What: US department stores are reducing their size to face competition and remain relevant.

Why it is important: Basics of retail remain the same: location primes over store size.

In the U.S., the average store size is at its smallest in 17 years, a trend driven by the rise of e-commerce and a shift away from large department stores and big-box retailers. In the first three quarters of 2023, retailers signed leases averaging 3,200 square feet, the smallest since 2006. This change reflects a greater focus on experience and food and beverage outlets, with these types of companies signing nearly one-fifth of all retail leases, typically targeting spaces under 5,000 square feet.

Despite the shift to smaller stores, demand for retail space remains strong, with a low national vacancy rate of 4.8%. Retailers are adapting by using data analytics to tailor their inventory and infrastructure for local markets, enabling them to occupy smaller spaces, particularly in open-air shopping centres. Some fashion and luxury retailers, however, are expanding their store footprints.

As online shopping grows, representing about 15% of all retail sales, less store space is needed for basic commodities. Instead, service and experience-based businesses like nail salons, coffee shops, and yoga studios are filling retail spaces. The cookie company Crumbl, for instance, has opened over 900 small stores since 2017. Traditional apparel and big-box retailers are also downsizing their physical presence, with companies like Macy's focusing on smaller-format stores and closing larger department stores.

The closure of many big-box retailers and minimal new retail construction have contributed to low vacancy rates and rising rents. To cope with higher rent costs, retailers, including Crumbl, are opting for smaller, more profitable store formats. This trend signifies a significant shift in the retail landscape over the past decade.

The American store is shrinking