Does the American Shopping Mall Have a Second Life? Retailers have to customize the experience

Changes to how shopping center’s function in the future is coming to a mall near you. Aivars Lode Avantce

Here's how to have a good time at the local shopping mall," a reviewer called Bunny E. posted on Yelp this past February. "Load the 'Dawn of the Dead’ soundtrack on your MP3 player and go to the mall between 7-8 a.m. (before they even turn on all the lights). Hit play and immerse yourself in a post-apocalyptic nightmare world. And get some great exercise to boot!"

The shopping center Bunny E. reviewed is the massive, 1.5 million-square-foot, nearly empty Cincinnati Mall, in the northern suburbs of Ohio's third largest city. It is one of hundreds of dead or dying indoor malls that dot the American landscape. Moms and dads who fondly remember teen years spent flirting at the mall now bring their kids to watch bulldozers flatten the dated buildings. Ironically, some of these zombie shopping malls have more nostalgic followers on Facebook and blogs like Deadmalls.com than they have actual shoppers.

Blame the recession, Amazon and unimaginative retailers. Offline stores are scrambling for "progressively smaller pieces of the retail pie as e-commerce relentlessly gains share in many categories," says Jeff Jordan, general partner at venture capital firm Andreessen Horowitz. Circuit City, Borders, CompUSA, Tower Records and Blockbuster all folded their tents, and many others are showing signs of serious economic distress, he points out. "The mall and shopping center stalwarts are closing stores by the thousands, and there are few large physical chains opening stores to take their place."

Some malls, however, are fighting back, using social media and inventive combinations of retail and community outlets. Doctors' offices, clinics, churches, indoor sports fields, grassy parks and even schools are filling up big chunks of retail space and attracting potential shoppers. What’s more, just when you thought it was a goner, the traditional shopping mall format is surfacing in some unexpected places (think airport security). The trend reflects consumers’ growing interest in blending recreation, education and other activities with the brick-and-mortar shopping experience, say experts.

Shoppers clearly still care about the fate of these spaces. When the 45-year-old, 32-acre Miracle City Mall in Titusville, Fla., closed in February, a local organization with deep Facebook connections wooed developers with a rally in its sprawling parking lot. The Greater Titusville Renaissance committee was hoping for several hundred supporters-cum-shoppers—about 3,000 showed up, along with high school marching bands and food trucks. Some supporters carried signs that read, "If you come, we will shop." Tentative plans for a new Miracle City Towne Center include five large stores (the old mall had two anchor stores), smaller shops and offices facing a small park and a tiled outdoor walkway. The new mall might also include doctors' offices, an urgent-care clinic and restaurants, says Robin Fisher, Brevard County commissioner and point person on the redevelopment.

Social media has been crucial in driving the project forward. "Looking at our demographics doesn't tell the whole story. We needed the developer to understand the community’s [hunger] for a nearby place to shop," explains Fisher, adding that Facebook helped get residents connected to the developers. By April, a development partnership based in Columbus, Ohio, was attempting to buy the old mall and line up tenants for the new open-air center. Demolition has been set to begin by the end of this year.

In the past, shopping malls were always set up more for developers than retailers, says David Ginsburg, CEO of Downtown Cincinnati Inc., a business development nonprofit. His organization is helping push redevelopment plans for another dead Cincinnati mall, Tower Place, which shuttered in February. The city bought the property in foreclosure and is negotiating with a developer to turn it into a parking structure with stores at the street level. The old mall parking garage would be replaced with a 30-story residential tower, more parking and a supermarket, says Jeff McElravy, senior development officer at City of Cincinnati.

"We need to learn the lesson from the empty malls and make our new shopping centers adaptable for what residents will need in the future," Ginsburg says. For now, brick-and-mortar stores will probably become a small part of community mixed-use malls, he adds.

Not everyone agrees. Mixed-use shopping hubs are a pipe dream, argues Don Wood, CEO of Federal Realty Investment Trust, which owns more than 80 shopping centers around the country. He says the towns around failed malls are not dense or high-income enough to support mixed-use projects. In addition, the projects are costly to build and require that developers have a wide range of experience in retail, office and residential, which is rare.

Not Dead Yet
From a brand and marketing perspective, the mall situation seems far more hopeful. The reinvented mall is merely in need of its own brand identity, featuring activities like ice skating and bowling plus retail stores carrying unique private label products, says Raj Kumar, partner in the retail practice of consultancy A.T. Kearney. "We know cookie-cutter, middle-of-the road shopping environments don't cut it anymore," he says.

Stores making a home in these hubs will also have to change their way of doing business. "Customers need to feel at home in the retail space such as they do at outfitter REI, which offers products, staff, décor and advice tied to outdoor activities," explains Kumar. "Retailers also have to customize the buying experience to make you feel special—such as Lowe's, which keeps a database of your purchases to help you shop." The winners in the space will be specialty stores with robust websites that can respond quickly to a very specific target audience, Kumar predicts.

The National Retail Federation's 2012 Shopper Experience study supports that. Four out of five purchases are still made in physical stores, according to the study, but shoppers are more demanding.

"Armed with tools to access data at any moment, they are poised to buy and expect retailers to be ready for them," the study points out. To keep customers coming back, it advises, retailers must recast stores as places for discovery and interaction with products, where employees assist in the decision-making process and shoppers enjoy instant gratification.

Also encouraging is research from Piper Jaffray which shows that teens prefer to shop in-store, especially for clothing. A study released in April indicates that about three-quarters of teens would rather shop in-store than online. Paradoxically, it also shows that a majority of teens are doing much of their shopping online. The upshot: There's a ripe opportunity for savvy mall retailers to snag those texting teens.

But they still have a ways to go.

"No one is ready to abandon the mall concept entirely," says Peter Breen, managing director at the Path to Purchase Institute. "But the big national chains haven't devoted much capital to any major real estate transformations. The emphasis for most of these dinosaurs has been on opening digital channels, with the logic that if you can’t coax the shoppers out to the mall anymore, then go find them at home."

Mall mainstay JCPenney has become a veritable poster child for the shopping center's struggle to adapt. The company last month replaced CEO Ron Johnson with his predecessor, Mike Ullman, after Johnson’s ambitious turnaround efforts—no coupons, stores within a store—harpooned sales. Survival, rather than innovation, seems to be the chain’s current strategy.

In the meantime, the hulking, 25-year-old Cincinnati Mall is holding on by its fingernails, with three-quarters of the space sitting empty. The owner hopes to sell about 15 percent of the retail space for a youth sports complex, but government red tape is slowing down the deal.

Meanwhile, the facility was rebranded in late February as the Forest Fair Village. Kohl's, Burlington Coat Factory and Bass Pro Shop Outdoor World have kept their doors open, with Bass continuing to offer in-store classes and outdoor-themed activities along with hunting and fishing gear. "We don’t call ourselves a mall anymore," says Karla Ellsworth, general manager of Forest Fair. "We are transforming into an indoor family activity and shopping center. It will be a place where parents can browse for clothes or shoes while their children are taking hockey or gymnastics classes."

Shop the Friendly Skies
Traditional malls may be dying in suburbia, but the mall concept is booming in the nation's largest airports, where an audience trapped behind security gates is looking for diversions. Air travelers are increasingly enticed by malls jammed with high-end retailers selling perfume, cosmetics, clothes, technology, wine and books.

Examples abound. This year, Los Angeles International Airport's new Bradley West International Terminal will add more than 60 food and luxury retail stores, including Michael Kors and Fred Segal. Dallas-Fort Worth International Airport recently increased space for retailers and concessions in Terminal A by 50 percent, with new upscale offerings including Geppetto’s toy store and wine bar Vino Volo. Over the next three years, Denver International Airport will completely overhaul its food, beverage and retail space, adding stores and updating existing ones.

Stacy Moore, a food retail strategist, says airport malls have become so popular that travelers have been known to go to the airport early so they'll have time to explore the shopping promenade before a flight. Those retailers with the most success, she says, sell clothing, gifts, food or beverages that are unique, fun and tied to the local area. Wine shops with tasting counters are also big, as are Best Buy electronics kiosks and Life is Good gift shops.

Impressed with the sales trends, Moore opened her own shop that sells specialty food inside a new shopping mall at Boston's Logan International Airport. Since Terminal C has become more populated with retailers, Moore reports a 30 percent sales bump for items like gluten-free sandwiches and packs of local chocolates and roasted nuts.

What, if anything, can zombie malls learn from these buzzing airport shopping hubs? Echoing the findings of the NRF, Moore says they demonstrate that consumers will still go to a physical shopping space but only if it lets them gain some specialized knowledge and have new experiences.

"Even in an airport, shoppers will walk right by a chain store with products and displays they can see anywhere," says Moore. "If you are a mall, your only hope is in targeting the right customer behavior." 

STREAMING DIGITAL MUSIC ROYALTIES TOP RADIO REVENUES FOR FIRST TIME IN U.K.

Music supply chain disrupted by the internet and streaming. Aivars Lode Avantce

Royalties earned from digital music services in the U.K. have beaten licensing revenues from radio broadcasts for the first time, the nation's Performing Rights Society has revealed.

New agreements with Google Play, Microsoft Xbox, and new entities like Spotify have contributed to a 32.2% growth in digital income compared to 2012. This means that digital music sources like iTunes, online streaming services, and the like are likely the main national source of recurring income for British music acts, since the PRS notes these revenues have also surpassed those earned from live performances. International licensing, thanks to the potentially greater market size, still dwarfs national licensing.

The digital music streaming game is exploding right now, underscored by Facebook's recent moves to more prominently integrate services like Spotify and Rdio into its users' timelines. But Spotify's expansion from its U.K. home was famously held up for years due to inflexibility in the U.S. record industry. Apple itself, the king of digital music downloads, struggled with U.S. labels for years, and has still to launch its own fully streaming music service.

Wal-Mart outlines its e-commerce priorities

Internet sales becoming even more dominant and changing the methods of delivery. Aivars Lode Avantce

International expansion, a new technology platform and an improved fulfillment network are top e-commerce priorities for Wal-Mart Stores Inc., the retailer outlined at the Bank of America Merrill Lynch 2013 Consumer & Retailer Conference.

Wal-Mart, No. 4 in the Internet Retailer Top 500 guide, expects to generate $9 billion in global e-commercerevenue in its current fiscal year, ending Jan. 31, 2014. In February, Wal-Mart’s Neil Ashe, president and CEO of global e-commerce, said e-commerce revenue growth was “accelerating and ahead of our plans.”

In 2011, Wal-Mart’s U.S. e-commerce sales totaled an Internet Retailer-estimated $4.9 billion, up nearly 20% from $4.1 billion the prior year. In comparison, Amazon.com Inc., No. 1 in the Top 500, had $48.08 billion in sales.

In 2012, Wal-Mart raised its stake to 51% in Yihaodian, a China-based e-retailer that sells more than 180,000 products. The deal gives Wal-Mart “a very strong foothold in the markets that can only be matched by the U.S. in terms of potential,” Holley said.“We’ve got three clear priorities for e-commerce, and the first is to penetrate and expand in key markets,” Charles M. Holley Jr., executive vice president and chief financial officer said last week at the Bank of America event. “We have a very solid foundation of e-commerce in the United States and United Kingdom. We have a new and exciting platform of growth in China, and we have a very fast-growing business in Brazil.” Sales were healthy in Brazil last year, he said, with expectations for the same this year. He did not disclose sales figures for Brazil.

Another priority is to develop Pangaea, Wal-Mart’s global technology platform, Holley said. He provided no details about Pangaea. Wal-Mart will continue to invest in other e-commerce technologies and in mobile commerce, he said. It has been testing self-checkout in its stores for shoppers using its Scan & Go iPhone app. And in August it debuted a new search tool for its own web sites, dubbed Polaris, developed by its research lab @WalMartLabs.

The retailer’s other e-commerce priority is to improve its fulfillment network, primarily in the United States. Wal-Mart is still testing same-day delivery, Holley said. The test only is in four cities now. If it expands, Wal-Mart has 4,000 stores that could serve as direct-to-consumer fulfillment centers, he said. “We need to make sure we leverage those stores,” he said.

Wal-Mart knows it has some catching up to its e-commerce competitors to do, Holley said. “We also know that we have not been good at the technology part of this, but we’re catching up quickly with our search engine and how we market on the Internet. We have a lot of work to do to make sure we’re efficient and getting the products to the customers, but we feel like that we have the tools to go do that.”

Digital Disruption

Even in the field of investment advice the supply chain is being disrupted: Aivars Lode Avantce

By Andrew Osterland

January 20, 2013 12:01 am ET

Internet-based advisory firms aren't much of a concern for most traditional fee-based financial advisers.

But they are for Ric Edelman.

The chief executive of The Edelman Financial Group, which manages more than $9 billion in assets, thinks that technology platforms offering financial advice could become the preferred option for younger Americans who eventually will inherit trillions of dollars from their baby boomer parents.

Equally scary is the possibility that as the digital platforms improve, they will attract more high-net-worth clients who sustain the thousands of fee-based advisers across the country.

Research from consulting firms such as Cerulli Associates Inc. suggests that wealthier investors already have diverted a significant amount of assets to low-cost, self-directed accounts since the financial crisis.

The proliferation of online investment services firms has been staggering.

Two years ago,

Grant Easterbrook, an analyst with consulting firm Corporate Insight, reported on five online startup firms offering different levels of investment management or financial planning services. His latest assessment covers 37 such outfits.

“The services these firms provide range from investment advice based on algorithms to low-cost online financial advisers focused on either investment selection or financial planning. Their fees are cut-rate,” Mr. Easterbrook said.

While few online outfits manage more than $100 million in assets, and most serve small investors who aren't very profitable for traditional advisers, Mr. Edelman believes the technology they use will have a profound impact on his practice and the entire advisory industry.

WHO IS BEING SERVED?

“This is the direction the world is moving, and we're at the beginning stages of it,” Mr. Edelman said. “Technological advances in the next three to five years will have a radical, disruptive impact on financial advice and how it's delivered.”

Attracted by a relatively low $50,000 client minimum, so-called mass-affluent investors have been advisory clients of Mr. Edelman's for a long time. On Jan. 7, however, he opened his doors to all comers, lowering his firm's investible assets threshold to just $5,000.

His plan is to deliver his services to these low-end customers via a revamped Edelman Online platform he says offers the firm's investment management services without human intervention, though all clients will have access to an adviser if they wish.

Mr. Edelman calls it a long-term loyalty program. “When these customers earn more money and receive their inheritances, they'll give it to me to manage,” he said.

Many of his peers think he's wasting his time and money targeting less affluent investors, but Bill Winterberg, founder of FPPad, a technology consulting firm for financial advisers, thinks it's worth the risk.

In fact, firms that don't prepare for the change run the bigger risk, Mr. Winterberg said. “Those who choose not to serve up-and-coming clients will miss the opportunity.”

Conventional wisdom, however, suggests the opportunity isn't much to miss. Numerous studies of lower-asset advisory clients indicate that they rarely evolve into bigger, wealthier ones. Bank of America Merrill Lynch research showed that the asset levels of 92% of small clients remained about the same after a two-year period. The company cited the findings when it announced early last year that it was reducing payouts to advisers on clients with under $250,000 in assets.

Wirehouses as a group continue to push advisers to shed smaller clients, but they're not ignoring them entirely. Merrill Lynch, for example, wants to serve clients with less than $250,000 — but on its Internet-based Merrill Edge platform, which had $75.9 billion in assets as of Sept. 30.

The optimistic view of low-cost tech offerings is that they are simply expanding the market for financial advice, reaching customers not currently served. A Society of Actuaries study in 2009 found that there were 14.9 million households in what they term the middle mass market between the ages of 55 and 74. With median net worth ranging from $111,000 to $348,000 depending on age and marital status, most of these pre-retirees and early retirees are not receiving financial advice, according to Betty Meredith, director of education and research for the International Foundation for Retirement Education.

Jude Boudreaux, a financial adviser whose company, Upperline Financial Planning Inc., has no minimum asset threshold for clients, believes the growth of online advice platforms is positive for the industry.

“We need more ways for non-high-net-worth people to access professional advice and technology,” Mr. Boudreaux said. “I don't think it's a danger to the industry. Technology will never replace what a true financial planner does.”

The more ominous possibility is that technology could undermine the economics of the advice industry just as discount brokers did to the brokerage industry and exchange-traded funds are doing to the asset management industry.

The marketing message of these online upstarts is easy enough to understand. “We're for the mass- affluent investor and anyone else smart enough not to want to spend 2% of their assets on a financial adviser,” said Jonathan Stein, chief executive of Betterment LLC. Mr. Stein's firm, founded in 2011, serves investors online and charges as little as 15 basis points.

It asks customers a series of questions and recommends simple portfolios of stocks and bonds, depending on the answers. The portfolios can be automatically re-balanced for a little extra. The company doesn't offer tax and estate planning or insurance, nor does it advise on philanthropic activities or the like — largely because most of Betterment's clients don't have those challenges.

"ROBO-ADVISERS'

That's not financial planning, said Michael Kitces, partner and director of research at Pinnacle Advisory Group Inc. He calls firms such as Betterment and FutureAdviser “robo-advisers” and doesn't consider them a threat to true financial planners.

“They do what Vanguard and Schwab do. They're just $2 trillion in assets behind them,” he said.

He sees a more substantial challenge from companies such as Personal Capital, a firm led by former Intuit CEO Bill Harris, and Learnvest, a website initially catering to women that offers financial plans for a flat fee but doesn't manage money. Both firms have increasingly elegant analytical tools and have hired dozens of certified financial planners.

“Financial planning done badly will be under siege by firms like these,” Mr. Kitces said. “If you only deliver passive portfolio design and management to your clients, these business models will take you down.”

Folks are lining up around the block to lose money

The numbers say it all commerce is here to stay! Aivars lode Avantce

Folks are lining up around the block to lose money Saturday, February 2, 2013

There are times to be bullish, and there are times to be cautious (or even bearish). And just about nobody ever gets them right. For example, in early 2009, after the market plunged more than 50% from its 2007 highs, nobody was bullish – even though it was the perfect moment to buy. And if investors knew that they should become more bullish as stock prices fell and less bullish as they rose, we could have avoided a situation like we faced in 2009, when the S&P 500 traded for 13 times earnings. The stock market went up almost 20% in 2009. It's gone up every year since, including last year's 13% rise. So folks now are bullish, with the American Association of Individual Investors Sentiment Survey showing 52% of respondents bullish on stocks for the next six months. Historically, anything above 50% is getting into extreme territory. Less than 19% were bullish the week ending March 5, 2009, the day before the S&P 500 officially bottomed. The mistake is obvious. The herd thinks whatever just happened will happen again soon. It's called "recency bias." It assumes the most recent data is the most important data. In the stock market, recency bias is closely aligned with availability bias. That's when you think the most readily available data is the most important data. Price quotes are the most readily available data about public companies. So putting our two biases together, the most recent price-quote history is irresistible to the vast, thundering herd of investors. And now, after four years of stock market gains, all anyone can see in the rearview mirror is a rising market… so that's the overwhelmingly popular expectation. Everyone wants to buy. Everyone wants to take more risk. "Junk" bond yields dipped below 6% for the first time in history this month. (Earlier this week, Steve Sjuggerud – one of the best contrarians I know – told DailyWealth readers that it's time to sell junk bonds.) I'm not delusional enough to try to call a top in the market. To believe that is to remain under the spell of recent price quotes. I'm just saying if all you know is price quotes – and that's all most investors know – you're going to lose money… and from the looks of things today, it looks like folks are lined up around the block to lose money in stocks once again.  One of the biggest trends in the market today is the decimation of brick-and-mortar retailers by e-commerce. Arguably the most visible bankruptcy resulting from this trend is book retailer Borders. Electronics retailer Circuit City also shuttered in large part due to Internet competition. Circuit City's main rival, Best Buy, is also hemorrhaging sales and clients… And the company's founder is considering taking the company private.  If you had to pick one company that's done the most to hasten the demise of brick-and-mortar retailers… it would be the world's largest online retailer, Amazon. Take a look at this chart of Amazon's sales versus the sales for the Morgan Stanley Retail Index (an index of 31 national retailers).

Barnes and Noble's hardest lesson: It pays to be small

The internet continues to change the face of retailing. Aivars Lode Avantce

Barnes and Noble's hardest lesson: It pays to be small

By Nin-Hai Tseng, Writer January 29, 2013: 3:33 PM ET

Barnes & Noble has struggled to keep up with the growth of digital books, but that's not the only hurdle it faces. We just want stores to be smaller now.

FORTUNE -- Barnes & Noble expects to close up to a third of its retail book stores over the next decade, The Wall Street Journal reported Monday. The closures seem inevitable. Like other retailers, the chain has struggled in a digital world, where readers increasingly turned to e-books and online discounts. Its savior is arguably its Nook products, but sales during the holiday season fell from a year earlier amid competition from the likes of Amazon,Apple, and Google.

Indeed, it's hard to run a bookstore in the Internet age, but new technology is only part of Barnes & Noble's (BKS) problems. Its stores simply got too big in a nation that increasingly prefers things -- well, smaller.

Since the financial crisis, Americans have warmed to smaller sizes in everything from cars to homes. Even massive Wal-Mart stores (WMT) have downsized. In 1962, the world's biggest retailer opened discount stores averaging 108,000 square feet, says Ed McMahon, senior fellow at the Urban Land Institute. By 1988, Wal-Mart unveiled its Supercenters, averaging 185,000 square feet. But a decade later it opened its Neighborhood markets, which, at an average of 42,000 square feet, was more than two times smaller than its Supercenters. The chain went even smaller in 2011, with its Express stores averaging 15,000 square feet.

The big box trend coincided with what many other retailers did as America's middle class left cities for the suburbs. Between 1960 and 2000, retail space rose ten fold -- growing from 4 to 38 square feet per person, McMahon says. Retail space grew five times faster than retail sales. The financial crisis put an abrupt end to that expansion. There is now more than 1 billion square feet of vacant retail space, mostly where big box retailers once did business.

MORE: Time for Samsung's next act

Beyond Wal-Mart, going small is being driven by several factors - some related, others unrelated: People are getting married later; U.S. cities are growing faster than suburbs for the first time in decades; the remaining suburbs, filled with sleepy strip commercial centers, are being turned into walkable urban places.

Of course, the Internet has played a big role in shrinking physical stores as well. Just as superstores put many local stores out of business, online shopping is hurting big box retailers, McMahon says.

But some local stores that managed to stick around are now thriving again. This is perhaps most evident in the market for books. In the years where big-box chains saw bankruptcies and store closures, the number of independents have generally stayed steady during the past few years. The American Booksellers Association, a trade organization that supports independents says that since the depths of the Great Recession, it has had roughly the same number of members -- 1,524 in 2008 to 1,567 in 2012. Stores did indeed close during those years with few if any new openings, but in 2009, new ones sprung up. Last year, 40 opened nationwide.

That's far fewer than Barnes & Noble, which until 2009 opened 30 or more a year. But the fact that any indie stores are opening at a time when big-box chains are closing says a lot about being small and local.

This isn't to say independents haven't struggled. In November 2011, best-selling novelist Anne Patchett opened Parnassus Books in her hometown, Nashville, TN. When a local bookstore closed and the area lost another one due to the Borders bankruptcy, Patchett partnered with Karen Hayes, a native who left her job in sales at Random House. The closings left a void in the area that's also home to Vanderbilt University, a literary community.

Parnassus filled it, but not all communities may be lucky enough to have an Anne Patchett around.

Office Depot debuts 'interactive' store, as merger rumors boosts stock

Brick and mortar business continue to have to transforn themselves due to the internets continued  business model disruption. Aivars Lode Avantce

Office Depot debuts 'interactive' store, as merger rumors boosts stock

By Marcia Heroux Pounds, Staff Writer

6:07 p.m. EST, February 8, 2013

Savvy customers sip on coffee while surrounded by the latest gadgets. They surf the Internet on laptops or tablets, check out some new headphones or ponder their next electronic purchases in a soothing, relaxed manner.

Office Depot's new "interactive'' stores are a little Apple-like, a little Starbucks-like. The stores still will sell basic office supplies and provide copy and print services for small businesses, but now it comes with a twist, a bit of modernization and hip as the company gets away from its old big-box mentality.

The new versions are already in six states and will be rolled out in Florida and elsewhere later this year as the office-supply giant trends toward smaller-format stores.

"We're looking at drawing traffic and new customers," said Juan Guerrero, senior vice president of Office Depot's North American retail division. The store is trying to attract the 18- to 35-year-old population — not the typical Office Depot shopper. Most current customers are small-business owners or mothers shopping for school supplies for their kids.

Office Depot's latest retail concept caps more than two years of initiatives to turn around the company in a difficult economic environment. The initial phase, introduced in 2011, was to reduce store sizes. The average 23,000-square-foot store is being reduced to units more like 5,000 to 15,000 square feet.

Ads by Google

• Penny Stock of the DayFree Penny Stock Pick Email alerts. Click here to sign up! www.DailyPennyStocks.com

The idea is to attract new customers and inject some excitement into Office Depot stores, which customer surveys revealed were "somewhat clinical and cold," Guerrero said.

While some analysts cast doubt on a younger demographic shopping at Office Depot, most say the smaller-store strategy is beginning to work.

Major stockholder Starboard Value LP could force a bolder move, a merger with rival OfficeMax. The industry is ripe for consolidation, with both retailers smaller than Staples, which leads in sales and profitability, analysts say.

Starboard Value, an activist shareholder that holds nearly 15 percent of Office Depot's stock, may seek seats on the company's board this spring at the company's annual meeting. Speculation of industry consolidation pumped some life into the stock, now over $4 a share, though still down nearly 70 percent from five years ago.

"If Office Depot can turn things around, [Starboard Value] is going to be happy. If that doesn't happen, they may have to do an OfficeMax deal," said Anthony Chukumba, analyst with BB&T Capital Markets.

Starboard has retained former Home Depot CEO Bob Nardelli and former Staples executive Joe Vassalluzzo as consultants, according to a securities filing.

When comparing the rival office-supply stores, "Office Depot is clearly ahead of OfficeMax in terms of small-format stores," said Chukumba, whose firm buys and sells both stocks.

Office Depot already is investing more than $60 million a year reducing its store count, with plans to downsize or relocate 500 stores — nearly half its U.S. outlets over the next five years.

OfficeMax also plans to debut a new, smaller store format this spring, comparable in size to the Office Depot transformations, said Nicole Miller, spokeswoman for the Naperville, Ill.,-based retailer.

"The goal is to focus on innovation and roll it out gradually," she said.

But a merger?

OfficeMax "has a long-standing policy that we do not comment on market rumors or speculation," Miller said.

Morningstar analyst Liang Feng said while Starboard may seek a seat on Office Depot's board, the power still rests with BC Partners, which holds three seats whose directors are contractually obligated to vote with Office Depot management. In 2009, Office Depot sold a 20 percent stake in the company for a $350 million investment.

Chief Executive Neil Austrian has said the company's strategies to shrink stores and increase profits are paying off. Austrian was not available to address recent company issues or plans, spokesman Brian Levine said.

Office supplies continue to be a tough sector. Office Depot's sales decreased 5 percent in its latest quarter, compared to same period in 2011. And during an investor presentation in November, Office Depot forecasts annual sales to be down by 3 percent in 2013, down 1 percent in 2014, and flat in 2015.

If Office Depot and OfficeMax did merge, they would face significant costs. BB&T estimates the companies would have to spend $300 million to $500 million to close 200 North American stores.

Yet savings from a merger also could be significant, according to Goldman Sachs, with lower costs for purchasing and distribution, advertising, and general and administrative expenses.

Another hurdle would be the Justice Department, which could have antitrust concerns.

If a merger is proposed, it would go before the federal official who once denied Staples' proposed acquisition of Office Depot. Former Federal Trade Commission official William Baer was recently confirmed to head the U.S. Justice Department's antitrust division.