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Will Target's New Small Format Stores Boost Sales?

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Everyone loves Target (TGT - Free Report) . Its clearance aisles, its partnerships with fashion designers, and its extensive array of products make it hard for customers to walk out of a store without spending at least $100. I can personally attest to that. But the retailer recently reported its first decline in store sales in roughly two years, suggesting that my valiant efforts at always spending too much money in a Target has not helped the company as much as I thought.

In order to combat this sales decline, Target has launched several small format stores across the U.S., mainly in big cities and college towns, that feature a limited selection of goods catered to the people who live in the neighborhood. For example, a smaller sized Target near a big university will more likely stock dorm room essentials and ping pong balls next to beer rather than kids’ toys and home décor.

According to the Wall Street Journal, “Target executives say the retailer is ready to move away from its traditional store model to enter new markets. ‘We had become really good at stamping out the same store in different markets,’ said Chief Operating Officer John Mulligan. ‘For these formats, we are rethinking everything.’”

Target has actually been testing out small format stores for a few years now, opening CityTarget and TargetExpress stores (these are now renamed as Targets). The new stores will be much smaller than a typical Target, less than 40% of their size; the smallest store so far is located near the University of California-Berkley, and is less than 10% of a regular sized store. They will also be in spaces previously occupied by grocery stores and local retailers, notes the WSJ.

Target isn’t the only traditional brick-and-mortar retailer switching up its business approach. Chief rival Wal-Mart Stores Inc. (WMT - Free Report) has also experimented with smaller format stores; however, it has closed over 100 of these Express locations to instead focus on its SuperCenters and its Neighborhood Markets, which offer mainly groceries. Both Target and Walmart have been under immense pressure from the increasing popularity of e-commerce giant Inc. (AMZN - Free Report) , and it’s reassuring to see these retail stalwarts address changing consumer preferences head-on.

Where Walmart failed, Target has the potential to succeed with its smaller format stores. Its consumer base is younger and wealthier, and there is a demand for the Target brand. On the other hand, Walmart has a stigma of embarrassment attached to it that it just can’t seem to shake, and it’s not surprising its Express stores couldn’t hit the mark.

Target will need to find the right balance between everyday essentials and high-margin merchandise in these small stores in order to turn a profit, as well as draw customers to a store location that has a more limited product selection than what they’re used to. The company is also modifying each store’s assortment based on feedback and sales performance, a sure way to guarantee Target is offering the right products at the right store.

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