The Container Store is reporting success in putting its brand into much smaller boxes, offering a possible case study along with other big-box retailers looking to shake up their brands.

Top executives say the initial results of a year-long plan to expand the Container Store's U.S. footprint with more compact format stores show the locations are luring new customers and exceeding sales expectations.

The Container Store's first small format store, which opened in September in Colorado Springs, Colorado, "continues to exceed our sales productivity expectations," President and CEO Satish Malhotra told investors during the Dallas-area company's third quarter fiscal 2022 earnings call.

The retailer is experiencing similar success at its smaller format store in New Salem, New Hampshire, which opened last month, with 70% of the customers walking into the store the first week being new to the Container Store brand, he added. Similarly, the Colorado Springs store saw an influx of new customers, with 58% of customers during the first week of opening being new to the brand.

The new small format stores "are definitely exceeding our expectations," Malhotra told investors. "It’s so encouraging to see that we’re tracking a lot of new customers. It just gives us a lot of confidence, as we think about the stores that we’re going to open for fiscal 2023."

The retailer's next new store is scheduled to open in Thousand Oaks, California, in early spring. In addition, executives at the Container Store say the company is on target to open an additional nine stores in the second half of fiscal 2023. The new stores, totaling about 12,500 square feet each, will open in new and existing key markets for the retailer, Malhotra said. The Container Store did not immediately respond to a request for the names of those markets.

Moving forward, Malhotra said the company expects each small format store to generate about $5 million in revenue per location, or about $400 per square foot in the first year. That goal seems to be achievable, based on data compiled by CoStar's national retail analyst last year, with specialty retailers seeing a sales per square foot of more than $500.

The retailer's smaller format stores are able to go into urban markets or fill spaces once too small for its stores that average about 25,000 square feet, luring new customers and showing them options without having to warehouse a wide variety of retail skews. Once in, customers can shop in the store and check out varieties online — making the shopping experience from in store to online seamless.

Smaller format stores have an advantage, with housing less inventory, paying less rent and needing fewer employees to operate the store, leading those in the industry to believe the future of big-box stores rest in their small format counterparts.

"It's a natural evolution for the big boxes to be more efficient in their physical space as they grow their e-commerce and we're seeing that with other retailers — not just the Container Store — where they want their stores to be a smaller format," said Alan Shor, co-founder and president of The Retail Connection, a Dallas-based retail real estate brokerage, who is familiar with the Container Store's business.

"Retailers also want it to be merchandised and laid out in a way that is more user friendly for people who order online and pick up in the stores or they want to return an online order to the store," Shor told CoStar News, adding the Container Store is also in a competitive retail segment where organizational wares can easily be bought online — making merchandising for the Container Store even more imperative.

And if a customer doesn't see exactly what they want, they can buy it in the store and have it shipped to their home.

"They are lowering their square footage cost, lower rents, lower occupancy costs, and they are doing it in a way where they don't sacrifice much in the way of sales and, in fact, increase sales," he added. "It's smart and a trend we have started to see pre-pandemic with the pandemic accelerating that thought process. I think it's a trend that will last."

The initiative is in its early stages, Shor said, with the data still being gathered on small format cost benefits. Other retailers, including Target, have reported early success in opening smaller format stores near colleges and targeting young professionals in urban cities. Even department store giant Macy's has big plans for small stores.

With today's consumer used to shopping online, it can offer retailers a chance to not only flex their in-store merchandising muscles, but e-commerce capabilities, Shor said.

"Physical retail is not going away, but great retailers have to execute at the store level and execute at the e-commerce level really well to grow," he added. "Those that don't are not long for the world."

The Container Store also rolled out its new mobile express checkout to all of its stores. But Shor is a bit more skeptical of the retailer's self-checkout program, calling it a "fad" for non-grocer retailers.

"Part of it is to reduce labor costs, but there's a certain pool of customers that don't want to go through that," he said. "They don't want to have to find the bar code, figure it out themselves and bag their items themselves. I'd be surprised if there was a real trend for retail to become all automated checkout. There's a large universe of customers that want the service."