Walmart Looking for Big Things from Small Format
Walmart is looking for the new Marketside small format store concept it is developing to eventually generate over $10 billion in annual sales from 1,000 to 1,500 locations around the U.S.
The retailer plans to open about 10 Marketside stores initially with the first four of the 15,000-square-foot units to open in the Phoenix market.
Walmart has moved to launch its new format in answer to Tesco’s rollout of its Fresh & Easy concept in the U.S. Walmart CEO Lee Scott said back in 2005 that one of the major advantages Tesco had over its Asda division was its convenience store format.
According to a Financial Times report, Tesco has opened more than 60 Fresh & Easy stores and has plans to have several hundred up and running over the next two years.
Other retailers including Safeway and Supervalu are also looking at opening small format grocery stores.
Discussion Questions: There are only so many groceries that can be bought. Which current format is most vulnerable to the emergence of small format grocery stores? Do you have a sense as to which of the large chains looking at small format grocery is most likely to be successful with the format and why?
The new small format food stores will re-confirm the retail saying of Location, Location and Location are key to success. The American shopper is looking more like a European by pantry loading once or twice a month and daily perishable shopping. That said, the large format supercenter/hypermarket may long term suffer due to the aging of America. As the Baby Boomers lose their drivers licenses, they will be unlikely to shop these stores. Any store out of the way of primary travel will be at risk.
Primary travel is to and from work or school. Should these smaller format stores also sell gasoline, the convenient stores are greatest at risk. Their current format is simply too small and prices are way too high to be competitive.
Anyone with a personal computer can e-mail a press release announcing plans for 1,000 stores across America. But after they open the first few dozen, their accounting software predicts their future. It tells them (Walmart, Tesco, Uniqlo) the rate of return on the investment. If it’s decent, they build more locations. If it stinks, they don’t. But they don’t recall the press releases.
Success in this emerging battle of formats will be determined by clarity of purpose. Which is it: Quality, convenience or low prices? The supply chain implications are vastly different if a consumer expects fresh, nutritious prepared meals or if it’s a fill-in stop between trips to the SuperStore. Bulk buying power provides a cost advantage, until you factor in the labor and transportation to break down pallet loads of goods to distribute to many small stores. Meals prepared in a central commissary may not seem fresh enough at point of sale, but preparing meals in-store imposes a costly labor model–not to mention equipment. Convenience means different things in different communities.
It’s equally important for retailers to decide what the brand is and what it isn’t.
I’ve long been a supporter of the concept of “small is the new big” and believe now as I did a year ago when commenting on the new Tesco operations, that these formats will gain favor among American shoppers and that Walmart would announce their format within a year.
It isn’t any news that Walmart is putting a lens to their category content and assortments. I have already seen changes and reductions in many categories and have noticed that they are cutting off seasonal replenishment earlier. All of which point to reduced inventory and faster turns.
Store sizes of 200,000 square feet are unnecessary in a time of reduced assortments and tighter inventories. Where once “stacking it high and watching it fly” were a common practice, fuel prices, as well as other inflationary economic changes are combining to impact disposable income. Reduced disposable income has a dramatic impact on consumption patterns within big retailers like Walmart.
More frequent shopping and smaller average purchases are likely to be more commonplace. Smaller stores, located in more densely populated areas, accessible through public transportation and providing affordable prices can serve this growing need.
I don’t anticipate nor predict the end of big box retailing, but I do believe that the growth in square footage in retail will be more heavily weighted to smaller footprint stores going forward.
The cool thing about Tesco (the best of the British multi-format concepts) in the UK is that they can leverage their powerful in-house brands across the formats. So they have the brand permission from the consumer to sell stuff like ready-meals and even meat in c-store format, even when there are Esso pumps out front. When Tesco F&E came to the US, they didn’t have that strong existing trust from the consumer, so they haven’t been able to reap the same benefits.
I see Safeway as a potential leader in this space in the US. Per the other discussion topic today, they are really building the brands and they have the consumer’s trust. I don’t know about Walmart…their offering will have to be price driven but that doesn’t tend to work well in small formats where you don’t have any scale at the unit-location level.
Wal-Mart’s fresh, prepared foods proposition with Marketside–to prepare the foods in-store in a kitchen, along with having seating for about 9-10 diners at a time–offers it the potential point of differentiation to be successful on a mass scale in the U.S.
Currently, we know that in terms of large-scale (stores in the hundreds or more) small-format grocery store chains in the U.S. there currently are three success stories: Aldi (about 900 stores), Sav-A-Lot (about 1,600 stores) and Trader Joe’s (about 300 stores and growing). There are very successful c-store/grocery hybrids like Wawa on the east coast, but my focus is on the more food and grocery-focused operations.
Tesco’s Fresh & Easy is too new–and its performance thus far too poor–to even categorize at this point.
In other words, two of the three examples of small-format groceries above–Aldi and Sav-A-Lot–are no frills discounters, while the other example–Trader Joe’s–is a specialty grocer with a focus on store brand specialty and natural products at discount prices.
The other small-format grocers–Safeway Marketside, Giant Eagle Express, Hy-Vee’s test store and others–are primarily taking a specialty focus.
Like Tesco with its Fresh & Easy, Safeway has taken the route making its fresh, prepared foods away from the store, with the exception of baking breads in-store using a wood burning hearth oven.
Now, by combining the unique proposition of in-store prepared foods–which is only unique because no mass small-format operator is doing it–with offering a selection of fresh meats and produce, basic groceries, and specialty and natural foods in the Marketside stores, Wal-Mart has the potential to match what Tesco and Safeway are doing–while retaining the unique on-store food prep and limited eating proposition.
This could be key. Execution is everything. If those Marketside in-store prepared foods don’t taste good and contain fairly healthy ingredients, it doesn’t matter if they are prepared fresh right in the store, or made in Bentonville, Arkansas and then delivered to the stores by Greyhound Bus.
But, my argument–execution being good–is this is where Wal-Mart can shine–and thrive competitively in the small-format world–with Marketside.
Also, don’t be fooled by suggestions that the Marketside stores will be pricey because they will have a more upscale focus than previously has been in Wal-Mart’s retailing DNA. They won’t be. Wal-mart is leveraging its supply chain expertise–including having new private label products that will be introduced in the stores when they open in the fall–and will be price competitive.
Tesco’s Fresh & Easy has great everyday retail prices on basic groceries and its fresh, prepared foods. But the fact is, its margins are seriously below the U.S. industry average across all categories. Its fresh foods shrink also is super high; that’s why the stores offer fresh foods marked down by 50% in its stores each day, for those not aware of this fact. Start-ups can do this for the first year or so–but margins must rise and shrink must be lowered–by serious factors at Tesco’s Fresh & Easy.
Wal-Mart will not have these problems because it has an established–not to mention the strongest–buying and supply chain in the U.S. This can not be underestimated.
It is no coincidence that so many established retailers are getting in on the small format. Just like Japanese lean manufacturing proved Detroit wrong, small format will also be an increasingly popular shock to the system. Big families moving to suburbia are no longer the gold mine they once were and have been replaced with a mix of demographic niches. Walmart won the war of big box retailers but the next champion will follow the advice of Wayne Gretzky and “Skate to where the puck is going, not to where it is.”
I think Walmart would be better off to build on their strength rather than attempt a new entry they really don’t understand–or have the patience for. They’re good at buying and logistics, so let someone else build the small stores and service them like a wholesaler. They’d then be more like Supervalu–with some of their own retail, some wholesale business…all purchased with the same efficiency and sold at a profit, without the incremental investment of small boxes. In most markets, they already drive right by the small format retailers they’d be looking to replace anyway.
Isn’t that basically SAM’s with delivery? Sounds like a perfect match to me.
The emergence of Walmart into the small format will drastically hurt the small chain stores still out there. It will also hurt the convenience stores that have expanded their offering from the traditional stop & go products. The small chains will find that they just can’t compete on price and execution through organizational structure.
Walmart will be successful because they understand retailing. They understand that logistics/supply chain is just as important as floor layout. You can’t sell it if it’s not on the shelf. They understand customer service and merchandising.
Walmart will succeed in the small format because Walmart has the buying power of Walmart. That’s not the case with other small grocery format stores.
The small format stores will be very dependent on location, even more so than larger stores. If Walmart gets the right locations with their buying power they will be very hard to stop. Small independents will be in big trouble. And, as has been stated, if they also have gas, it will dramatically effect C-stores also.
In my opinion, I don’t see the small format being successful. With Fresh & Easy having the biggest British failure in America since the Revolutionary War, I think this would send a message. Just what is a small format store anyway? Is it 10,000 square feet, 15,000 square feet, or 40,000 square feet? Aldi and Trader Joe’s have been successful because they are niche operators. Seems everyone thinks they can get $10,000,000 a year out of a tiny store if they just come up with the right program. Good luck.
Two main categories are very vulnerable to a small footprint supermarket with Walmart pricing. 1. Is the independent supermarket in rural settings? These retailers have not had to work as hard to compete as independents in urban and suburban areas. They probably cannot shift their business model fast enough to survive. 2. The c-store format is very vulnerable as Walmart can easily build pumps into any site plan. Walmart pricing could easily sound the death knell for many c-stores.
Once again, 50% or more of ALL supermarket shopping trips buy 5 or fewer items, with ONE being the most common number. Also, the typical household only buys 300-400 different items in an entire year, half of those on a regular basis, week after week, month after month.
If major retailers keep ignoring these hard FACTS, their lunches will be eaten by others. And those encouraging their losing ways should go hungry, too.
David Livingston is on to something. Tesco created a lot of excitement because it was Tesco coming to America, not because it had seen the future and the future was small formats. There will be some sporadic successes with downsized stores, but Kroger seems to be doing well with its decidedly un-small formats. Walmart knows a lot about consumers and retail locations in this country. If Marketside is very successful, then maybe we’ll have to revisit the “let’s get small” craze.
Let’s try another angle.
Don’t feel complacent & think, “At least WM isn’t competing against me.”
Aldi is successful in the US, but is it a successful grocer or a general retailer? Maybe its grocery format isn’t profitable, why else would Aldi stock & advertise electronics, software, clothes & other nongrocery items?
WM builds small stores and calls them grocery stores and/or convenience stores. It seems grocery & C-stores are mostly owned by big companies. So, the effect of WM’s small stores on locally-based—Mom & Pop stores would seem negligible? Fewer people will object to a big company competing with other big companies.
But WM refuses to specialize in any product categories. After the small stores are open, WM can be like Aldi and add other products. A few nongrocery items won’t seem like a threat; so what? No big deal!? Not so fast!
Soon WM’s small stores may compete with any retailer on a somewhat small basis. A few people–every day who would have gone to other stores–see what they want in a Neighborhood Market or a Marketside and buy those things from WM instead. Since they’re in that WM store anyway, they think they might as well buy other things they want/need.
What happens to other stores—big or small—that are struggling to survive. If they lose another 5% of their sales revenue, they’re no longer breaking even. They close down.
Maybe some of WM’s Neighborhood Markets & Marketsides won’t be profitable. Those will be closed too. By then the former owners of the other stores are struggling to pay their personal bills, plus the debts of their failed stores. Even with their nemesis gone, they can’t afford to reopen their stores.
Since WM experiments with various products–like upscale clothes, it needs some place to sell those products that aren’t moving in their big stores. Why not, put those products in the small stores—just to liquidate them or test responses of upscale shoppers?
The lesson: Big retailers don’t have to be highly successful to hurt small retailers. Big retailers can be spoilers–intended or not.
Having seen the indices of the performance of Fresh & Easy against targets, I’d love to know where David Livingston gets his data. It’s performance certainly is not, quote, a “failure”. Incidentally, I work for Tesco.
Walmart’s Marketside stores opened here in the Phoenix area this past weekend. Thought it was different and interesting.
Much different than a Fresh & Easy, definitely had the feel of more of a traditional grocery store–more like a mini-Safeway. The store had an open, yet somewhat upscale look. There was nearly a full produce department, reminded me again of a traditional grocery store. There was a full service deli area–featuring meats, salads, pizzas, and various gourmet items. (something F&E doesn’t have).
There was a lack of the private label items often found at Fresh & Easy though. Most of the rest of the store was a pared-down selection of national brands found anywhere at somewhat competitive prices. There were a few items under the Marketside label, but many of those were in the smaller prepared foods aisle. The prepared foods area was small however.
The check out area was all staffed, no self-checkout areas.
One major item: nothing in the store alluded to Walmart. One would never know unless they were familiar with the company.
Wal-Mart isn’t really looking at those numbers for Marketside. Of course it would love them. This started with the Financial Times reporting it because those numbers were briefly on the Marketside Web site. Trust me, the numbers aren’t in the Wal-Mart Marketside strategic plan. Again, they would love them…but then, who wouldn’t?
What most often made mistake is comparing Marketside with Tesco Fresh & Easy directly. Two different animals. Fresh & Easy is a single-play in the U.S. for Tesco. Marketside just a part of Wal-Mart’s multi-format strategy. It’s a niche format–fill-in, urban, etc.
Wal-Mart will roll out one or two more new formats next year–all part of this grand multi-format food and grocery retailing strategy.
Also, keep in mind that the huge new business Wal-Mart’s Supercenters are doing, especially in food and grocery, in the recession has influenced thinking about format-size once again in Bentonville. In just a year consumer grocery shopping behavior has really changes–more so then anytime I can recall in the last decade. Re: The flight to Wal-Mart in particular.
So, contrary to that report, Wal-Mart isn’t looking seriously for those numbers with Marketside. An interesting note is that Wal-Mart recently dropped its trademark application for Marketside in Canada because a mom and pop shop there uses the name on its neighborhood food store. No court battle, nothing. Wal-Mart dropped it after a couple letters from a lawyer for the couple who own the store.
It’s funny how one newspaper piece keeps coming back as if it is the truth.