Canadian Supercenters Seen as Model for U.S.

ELLIOT ZWIEBACH

TORONTO — Could the seven Wal-Mart Supercenters in Canada serve as prototypes for a remodeling effort at the company's U.S. supercenters?

Although Wal-Mart officials did not address that question during a day-long international meeting with analysts and institutional investors here last week, Perry Caicco, an analyst with CIBC World Markets here, believes the answer is yes.

“The growth rate of Wal-Mart Supercenters in the U.S. is slowing, and the model has been essentially unchanged since its inception,” he said in a research report. “We believe Wal-Mart is about to launch a vast remodel program for its U.S. stores based on its new Canadian model.”

That model, Caicco said, expands the fresh and service offerings, adds a three-tier private-label program and offers more local merchandise.

Andrew Wolf, an analyst with BB&T Capital Markets, Richmond, Va., told SN any improvements Wal-Mart can make on the merchandising side of its U.S. supercenters could have a significant impact on sales.

“The cyclical recovery in U.S. supermarkets is due to better prices, which have been driven by pressure from Wal-Mart, combined with better merchandising, which is what is bringing customers into the supermarket.

“So it would definitely work to Wal-Mart's advantage if it added better merchandising at supercenters, because that could prompt existing customers to buy more and might also attract more new customers.”

Mark Husson, New York-based managing director and global head of consumer research for HSBC Securities, London, said any talk of changes Wal-Mart may be contemplating at its U.S. supercenters is “purely speculative.” He also told SN he does not believe the differences between new supercenters in the U.S. and the Canadian model are very significant.

During the company's meeting here last week, Mario Pilozzi, president and chief executive officer of Wal-Mart Canada Corp., said the company will continue to open new discount stores “wherever they are appropriate, but we will build supercenters wherever possible, because that is a smart investment.”

The company plans to open 21 new supercenters in Canada this year, including 10 new sites, 10 discount store expansions and one relocation, at a cost of approximately $500 million. Stores will range in size from 100,000 square feet up to 215,000 square feet.

In response to a question as to whether the number of supercenters would be equivalent to the number of discount stores in 10 years, Pilozzi said, “That's a good guess.” Wal-Mart operates close to 300 discount stores in Canada.

With one supercenter distribution facility already operating in Canada, Pilozzi said Wal-Mart plans to build a second facility in western Canada as it expands supercenters in that direction, “and as we move to other parts of Canada, we plan to open additional distribution centers,” he said.

Mike Dombrow, director of marketing for Wal-Mart Canada, said the company created a new brand for the food sections in its supercenters here — “Your Fresh Market” — whose signage has the look of a handwritten sign at a farm stand, with the word “fresh” inserted into the logo to emphasize the fresh aspects of the department.

In his written report, Caicco listed the new elements of the Canadian supercenters as follows:

According to Caicco, “This model intelligently reflects the changes ongoing in the food customer base, the renewal and modernization of nearby conventional competition and an effort by Wal-Mart management to refresh its core assets in a relevant way.”

However, the stores are more labor-intensive, he noted, “[though] the company is attempting to develop new labor productivity elements in core grocery to pay for the labor needs in perishables.”

With more fresh products, shrink is also a bigger problem, he pointed out, and store conditions are tougher to maintain.

“But clearly Wal-Mart is seeing enough sales success at these new-look supercenters to be confident in the concept. If the sales are there, Wal-Mart will eventually figure out the economics,” Caicco observed.

Caicco said remodeling U.S. supercenters to the new fresh market concept would not be expensive — perhaps $500,000 to $1 million per store. But with labor costs and shrink rising, “it would take a 15% to 20% sales increase — with similar margins or with margins boosted by an improved mix — for these remodels to pay out,” he said.

Wal-Mart also said it plans to expand remote checkouts. The company believes it can have 37 checkstands up front and 17 more at locations on the floor.