Shopko aims to right-size the big box with its Hometown stores

This article was published in the July 2016 issue of STORES Magazine.

One of the most impactful retail trends in recent years has been the stress on many big-box chains. To survive in this brave new world, one company is shrinking the box.

Truth be told, Shopko has been squeezing the size of its stores for more than a decade.

“We haven’t opened a big-box store in 15 years,” says CEO Peter McMahon. The Green Bay, Wis.-based chain, with 363 stores in 24 states, is laser-targeting its growth with Shopko Hometown stores, small-town locations that are typically about one-third the size of big-box stores.

Hometown stores attempt to attract local business by offering an array of brand name products at prices that don’t break the bank.

“Our whole industry is seeing a reduction in big-box locations,” says McMahon, who joined Shopko in 2013 from Canadian retail giant Loblaw Companies, where he was chief operating officer. “Shopko’s future is extending into underserved markets with smaller box stores and fulfilling the needs of small-town America.”

For Shopko, it’s a carefully calculated strategy that the rest of the retail world is watching. Can a retailer whose very essence was wrapped in 100,000-square-foot stores chart a new path to success by operating 25,000- to 35,000-square-foot locations in rural areas that focus on name brands and product category expansion, and vastly change the customer experience?

“The rural population is grossly underserved by retailers, so we’re eager to bring Shopko to more communities.”

Peter McMahon,

‘Underserved’ markets

Shopko is betting heavily on smaller boxes. The company opened 53 Hometown stores in 2015 and already has opened a dozen more in 2016, with plans to open up to 40 Hometown stores annually.

Ultimately, McMahon says, there’s the potential for 2,000 additional Hometown stores across the United States.

“The rural population is grossly underserved by retailers,” he says, “so we’re eager to bring Shopko to more communities.” Many of these communities already have Family Dollar or Dollar General stores, or large Walmart locations within 30 or 50 miles.

One expert says Shopko Hometown faces serious headwinds.

The biggest problem is that only 17 percent of the U.S. population lives in rural areas, says Steven Platt, director of the Platt Retail Institute. What’s more, incomes are generally lower and poverty rates are higher in rural areas versus urban areas.

Yet Shopko, with sales that exceeded $3 billion in 2015, is convinced it can compete and grow as a serious rural player with Hometown stores. Most of its locations also have pharmacies and many have optical departments, but one of the biggest draws is the surprisingly wide selection of name brand merchandise.

Hometown offers Nike, Adidas and New Balance athletic shoes and apparel. It’s got Gloria Vanderbilt designer clothing, Sony electronics, Kitchen Aid appliances and Fisher-Price toys. These are the kinds of brands that many rural residents are accustomed to driving miles to find.

Hometown is a substantive change for the chain founded in 1962 by pharmacist James Ruben. He envisioned a large discount chain that also offered health care services; in 1971, Shopko was among the very first retailers to feature in-store pharmacies.

Now under the ownership of Sun Capital Partners, Shopko is trying to stretch the retail envelope even further, though McMahon says there are no plans to close any of its 131 big-box locations “in the foreseeable future.”

McMahon learned to appreciate retail early on, recalling how his family would spend the day window shopping when he was a young boy. The family of seven was of modest means, he says, “so we’d spend the whole day in the stores just looking.”

Decades later, McMahon has become a quick study of the retail habits of American consumers and domestic pop culture. After joining Shopko in late 2013, he led a restructuring that reduced overhead by 15 percent and drove 20 percent growth in the store base.

He also oversaw a complete overhaul of the chain’s e-commerce business. Last year Shopko launched a new branding strategy with the slogan: “Shopko, the stuff that counts.” Profitability has jumped 45 percent while McMahon has been at the helm.

His focus is spreading Shopko Hometown stores across the country. “Our target is small-town America — a market that’s remarkably underserved,” he says.

Giving ‘good value’

By giving small-town residents a store with a grocery, a full range of home improvement products, name brand apparel and small appliances and a pharmacy, McMahon says, “We’re like a mini department store.”

In fact, he says one of Hometown’s goals is to nudge local residents to think twice before jumping in the car and driving 50 or 60 miles round-trip to the nearest big-box competitor.

“We give our customers a broad range of consumables at competitive prices,” he says. “We’re not the cheapest, but we give good value.”

Product prices are driven by local market research. Hometown locations typically offer about 35,000 items; big-box Shopkos carry about 100,000. The e-commerce operation sells upwards of 150,000 items.

Hometown store managers are given a sizable budget for community involvement and try to purchase from local vendors.

Hometown stores tend to be a bit larger — and carry more items — than typical Dollar General or Family Dollar stores. What’s more, store managers are given a sizable budget for community involvement. Beyond local schools and charities, the stores also try to purchase from local vendors — including some locations that buy beer from local breweries.

More recently, the chain has given local managers more say in what products to order. The company learned that lesson the hard way, McMahon says, after a Hometown location in Andrews, Texas, received a large shipment of heavy winter garments that were utterly out of place in the warm climate.

“That was not the best merchandising situation,” he says.

The same customer loyalty program in place in Shopko stores has been extended to Hometown locations. The company has 7 million loyalty card holders, about 4 million of whom are frequent users.

More recently, Hometown has worked to embrace Millennial customers. The chain has a presence on Facebook and Pinterest; to boost interest among younger consumers, it doesn’t just invite the town council and mayor to the ribbon cutting when new stores open.

When a new store recently opened in Canadian, Texas, a small town not far from Amarillo, Shopko invited the cheerleaders from the local high school to perform. No surprise: Some players from the school football team showed up, too, along with their families.

Score one for the Hometown team.