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Do You Have This in a Small?
Mall retailers shrink stores to cut costs

May 2010 | Retailing

By ELIZABETH HOLMES
The Wall Street Journal

Retailers have a new strategy to expand their profits: shrink their stores.

For two decades, mall-based apparel companies saturated the market, aggressively adding more stores and building them bigger. Battered by the recession, however, retailers including Gap and AnnTaylor Stores are looking for stores they can cut down to size.

The effort marks a new phase in the industry’s response to the weak economy. After consumers snapped their wallets shut in the fall of 2008, sending sales plummeting, retailers laid off waves of employees and slashed inventory.

Now, many of them see re-evaluating their real estate, one of retailing’s biggest expenses, as a critical step on their path to recovery.

“During the ’90s era, everybody wanted a bigger box,” says Kay Krill, AnnTaylor’s CEO. “Now, all of us are trying to get out of those bigger boxes.”

Ms. Krill says she is shrinking square footage at AnnTaylor’s new namesake stores by a third. Her reasoning: “I like productivity.”

Average sales per square foot at American malls, a closely watched measure of retailers’ productivity, peaked in 2007 at $454, according to research firm Green Street Advisors. By the end of 2009, the average had fallen to $401, wiping out five years of progress.

HANGOVER

For many retailers, the decline has been even steeper. Between 1999 and 2009, sales per square foot at Gap, the country’s largest apparel retailer, fell 40% to $329. Total square footage for the company, which also owns the Banana Republic and Old Navy chains, jumped 62% over that period, even though its number of stores increased just 2.6%.

Gap is dealing with “a hangover of yesteryear,” says Chief Financial Officer Sabrina Simmons.

The company wants to shrink the size of its Gap stores to between 8,000 and 12,000 square feet, she says. That compares with a current average of about 18,000 square feet, excluding some of its largest locations.

“Quite frankly, it’s just not as positive of a shopping experience as a smaller box that’s a more intimate experience,” Ms. Simmons says.

In locations where Gap has multiple store formats, such as GapKids or Gap Body, in addition to a conventional Gap store, the company aims to consolidate them into a single store.

Lengthy lease terms can make it difficult to close stores outright. But mall landlords often can be persuaded to accept downsizing, because it keeps the retailer in place, avoiding an empty storefront.

EASIER TO FILL

Not only can smaller stores help to cut costs, they can also force retailers to choose their product mix more shrewdly. “Filing a 10,000-square-foot box with good ideas is a lot more difficult to do than filling a 3,000-square-foot box,” says Paul Lejuez, a retailing expert.

Mr. Lejuez says he believes the Gap brand’s larger stores forced it to broaden its offerings for a wider age range, muddling its image.

Glenn Murphy, who joined Gap as CEO in mid-2007, has made shrinking its real-estate portfolio a priority. Last year, Gap pared roughly 2% of its total store space, which peaked at 39.9 million square feet—or the equivalent of 693 football fields—in late 2008. Next year it plans to remove an additional 3%. Mr. Murphy says he hopes to cut between 10% and 15% of Gap’s sprawling footprint.

At the same time, some chains with strong sales trends are expanding their stores. Both overall sales and sales per square foot have rocketed during the recession at bargain-priced teen retailer Aeropostale, whose stores are among the smallest for a typical mall. Of Aeropostale’s roughly 950 stores, 170 have sales exceeding $800 per square foot, Co-CEO Tom Johnson said earlier this month.

Aeropostale is looking “to increase the square footage in a number of these highly productive locations,” he said.