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Go Big or Go Home: How Menards is Bucking the Trend of Store Downsizing in the US

In April 2013, Home Improvement retailer Menards Inc plans to open new stores in St. Peters, Missouri and O’Fallon, Illinois – both of which are in the St. Louis area. The unique feature of these new stores is their incredible size, with each outlet expected to surpass more than 18,500 square metres of shopping space.  For reference, the average outlet size of leading Home Improvement retailers Home Depot and Lowe’s were only 10,500 and 9,800 square metres, respectively, in 2012. In fact, even Walmart Supercenter – the hypermarket viewed as the epitome of a large-format retailer – averaged an outlet size of only 17,000 square metres in 2012.

These are not the first mega-stores that Menards Inc has opened. In 2011, the company reopened a store in Eden Prairie, Minnesota that measured over 21,800 square metres and stocked a range of grocery, healthcare, jewellery, toys, and apparel products. The company followed in 2012 by introducing a mammoth store in Golden Valley, Minnesota that topped 23,200 square metres.

Interestingly, Menards has launched these new mega-stores at a time when most other retailers have been aggressively scaling down. Internet retailers like Amazon.com Inc, which do not face the costs of running a retail store network, can typically undercut most store-based retailers on price. As internet retailing continues its rapid growth, therefore, most store-based retailers have sought to cut costs by reducing the size of their stores. For this reason, while value sales across all store-based retailers in the US grew 3.9% between 2007 and 2012, total selling space declined 6.5%. Retailers like Wal-Mart Stores Inc and Best Buy Co Inc, for instance, have increased their emphasis on smaller-format outlets like Walmart Express, Walmart Market, and Best Buy Mobile stores.

Menards’s new mega-outlets, therefore, have proven to be somewhat of an anomaly to broader trends in US retailing. In fact, while the total Home Improvement and Gardening Stores channel saw value sales grow 1% between 2010 and 2012, these new mega-outlets helped Menards increase its sales nearly 12% during the same period. The question, therefore, is what factors have allowed Menards to launch such large outlets at a time when most other retailers are downsizing their stores?

The secret to Menards’s success lies in its geographic footprint. Unlike competitors Home Depot and Lowe’s which are nationwide, Menards’s retail footprint is entirely limited to Midwestern states, with its strongest presence in its home state of Wisconsin and neighboring states like Minnesota, Illinois, Michigan, and Indiana (see map below). In fact, while Menards Inc held a value share of less than 3% nationally in the Home Improvement and Gardening Stores channel, the company’s value share in the Midwest reached nearly 12% in 2012. The company cites its strong ties with “Midwestern values” as a central component of its success in the region. It believes that by treating its customers like they are in a hometown hardware store, it can retain their loyalty and drive return trips.

MenardsStoresbyState

While there probably is a cultural factor to Menards’s success in the Midwest, the true secret to the growth of its new mega-stores lies in the geography of the region. The Midwest features a low population density and is a largely agricultural region with the country’s highest percentage of people living in rural areas. In this environment, real estate prices remain relatively low, which makes it feasible to build giant stores. At the same time, the sprawling nature of the region leads most consumers to drive a car to their destinations. This combination of a strong car culture and low real estate prices helps large-format retailers thrive in the region. Midwestern consumers are both willing and able to stock up at big box retailers that offer low prices and a vast range of products in one convenient location.  Hypermarkets, for example, have been wildly successful in the Midwest, with per capita value sales far above all other regions in 2012. With a geographic landscape seemingly designed for large-format retailers, therefore, the success of Menards’s new mega-outlets in the Midwest becomes much clearer.

The landscape of the Midwest also generates strong demand for home improvement products. In this rural region, consumers regularly invest in tools, fertilizer, lawn mowers, and other products to care for their homes, lawns, and gardens. This demand is much higher than in largely urban areas, where people living in condominiums or rented apartments often do not have a yard or garden to maintain. For this reason, per capita spending across the Home Improvement and Gardening Stores channel is higher in the Midwest than in any other region. This demand is a perfect fit for Menards’s specialty products.

The continued growth of Menards stores larger than 18,500 square metres, therefore, can be largely attributed to the company’s strong presence in Midwestern states, as the unique geographic features of this region allow large-format retailers to thrive and generate strong demand for home improvement products. For this reason, it is remains unlikely that Menards will expand this retail model to other regions in the near future. On the largely urbanized and densely-populated coasts, for instance, high-priced real estate, space limitations, and lower demand for home improvement and gardening products makes the prospect of a massive new Menards store highly unlikely.

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