Big Impact in a Small Format For further information: Thomas Ripsam, Florham Park: [email protected] Alonso Martinez, New York: [email protected] Carlos Navarro, City: [email protected] Booz & Company

06/19/2007 a strategy+business exclusive

© 2007 Booz & Company Inc. All rights reserved. strategy+business strategy+business leading

IDEAS Big Impact in a Small Format

Large retailers are beginning to see the beauty of a tinier world. 1 by Thomas Ripsam, Alonso Martinez, and Carlos Navarro

.B. Beaumont, a operator in to 400 stores there per year. The stores operate as fran- the U.K.’s East Midlands, saw less-than-stellar chises, usually owned by locals who are familiar with the Jsales in its six stores — and recognized an oppor- micromarket in which the store is located and can cus- tunity. Changing demographics in the region, such as tomize service to the neighborhood’s needs. Stores in smaller families and more single-head households, were neighborhoods where residents return home late at creating a valuable segment for a retailer that could pro- night remain open 24 hours; other stores deliver to vide a broad array of products in a format suited to nearby areas with high numbers of elderly or affluent these groups. residents. Oxxo is building on the region’s traditional To cater to their needs, Beaumont began offering changarros, or mom-and-pop stores, by personalizing its both takeout meals and meals that a family can prepare service for its customers. at home with minimum effort. It added cold beverages After years of hype about “big box” retailing, we see that can be consumed immediately; traditional grocery an increasing number of small format success stories, items, such as condiments, in smaller packages; and sin- ranging from convenience stores, such as Beaumont in gle-serving sundries such as aspirin. In short, it moved the U.K. and Oxxo in Mexico, to discounters, such as into the middle ground between, say, a fish-and-chips Germany’s Aldi and EKI Descuento in Argentina, shop that can provide a meal but not much else and a which sell basic staples and key grocery items in a cost- grocery store that can meet all of a shopper’s needs but effective neighborhood format. The interest in small might also eat up an hour of her time. Beaumont’s new formats may soon extend to the United States, as well, format did so well that it attracted the attention of giant where big retailers including Wal-Mart and Publix J. Sainsbury PLC, which acquired the smaller retailer in already are experimenting with the idea. November 2004. However, the trend isn’t limited to purveyors of The popularity of small format retail stores isn’t food items. Regardless of whether the smaller stores are limited to Europe’s mature and affluent markets. The selling groceries, electronics, clothing, or home goods, same trend is gaining traction in , where there are three major reasons that retailers should con- convenience store retailer Oxxo, for instance, has estab- sider how small formats could work in their markets. lished around 4,000 stores in Mexico and is adding 300 One is that the consumer experience in massive retail strategy+business strategy+business

Thomas Ripsam Alonso Martinez Carlos Navarro ([email protected]) is a ([email protected]), a ([email protected]) is a principal with Booz Allen in senior vice president with Booz vice president with Booz Allen New York. He focuses on go- Allen Hamilton based in New in . He focuses on to-market strategy develop- York, works with global multi- commercial, marketing, and ment and sales force nationals and leading Latin distribution strategy for multi- organization and operating American companies, particu- national and local consumer model design for clients in the larly in the consumer products and health companies in Latin consumer, technology, and industry. He advises companies America. leading industrial sectors. on transformation and growth strategies. IDEAS

2 establishments is becoming increasingly unattractive. relationship with customers and employees and there- The amount of time it takes to negotiate the seemingly fore allow for genuine innovation in store design and endless aisles is a drawback to harried shoppers — and even business model design. At Oxxo, for example, store it's made worse when they hit the checkout and run into operators are not just employees; as franchisees, they dozens of other people in a hurry. The size of the store receive a share of the store’s profits. However, Oxxo fre- also takes away from personalized service and doesn’t quently makes all of the necessary capital investments to allow for a product assortment tailored to a particular ensure consistency across the chain, such as purchasing demographic niche. standard shelving, microwaves, and refrigerated dis- Lower-income shoppers, in particular, find that they plays. Oxxo’s store displays, layouts, and product assort- are not comfortable in large stores because service is less ment — with modern fixtures, lighting, and high personal and the broad assortment of products drives standards of cleanliness — are much more appealing home how little they can afford. Furthermore, getting to than those of traditional Mexican mom-and-pop stores. large stores, which are often located far from city centers, Oxxo’s parent company also drives intensive promo- is difficult for this group of shoppers, who have to spend tional and bundled offerings by, for example, offering money to get there and may even lose hourly wages if it’s Marlboro cigarettes with a free lighter or a bottle of truly out of the way. Going farther to a bigger store is Coke bundled with a discounted Powerade. The busi- only a good value, in terms of the total cost of purchase, ness model is novel — and effective. if the big store offers substantially lower prices — and Interestingly, the small format trend is widening in even then, the resulting savings are usually not enough to both Europe and Latin America, which have entirely offset the cost of public transportation. different demographics and income levels. In Europe’s Essentially, consumers will still patronize those large affluent economies, consumers are looking for conven- establishments, but many of them want to complement ience items, including meals, to suit the busy lifestyles that shopping with frequent stops at more conveniently of single heads of households. Retailing in Latin located establishments. America, by contrast, is focused much more on low- A second reason for rising interest in small formats income and larger families. Part of the explanation for is that economics and technology have shifted the value why smaller formats are working in Latin America is proposition. Smaller stores are no longer necessarily sad- that items such as dry pasta, cooking oils, milk, bath dled with higher prices or lesser quality. Savvy operators soap, and laundry detergent can be acquired in precise- of chains of smaller stores are able to achieve efficiencies ly the right quantities for daily use. The stores are, in of scale in procuring their merchandise and are then effect, the customers’ pantries. able to distribute those goods to specific stores through The big question is whether the U.S. market is distribution channels that have been much improved by ready for a shift toward smaller formats. In grocery, for computerization and supply chain logistics. instance, industry analyst Planet Retail and Booz Allen Last, small formats offer retailers a more intimate Hamilton have found that large format stores capture , s+b , Spring 2004: This arti- 2004: , Spring s+b Guillermo D’Andrea, Leticia Costa, and Fernando Fernandes, “Successful Fernandes, Leticia Costa, and Fernando D’Andrea, Guillermo white Booz Allen Hamilton Markets,” in Emerging Innovation Retail Booz Allen and the Coca- 2007: A joint study between January paper, a are stores that small format Council shows Research Cola Retailing www.boozallen.com/media/file/ Latin American markets. fit for strong CCRRC_InnovationLA_Eng_sb_final.pdf “6 and Anne Goebel-Krstelj, Stengel, E. Alejandro D’Andrea, Guillermo Consumers,” about Emerging-Market Truths www.strategy-business.com/article/04106 format stores. Factor,” “The Haddock, and Ronald Flatbread Alonso Martinez in evolve consumer products 2007: An in-depth look at how Spring www.strategy-business.com/article/07106 emerging markets. Jones Dow Strategy,” Small-Store Mulling Be May “Wal-Mart potential Wal-Mart’s 30, 2007: A brief overview of April MarketWatch, adept at small format that are competitors like to European response www.marketwatch.com/news/story/wal-mart-may-mulling-small- retailing. store-strategy/story.aspx?guid=%7BEB118FB9-7B2D-44A7-A2FB- 79CE37736808%7D Resources study of emerging con- of a Latin American cle focuses on the results including their affinity for small sumers and their shopping preferences, + European retailers, such as U.K.-based grocer Tesco grocer such as U.K.-based retailers, European Wal-Mart, like that for U.S. retailers believe We balanced need a more retailers All the big box 80 percent of retail sales in the United States, a number States, sales in the United retail of 80 percent majority of other significantly higher than in the vast world. developed in the markets discounter Aldi, may be the Corporation and German to smaller for its receptivity first to test the U.S. market for example, plans to enter the U.S. Tesco, formats. of roughly stores 100 convenience-type with market & Easy feet under the Fresh 10,000 square slated to are Those stores brand. Market Neighborhood and California. Nevada, be opened in 2007 in Arizona, to catch up with their inter- and Lowe’s Depot, Home and national competitors, find the next spurt of growth, suffering, now saturation they are escape the market to consider smaller formats as key they will also have is Wal-Mart models. retailing channels in their overall feet, about as small as 20,000 square considering stores and other large of its Supercenters, one-tenth the size to be doing the same. rumored are retailers their customers and will benefit in to reach approach important what they learn about shopper ways from of in smaller format contexts. Manufacturers preferences consumer packaged goods (CPG), too, can cash in on partners to with their retail working by this opportunity, new and creating data available mine the personalized in the CPG The major players accordingly. products they sophisticated in how reasonably industry already are one geography to anoth- from mixes adapt their product one demographic mix to others, but using er and from to get close to their customers could foster a small stores formats and in the prod- in retail new of innovation wave ucts and business systems on which they rely.

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Originally published as “Big Impact in a Small Format” by Thomas Ripsam, Alonso Martinez, and Carlos Navarro.