For a growing number of retailers, small is the new black

It’s hardly news that the retail industry is going through significant contraction of selling space as an uptick in bankruptcies and outright liquidations forces hundreds of locations to close en masse. In addition, dozens of struggling retailers continue to shutter outlets hoping to improve profitability or avoid a similar fate. In fact, there is a pretty good chance that the number of store closings this year will exceed last year’s record pace. While there are plenty of new store openings, the net downsizing of retail space in certain categories is clearly significant (for a deeper dive I recommend this excellent report by Coresight Research).

Another factor that is starting to affect vacancy rates is that some brands are “right-sizing” their prototypical store, in what I affectionately label the “Honey, I shrunk the store” phenomenon. Some of this is a sure sign that the retailer has run out of ideas for the space it has and is hoping to shrink to prosperity. Good luck with that. Others are wisely optimizing their footprints to address the rise of e-commerce and other fundamental changes in shopping behavior. I fully expect the large scale thinning of the herd to continue apace through (at least) next year, while the evolution of store models will take multiple years to play out.

What’s new—and fundamentally more interesting for retail’s future—is the rise of much smaller and very much reimagined formats from well-established brands. I first delved into this last year writing about Nordstrom Local, the storied retailer’s new service-focused micro-concept. Nordstrom has since disclosed plans to open additional locations and hinted in its recent investor presentation that Local could be a key part of the company’s portfolio strategy to drive market share on a city-by-city basis. And just this week Ikea joined Sephora, Target and others who are hoping to spur outlet growth by announcing a smaller format that holds the potential to unlock many additional urban locations by having fundamentally different economics and site-location requirements.

In some cases these retailers are dealing with the harsh reality that their concepts are maturing and it’s becoming impossible to find locations where they can generate an ROI from their traditional format. Without reengineering their underlying economics, their store growth plans come to a screeching halt. In other cases they are mirroring aspects of the playbook employed by many digitally-native brands as they began opening physical stores: locate closer to where the target customers live or work, make services a key component of the value proposition, harmonize the experience across digital and physical channels, minimize inventory and use technology as a differentiator.

Over the years, many retailers have chased the notion of a smaller store as the key to spurring outlet growth (I’ve personally worked on several of these initiatives). Where most went wrong was delivering a watered-down version of what the brand was known for. Saks’ Main Street strategy is an expensive lesson in what not to do. The smaller box did encourage them to open in locations that could not financially accommodate a “real” Saks store. In theory, this strategy held the promise of increasing the luxury retailer’s store count by some 50%. Unfortunately customers were underwhelmed by the offering, seeing it as a “baby” Saks. Eventually all the expansion sites were closed.

What savvy brands know is to avoid creating a new concept that is merely a smaller version of the core value proposition, designed by pruning all the “non-essential” elements. This top-down approach is likely to be seen as a compromise. And who wants the customer to feel like she is settling? Instead, any new offering should be built by leveraging what the parent brand is known for, while taking a bottoms-up approach to eliminating customer pain points and finding new ways to be intensely customer relevant. This is one way a brand that’s running out of gas can go from boring to remarkable.

It’s increasingly clear that when we get beyond the outlet growth we see in the off-price/discount segment, a lot of new store openings are being driven by the Warby Parker’s, Casper’s and Indochino’s of the world who have made this way of thinking central to their store expansion strategies. For legacy retailers hoping to stay relevant, well thought out micro-concepts have the potential to jump start growth by reaching new customers and getting closer to the customers they already have, while providing a measure of protection against often more nimble new competition.

Many mature retailers would be wise to follow Nordstrom and Ikea’s lead. Small is starting to become big.

A version of this story appeared at Forbes, where I am a retail contributor. You can check out more of my posts and follow me here.