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Small Is the New Big Thing in Supermarkets

The time of the small-format store has apparently arrived. Whether spurred by high gas prices that make shopping in the neighborhood more attractive or recognizing the potential of the Fresh & Easy model, retailers are suddenly interested in operating stores of 10,000 to 20,000 square feet. Tesco paved the way nearly seven months ago with its Fresh & Easy Neighborhood Markets; Safeway opened its first

The time of the small-format store has apparently arrived.

Whether spurred by high gas prices that make shopping in the neighborhood more attractive or recognizing the potential of the Fresh & Easy model, retailers are suddenly interested in operating stores of 10,000 to 20,000 square feet.

Tesco paved the way nearly seven months ago with its Fresh & Easy Neighborhood Markets; Safeway opened its first location of “The Market” earlier this month; and Wal-Mart Stores expects to open four Marketside stores in Phoenix in the fall.

The success or failure of these stores — and others by other companies that may follow — will determine whether small formats are just a passing fad or a longtime trend.

Safeway believes it has a winner in The Market — a 15,000-square-foot store located in the Belmont Shore section of Long Beach, Calif. — though the concept remains in the experimental stage, Rojon Hasker, president and general manager of corporate lifestyle stores, told SN.

“Right now we don't have all the answers for a small format. But we're willing to make changes in the mix and the concept, though whatever we do at future locations will depend on how things go at this first store.”

Besides providing a vehicle for upgrading older, smaller stores, Safeway believes the smaller format offers new expansion opportunities.

“This is just our first stab,” Hasker said. “We expect to open a second store by the end of the year. We want to try the format in other locations within California and elsewhere, with different layouts and different demographics. And there are areas where we don't do business now where we could go with a 15,000-foot format.”

Wal-Mart contemplates opening four Marketside locations around the Phoenix area in the fall — in Chandler, Gilbert, Mesa and Tempe, Ariz. Stores will be 20,000 square feet — about half the size of Neighborhood Markets, which is the company's smallest format to date.

Asked about Marketside, a Wal-Mart spokesman told SN, “We try to test a lot of different ways to serve customers, and looking at a smaller Neighborhood Market would be one way of doing that.”

Wal-Mart describes Marketside as “the neighborhood market for busy people with a taste for fresh and delicious food.” Wal-Mart is promising to “simplify the daily challenge of creating an enjoyable meal by providing inspiring choices while also offering everyday favorites at great prices in an easy-to-shop environment.”

Gary Giblen, an analyst with Goldsmith & Harris, New York, said retailers' interest in smaller-format stores is part of a natural industry cycle.

“Many supermarkets recognize that small stores offer the ultimate in convenience, whether they are in downtown areas that are becoming more gentrified or residential areas with lots of apartments. And with the rise in gas prices over the last year or so, small stores geared to local neighborhoods have become more important.”

Jonathan Ziegler, a Santa Barbara, Calif.-based analyst with Dutton Associates, El Dorado Hills, Calif., told SN he also thinks high gas prices “mean many people may not want to drive, so a close-in, conveniently sized store may fill their needs very well.”


He said he believes retailer interest in developing small formats is driven in part by “tapping into the consumers' need for restaurant-quality meals at home.”

Willard Bishop, principal at consulting firm Willard Bishop, Barrington, Ill., offered a similar view. “Safeway is striving to be a place where people who would otherwise go to a local restaurant will now turn to a small store in their neighborhood,” he told SN.

Smaller stores have particular appeal to consumers looking for high-quality prepared foods and ready-to-go meals — a challenge Wal-Mart will have to meet with its Marketside locations, Mike Griswold, a Boise, Idaho-based analyst with AMR Research, Boston, noted.

“Now that Wal-Mart is talking about adding prepared foods at its Marketside stores, its challenge will be to develop the kind of credibility Safeway has in that category,” he said.

Another observer said he agreed that Marketside's success could hinge, in part, on whether Wal-Mart improves its perishables offerings. “The impact could be modest if Marketside does not improve upon the perishables offering currently found at Neighborhood Markets,” he told SN.

Most observers believe Tesco's entry into the U.S. with smaller stores was a major motivator for what Safeway and Wal-Mart are doing.

“Although the question for Tesco remains whether it can make money in a smaller footprint, no one wants to miss the bus once it leaves the stop, so different companies are striving to come up with their own answers,” Bishop said. “And it's not just Safeway and Wal-Mart — Giant Eagle and Ukrop's have also experimented with small-format stores.”

Griswold said Tesco “uncovered or perhaps illuminated” the virtues of a small format with a broad variety.

“While that approach has resulted in an immediate rush to judgment on Fresh & Easy's long-term prospects, “people will be a lot more patient to see how things play out at the small-format Safeway store,” he said, “because Safeway has been operating supermarkets and building its credibility for years.”

Ziegler said smaller stores may help retailers learn lessons about product assortments that can be useful at larger stores. “If you eliminate selection, you may learn things about customers' purchasing behavior that could have applications for a larger store,” he explained. “Instead of an over-assortment of products, retailers may find they can be more effective with a more limited SKU count.”

Small stores can also result in a better margin mix, Ziegler pointed out. “And real estate is more available for that size box,” he added.

Aside from possible competitive opportunities, smaller stores may make economic sense to operators seeking new ways to utilize older, smaller units, Griswold pointed out. “It's certainly better to in-fill with small stores that provide ancillary support to more conventional locations — stores with special appeal to people who like to shop more frequently and in smaller-sized boxes.”

Bishop said he believes there is value for retailers in operating small stores because of the low break-evens. “Most of the time, a store's economics turn on sales per square foot, so the break-even at a 15,000-square-foot store is one-third the break-even for a 45,000-foot store and one-quarter the break-even for a 60,000-foot store, so the hurdle is significantly smaller.”


Overcoming that hurdle in a smaller box is possible from either end of the pricing spectrum, as exemplified at the low end by Aldi and Trader Joe's, Bishop said, and from the high end, as exemplified by Bristol Farms. Fresh & Easy, as a discounter, falls closer to the low-end pricing spectrum, while Safeway's new format, with more conventional pricing, is somewhere in the middle, he noted.

Hasker said Safeway has been looking for new ways to utilize its smallest locations for several years “because we have so many of them.”

Of the 500 Safeways not yet scheduled to be “lifestyled,” approximately 10% are under 25,000 square feet, with probably 15 or 20 of those around 15,000, she pointed out. “So we've been looking at smaller formats for years, all over the U.S. and Canada, to pick up ideas we felt would be effective for us in a smaller store.”

The store Safeway opened in a former Vons in Belmont Shore is not quite a lifestyle store, though it has many elements of that concept, Hasker said, including expanded perishables, floor design and wall colorings. “It has the feel of a lifestyle store in a smaller format,” she pointed out.

The Market is geared to the local neighborhood — which includes a mix of high- and limited-income shoppers encompassing families and beach residents, Hasker noted — with a heavy focus on perishables, including ready-to-eat meals, with a condensed selection of Center Store goods.

Some of the selection is based on what customers at the old Vons store liked to buy, she added. “We utilized sales data from the existing store to develop the selection — to make sure we have what customers want — and then added things we felt they wanted but couldn't get there before.”

Safeway added a full array of service departments — meat, seafood, deli and bakery — plus a floral section; an expanded selection of produce; the World Cuisine line of prepared foods, previously available only at a handful of Safeway stores in Northern California; and more organic and natural foods, soy products and new items like flavored ice.

Hasker declined to pinpoint the market's SKU count but said it is “significantly less” than half of the normal amount of 20,000 to 28,000 items. One local source estimated inventory at 4,200 SKUs — about 15% of the usual selection.

The store also features a higher percentage of corporate brands than usual, she indicated, with selection in the Center Store area limited to one national brand and one corporate brand in most instances.

Hasker declined to estimate the sales volume Safeway expects at the store, “but we feel very optimistic,” she said.

Upon entering, customers see a multi-level produce display up front opposite a selection of fresh floral bouquets; the store also has several island displays of produce positioned between the grocery aisles and the service counters.

“We put fresh produce throughout the store because produce is so important to people on a daily basis, and as we looked at other small stores, we decided this is where we had an opportunity to do a better job,” Hasker said.

The right side of the store has seven two-sided gondolas for packaged goods, with cold beverages and beer on a side wall and frozen food cases on the back wall.

The left side of the store consists of a line of curved display cases featuring separate counters for full-service meat, seafood, deli, bakery and sandwiches, each with a condensed offering; and a wine and liquor section in the left front corner.

The store features only a slim offering of pre-packaged meats “because there are a lot of singles in the area and others who will buy more convenience foods,” Hasker pointed out. The bakery does not offer any decorated cakes because of space, she added.

All service departments share a single small production area.

There's also an island fixture for grab-and-go meals and a curved fixture for a wide variety of prepared foods. “We used curved fixtures at this store for the first time in the chain to provoke interest,” Hasker explained.

Included among the prepared foods are Safeway's Signature Café line, including World Cuisine entrees — the product line developed at Citrine, the chain's restaurant, that were available only at about 25 pilot stores in Northern California before they were installed at the market, she pointed out.