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Rona, other retailers thinking outside the big-box

Rona is closing or downsizing 23 big-box stores, most of them in the highly competitive Ontario market.

Chris Young for The Globe and Mail/chris young The Globe and Mail

A tough economy and the burgeoning popularity of online shopping are starting to shrink the number of big-box stores.

Home improvement retailer Rona Inc.'s decision on Thursday to shift to smaller stores from big-box outlets – closing 10 of the underperforming large stores altogether, downsizing 13 others and adding 25 smaller shops – reflects a wider move among retailers: They're rethinking the big-box store as they race to squeeze more business into fewer aisles.

The changes are driven partly by a gradual shift of retailing to the Web, a trend that is expected to speed up over the coming years and force retailers to look even more at reducing their store size. The transformation is also being spurred by a rocky recovery, rising global competition and sluggish sales, compelling retailers to look for ways to offset higher real estate costs.

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"In order to be leaner and more profitable … the retailer is doing everything he can to get as much as he can out of fewer dollars being spent," said Chuck Lanyard, president of the Goldstein Group, a retail brokerage firm in Paramus, N.J. "There are a lot of Internet sales that can pick up the slack."

Shifting shopping patterns, cautious consumers, higher gas prices and fewer shopping trips are prompting retailers to reconsider adding more big boxes. Rona's research found that its customers prefer smaller shops that are closer to their homes and provide more contact with store staff. Now retailers ranging from Wal-Mart Canada Corp. to Canadian Tire Corp. and Staples Inc. are counting on smaller stores to draw customers.

The big-box store "is not the right concept for the future," Robert Dutton, chief executive officer of Rona, said on an analyst conference call, signalling what he said was a consensus among CEOs of major home improvement retailers whom he met with recently. "So that is the reason why we don't expect to build [more]big box stores. … Now the customers demand something different."

For Rona, the retooling is aimed at easing the pain of deteriorating financial results as the retailer feels the competitive pressures of savvy U.S. rivals and a tight-fisted consumer. Rona is taking a $181.3-million hit in restructuring costs over two years, including $71.3-million in 2011. In its fourth quarter, it posted a loss of $150-million, or $1.19 a share, compared with a profit of $21.3-million, or 15 cents, a year earlier. Revenues rose to $1.17-billion from $1.14-billion.

Now Rona is closing or downsizing 23 big-box stores – most of them in the highly competitive Ontario market – while at the same time converting the shrunken stores to a new "proximity" prototype that is 30 to 50 per cent smaller. Ultimately, it will be left with about 60 big box stores.

As well, it will add 15 new proximity stores and 10 even smaller outlets. It will also convert 20 of its Totem stores in Alberta to the "proximity" prototype.

The economics suggest that the smaller stores yield healthier financial returns than the big boxes. Its current "proximity" outlets generate 30 per cent higher sales per square foot and 30 per cent higher purchase amounts than at its big-box stores, said Luc Rodier, an executive vice-president at Rona.

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Staples has rolled out stores that are about two-thirds the size of its standard outlet over the past five years in a bid to serve bantam-sized towns. Now, the office supplies retailer is testing three even smaller stores – less than half its traditional size – for even smaller towns, said Steve Matyas, chief executive officer at Staples Canada.

He expects that in five years, Staples will have to start downsizing its stores as more customers shift to e-commerce, reducing the need for physical stores.

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