COMBO CONVENIENCE

MARK HAMSTRA

Cheap groceries aren't the only thing attracting customers to Wal-Mart's Neighborhood Markets. The Bentonville, Ark.-based company's combo-store format, which enables the discount-retailing giant to leverage its buying clout in suburban sites too small for a Wal-Mart Supercenter, includes a full drug store that analysts say will vie with Walgreens as much as the grocery side of the store vies with Safeway.

"I think, in a convenient location, the Wal-Mart Neighborhood Market will be formidable competition for a Walgreens," said Lisa Cartwright, analyst, Salomon Smith Barney, New York.

A recent visit to a Neighborhood Market in Houston left Cartwright impressed with the drug store side of the operation.

"I thought the presentation was very good, especially the cosmetics, and the whole health-and-beauty side of the store was very good," she said.

Some observers said the Neighborhood Market format is not a radical departure from the traditional food-and-drug combo stores that supermarket chains have been operating for years, but it does raise the bar in some key aspects, primarily in its emphasis on convenience.

"They realize that health and beauty care is the largest category of the store," said Chris Ohlinger, chief executive, Service Industry Research Systems, Highland Heights, Ky.

He said many supermarket operators don't recognize that fact, and fail to give the department the attention that Wal-Mart does in its Neighborhood Markets.

According to some reports, the Neighborhood Markets generate about 30% of sales from nonfood items. Wal-Mart declined to comment on the stores' sales.

The two key differences between the Neighborhood Market and traditional combo supermarkets, Ohlinger said, are the drive-through pharmacies and the high level of trust consumers have for the Wal-Mart name.

"The drive-through is such a hot button with consumers right now," he said.

Although the concept is in its developmental stages, all but one of the 31 Neighborhood Markets built thus far have drive-through pharmacies, and the company plans to continue to offer the service in its new stores as it builds out its current markets in Texas, Oklahoma and Arkansas, and expands into Alabama and Tennessee.

Cartwright of Salomon Smith Barney said that while pharmacies in Wal-Mart supercenters might be convenient for picking up once-a-month maintenance subscription medications, the Neighborhood Markets are designed more to capture on-the-go sales.

"When your child is sick, or when you are sick, and you just want to run in and out quickly, the Neighborhood Market is a good place to do that," she said.

"One of the attractions of Neighborhood Markets is convenience," said Rob Phillips, spokesman, Wal-Mart. "Customers can get in and out quickly."

The strategy appears to be working. In the few markets where Wal-Mart has opened Neighborhood Markets, its stores have gained market share quickly, according to analysts.

"If you look at it on a market-by-market basis, the velocity that's driven through the Neighborhood Market is significantly above the average for the market, which bodes very well for the concept," said Shelly Hale, managing director, Banc of America Securities, San Francisco. "Obviously, part of what's driving the velocity is the fact that they do offer the convenience of both [drugs and groceries]."

She recently analyzed Wal-Mart's supermarket share in several markets, and found that in Fort Worth, Texas, for example, Wal-Mart captured about 14% of the grocery market with 14 stores, including four Neighborhood markets, in 2001. That's an average of about 1% market share per store, vs. an average of 0.5% per supermarket in the area.

Three of the four Neighborhood Markets opened in the last year, and together they accounted for 3.8% of the market share. All of the other supermarket chains in the market lost share during the year, according to Hale, except Tom Thumb, which maintained a 12.2% share. By the end of this year, she said she expects Wal-Mart to move ahead of Kroger to become No. 2 in the market.

"The fact that the Neighborhood Markets are doing so well without even being open a full year is pretty amazing," she said.

In Oklahoma City, where the company's Neighborhood Market strategy is more mature, the company captured 25.1 percent of the grocery market in 2001 as the No. 1 player, with six Neighborhood Markets each garnering about 1.2% of the market, Hale said.

Analysts said they don't have information about the volume of drug sales at Neighborhood Markets, but observers think that the combo stores are generating high prescription volume.

"I think their pharmacy business is doing very well," said LeeRoy Treadway, vice president, pharmacy, Minyard Food Stores, Coppell, Texas. "They have a pretty strong drug image in that portion of the store."

In addition, he said, Wal-Mart brings a strong reputation and a high level of expertise in pharmacy.

"The thing about Wal-Mart is that they have such a strong network; they have instant volume the second they open the door," he said.

Treadway said that Minyard, which operates 46 in-store pharmacies, lost two pharmacists to Wal-Mart in the past year.

"They pay whatever it takes to hire the help they need," he said.

He agreed that the drive-through component of the stores gives the Neighborhood Markets a level of convenience not offered by many of the combo stores in the region, although he said both Kroger and Tom Thumb, a Safeway-owned banner, have a few drive-through pharmacies in Texas. The major drug chains in the market, including Walgreens and Eckerd, offer drive-up prescription service at many of their stores.

According to last year's Food Marketing Institute Supermarket Pharmacy Survey, about 35% of supermarkets offer drive-through pharmacy in at least one store, and the service accounts for a median of 15% of daily prescription volume.

One potential liability of the Neighborhood markets, Treadway observed, is their limited assortment of HBC merchandise.

"They don't have a great selection," he said, noting that the stores might only offer one size of some items.

SN recently visited some of the Neighborhood Markets in the Dallas area.

From the outside, the brick-facade stores appear to give equal emphasis to grocery and drug, with "drug" signage on one side and the "food" sign on the other.

Separate entrances lead into the distinct drug store side and grocery sides of the building. On the drug side, the cosmetics department greets customers first, followed by health care and over-the-counter products. The pharmacy is against the left wall.

The design of the pharmacy area is similar to that of the supercenters, with a window at one end for prescription drop-offs and others for pickup with counseling windows made semi-private by dividers.

Self-service blood-pressure testers are also located near the pharmacy.

One-hour photo labs are positioned prominently, either at the front or back.