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CityTarget: Will It Be a Bullseye?

After two years in the making, Target opened its first CityTarget stores Wednesday in Chicago, Los Angeles and Seattle. In October, two more CityTarget locations will open in Los Angeles and San Francisco.

City Target
Source: Target
City Target

More Americans, and their money, are leaving the suburbs for the city, and retailers like Target are reformatting the way business is done to try to tap into the potential demand as retailers move into market maturity.

The latest U.S. Census data reveals 80.7 percent of Americans live in urban areas, more than the 79 percent a decade ago. The populations of urban areas has also increased by more than 12 percent, faster than the rest of the country’s 9.7 percent growth rate from 2000 to 2010.

CityTargets are smaller, though not necessarily small. The stores average from 80,000 to 100,000 square feet, or about two-thirds the size of a typical Target store. The new CityTarget locations feature slimmer check-out lanes, smaller back-rooms for delivery and slightly different merchandise to best cater to the urban consumers Target hopes to capture. Even the delivery trucks themselves are smaller.

Big box competitor Wal-Mart also operates scaled-down stores in Chicago, although they are considerably smaller than the new CityTarget. While Wal-Mart hasn’t broken out the financial results of the its smaller format stores, analysts say the retailer seems pleased with the performance and plans on opening more.

However, Walmart Express stores in some cities like Chicago have had some growing pains, according to analysts. One example analysts point to is a mismatch of merchandise sold: Walmart Express stores didn’t have the prepared food options desired by urban consumers on the go.

(Related: Target or Wal-Mart? Pro Picks Favorite)

Best Buy has found success in its smaller format stores in malls and elsewhere, including Best Buy Mobile locations. However, most consider the consumer electronic retailer's move to a smaller format as more of a necessity to adapt rather than an opportunity to capture new consumers thanks to increased competition from e-commerce retailers like Amazon.com .

Target Senior Vice President Shawn Gensch told CNBC, “CityTargets will have the right products for urban guests and commuters. We may not have large patio sets and furniture in the store, rather bistro sets. … One of the great things about CityTarget is the ability to customize each location to each city we are in. … This is a way for us to bring that local, urban feel to tourists, urban residents and commuters that come through our stores.”

Morningstar retail analyst Michael Keara was at the new CityTarget in Chicago Wednesday and called the merchandise impressive. He said it is geared more towards a city-dweller and is considerate of a shopper on foot who will likely be carrying merchandise or riding public transportation. He said he saw products in the furniture section for organizing small spaces, a wider breadth of consumer electronics, and more natural food options.

Keara thinks grocers should feel the biggest competitive threat, thanks to CityTarget's food offerings.

“[Target] is another player using groceries to drive customer traffic," he said. "They aren’t looking to make money on the bananas they sell, they just want the [CityTarget] consumer to come in there and hopefully create traffic and buy some high-end home goods or apparel. Walmart did this in the 90s … and it really hurt the traditional grocery stores.”

However, Keara is also concerned about how successfully Target will be able to grow incremental sales at the new CityTarget stores, especially with other Target locations nearby. Target opened its first store in the Chicago area in 1993.

“How much are you cannibalizing your own sales? There’s a Target less than a mile down the road from the State Street CityTarget … I’m a shopper at that Target and I know I will be splitting my shopping basket between the two,” he said.

-By CNBC's Courtney Reagan

Questions? Comments? Email us at consumernation@cnbc.com. Follow Courtney Reagan on Twitter @CourtReagan.

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