Big-Box Retailers Take to the City

Wal-Mart, Target and others are migrating along with the population

By Alyssa Oursler, InvestorPlace Contributor

In general, when you think of shopping in the city, you think of store after store lining the street — and expensive prices.

Unless, of course, you count discounters like Dollar Tree (NASDAQ:DLTR) and Dollar General (NYSE:DG), which dominate the low-end retail market in urban areas — especially in today’s rough economy. And dominate is a good word: These guys have been booming recently. DG stock is up 60% in the last year, and DLTR is up 56%.

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When you think of shopping at other low-end retailers like Wal-Mart (NYSE:WMT) and Target (NYSE:TGT), on the other hand, the exact opposite of a city’s small and expensive shops comes to mind. That’s not to say these names haven’t been performing well — Wal-Mart is up around 40% and Target over 20% in the last year.

But to keep having the same kind of success that they’re used to, these retailers have to adapt to consumers. And right now, consumers are increasingly moving toward cities. Urban sprawl, as USA Today puts it, is on the skids.

Sure, such retailers usually have mammoth-size locations in suburban areas. And shoving them into more populous areas seems a bit implausible. But now, with suburbia pretty well saturated, giant discount retailers are following consumers into the urban landscape — and following the smaller scale typical of in-city stores.

As The New York Times puts it, “It is a significant shift from their approach in the past, when they tried to cram their big-box formats into cities, often prompting big fights.” Target, for example, is creating CityTarget stores — the first of which opened in Chicago, Los Angeles and Seattle last week.

The stores are scaled to their urban location — two-thirds smaller (around 80,000 to 100,000 square feet) than a typical store with smaller backrooms, slimmer checkout lanes and slightly varied merchandise selections

The merchandise is geared toward the urban consumer, both in practicality (more products in the furniture section for organizing small spaces, a greater selections of consumer electronics, more natural food options) and transportability (products that are easy to carry home on foot or via public transportation).

Simplicity is also key for consumers. Stores display signs and sales more prominently, to adjust for high-speed pace of life

And Target isn’t alone. Wal-Mart is trying on some new sizes. In addition to its usual supercenters, the retailer is experimenting with small Express stores and medium Neighborhoods Markets.

Moving into the city can have its hurdles: Zoning details must be ironed out, rent can be more expensive, formatting and architecture can be odd or complex. But Wal-Mart, for one, is making the move — and doing so on city-dweller terms. In Chicago, it has agreed to use union labor to build its city location, and it has donated to politicians and community groups in urban areas it hopes to build in.

And these two big names are just the tip of the trend. Office Depot (NYSE:ODP), Best Buy (NYSE:BBY) and Walgreen (NYSE:WAG) are also among big retailers trying their hands at city-slicker shopping destinations.

Office Depot recently opened a smaller downtown store with half the number of products. And Best Buy has already found some success — although the company overall is struggling — in its smaller Best Buy Mobile stores.

It still remains to be seen, though, if the city-size spin-offs of giants Wal-Mart and Target should stick to the suburbs. And even if these big-box shops do handle the move to the cities well, they can’t forget about the migration to shopping online. Amazon‘s (NASDAQ:AMZN) new warehouse scheme could take away as many customers as they gain downtown.

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