Wal-Mart Supercenters are shopping malls unto themselves. In addition to their grocery, toy, apparel, sporting goods, jewelry, pet, and other departments, they also include photomats, barber shops, wireless phone shops and even Taco Bells or KFCs conveniently located inside. So why would a shopper waste time making separate trips to the grocery store, the toy store, the shoe store, etc.?

To give shoppers a reason to spend more and stay away from the supercenter, competing retailers are joining forces, locating stores within stores and creating their own one-stop shopping venues. KB Toys and FAO Schwarz, for example, are installing toy departments in grocery stores, drug stores and department stores. Even Payless Shoe Source is getting in on the trend, putting small boutiques in supermarkets.

“Retailers are looking for ways to differentiate themselves and build customer loyalty. It's extremely hard to out Wal-Mart Wal-Mart on price,” says Lois Huff, senior vice president at Retail Forward, a consulting firm and industry watchdog. “So, they're bringing in better management of a product and brand expertise. It's a win-win for everyone,” she continues, adding that the primary store is able to move to a more compelling offering of quality products or services than it previously stocked and in-store retailers are able to reach a broader market on a frequent basis.

Yves Mizrahi, senior director of CB Richard Ellis' Retail Division in Seattle and former marketing director for Starbucks, agrees. “The key to success in expanding the product mix is bringing a leader in the field that already has a brand recognized as best of class for products that aren't your best calling card. Otherwise, it can have a punitive effect.”

This idea is being applied both as stores-within-stores and as exclusive and/or seasonal relationships with vendors to provide quality products and services that enhance the customer experience and provide one-stop shopping convenience.

Mi Casa Es Su Casa

Last month, Marshall Fields — a division of Target Corp. — announced the addition of a variety of innovative in-store shops at its flagship State Street store in downtown Chicago, including: The Coca-Cola Shop, a 415-square-foot soda shop designed around retro and contemporary images of this classic American brand; a 1,048-square-foot Bally Total Fitness shop, offering Bally smoothies and shakes, nutritional supplements, fitness apparel, accessories and home-exercise equipment; a 553-square-foot Crunch Fitness shop, offering funky-flavor smoothies created just for Marshall Fields customers and Crunch-branded fitness apparel, accessories and workout videos; and a 560-square-foot Aprilia USA boutique, featuring Aprilia scooters, apparel and accessories.

Standing out from the crowd is a key strategy for Saks Department Store Group (SDSG), according to Julia Bentley, SDSG vice president of investor relations. “Our differentiation strategy involves growing our proprietary brands,” she says, noting that private brands will represent about 15 percent of sales in 2003, up from 12 percent last year, and total sales from private brands, unique and emerging vendors, and exclusive products will be nearly 30 percent of total revenue generated this year, up from 17 percent two years ago. Some of the latest additions include a Club Libby Lu, a specialty retailer focused on fashions for the “tween” crowd that SDSG acquired last May; Paint the Town nail spas; and FAO Schwarz toy boutiques or small holiday shops in the majority of its department stores.

And Albertsons recently forged relationships with Office Depot and Toys R Us to offer customers an array of quality office and school supplies and children's gift items. Albertsons is testing Office Depot aisles in 18 stores in the Chicago, Phoenix and Los Angeles markets. But the grocer is taking a gangbuster approach to the toy market. In an effort to increase its market share of this $20-billion-a-year industry, Albertsons is rolling out the Toys R Us brand under a store-within-a-store concept called Toy Box in 2,300 Albertsons food and drugstores in 31 states, including Jewel-Osco, Acme, Albertsons-Osco, Albertsons-Sav-on, Sav-on Drugs, Osco Drug, Super Saver and flagship brand Albertsons.

CVS Inc. last year signed on KB Toys as the exclusive toy supplier for its 4,000 drugstores nationwide, and Safeway began putting holiday displays of KB Toys in most of its 1,700 supermarkets, including Carrs, Genuardi's, Pavilions, Tom Thumb, Vons, Dominick's, Pik'n Save Foods, and Randalls markets.

Sears also has an agreement with KB Toys to expand its shops at Sears from 77 stores during the 2002 holiday season to 600 stores this year. Additionally, Saks Inc. will have temporary FAO Schwarz toy stores in both its tony Saks Fifth Avenue stores and moderate-priced chains such as Profitt's. Minneapolis-based Creative Kidstuff has also opened shops in 21 Marshall Fields stores. Huff notes that these temporary relationships are interesting because the brand operators get another growth outlet, while the landlords retain flexibility to free up space after the holidays for other seasonal items and are not stuck with leftover toy inventory.

Elsewhere, Federated Department Stores Inc. is installing 1,500-square-foot, in-store LensCrafters boutiques in five stores, including Bon-Macy's in Tacoma, Wash.; Macy's West stores in Scottsdale, Ariz. and Sacramento and Concord, Calif.; and Burdines-Macy's in Ft. Meyers, Fla. The new boutiques will offer a high-end collection of designer optical products created exclusively for Macy's customers. Federated spokesperson Jean Coggan says, “This is a natural fit with our stores, and we will be analyzing the results to decide if we're going to expand further.” Additionally, Federated is installing kiosks in 41 stores to offer American Greetings' upscale Winking Moon Press line of cards.

Smaller retailers also are realizing the growth potential of adding store-within-a-store units. Borders Group subsidiaries Borders and Waldenbooks stores, have signed agreements with FAO Inc. to test the concept of FAO-operated stores in up to 25 Borders and 12 Waldens locations. FAO will offer collections of toy, educational and developmental products under the Zany Brainy and FAO Schwarz brands.

Texas-based grocery chain H-E-B has taken the store-within-a-store concept a step further, creating a shopping center within its new 78,000-square-foot Laredo, Tex., supermarket. The center includes five shop spaces, two of which are leased to Payless Shoes and the remaining spaces to Fred Loya's Insurance, Verizon Wireless and La Casa Hogarena, a retailer specializing in soft goods for the home imported from Mexico.

Noting that the concept was introduced in the firm's Mexico store, Debbie Lindsay Opel, H-E-B director of public affairs, says, “We decided to give it a shot here, and we've been very pleased with the outcome. Our customers have responded very well — they appreciate the convenience factor,” she adds, noting that H-E-B plans to expand the concept at its other stores and is looking for national vendors who may want to participate.

Stores-within-stores also provide low-risk opportunities for retailers to test new markets. Wanting to put a toe in U.S. waters before funding a major expansion, British health and beauty chain Boots signed a deal with Target and CVS last month to open boutiques within 32 of the two retailers' locations in Denver and on the East Coast. Boots says the results of this “very low-risk, low-capital model” will determine the company's U.S. strategy.

Putting It Together

While retailers are reluctant to reveal details of financial deals with in-store retailers, some did disclose basic operational information on these arrangements. Bentley notes that Saks is leasing space to FAO, which operates the toy boutiques and owns the inventory. Sears and Safeway, on the other hand, have a vendor relationship with KB Toys. According to Sears spokesperson Cory Crutt, Sears operates its KB toy department, which is staffed by Sears employees.

Safeway's Greg TenEych, public affairs director in the firm's eastern division, points out that all in-store specialty sections, except for bank tenants, are operated by Safeway and manned by Safeway employees. “We are always seeking ways to make shopping at Safeway a convenient, pleasant experience,” TenEych says, noting that some Safeway stores have added fuel centers, drycleaners, one-hour photo centers and have expanded the selection of small appliances and other non-grocery items. “We don't employ a cutter approach,” says Marshall Field's spokesperson Jennifer McNamara. “We have a variety of agreements with outside companies.”

Huff considers the store-within-a-store concept an excellent strategic move “to get customers to cross over to your site.” But she cautions retailers to stick with products that are a good fit with their core businesses.

“The product has to make sense from the customer's perspective, be conducive with the shoppers' mindset of what they were going there for,” she says, noting that moving from “shut up toys” to Toys R Us makes sense, because people are more likely to buy quality toys for gifts in a grocery store, than toys in the “throw-away category.”

Likewise, toys in a bookstore are a good fit, because “bookstores have a nice children's section, and customers are there already looking for gifts.”

Mizrahi agrees: “Products must coincide with your focus. Coffee, cards, books all go together. Wherever there's a convenience factor for the customer, it can happen.”

However, he points out, “I don't know how much further grocers can go in bringing in branded goods, because there's only so much shelf space.”

BRINGING IN A SPECIALIST

PROBLEM:

Wal-Mart Supercenters' unbeatably low prices and wide variety of products are drawing shoppers away from traditional retailers in droves. Grocery stores, department stores and drug stores can't slash their prices as much as Wal-Mart, so how do they keep their customers?

SOLUTION:

Retailers recruit other retailers to set up specialty shops within their stores, creating a more compelling breadth of quality products and services. The in-store shops provide a broader market on a more frequent basis for their parent retailers.

BUZZ:

The trend started as a seasonal toy experiment, but successful in-store tests are leading to year-round deals.

DATA:

KB Toys specialty shops now inhabit 2,300 Albertsons stores, 4,000 CVS stores, 1,700 Safeway supermarkets and 600 Sears stores. Toys R Us, FAO Schwarz, LensCrafters, Payless Show Source and more are following suit.