Winn-Dixie's response was swift when Walmart announced in 2004 that it was bringing Supercenters to Cincinnati. The company closed its 21 local Thriftway supermarkets rather than wait for their inevitable demise courtesy of the Walton clan.
For most of the past five decades, bigger was indeed better for the big-box stores. Over the past 20 years, Walmart Supercenters, Super Targets and Big Ks sprang up across America, and none was better at big than Walmart. It devoured farms, fields and entire supermarket chains to build the megastores, which often assumed leading market shares—sometimes in as little as a year.
But, more recently, something happened as Walmart began saturating even more markets with its Supercenters. The model stopped working so well. And small has suddenly become beautiful -- or at least a lot more alluring -- for Walmart and other retailers. The big-box epoch may be winding down.
This year, Target will open a series of smaller-format, supermarket-size City Targets in an effort to expand into urban centers such as San Francisco, Seattle and New York.
Kohl's expansion plan has switched primarily to stores in the 60,000-square-foot range, down substantially from the 90,000 square feet typical in the past. Thirty of the 40 locations Kohl's opened last year were small-format, and "substantially, all [20 new] 2012 stores will be small," Chief Financial Officer Wesley McDonald said on a February earnings call.
Walmart, though continuing to build Supercenters, is also shifting its focus to smaller stores.
Last year, in an expansion of 9.6 million square feet, the retail giant added 119 Supercenters via new construction or remodeling smaller stores in the U.S., but only 27 small-format stores.
Walmart plans an expansion of 14 million to 15 million square feet this year, but that growth could come largely from 80 to 100 new small-format stores, mainly supermarket-size Neighborhood Markets, Walmart U.S. CEO Bill Simon said in a February earnings call.
"Supercenters remain the best format to capture market share," Mr. Simon said. "And we remain committed to growing through new Supercenters, as well as smaller formats."
But the reality is that Supercenters have stopped carrying their own massive weight, at least on the top line. In its fiscal fourth quarter, ended Jan. 31, Walmart U.S. had same-store sales growth of 1.5%—less than grocery inflation of 4%—and smaller stores helped sluggish overall comps.
"The Neighborhood Market format continues to deliver above-industry results, with approximately a 5% comp during the fourth quarter and positive traffic throughout the year," Mr. Simon said.
Translation: Smaller locations' same-store sales growth was more than three times Walmart U.S.'s overall figure. They also had positive traffic for the entire year, vs. only the fourth quarter for Walmart U.S.
Part of the story is product mix. Neighborhood Markets, mostly with food sales, benefited from food-price inflation. They also have little exposure to categories (such as apparel and electronics) that have been declining for Walmart. For example, same-store electronics sales had been dragged down by deflation rather than boosted by inflation.
But there are structural reasons that Walmart and others are moving away from megacenters and other large-format stores, according to Leon Nicholas, director of retail insights for Kantar Retail.
"The supercenter certainly is not the format of the future," Mr. Nicholas said. "Part of that is demographics, because you've got smaller families now with Generation Y who are more likely to live in urban areas and have more options to choose from. They can save time by shopping at smaller formats."
E-commerce is another major driver of megastores' decline.
"Online enables me to capture not only those long-tail kinds of stock-keeping items -- items I buy infrequently and the store doesn't need to have -- but also those replenishment items, like diapers," Mr. Nicholas said.
Besides stepping up its number of supermarket-size stores, Walmart is experimenting with smaller formats, including a 3,500-square-foot Walmart on Campus with a pharmacy and a basic assortment of food and personal-care items, in Fayetteville, Ark., near its Bentonville headquarters.
It is testing a somewhat larger alternative, Walmart Express, in 15 stores in Arkansas, North Carolina and Chicagoland. These stores carry a fairly wide range of food and household items, including such things as outdoor garbage cans, in a space 10,000 square feet to 15,000 square feet bigger than most dollar stores but less than a third the size of supermarkets.
Getting the assortment right in small stores may be a trial-and-error experience. "Trying to cram everything from a big box into a small box is not the way to go," Mr. Nicholas said. "It's a different shopping-trip mission, so it takes a different assortment."
Walmart and other big-box retailers must determine how to remove selection from stores at the same time as they use them as outposts to deliver a wider range of products online -- something that 's in the experimental stage, according to Mr. Nicholas. He also sees potential in the U.S. for an approach that Tesco has tried in South Korean subways, creating virtual store shelves in two-dimensional physical spaces to facilitate mobile orders.
Their huge footprints mean megastores will be around for years, probably decades, "but they're not going to be a source of growth," Mr. Nicholas said. He expects to see an increasing amount of their space converted to service offerings.
While smaller stores are widely viewed as a way for traditional big-box retailers to further penetrate urban markets, they also have possibilities elsewhere.
Walmart appears to be getting decent traffic at such stores in smaller towns in northwest Arkansas, an area already heavy with Supercenters, and in rural towns too small to support the big boxes that are 10 miles to 15 miles away from them.
But don't count out big retail entirely, even in urban areas. One of Target 's three Brooklyn stores is among the chain's biggest -- 225,000 square feet on two levels. Target 's Harlem store is smaller but, at 174,000 square feet, still of megastore proportions. Even the smaller "City Target " format is twice as big as many supermarkets -- 85,000 to 89,000 square feet in San Francisco and in Portland, Ore., respectively.
A Target spokeswoman said lessons have been learned from New York, where stores have walk-in rather than drive-in traffic and serve a population far denser than a typical suburban Target . They include stocking shelves wider and deeper with smaller sizes of everyday necessities, and making departments such as automotive and outdoor merchandise smaller -- but not necessarily making stores small.