutique experience, and so they then expect a little bit more personalized attention, but then they end up not getting that.”

For many retailers, it’s a constant iteration to figure out what services or products make the most sense for the smaller locations. While the small Target and Macy’s stores are essentially scaled-down versions of their larger counterparts, others like Ikea and Nordstrom see their smaller locations more as pickup points.

“We know there are more and more demands on a customer’s time and we wanted to offer our best services in a convenient location to meet their shopping needs,” Shea Jensen, Nordstrom svp of customer experience, said in a statement when the company launched the concept in 2017.

Nick Egelanian, president of retail real estate consultancy SiteWorks and a longtime adviser to retailers and property owners, said he expects retailers to continue trying to expand with small-format stores but has long been critical of the idea. He said these ventures often fail or distract from retailers’ core business models. In his opinion, Macy’s should focus more on improving its fleet of traditional stores in the limited number of still-thriving malls out there.

“If you’re a retailer and you want to grow, and you’re out of places to grow your normal concept or you think you see a niche, this is a way that on paper sounds like a really good way to attack that niche or to keep growing,” he said. “Not only is it difficult internally to operate a smaller store, but oftentimes the principles that will make the smaller store successful are completely different than what made the bigger store successful.”