Maybe it's different in Europe, but at least in Australia you end up paying more at smaller shops, so I tend to avoid them. Is this the case in Europe as well?
That probably depends on the country and what you mean by small. Smaller shops/supermarkets in Denmark tend to be cheaper, because they are run mostly as discount brands, while the larger stores a premium brands and have the more expensive options.
However, Danish supermarkets are generally kept small by regulation, meaning that there are very few supermarket that could be considered big by international standards.
For a first world country, Germany has ridiculously low food prices. These are found at the chain supermarkets (Aldi, Lidl, etc.). They tend to be small by American big box standards (perhaps 1000sqm, so maybe 3x the size of a bodega). There's a lot of these supermarkets everywhere in the country, most people can easily come across them during usual daily trips.
Yes shops in dense urban areas are overall more expensive but there are discount stores like Lidl too. For higher quality products the difference is marginal (if you can even find an equivalent in a big suburban store). Having experienced both, my feeling is that it evens out if you account for the running cost of a car used often or delivery.
I would think the sensitivity to this would depend a lot on family size. Shopping for just myself... it doesn't matter much. Shopping for a family of 4 would be very different.
In my country and city the small shops are largely stocked from buying the same things from larger shops combined with their own resupplying network. So you can either walk 100m to the corner shop, pay couple dozen % extra or walk 500m to the nearest Lidl or similar and save on basically the same products.
