Wharton's Peter Fader and Syracuse's Amanda Nicholson discuss recent moves by Target and Amazon.

The retail business is witnessing two potentially game-changing strategies: Retail chain Target is opening smaller stores in urban locations to attract younger customers, betting big on that “flexible-format,” as is apparent from a Manhattan store opening announcement in October. Also diversifying its mix is online retailer Amazon, which plans to expand its grocery business with convenience stores and curbside pickups, according to an October 12 Wall Street Journal report.

Target’s move could turn out to be a brainwave that attracts more than just millennials living in urban America, according to Wharton marketing professor Peter Fader. The smaller stores could also occasionally send those same customers to larger Target locations in suburban malls for larger shipping trips, and attract suburbanites who work in cities to drop by the downtown Targets on their drive back home, he says.

Amazon’s convenience-store strategy could pay off if the e-commerce giant could leverage its technology and supply chain to extract significant profit margins, says Amanda Nicholson, professor of retail practice at Syracuse University’s Whitman School of Management. “Eventually [Amazon] is going to find their Waterloo, going a step too far, but in the process it is going to change how grocery retailing works, whether this latest effort is successful or not,” adds Fader.

Fader and Nicholson discussed the latest retailing strategies of Target and Amazon on the Knowledge at Wharton show on Wharton Business Radio on SiriusXM channel 111. (Listen to the podcast at the top of this page.)

“To have people seeing the big red circles (Target’s logo) everywhere is one very effective way to crowd out people from automatically buying everything from Amazon.”–Peter Fader

Here are five key takeaways from their discussion:

The More Red Bullseyes, the Better: A bigger footprint for Target by expanding with smaller-format stores makes its brand ubiquitous, says Fader. That in itself would increase the company’s sales volumes as it will stay on top of people’s minds, he adds. Target is trying to defend its turf against competitors like Amazon “in a great way, not only to have an interesting variety of merchandise available, but to have that share of mind,” he notes. “To have people seeing [Target’s logo] everywhere is one very effective way to crowd out people from automatically buying everything from Amazon.” Nicholson adds that while Walmart’s move to open smaller stores didn’t fare well, Target is better positioned to explore that strategy, and that it has done well with some of its existing smaller-format stores.

Against the Grain? Nicholson explains why it makes sense for Target to expand at a time when many large chains are closing stores. “Many of them, like Macy’s, are closing down stores … partly because they are underperforming and the real estate is not in the right places,” she says.

Target is also “a different breed” than Walmart and Amazon, says Nicholson. “Walmart is based on low cost and has done an incredible job with that; Amazon is based on technology in the consumer’s mind. Target is focused on … cheap chic. They understand how to pull in things at an incredible value that have a sense of design and look.”

Nicholson notes that Target also understands millennials’ needs well. “They’re here on their way home; they can pick up some dinner and they can pick up that lamp that is well-designed and well-priced, and take the elevator up to their apartments,” she says.

Risks and Lessons: Learning from Walmart’s experience with smaller stores would be useful for Target, says Fader. “It’s not just a matter of ‘If we build it, they will come’; there can be issues with brand fit and overall corporate fit to run a different kind of operation,” he adds. He also notes that smaller stores are more expensive to operate with heavier overhead costs. While Fader has no doubt that Target will see an uptick in purchasing with smaller urban stores, his big question is: “Is it going to be enough of an uptick to justify all the additional expenditure?”

Target is also learning with the smaller formats, trying out different merchandise assortments from its larger stores and different retailing approaches, says Fader. “They will learn what works and what doesn’t.” Adds Nicholson: “Retailers can get complacent when they get into one model and it works; they keep repeating it. The whole genius of doing things is to figure out a way to change the format and update it to appeal to new generations of shoppers.”

“The local convenience store has one dead lettuce, three old apples and a banana. We have never done this well.”–Amanda Nicholson

Merchandizing Is Critical: The trick for Target to make its new stores viable is to stock the right merchandise, says Nicholson. “Merchandizing these small stores and making them individualized to the local Target market in the urban areas they go to will be critical,” she points out. Fader agrees: “If they are good at customizing the product selection for the geography they are in or the buyers who live around it, they can be very successful, instead of the usual one-size-fits-all approach that all others have tried,” he says.

Both Feet in Two Worlds: Amazon is also targeting a bigger market share among younger customers by pushing both its online channels and its convenience stores, says Nicholson. “Generation Z and millennials always use both channels,” she adds. “It’s very important for brands to have physical locations rather than solely sell online.” She also notes that grocery retailing needs innovation. “The local convenience store has one dead head of lettuce, three old apples and a banana. We have never done this [type of retail] well,” she says. “I have to go to a supermarket.”

Amazon’s plans in grocery retailing “changes the retail landscape for the better of everyone except for the deeply entrenched legacy players,” says Fader. “It’s better for the consumers and in the long run it is better for the retailers as well. They’re just teaching an entirely new rulebook with it.” He expects to see changes in not just store locations or merchandise, but also in how retailers gather price information, use it and change price levels.