CALIFORNIA'S NEW ARRIVAL 2004-03-15 (2)

ELLIOT ZWIEBACH

LA QUINTA, Calif. -- Wal-Mart Stores fulfilled its manifest destiny when it opened its first California supercenter in this desert community earlier this month.

A second California supercenter could open before year's end in Hemet, located about 65 miles northwest of here, and within four to six years, the Bentonville, Ark., juggernaut anticipates operating at least 40 supercenters up and down the state.

Industry observers told SN they believe it will be several years before supercenters exist in sufficient numbers to become a major factor statewide.

But with the supercenter here expected to do about $1 million in sales a week, according to local sources, the store is likely to have a significant impact locally, said Jonathan Ziegler, principal in PUPS Investment Management Santa Barbara, Calif.

"With the store doing about $50 million a year, including $18 million in food sales, if you have three or four competing supermarkets in the area and each one loses an equal part of $18 million, that's a loss of $4.5 million per year, which is a substantial impact," Ziegler said.

Mark Husson, an analyst with Merrill Lynch, New York, said he was not as concerned at the local impact each Wal-Mart supercenter will have, even with 40 units in the state. "With California having the seventh-largest economy in the world, 40 Wal-Mart supercenters in the state would represent only about 1% to 2% of the state's [food sales] market share," he pointed out.

That's a large chunk of business, he added, "but because land costs near major population centers are so high in California, the supercenters Wal-Mart opens are likely to be outside the big cities, and while there's still a 'shock and awe' factor about Wal-Mart's low prices, people will still have to drive long distances to get to its stores, and in California, it's a question of how much extra driving time is it worth to get to outlying locations like La Quinta?"

While some customers might be willing to drive 30 miles on occasion, "they're not going to do it on a regular basis," Husson said.

Ziegler told SN he expects Wal-Mart will be as successful in California as it's been elsewhere. "Wal-Mart has the knack for turning the deuce of clubs into the ace of spades whenever it tests a format, and it has enough confidence in supercenters by this time to get it right pretty quickly. But I think its biggest challenge may be the series of referenda at the local level."

Natural Growth Progression

Chuck Cerankosky, an analyst with McDonald Investments, Cleveland, said he doubts attempts by local municipalities to keep Wal-Mart supercenters out will have much impact in California. "If I was a Wal-Mart competitor, I wouldn't bet on local ordinances to keep them out," he told SN. "Those efforts may be more intense in California than in some other states, but Wal-Mart has dealt with these obstacles before, and you don't get to be Wal-Mart's size by catering to municipalities -- you do it by catering to customers."

As Wal-Mart grows supercenters location by location, "it will give customers a taste of what it has to offer and rely on positive word-of-mouth to draw customers, while conventional operators will have to adjust their merchandising assortments, price points, promotions and cost structures," Cerankosky said.

"As a result, by the time Wal-Mart approaches 20 supercenters in the state, it will probably begin having a major impact on all competitors because of the synergistic effect as consumers become more aware of those stores."

However, Wal-Mart may not be able to achieve the kind of dominant impact in California it has had in other states because of natural geographic obstacles to expansion, "so it may have to rely on each store drawing on a larger area for business," Cerankosky said.

Albertsons, Kroger and Safeway endured a 20-week strike and lockout in Southern California in an effort to lower their costs so they could compete with the anticipated entry of Wal-Mart supercenters -- a labor dispute that ended just days before the doors of the supercenter here opened.

In that dispute, the chains sought and achieved a two-tier wage and benefits system as one way to lower their cost structures. "But even with two tiers, the chains will still not be as flexible or efficient as non-union operators like Wal-Mart, nor is it likely the United Food and Commercial Workers Union will try to go after Wal-Mart anytime soon," Cerankosky said.

With Wal-Mart operating supercenters in 44 of the 50 states, the move to California was a logical progression. "Opening supercenters is no big deal," Cathy Bishop, operations coordinator for Wal-Mart Supercenters in California, told SN during an interview at the store. "They open supercenters every day in other places."

Now, only five states do not have a Wal-Mart supercenter: Alaska, Hawaii, New Jersey, North Dakota and Vermont.

Wal-Mart delayed opening the store here for several months until the company's distribution and logistics capabilities caught up with the efficiencies of supplying the store, Mickey Anderson, the supercenter manager, told SN.

"We deliberately slowed down the [store construction] process," he said -- noting that it took 16 months from groundbreaking to opening -- to allow the company time to complete construction of a food-distribution facility, which opened last August, in Casa Grande, Ariz., rather than pull groceries from its New Mexico grocery warehouse.

Although construction on the second supercenter -- the one most likely to open in Hemet, he noted -- has not yet begun, Anderson said breaking ground and opening it within six months would not be a problem.

Supercenter No. 1,471

The supercenter here -- No. 1,471 -- covers 225,000 square feet, the largest prototype Wal-Mart operates. It replaces a Wal-Mart discount store about a quarter-mile away that had operated here for 11 years and accounted for 40,000 transactions a week, Anderson said.

The supercenter will be competing with units of Albertsons, Ralphs, Stater Bros., Vons and Food 4 Less, plus a Kmart discount store and a new Target that opened just four days after the Wal-Mart opening.

La Quinta is an upscale community located about 20 miles east of Palm Springs (and 140 miles east of downtown Los Angeles). However, the store is expected to draw from a 30-mile radius, Anderson said -- from Palm Desert on the west to Thermal on the east -- "though we hope it's more," he added.

The supercenter here features bilingual signs throughout "because we expect to pull a large number of Hispanic-based customers from the east, where the population is 75% Hispanic," Anderson said.

The grocery section on the store's left side covers about 25% of floor space to accommodate 80,000 grocery items. The section consists of 14 gondolas that run parallel to the front of the building, an up-front produce section and a series of perishables departments around the side and back walls.

Across the front concourse of the supercenter are a nail salon, a bank, a vision center and a pharmacy, adjacent to the health and beauty section, and pet supplies. To the left of the store's entrance on the grocery side is a McDonald's; a second entrance leads customers past the pharmacy into the store's discount-store section.

While the consumables product mix is pretty much standard for a Wal-Mart supercenter, Anderson said the store here features more California-grown produce than supercenters in other parts of the country.

Wal-Mart brought in several experienced perishables managers from out of state to oversee the fresh sections, Bishop said. In addition, it opted to double up on perishables management "so we can start growing more of our own people so when we open our second store, we'll have experienced personnel," she noted. Several of those additional managers were recruited from California supermarket chains, including Stater Bros., Vons and Ralphs, she said.

To help train stockers and cashiers to handle fresh items properly, trainers purchased a variety of produce items "so employees could touch and feel each one so they knew what it was," Bishop explained. "Most of the cashiers had never checked out produce or scanned or weighed it, and we made sure they learned the codes and how to bag it properly.

"We went through the process three times with each item so they would learn through repetition."

Bishop, a former district manager for Wal-Mart's discount stores in the area, told SN she was named operations coordinator for the California supercenter expansion "because I'm a woman and I shop, so when I look at product presentation, I ask myself whether or not I would buy that item."

As the first supercenter was being designed, Bishop said she made some suggestions the store incorporated regarding signs, cleanliness and presentation, based on talks she had with vendors and department managers plus observation at other Wal-Mart supercenters.

Bishop said the supercenter here will conduct more product sampling during its opening weeks and possibly afterward as well. "We'll do sampling for about six weeks so people can see and taste what we're selling, and if it works well, we may do it longer here or at the next supercenter," she said.

One of the things Bishop said she sought to establish with the first California supercenter was consistency of job descriptions and product shelf placement. "That's something I tried to achieve as a district manager, and that's what I'm trying to achieve as we open supercenters, by posting job descriptions in the back room and making sure we keep items in the same place from store to store," she explained.

"In California, where government oversight is very prevalent, compliance is important in terms of the cold chain, temperature calibrations, and health and safety standards. I noticed a lot of inconsistencies at other stores, so we're making sure our employees know what to look for here."