NEIGHBORHOOD MARKETS SET TO EVOLVE

Elliot Zwiebach

ROGERS, Ark. -- Wal-Mart plans to differentiate its Neighborhood Market format to try to appeal to specific demographic groups, executives said here last week at the company's 12th annual analysts' meeting.

Eduardo Castro-Wright, president of the company's Wal-Mart Stores division, which encompasses discount stores, supercenters and Neighborhood Markets, said Wal-Mart will leverage the knowledge it's gained from operating stores in Mexico, Japan and other countries to find better ways to serve customers in different communities.

Some of those opportunities may come in Hispanic communities, he noted. "If you look at our stores today that service a Latino population of 60% or more, those stores typically underperform [other Wal-Mart stores]," he said, "so we have an opportunity to be more relevant and to become a store of choice. Accordingly, we will put a big emphasis on using market-driven information that we might not have identified before to do a better job servicing customers at those stores.

"For example, we may be able to deliver the best value in a community by setting up a store that's a better proposition for a Hispanic customer, based on what we've learned from operating in Mexico," he said, "or we may be able to leverage our know-how from Japan to improve the seafood sections in our stores."

The prospect seemed to please Lee Scott, chairman and chief executive officer of the Bentonville, Ark-based company. "Eduardo's vision of taking Neighborhood Markets and de-homogenizing them has a lot of power and will be meaningful to us in the future," he told the analysts.

In fact, differentiating Neighborhood Markets "means we could operate those stores in high-income neighborhoods," Scott added.

Neighborhood Markets are Wal-Mart's format of the future, after it has saturated the market with supercenters, Scott said.

Wal-Mart said last week it plans to open between 270 and 280 supercenters in the fiscal year that begins Feb. 1, 2006 -- a 12% increase over the 240 to 250 supercenters the company said a year ago it expects to open this year. During the analysts' meeting, Tom Schoewe, chief financial officer, said the company will actually open at least 265 supercenters by the end of its fiscal year -- which will bring its total up to approximately 1,900 this year and close to 2,200 by the end of next year.

The company said 160 of next year's supercenters will come from conversions of discount stores -- the same number of conversions as this year.

Wal-Mart also plans to open 30 to 40 Sam's Clubs next year, the same number as it will open this year; however, it said it plans to reduce the number of discount store openings to between 20 and 30, compared with 40 to 45 projected to open this year.

The company also said it expects to open fewer Neighborhood Markets next year -- 15 to 20 -- compared with the 25 to 30 it has targeted for this year.

Talking with the analysts, Scott said Wal-Mart does not plan to undertake a major expansion of Neighborhood Markets until the company begins to reach a saturation point with supercenters, though that point is nowhere in sight, he noted. "In our current five-year plan we don't see ourselves reaching market saturation. We still see reasonable opportunities for growth ahead of us in the U.S., and we could still be three or four times bigger than we are without reaching saturation."

Wal-Mart operates 95 Neighborhood Markets, "and I believe this year we will do double the business in Neighborhood Markets that we did in the entire company the year I joined Wal-Mart [in 1979]," Scott noted.

"As long as we can open supercenters, that's where we'll spend our money. But we intend to continue establishing a base of Neighborhood Markets so when there's a downturn in supercenter opportunities, we can expand that format."

Asked about the growth of supercenters in California, where Wal-Mart operates seven, with four more due to open early next month, Scott said, "All have all been extraordinarily successful." He said he expects battles there over every supercenter. "If we built stores of 39,000 square feet, they would still propose box laws to keep us out."