MP3s are quite compressed, meaning a lot of data is thrown away in an effort to have smaller files. The quality of audio is sacrificed quite a bit though.

Lossless formats retain as much data as possible as to not impact the sound quality, but at the expense of larger files. The OP says "smaller" because that's in comparison to the raw uncompressed sound data stream. But they are larger than MP3s because MP3 is a lossy format.

File size used to matter a lot in the past when digital music players first came out. My first player had 128 MB storage, for example. At 3-5 MB per song that would fill up quickly. Nowadays larger storage of portable devices is more ubiquitous, with even the cheapest phones sportiing 32-64 GB, and more. So people prefer audio quality and don't care as much if each song takes up more space.