Big box stores invest in ‘stickier’ stores as inventories normalize

In the last few years, big box stores have faced a pandemic, a global supply-chain crisis, elevated inflation, and most recently, excess inventory and cautious consumers. Now 2024 is around the corner, and what challenges will make headlines in the coming months is still a matter of speculation, but industry experts see some clear trends going into the new year.

Back to normal: One is that inventory management is actually starting to normalize. This may sound like old news, considering the slew of articles that came out over the summer declaring that retailers’ excess inventory problems were behind them, but more recent data shows not just a reduction in excess inventory, but a return to a more typical flow of goods.

The Logistics Manager’s Index, a closely watched measure of supply-chain activity, found that inventory levels dropped significantly in November, indicating that retailers were selling off inventory more quickly.

“Nature is healing itself,” Zac Rogers, assistant professor of operations supply-chain management at Colorado State University who helps put together the index, told Retail Brew. “You should have a decrease in inventories in November. That’s part of the steady state of seasonal retail cycles.”

The index also shows both inventory levels and costs steadily declining from 2021, which Rogers attributed to getting serious about reductions. “Based on the numbers, it looks like they’ve really done it,” he said.

Sticker stores: Meanwhile, as inventory becomes less sticky, retailers are investing heavily in making their stores more sticky for customers who are generally more cautious and selective.

“I think what Walmart and Target are both busy doing is trying to create stickier propositions,” Neil Saunders, retail analyst for Global Data, said. “What they’re trying to do is to make the stores more appealing—give people more reasons to come there, give people more reasons to linger, give people more reasons to convert and buy different products.”

Target kicked off this earlier this year with the announcement of a $4–$5 billion investment into improving the shopping experience at its stores, among other initiatives. Walmart announced a similar initiative later in the year, committing to upgrade 1,400 stores with a $9 billion investment over two years.

“I think we’ll continue to see investments on that front,” Saunders said.

In most of these cases, he added, the investments are an acknowledgement that consumer expectations have changed. “The store experience now has to offer something deeper,” he said. “It has to offer an emotional connection or inspiration, or it has to be super convenient and a place where people really get some enjoyment out of visiting.”

Smaller front end, bigger back end: As Retail Brew reported earlier this year, these investments come as several big-box chains, including Target, experiment with the size of their stores’ footprints. Lee Peterson, EVP of thought leadership and marketing at consulting firm WD Partners, said retailers “don’t need as much space as they used to.” As the Wall Street Journal recently wrote, “the American store is shrinking,” as the increasing popularity of e-commerce has slowed demand at malls, department stores, and big-box stores.

However, Peterson noted, there's one area in which retailers do need more space: fulfillment. He said stores will soon focus on building a “smaller retail space but a bigger space in terms of fulfillment.” Target, for example, has exemplified this effort to turn brick-and-mortar stores into hubs for e-commerce fulfillment.

This rebalancing doesn’t necessarily indicate that big-box stores are building toward their own obsolescence. As Saunders pointed out, big-box stores are performing significantly better than department stores and mom-and-pop shops.

“We’ll see a reasonable year in 2024,” he said. “I think it will continue to be a little bit pressured. But those formats continue to have relevance. They pull people in because they have a convenient array of products people want to buy.”