Why Do So Many Small Stores Fail?

The author expounds on what he believes are the key culprits dogging compact format grocery stores
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Although big remains beautiful for H-E-B, Walmart, Wegmans and others, small stores have been a major growth sector in the grocery business over the past 10 to 15 years.

Key drivers of the small-store trend are found at the foot of this commentary, and arguably have been led by the exemplary success of Aldi, Sprouts and Trader Joe’s, as well as the weakening consumer appeal of center-store product categories, among other factors.

But why has there been such a high casualty rate among small-store retailers? Examples include Tesco’s Fresh & Easy, Jewel’s Urban Fresh, Mrs. Green’s, Whole Foods 365, Lucky’s Market and Earth Fare?

10 of the most important reasons are as follows:

  1. 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.
  2. Excessive debt and optimism, frequently stimulated and/or driven by private equity investors.
  3. Management perceptions of reduced investment risks has given rise to overexpansion of the format, accompanied by inadequate site and market research.
  4. 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.
  5. 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. 
  6. 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.
  7. 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.
  8. 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.
  9. Limited product selections also produce the inconvenience of the “extra stop.”  This “inconvenience” has to be made worthwhile on a continuing basis.
  10. 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.

In summary, small stores can work—as Aldi, Trader Joe’s and a small portion of others have proved—but they are even more dependent on execution (in all respects) than are larger stores. In particular, despite their lower investment risk (per store), they require more attention to site and consumer research than do full-size grocery stores, which can often “draw” their way out of a problem because of their more extensive trade areas.

Drivers of the Small Grocery Store Trend

  • Demographic trends: the aging population and preferences for urban living.
  • Sluggish income growth has stimulated multistore shopping patterns.
  • Concerns with food deserts and food waste.
  • Rising health awareness—supported natural/organic/perishables stores/weakened center store categories.
  • Increasing time pressures and disorganized lifestyles has led to more quick fill-in trips.
  • A long-term real estate glut provides extensive development opportunities.
  • Growing e-commerce has reduced the selection appeal of large stores and of center store categories in particular; reduces nonfood margins at large supermarkets and supercenters and favors pickup point role for small stores.
  • Growing competition from Aldi, dollar stores and other large national discounters.
  • The traditional competitive weaknesses of convenience and drugstores (i.e., perishables, selection).

David S. Rogers is president of DSR Marketing Systems Inc. He can be reached at dsrms@sbcglobal.net.




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