Why Do So Many Small Stores Fail?

Many of the small-store formats have fragile business models, particularly those with a low-price emphasis. Inadequate operational disciplines, such as too many SKUs, can inflate costs and erode profits.

Excessive debt and optimism, frequently stimulated and/or driven by private equity investors.

Management perceptions of reduced investment risks has given rise to overexpansion of the format, accompanied by inadequate site and market research.

The quality of store locations, in terms of site or demographic characteristics, is less important when a store concept is unique. But as competition grows over time, the weaknesses of a “successful” location can become fatal. Natural and organic formats are a good example of this. As conventional supermarkets have raised their game in natural and organic foods, the original natural/organic specialists are finding it increasingly hard to support locations that were previously profitable.

Small-store formats frequently require powerful—and targeted—positive image differentiation. Examples include low prices at Aldi and Lidl, produce at Sprouts and special products at Trader Joe’s. This appeal needs to be achieved and consistently maintained over time. 

Because small stores are targeted to specific needs, they are also frequently targeted to specific target demographics.  As a result, they are very vulnerable to weak or absent site research.

Inadequate (or nonexistent) customer/shopper research—a common problem in the supermarket industry, which is particularly deadly for small stores that may have only a limited number of “draw” factors to play with. This is why some of the retailers listed above have typically opened well and then experienced continued sales erosion thereafter, ultimately resulting in closure.

Chief among the potential inadequacies of small stores are selections that do not meet what shoppers need or want.  This can vary from store to store and is not identified by the passive data from frequent shopper programs that cannot tell retailers what would have sold if they had carried it.

Limited product selections also produce the inconvenience of the “extra stop.”  This “inconvenience” has to be made worthwhile on a continuing basis.

Finally, almost inevitably by definition, small stores need to fit locationally within shoppers’ overall trip patterns and activity spaces. This is a subtle issue, but one that is well-known to Aldi, which frequently locates near a Kroger or Walmart Supercenter in order to encourage a “first stop” place in an increasingly common trip pattern that includes two, three or even four store visits.