Is Real Estate Availability the Reason that Retailers Are Focusing on Small Markets?
Retailers such as Dollar General and Tractor Supply Company have long focused on serving small town, rural and "tertiary" markets.
But now others including Big Lots , RITE AID , TJ Maxx & HomeGoods have made opening new locations in small towns and tertiary markets a key focus of real estate strategy and store growth.
Why the focus on small markets?
Well a recent report from 世邦魏理仕 estimates that tertiary markets represented 62% of net migration in the U.S. over the past 3 years - much higher than the population gain in most primary and secondary markets.
And the Economic Innovation Group noted that while more than two thirds of large urban counties saw population declines in 2021, 80% of "exurban" counties gained new residents during the same period.
But it isn't just demographics and population trends.
Stores in small markets make money for retailers - and typically deliver strong margins and a good return on invested capital.
There is generally less competition in small markets. And despite generating lower sales volumes than urban and suburban stores, small town stores tend to have lower real estate and operating costs, less labor turnover and fewer issues with shrinkage and theft.
There may be another key reason why many retailers are looking to small markets:
Real estate availability.
Several retailers that had focused on small and rural markets have failed in recent years - leaving a lot of vacant real estate and lost sales in their wake.
Like Wisconsin-based Shopko Stores - known as the “department store of rural America” - which went bankrupt and liquidated 363 stores in 2019.?
And Stage Stores, a Texas-based off-price retailer that operated nearly 800 stores under the Gordmans, Peebles, Bealls and Goody's brands - mostly in small and rural markets - liquidated operations in 2020.
Shopko and Stage generated $3.3 Billion and $1.6 Billion, respectively, of sales volume in the year prior to each's bankruptcy.
While some of this sales volume was absorbed by e-commerce and general merchandise retailers like Walmart, the ~1,200 empty stores left by Shopko and Stage still may represent opportunities for retailers with a differentiated approach.
One such retailer may be Big Lots , a furniture and home decor retailer with over 1,400 stores throughout the country.
Bruce Thorn, CEO of Big Lots, has noted on the Company's past several earnings calls that it has shifted its real estate strategy to leverage the “opportunity in rural and small town markets where we know we outperform. These rural and small town markets are underserved, particularly in furniture and home categories where we face less direct competition.”
Big Lots has historically focused on opening #BigBox stores of 25,000 - 35,000 square feet in "2nd generation" sites that were previously vacated by other retailers.
One such example is a new store that Big Lots opened this past February in Albert Lea, Minnesota, a town of 18,000 that is approximately 100 miles south of Minneapolis.
The new Big Lots is the only furniture and home store in town and, not surprisingly, is located in a former Shopko that closed in 2019.
Leading off price retailer TJ Maxx - which operates approximately 4,700 stores throughout the country and opened approximately 170 stores in 2022 alone - has also recently entered many small markets.?
Five of its new store openings for its flagship TJ Maxx concept in November and December 2022 were in the following markets:
Like Big Lots, TJ Maxx typically relies on lower cost, "2nd generation" real estate to fuel store growth for its concepts that also include Marshalls, HomeGoods, and Sierra Trading Post. This includes space vacated both by retailers following bankruptcy as well as by companies like Staples and Office Depot that have been systematically reducing store counts in recent years.
TJ Maxx and its family of concepts offer a similar merchandise assortment and value proposition to that which had been offered by the Stage Stores concepts - and has moved into several of its former sites, including a Peebles suite in Shippensburg, PA that was recently converted into a Marshalls store.
Other retailers that are targeting small town markets also have a differentiated focus that is critical to both store performance - and to secure locations.
Like Rite Aid which has closed over 300 of its ~2,200 freestanding urban and suburban drugstores over the past few years.
However it also opened 5 new stores during that same period - and has plans to open approximately 15 additional stores in the coming year.
What is unique about the stores that Rite Aid is opening?
They are all small format, 3,000 square foot stores that target underserved rural areas.
Rite Aid notes that approximately 60 million people in rural areas struggle to access healthcare, roughly 1 in 7 Americans live over 5 miles away from a pharmacy and that ~29% of Americans fail take to take medications as prescribed - a situation that results in over $500 billion in avoidable medical costs.
The Company believes that opening rural pharmacies can tap into this underserved population - and the small size and flexible format of its rural pharmacy prototype opens plenty of 2nd generation and #adaptivereuse possibilities in small town and tertiary markets.
For instance, Rite Aid's first rural pharmacy opened last year in a former F&M Bank building in Craigsville, VA, a town of less than 1,500 people that was over 20 miles away from the next nearest pharmacy.
Even Dollar General and Tractor Supply - two stalwarts of new rural store development - have pivoted at least in part to the #adaptivereuse of 2nd generation real estate for new stores.
In fact, nearly 40% of Tractor Supply stores are located in shopping centers, many in space that was previously occupied by other retailers.
Approximately 10% of new Tractor Supply stores that opened over the past three years were backfills of former Shopko locations in the Upper Midwest.
Dollar General's historical store growth has been fueled largely by the new construction and development of freestanding buildings in rural and exurban areas throughout the U.S.
But high interest rates, increased construction costs and challenges to secure municipal approvals may lead?#DollarGeneral ?increasingly rely on the?#adaptivereuse ?of existing buildings to support future real estate growth.
It isn't just large publicly traded retailers that have been moving into rural and tertiary markets.
Other large national and regional retailers including Harbor Freight Tools , Dunham's Sports and Bealls, Inc. have also been growing rapidly in small towns - including by taking several of the former Shopko and Stage Stores locations.
Ultimately, there are multiple reasons why retailers are pursuing new stores in small town, rural and tertiary markets including demographic and population trends, lower competition, and strong profitability metrics.
But the simplest explanation may be that there remains - for now - good real estate availability of 2nd generation space in small town, rural and tertiary markets and the unique opportunity for retailers to capture lost sales from these previous tenants.
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1 年Thorough analysis, Jason. Well done.