End of the big-box era?

Former stockbroker James Brumley on why the days of the big box store are numbered.


When big box retail chains like Circuit City, Dillard’s and Office Depot started to close doors in 2008 and 2009, it made sense. The recession crimped consumer spending, and these oversized, over-staffed and over-inventoried stores had to shed some dead weight in order to survive. A funny thing happened on the road to recovery in 2010 and 2011, though: these big-box retailers didn’t pull out of their nosedive. More casualties are on the way, and unfortunately – not to mention needlessly, in many cases – these retailers are powerless to prevent their own demise.

What separates the survivors from the also-rans? It’s not an easy answer, but there is an answer. Investors, take note, because the men are about to be separated from the boys in a contest that really should have happened a long time ago.

More than a few, and more than a fad

Make no mistake about it –big box retailers are a dying breed. Were it just one or two struggling to stay above water, we could probably just chalk it up to poor decision-making or off-target marketing. When a bunch of them are in dire straits, though, it’s not weak management; it’s an epidemic without a super-clear cure.

Best Buy recently decided to close down its 11 UK stores, each of which qualifies as a big-box unit, after closing its namesake stores in China in early 2011.

Sears Holdings announced at the beginning of 2012 that it will be shuttering around 100 stores.

In October, Lowe’s revealed plans to close 20 stores and reel in plans to open new ones.

And the list goes on: Border’s, Linens ‘n Things, and more.

These aren’t just closings for the sake of appearing to care about every penny making (or not making) it to the bottom line, either. These outfits are in real trouble. Sales at Sears stores that have been open at least 12 months, for example, have fallen every year since the new company (which includes Kmart) was recreated in 2005. Sears and Best Buy are facing similar struggles.

Even the venerable Walmart is struggling. Sure, Walmart hasn’t been closing stores left and right, and it has actually been growing its top line. But only international growth is improving. 

In the middle of the year, the world’s biggest retailer posted its eighth straight quarterly decline in domestic same-store sales. We’ve seen hints that the domestic revenue downtrend has slowed in the meantime, but it’s a tepid and questionable trend turnaround. 

In a similarly startling statistic, data from CoStar Group shows that the square footage of new shopping centres developed in 2010 reached a 40-year low. 

Only 12 million sq ft (120,000 sq m) of shopping-centre space – versus an average of 132 million sq ft – was finished in 2010. There is no final tally on 2011’s builds, but considering that mall-vacancy rates in the US ended the third quarter of 2011 at a record 9.4%, it’s hard to imagine why last year’s total build-out would be any better.

What’s going on?

Of course, the million-dollar question – particularly if you’re one of the retailers with your head on the chopping block — is ‘what’s causing this phenomenon?’ If you can answer that, you might have a shot at surviving, right?

Well, no, not really…at least not in this case.

The smartphone (and by extension, the web) is getting the bulk of the blame for the demise of monster retailers. Of course, it’s not helping. But there’s a bigger issue at hand than just a lot of competition on the web.

Here’s the deal: what’s causing the mass extermination of big-box retailers is that they’re big-box retailers, with all the drawbacks and vulnerabilities thereof. These drawbacks and vulnerabilities include (1) poor in-store service, (2) not being price-competitive with the web, and (3) not recognising that drawing a spending crowd is as much about entertaining shoppers as it is about selling compelling merchandise. These problems go with the territory when one store’s employee count numbers in the hundreds – managers can’t watch, train and retrain all of them all the time – and when there’s more than 100,000 sq ft of selling space and merchandise to take care of.

Oh, sure, it worked until a few years ago because to buy something, you essentially had to go to a retail locale. That made retailers arrogant, thinking it was their special skill, quality of sales training, or knowledge of the customer that drew a crowd. Surprise! It wasn’t.

As it turns out, Sears is boring. Dillard’s isn’t selling the hottest fashions. Shoppers may know more about the technology they’re looking to buy than most Best Buy employees do. These retailers did reasonably well through the early 2000s mainly because shoppers had little choice but to go to those places if they wanted to buy something.

The rise of Amazon, the ensuing rise of all e-commerce, and the proliferation of the smartphone has indeed given shoppers this choice. And that’s the key: it’s not the smartphone itself that’s killing big-box retailing. It’s that the smartphone (along with the internet) has exposed what a lame, annoying and dissatisfying experience in-person shopping can be.

Sure enough, malls are seeing less and less traffic – with the exception of Apple retail stores.

How does Apple do what nobody else can – draw a crowd? There’s the key point again: Apple’s stores offer great service and they entertain – no, dazzle – shoppers with well-informed and charismatic employees and an ever-more-exciting product. The only potential pitfall for Apple’s retail stores is that they don’t compete with other retailers of Apple’s goods when it comes to price, and they’re generally more expensive than comparable consumer electronics sold elsewhere. But when you’re as cool as Apple, you don’t have to be ultra price-competitive.

The only solution to those big-box problems is simply to stop doing business as big-box stores.


Think about this – while Best Buy ranks right up there with the industry’s most-hated stores based on the total shopping experience, we have to at least give the company credit for recognising that the megastore concept is passé and that smaller, more focused stores (called “small-box” stores) manned by well-informed associates who aren’t trying to sell you extended warranty coverage is the way to go.

Although it’s pulled the plug on all of its big stores in the UK, Best Buy is simultaneously expanding its presence by acquiring the Carphone Warehouse chain, which has less square footage per store but a clearer theme. It will also let employees be specialists, in a sense, focusing on doing one thing very, very well. 

And rather than continue to man each Best Buy store’s average 45,000 sq ft, the company announced an initiative in July that will wall off about 10,000 sq ft in some of its California stores to be subleased to other retailers.

Kohl’s is seeing the same writing on the wall and taking similar action. As (barely) indicated by CEO Kevin Marshall in a recent conference call, three-quarters of Kohl’s new stores that opened last year were considered small stores, averaging only 64,000 sq ft, tiny by historical comparison. Nine out of ten Kohl’s stores planned for a 2012 open are also going to be small, producing less revenue than their larger counterparts but perhaps generating more profit on a per-square-foot basis.

Considering that Staples, Depot and Cabela’s are also expanding via small-box shops, there’s clearly something to this. The problem is, it’s easier said than done, and most of these monster-sized stores won’t be able to make the transition for a variety of reasons. The biggest of these reasons is that being a big-box retailer is all some of these companies know how to do.

A close second problem is that a smaller store doesn’t automatically make for a better store. It just lowers overhead.

Another solution

One thing to keep in mind as Kohl’s, Best Buy, Office Depot and even Walmart migrate towards less square footage is that it doesn’t make employees care more or make them more knowledgeable about the company’s products.

Clearly this keeps Best Buy, where electronics know-how makes for a more potent sales associate, in the line of fire, but even the likes of Walmart and Office Depot are being tripped up by rude, disrespectful, unqualified or untrained employees. It’s a growing and chronic problem that may be more detrimental than top management cares to believe.

Let’s face it: while Walmart may have undermined a whole slew of mom-and-pop stores, there’s a reason a bunch of them are still around – and it’s not their merchandise selection or prices. There’s a reason a general dislike for big-box retailers has turned into outright revenue-crimping activism.

More consumers are making a point of avoiding large chain stores after suffering through years of poor and impersonal customer service. For example:

  • Etsy (etsy.com), a website that lets users sell their handmade and homemade personalised crafts, reported its strongest sales day ever on 2011’s Cyber Monday
  • Small Business Saturday: In late November 2011, communities across the US picked a Saturday to make a point of specifically shopping at their local merchants and avoiding the faceless big-box retailers.

One day doesn’t make a dent, but it does make a point. 

Even more interesting is how consumers made a point of doing something about poor customer service and didn’t act solely on price. If it’s a glimpse into the mindset of the average shopper (and it is), then the big-box stores that have survived so far should take note: shoppers truly are fed up. It’s not just an idle threat anymore, as declining sales should confirm.

Reality check

But wouldn’t a shrinking number of competitors ultimately be a good thing for the survivors? On the surface, yes. In reality, no – not when the reason so many stores have closed remains in force.

Most major retailers still don’t get that just opening their doors isn’t enough anymore. Consumers want to be dazzled by something they can’t get via their smartphone. Store employees can’t be insulting or annoying anymore – everyone knows those extended warranties are worthless. Retailers can’t count on being a price leader any longer, either, since everybody price-matches. 

Sadly, most of these big-box names will probably never get it. As such, they can make for poor investments, struggling to just survive. Many of them won’t even do that.

It really is a new era in consumerism. 

Article first published on InvestorPlace, a news and investing website in the US.

James Brumley is a reformed stockbroker and former Director of Research for an options-focused newsletter. He’s now a freelance writer, and his work has appeared on several websites, including Street Authority, Motley Fool, Kapitall and Investopedia.