Wal-Mart's Fill-in Strategy
Big-box pioneer thinks small with Walmart Express.
Capital is not the question.
If Wal-Mart wanted to expand, it could hit the button and move like fire ants. Question is, will Walmart Express be its answer?
In a move to stem sluggish sales and regain ground claimed by dollar stores and other niche segments during the country’s three-year economic malaise, the originator of the big box is thinking small—something in the neighborhood of 15,000 square feet. Not only will Wal-Mart’s strategy “fi ll in” both rural and urban areas that couldn’t support a Supercenter, but it also takes a swipe at what many convenience retailers hold dear: the fi ll-in trip.
“It would be a direct threat,” says Robin Sherk, senior analyst with research fi rm Kantar Retail, Cambridge, Mass. “When you’re out of eggs or soup or you’re thinking what’s for dinner tonight or you need some headache medicine. ... This is the fi ll-in, what you do between trips to the grocery store or stock-up trips.”
Another potential threat exists with immediate consumables, says Craig Johnson, president of Customer Growth Partners, a retail-trends consulting and research company based in New Canaan, Conn. “The key area is food items, including the ‘buy now, eat now,’ ” he says. “The immediate-consumption market is the key battleground.”
Here’s a rundown of what’s planned:
30 to 40 new small-format locations this year, which in addition to Walmart Express includes Walmart Neighborhood Markets, its 42,000-square-foot version of a supermarket/drug store. (See sidebar, right.) At press time, the fi rst two Walmart Express locations had opened in Arkansas, one in the town of Gentry and the other in Prairie Grove, with announced plans for another in Ridgefi eld N.C., and several in Chicago. The larger goal: “hundreds,” with some reports saying 350 per year.
11,000 to 13,000 SKUs. A mix of food, appliances, clothing and health and beauty care (HBC) items, with a “strong emphasis on groceries as well as a more limited selection of general merchandise,” says a Wal-Mart spokesperson. Pharmacies at most locations.
Gasoline at only a small percentage of stores.
Pick-up site for Internet purchases. Through its “site-tostore” program, people ordering items from Wal-Mart’s broader range of goods online can use the stores as pick-up points.
Financial services, such as check cashing and the acceptance of food stamps.
Building in so-called “food deserts.” Wal-Mart offi cials speak of the Express stores as also targeting communities that because of distance or economic hardship have no options for staples or healthy food. But if Chicago is any indicator, not all the stores reportedly planned are in economically disadvantaged communities.
The format will evolve over time, says Steven Restivo, senior director of community affairs for Wal-Mart Stores Inc., Bentonville, Ark. “As we open and operate Walmart Express stores, we will continue to evaluate the merchandise mix to ensure that those offerings address specifi c needs in the community,” he tells CSP magazine in an email interview.
Most analysts see the true competitive targets as drug chains and dollar stores, with Sherk of Kantar narrowing that down to urban drug stores and rural dollar stores. But c-store retailers are wary. “Every store that’s built around a location is a potential competitor,” says Rob Razowsky, owner of Rmarts in the Chicago suburb of Deerfi eld, Ill. “Walgreens, for example, does compete on the front end, and recently they have added liquor and have become aggressive on tobacco pricing.”
What C-Stores do Better
If Walmart Express proves to be a successful endeavor, it could have a far-reaching effect on certain markets.
Jim Fisher, founder and president of IMST Corp., Houston, says the radius of concern in suburban areas would be 5 to 7 miles, or a 6- to 8-minute drive. For core urban markets, everything shrinks, with compactness and density changing those parameters.
But Fisher adamantly believes c-store retailers have nothing to fear from Walmart Express. The reasons people stop at a c-store are completely different, he says. “This concept will have virtually no impact on members of this industry,” he says. “It will have an impact on the supermarkets, drug stores, dollar stores and similar retail offerings.”
As Razowsky of Rmarts weighs the potential threat of a Walmart Express, he also believes c-stores differentiate themselves with their in-and-out setup, convenient hours of operation, limited SKUs, ease of shopping, fuel and car washes. He does not believe at this point that any of his Chicago-area locations fall into Wal-Mart’s zone of competition.
Others believe c-stores have an infrastructure advantage. Johnson of Customer Growth Partners says c-stores already have the corner locations necessary to stand their ground. In addition, Wal-Mart would also need to purchase property, with much of it in the hands of local developers keen on preserving the viability of their neighborhood merchant base, he says. Put another way, welcoming Walmart Express in some markets could mean waving goodbye to many local shops.
On the distribution side, Wal-Mart’s historic advantage may not bear out with its Express concept. As an industry, c-stores have built a solid distribution model rooted in supporting small boxes.
“[Wal-Mart’s] supply chain is used to setting up and servicing a 190,000-square-foot Supercenter,” Johnson says. Not everyone buys into this thinking. Fisher of IMST holds logistics to be one of Wal-Mart’s fortes. The supercenter can act as the “mothership” that feeds the smaller Express stores. He says it may have to resize its trucks to operate in urban areas, but “if anyone can create a distribution system, it’s Wal-Mart; they’re the crown jewels of [logistics].”
Pressure to grow is incumbent on any company, especially public ones. But lower sales volumes and traffic at Walmart Supercenters, coupled with a 4% sales increase and higher traffic counts at the 42,000-square-foot Neighborhood Markets, are prompting the company push to smaller.
Supercenters can also be problematic, according to Steve Montgomery, president of b2b Solutions, Lake Forest, Ill. They require massive overhead, not to mention the space. “If they want to continue to grow in the U.S. at the rate it has been, [the company] needs to look at alternative formats,” he says. “Going into the cities, you’ve got land cost, zoning issues, availability. … [All that] will not permit a supercenter. So it’s a good format to penetrate that market.”
In many cities—Chicago among them—Wal-Mart has been unable to secure zoning for its Supercenters, with residents fearful that such behemoths will vanquish their local Main Streets. And as Chicago demonstrates, the smaller format has been the entrée into these neighborhoods, with reports indicating larger formats are now being planned within city limits.
With Wal-Mart being a public company, the Express strategy also shows innovation and a desire to grow. “It may even have more of a psychological impact than financial as far as the investor community goes,” Montgomery says. “But large-format companies have not always been able to demonstrate success at running a smaller footprint.” With Wal-Mart’s Restivo and other executives indicating that food deserts are a prime location for these stores, the demographics involved also lead Fisher to question Wal-Mart’s ability to succeed. He says the target groups are lower-income, and heavily skewed toward younger and older ages, higher level of ethnicity and heavy food stamps use (or whatever government program might apply). Wal-Mart will have to zone in on this demographic and make money on the business that comes in.
Razowsky of Rmarts is also skeptical about how Wal-Mart will make the economics work. “Food deserts have some serious social and economic issues associated within the community, like high crime, low per capita income, lack of traditional family units and education, to name a few,” he says. “So I suspect that they will also be challenged to spend capital in many of those areas, as have others.”
Last year, first lady Michelle Obama took on the cause of addressing food deserts, called “nutritional wastelands that exist across America in both urban and rural communities,” according to White House press material. These are areas “where parents and children simply do not have access to a supermarket. Some 23.5 million Americans—including 6.5 million children—currently live in food deserts.”
Coming from a rural perspective, Brian Johnson, vice president of finance for Casey’s General Stores, Ankeny, Iowa, is also suspect of Wal-Mart’s ROI. At 15,000 square feet, “that’s a pretty large building to put into a town of 2,500 people and make a return,” he says. “If they do come into our area, we’ll treat them like any other competition. And if we had a store next door or in the same market, we would monitor pricing to make sure [we stay] competitive.”
One respected c-store chain, however, sides with Wal-Mart at least on one point: the value of the inner city. Tedeschi Food Stores, Rockland, Mass., recently opened an urban, 4,000-square-foot prototype store that’s heavily into foodservice, featuring fresh produce, meal solutions and an in-store butcher.
“There’s an underserved market that’s huge in our urban centers, and most retailers now are vying for that business,” says Joseph Hamza, vice president of sales and marketing for Tedeschi. If he had to go up against an Express store, he says, “We have to have our own game plan. You can’t compete on the same product mix with Wal-Mart. You have to have a unique concept.”
Besides a customer-service focus, Tedeschi’s strengths include a fresh-food identity with an in-and-out environment, along with the brand equity built from delivering on Tedeschi’s “superette” roots. He points to the company’s proprietary brands, the Tedeschi Select line of salty snacks, candy and carbonated beverages, and the TD’s Deli sandwiches, salads, parfaits and other menu options. “We’ve created these lines based on proprietary ingredients, and they make us different when it comes to product offering,” Hamza says. Still, Wal-Mart’s ultimate goal, by many accounts, is to expand its reach through more nimble, faster-to-build concepts, with food deserts only part of the story. According to Razowsky, Wal- Mart has secured property in Chicago’s Lakeview area, a well-established, upperincome neighborhood. As Fisher put it, the new format “is a great way to get around zoning issues and governing bodies.”
Fig hting for Fill-in
Once Wal-Mart establishes its smaller formats in a new market, ownership of the fill-in purchase may go up for grabs. Data shows c-stores may already be vulnerable to other channels for that shopping trip.
In its ongoing consumer survey of convenience-store purchase behavior, The NPD Group, Port Washington, N.Y., is finding an “increasing incidence” of people reporting a non-convenience store chain (such as drug, grocery, dollar or mass stores) as the location of their most recent convenience-store purchase. David Portalatin, director of industry analysis for the research firm, says that in the first quarter of 2011, those non-convenience retailers combined for 8% of all “conve-nience store” traffic, up from 6% a year ago. Price, discounts and promotions stand out as reasons why consumers are selecting these chains, he says. Consumers do appear to be doing “fill-in” trips when at food-drug-mass locations, Portalatin says.
Consumers at traditional c-stores report that 68% of their purchases are for immediate consumption; at non-convenience retailers, immediate consumption accounts for anywhere from 33% to 43%. That may mean customers are potentially doing more fill-in shopping with these competing retailers vs. with c-stores, he says. “So if convenience is your only differentiating value proposition,” he says, “you may be vulnerable to a broad-line retailer who develops a convenience offering.”
Operators fearful of the potential challenge the world’s largest retailer will bring with its smaller format can take solace in c-stores as a viable business concept, says Johnson. Good locations that are clean, convenient and offer the right mix can survive.
“But retailers will have to step up their game in terms of quality and service,” he says. “It can’t be a crummy place with only [beef jerky] and a six-pack.”
In terms of a timeline, he expects Wal- Mart’s testing with product assortment to continue for a year. In the end, he says the assortments will probably differ as each location determines what works best in the surrounding community.
Razowsky sees Walmart Express as yet another nail in the coffin of older sites. “The landscape of convenience will continue to evolve and the smaller, less viable locations will go away,” he says. “And more efficient stores will dominate.”
Markets vs. Marketside
Wal-Mart has dabbled with smaller formats over the years, creating some confusion between the concepts. Two in particular sound similar at least in name. Launched in 1998, Walmart Neighborhood Markets (left), which combine grocery and drug-store elements in a 42,000-square-foot format, are essentially doing well. Company figures showed a 4% increase in sales from last year at the 190 locations.
A separate concept, a 15,000-square-foot grocery format called Marketside (top), launched in 2008. Four units were built in Arizona to strong reviews, with critics believing Wal-Mart succeeded in creating a warm, inviting environment. Since then, however, little else had been said or done. Robin Sherk, senior analyst for Kantar Retail, Cambridge, Mass., believes the inactivity does not bode well for the concept
Update: Everyday Low Pricing
The perception of Wal-Mart being the low-price leader has taken a hit, as its rival Target battles neck-and-neck with the big-box giant—at least until this past spring, according to one research firm.
New data from Customer Growth Partners, New Canaan, Conn., shows Walmart U.S. regaining its title. After being in a virtual tie in price leadership by the Minneapolis-based Target earlier in the year, Walmart has retaken its traditional spot as of late April, albeit by only a 2.8% margin.
The monthly analysis was conducted in adjacent Target-Walmart store pairs in four states and looked at prices of identical products for 55 grocery and general merchandise items. For Target Redcard holders, however—which is almost 15% of its sales—the 5% discount would invert the standings to favor Target over Walmart. Both stores trailed hard-discount chain Aldi, Batavia, Ill., which remains the low-price leader among grocery products by more than 14%.