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While smaller stores are not a new concept, they are evolving to meet specific needs for some major retailers, including a focus on urban expansion.
Recent examples like Amazon’s Whole Foods Market Daily Shops and CVS’s plans to test mini pharmacy stores highlight the potential of ongoing experimentation with small format stores in urban retail.
So far, Amazon’s new smaller format grocery stores that stock a tighter selection have opened in three neighborhoods in New York City: Lenox Hill, East Village, and Hell’s Kitchen. Meanwhile, CVS has said it plans to open 12 mini stores in cities and towns where “residents already may be buying their household items from Walmart or dollar stores,” per a report in the Wall Street Journal.
According to retail experts who spoke to Retail Brew, Amazon’s strategy is seen as experimental, focusing on urban densification and smaller baskets. While CVS’s approach is viewed as strategic, aiming to profit from urban convenience and beauty products at a time when the traditional drugstore model is under pressure.
Jason Goldberg, chief commerce strategy officer at Publicis Groupe, told Retail Brew that Amazon wants to solve a different problem with these smaller stores than its other big stores: “I think Amazon is experimenting because they want to find some new model that helps them grow where [customers] are.”
“These New York stores, for the most part, feel more like the Amazon Fresh stores in Chicago that they’re continuing to evolve. They’re trying to figure out a model that works for winning grocery,” Goldberg added.
Separately, Bryan Gildenberg, founder and CEO of commerce consultancy Confluence Commerce, said Amazon is throwing a bunch of strategies at the wall to see what sticks. “It’s not like Amazon has this sorted out and they’re like, ‘Wow…we really nailed big stores. We’re going to try small ones,’” Gildenberg said. “Their strategy is about urban densification, but that urban densification will be a combination for them—physical stores, and then their increasing ability to do their standard e-commerce office in more densely populated areas with smaller baskets.”
However, within grocery, smaller-format stores (less than 30,000 square feet) saw a 3.2% rise in foot traffic, outpacing larger stores significantly as per data from Placer.ai. Perhaps Amazon is onto something.
Death by pharmacy: CVS’s focus on smaller format stores is purely “out of desperation,” Goldberg said.
“Pharmacies are in this business where the business model has changed, and it's putting them out of business, and they’re all trying to reinvent a way to survive,” he said.
CVS is dramatically shrinking its footprint, planning to close 270 stores in 2025 after already shuttering 800 locations over the past three years as part of its 2021 downsizing strategy.
“So if you’re CVS and you go—’All right, our traditional model is not working. Maybe there’s a business for a smaller store that’s more cost effective, that can pay less people to work in, that has less inventory costs,’” Goldberg said.
However, Gildenberg added, while the economics of running a pharmacy business are under pressure, store expansion in urban centers makes sense: “The one place where you can make money running drugstores [is] in the city, because they’re a combination of a healthcare store and a convenience store.”
“Most of the money that the drugstores make in urban markets [is] because their pharmacy business, which is the disproportionate share of their volume in suburban and more rural markets, is basically breakeven,” he said.
Ultimately, there is potentially merit in the argument that small formats continue to hold some value in that urban densification market. And Amazon in particular wants to grow and experiment within this format that it’s not succeeded in yet.