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Wednesday, Feb 21, 2024

Why Big-Box Retailers Are Adding Smaller Stores

The giant blue stores with large yellow letters visible for miles from the freeway will not become a thing of the past just yet, but Ikea is one of many retailers testing smaller-format stores.

The Scandinavian furniture giant announced earlier this year its intention to open planning studio locations in the Long Beach Towne Center and at the Westfield Santa Anita mall in Arcadia. Both are expected to open in the spring.

Janet McGowan, area manager for Ikea USA, said the planning studios were a new way for Ikea to expand its reach.

“In looking at our L.A. expansion plans, we really determined what are the most important things to the people of L.A. and what we determined was the first thing we needed to address was accessibility,” McGowan said.

She added that Ikea wants to be within 30 minutes of its customers, and the two planning studios, which are in addition to the company’s big box stores in Burbank, Covina and Carson, would allow them to be closer to more people.

The planning studios will allow customers to book appointments with design specialists to plan and select furniture for their homes. Customers do not take things home with them; the goods are delivered instead.

McGowan said customers would still have the experience of coming to an Ikea without having to travel as far.

The Long Beach location will be roughly 8,000 square feet while the Arcadia location is a little over 9,000 square feet.
Ikea isn’t the only retailer opening small-format stores. Chains like Target Corp., Superior Grocers, Nordstrom Inc. and Bloomingdale’s have all tested small-format stores nationwide as well.

The push toward small-format stores “started 10 years ago with ecommerce and Amazon,” Barbara Armendariz, president and founder of SharpLine Commercial Properties, said. “All of the ecommerce has affected a lot of these retailers, and they’ve shrunk. Covid forced that evolution to happen much faster.” 

‘Right-sizing’ retail space

Stores are finding smaller formats appealing for several reasons.
Armendariz said small-format stores are more competitive with online sites and are valuable in L.A. because of “the scarcity of land.”

Scott Burns, a managing director at Jones Lang LaSalle Inc., who works with Ikea on its leases, agreed.
“It’s a very competitive environment, and there’s a scarcity of land and a scarcity to accommodate these very large retailers,” he said. “They are adapting to the challenges of offering their product to more dense communities.”

Rents, Armendariz said, are lower for smaller stores which can result in savings.
“The smaller concepts potentially allow for better pricing and allows these retailers to be competitive with ecommerce companies that are out there,” she said.
But Burns said the No. 1 reason for stores like Ikea to open small-format locations is to get closer to customers.

Peter Spragg, a senior managing director at Newmark Group Inc., said small-format stores weren’t simply a matter of retailers downsizing but called it a “right-sizing” for many retailers that opens up more possibilities for them.
“They are able to go into markets that don’t have the capabilities or sizes that their traditional formats need,” Spragg said.

One recent example is a roughly 25,000-square-foot Target that opened in Westchester last year at a property developed by El Segundo-based Paragon Commercial Group.

“That’s an area where you can’t find 100,000 square feet, so it allowed them to go into that land, and the ownership was able to land a high-profile tenant,” Spragg said.
Motti Farag, a senior associate at CBRE Group Inc., said that by going smaller, the retailers were actually going bigger.

“They are opening in secondary and tertiary markets to extend their reach,” he said. “They are looking at where the consumers are and how they are going to reach them.”
And stores can carry goods based on the clientele in their specific market, like Target, which has small-format stores near universities targeted toward students.
Farag said these small-format stores often “supplement typical stores” as a result.

Landlords adjust

Vestar is the landlord for the Ikea planning studio in Long Beach. Ryan Ash, a project director at Vestar, called small-format stores “a common trend across the retail industry for a number of years.”

“We’re seeing these large-box retailers opening completely different formats of stores similar to Ikea,” Ash said. “That is something that has been getting tested out over the past few years.”

He added that L.A. was often used as a “proving ground” for small-format concepts due to the city’s density and how spread out the area is.
“We’re the first city to really see a lot of these smaller-format stores, which are getting tested by the retailers,” Ash said.

And while some landlords may be looking to fill vacant big-box retail stores, Ash said, the small-format concepts have their benefits as well.
“The smaller stores are easier. There’s more supply of them in terms of the existing retail supply, so a tenant has a lot more options when they are looking at existing shopping centers in a geographic area,” he said.

He added that a store looking for 40,000 square feet will only have a very limited number of options while a store needing only 8,000 square feet has a lot more choice.
Jim Dillavou, principal at Paragon, said that shrinking store sizes for retailers also decreases the overall size needed for a shopping center.

“It takes any shopping center in Los Angeles, and it shrinks it,” he said. “That means that instead of 7 acres or 10 acres, you don’t need that; you need 4 acres. You don’t need as much space for a retail shopping center. That means you’ve now got extra land.”
Dillavou said that extra land could mean an opportunity for redevelopment, and a lot of centers were including multifamily components.

He added that it’s not just traditional retailers that are exploring small-concept stores but also tenants like grocery stores.
“Big picture, small-format stores are just a piece of the ecommerce puzzle. As retailers begin to use brick and mortar as well as ecommerce, they don’t need stores as big. In retail, almost all retailers are getting smaller,” Dillavou said.

Burns said many landlords “love them as an amenity,” adding that small-format concepts bring big retailers like Ikea into spaces that normally would not be able to have them.

‘Everybody’s doing it’

Looking forward, experts agree that small-format stores are here to stay.
“Everybody’s doing it. You’re seeing it across the board from grocers to larger-scale operators,” Spragg said. “The question is, do the home improvement groups get into the game with the Home Depot and Lowe’s?”

Burns added that he is also seeing interest in small-format stores from car dealerships. Companies like Tesla Inc., he said, already are in retail centers where they only have a few vehicles on hand as opposed to a lot with hundreds of cars. He expects to see more automotive companies do the same and have small-format stores at retail locations.

“Retailers are getting more efficient,” Burns said. “They know what their customers want, and if they go smaller, they can have better coverage and put stores together closer than they could in the past.”
Ikea’s McGowan said small-format stores were something the company intends to continue with.

“This is just the start,” she said.

Hannah Madans Welk
Hannah Madans Welk
Hannah Madans Welk is a managing editor at the Los Angeles Business Journal and the San Fernando Valley Business Journal. She previously covered real estate for the Los Angeles Business Journal. She has done work with publications including The Orange County Register, The Real Deal and doityourself.com.

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