Target’s store closures seem to highlight challenges of small-format model

In 2023, the retailer closed at least 13 stores, the majority of which were smaller stores in urban areas that had opened in the past five years.
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· 5 min read

Earlier this fall, Target announced plans to shutter nine locations across four states due to “theft and organized retail crime,” and the news has fueled a fresh round of speculation around whether crime is the sole cause behind the closures.

Target’s own numbers show that the cost of shrink—which encompasses any loss of inventory, not just theft—has increased just 0.2% year over year in 2023. Shrink was responsible for a 0.9% hit to Target’s gross margin rate in the second quarter, up from 0.7% for all of 2022, according to the company’s SEC filings. As a percentage of sales, that’s $219.5 million higher than the same quarter a year ago. For comparison, the company lost ~$3.7 billion just from merchandising in 2022.

  • In addition, the National Retail Federation (NRF) released a survey last month showing that the average shrink rate increased just 0.2% in 2022 from the year before, and CNBC found this was only a marginal uptick as a percentage of overall sales.
  • As Popular Information found in an analysis of local crime data, shoplifting in the areas around at least two locations in New York and San Francisco was also comparable, if not lower, than around nearby stores.

The company did not respond to a request for store-level crime or shrink data, but there is a clear pattern among the locations that are slated to close: Nearly all of them are small-format stores in urban areas that had opened within the past five years.

In the last decade, Target distinguished itself by expanding its footprint into cities, while other major retailers, such as Walmart, mostly stuck to suburbs and rural areas. Some even speculated that small urban stores were the “future of the chain.” Now these locations are taking the brunt of recent closures.

Without additional information, Neil Saunders, retail expert and managing director of GlobalData, told Retail Brew that “we have to take them at face value,” but said “with store closures, it’s never a single factor that influences that [decision].”

He highlighted one variable in particular: “One of the most obvious conclusions is that it is difficult to make smaller format stores work, and it’s especially difficult to do that in cities.”

City problems? The three Portland stores set to close are small-format, for example, and opened their doors as recently as 2021 and 2018; the two Seattle locations are smaller and opened in 2019 and 2020—same for two of the Bay Area locations that opened in 2019.

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It also isn’t the first time this year that Target has shut down stores in urban areas. In March, the company shuttered four small-format locations in cities, citing business performance issues. The company also shut down a Baltimore location in 2018, and nearby residents said they were told it was related to shrink, per a New York Times investigation—though a former store manager told the outlet that during his four-year tenure ending in 2012, that was “untrue.”

Lee Peterson, EVP of thought leadership and marketing at consulting firm WD Partners, also questions the narrative that theft is the main reason for this latest round of closures.

“I think the idea is solid,” he said of Target’s small-format model. “But they went full bore with it over the past couple of years, and it looks like they made some mistakes.”

In addition, Saunders explained that shoppers in cities without their own cars tend to buy less product and more lower-margin essentials than shoppers at larger suburban locations, who tend to buy more products and more higher-margin items.

“You just don’t get the basket sizes,” he said. “You don’t get the profit levels from them that you would get from some of the traditional Target stores.” Toss in generally higher rent costs, he added, and “they are more difficult financially for sure.”

Sizing up: Based on Target’s list of upcoming store openings, it’s clear that the company is not giving up on the small-format model. In New York City alone, four out of five stores slated to open are between 28,000 and 47,000 square feet. One of them is just a mile and a half from the lame-duck Harlem location. Still, a shift in strategic priorities seems evident in the company’s communications around the smaller-store format.

In 2020 and 2021, Target’s statements on its strategic priorities touted the number of small-format stores that were in the pipeline. In 2022, it started emphasizing “flexibility” and said stores would “range in footprint, from mid-size locations in dense suburban areas to small-format stores in city centers.”

By 2023, “small-format” doesn’t even appear in its statement on its annual plans.

“I think given a preference Target would prefer to open larger stores,” Saunders said. “They are more profitable, they’re easier to execute. It’s much easier to serve as customers and to do things like online fulfillment from these larger format stores.”

Retail news that keeps industry pros in the know

Retail Brew delivers the latest retail industry news and insights surrounding marketing, DTC, and e-commerce to keep leaders and decision-makers up to date.