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The Great Retail Shrinkage: Will Smaller Stores = Higher Profits?

(Retail shrinkage article updated with Staples small-format plans.)

NEW YORK ( TheStreet) -- You can supersize soft drinks, French fries and giant rolls of paper towels, but the era of supersized stores may be coming to an end.

Indeed, after decades of big-box stores that housed everything from food to clothing and appliances, retailers are realizing bigger might not be better.

Looking for ways to cut costs amid the recession, retailers tightened inventory levels, slashed jobs and shuttered stores. Now as the consumer slowly returns, the sector continues to seek ways to squeeze the most profits out of its business.

The surge in online shopping is also pushing retailers to shift a chunk of their brick-and-mortar business to the Internet and to reduce overhead costs. In these smaller spaces, retailers need fewer workers and building costs tend to be cheaper.

While for some this model might prove fruitful, getting smaller isn't the answer to all retailers' problems. If consumers are unwilling to shop or if a retailer doesn't have the right merchandise, it doesn't matter how small the package gets.

Despite some likely benefits, our conclusion is that shrinking is not a winning strategy," Nomura analyst Aram Rubinson wrote in a note. "In our view, the solution to a discerning customer and the e-commerce threat is great merchandising."

Given this, here's a look at retailers shrinking their footprint in the hopes of driving profits....
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