Wal-Mart Preps Entry Into Small-Format Fray

ELLIOT ZWIEBACH

BENTONVILLE, Ark. — Battle lines are being drawn for a clash between smaller-format food stores following reports last week that Wal-Mart Stores plans to test a new, 20,000-square-foot concept in the Phoenix area later this year.

Wal-Mart reportedly plans to open four stores using the new format — called Marketside but dubbed “Small-Mart” by some industry wags — within a mile of some of the eight Fresh & Easy stores that Tesco has opened in the Phoenix area.

If the Marketside stores open as planned, they would be twice as large as the 10,000-square-foot Fresh & Easy stores and half the size of Wal-Mart's 42,000-square-foot Neighborhood Markets, though with a stronger emphasis on fresh products.

Wal-Mart neither confirmed nor denied such plans.

“We try and test a lot of different ways to serve customers, and looking at a smaller Neighborhood Market would be one way of doing that,” a Wal-Mart spokesman told SN.

Another battle line in the small-format wars may be drawn somewhere in Northern California, possibly in the San Jose area, when Safeway opens a group of 20,000-square-foot perishables-focused stores — which could begin appearing before the end of March, according to some industry observers. Safeway said in December it planned to experiment with a new format sometime in 2008, though it did not say when or where, or what the focus of the store would be. Tesco has not announced any plans yet to open stores in Northern California, although reports have said it was scouting for sites there.

John Heinbockel, an analyst with Goldman Sachs, New York, said the expansion of Fresh & Easy, combined with entries by Wal-Mart and Safeway, may signal “a pitched battle” over the next few years among smaller-format stores that would include Aldi, Save-A-Lot, Dollar General, Fresh Market, Henry's, Trader Joe's and Sunflower.

Wal-Mart's Marketside is likely to be in test mode for a while, Heinbockel said, “and it is unclear if its return on invested capital will be sufficient to merit a full-scale rollout.”

Also unclear is how differentiated the Marketside format will be from Wal-Mart's own Neighborhood Market or other retail formats, he added. “Even in the event of a larger rollout, the impact [on other retailers] could be modest if Marketside does not improve upon the perishables offering currently found at Neighborhood Market,” Heinbockel said.

Reports indicate the first four Marketside stores will be located in Chandler, Gilbert, Mesa and Tempe, Ariz. — Phoenix suburbs located 15-20 miles southeast of the city's core. “The Arizona market, particularly Phoenix, has been a very good market for [Wal-Mart] over the past couple of years,” Deborah Weinswig, an analyst with Citigroup Global Markets, New York, pointed out. “Additionally, the company could be taking advantage of available leased space in [that] market.” The available space is coming from older drug stores that CVS closed after it acquired some Osco locations from Supervalu in 2006. Fresh & Easy has opened 31 U.S. stores since early November, including 16 in Southern California, seven in Las Vegas and eight in Phoenix. It plans to open about 27 more locations in Phoenix this year, a company spokesman told SN. Wal-Mart operates 12 supercenters and five Neighborhood Markets in the Phoenix area. Jonathan Ziegler, a Santa Barbara, Calif.-based analyst with Dutton Associates, El Dorado Hills, Calif., said each company that operates a small-format store might add its own wrinkles. “Fresh & Easy got a fast start, but the model can be improved upon,” he told SN. He also suggested Marketside may be a way for Wal-Mart to enter more communities without facing the opposition its supercenters attract. Art Turock, a consultant based in Kirkland, Wash., told SN he believes Marketside could be “a very powerful format” that combines low prices and convenience with the ability to tailor each location to the needs of specific customer segments. But the small format could also have drawbacks, Turock added, including the need to bring in high traffic to generate adequate volume. He said he views Marketside as a clear response to Fresh & Easy. “By opening these stores so close to Fresh & Easy, it seems Wal-Mart's intent is to develop a competitor-specific format as a quick counter-response to Tesco,” Turock indicated. Chuck Cerankosky, an analyst for FTN Midwest, Cleveland, offered a different opinion. “Wal-Mart is simply looking at a market where it has three sizes of boxes already — discount stores, supercenters and Neighborhood Markets — and it believes there might be a spot for something else as it tries to fill in the space between existing stores.”