SQUARED OFF

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For better or for worse, big boxes are here to stay.

The format's dominance, especially when coupled with food, is expected to endure and grow, retail consultants, store designers and land developers told SN.

While big-box momentum continues, the giant store formats are under pressure to change as consumers, communities and other competitors exert their influence.

Large in scale, but lacking aesthetic appeal, the big box's message is simple: Big is indeed better for consumers looking for a large selection of consumables, including food, sold at low prices, and all conveniently located under one roof.

Kevin Kelly, principal/brand strategy, Shook Kelly, Los Angeles, who worked on Kroger's Marketplace concept with the Fry's makeover in Phoenix, calls big boxes "a primal motivator."

"We love to see an ample supply of material goods. It is important to our DNA when we see lots of meat, cheese, nails, hammers and pots. We say, 'I am doing OK. I have lots of choice here. I am going to get my stuff here.'"

In forecasting changes on the retail landscape, consulting firm Willard Bishop, Barrington, Ill., issued a report that said supercenters, considered nontraditional big-box grocery formats, are poised for tremendous growth, from 12.9% dollar share in 2004 to nearly 18% in 2009. Low prices and aggressive store expansion are key to their projected growth, the report said.

Warehouse club stores, the next-largest big-box format and which represented 6.7% dollar share in 2004, are expected to grow at a more modest pace of 8% by 2009.

Club stores have had a positive impact on the big-store market, Kelly said. "Club stores made shopping seem fun, exciting and a surprise, and some of the big-store formats are learning from them."

Extreme Impact

The supercenter has exerted the greatest impact of all competitive formats on the conventional supermarket. According to Food Marketing Institute's 2006 Speaks survey, 45% of retailers rated the impact of the supercenter on their business as "extreme," and 33.8% said the format had a "moderate" impact.

When it comes to building supercenters, no one disputes the dominance of the Bentonville, Ark., discounter.

"Wal-Mart is the big King Kong of the industry," said Jeff Hershey, president of Jeff Hershey Consulting, Royal Oak, Mich. For supermarkets trying to be all things to all people, it is increasingly becoming more difficult because "Wal-Mart is taking a bigger and bigger bite of the potential that is out there," he said.

In 2004, there were 2,293 total supercenters in operation, representing $103.9 billion in sales, according to Bishop's report. That year, Wal-Mart Stores operated 1,471 supercenters, or 64% of total supercenter units. The next year, it built 242 supercenters, followed by 267 in 2005. As of May, Wal-Mart operated 2,056 supercenters. It plans to add another 280 next year.

Like other power retailers, Wal-Mart is aggressively densing up its supercenters at the risk of some cannibalization.

In a report issued last year, the National Grocers Association listed the states slated for the largest Wal-Mart supercenter expansion: Texas with 31 stores, Ohio with 30, Florida with 28 and California with 19. "This enormous growth supports Wal-Mart's plans to saturate markets, including Oklahoma City where they have intentionally placed supercenters five miles apart," the report stated.

Jeff Green, president of Jeff Green Partners, Mill Valley, Calif., a retail feasibility consultant, said public big-box operators in general are under great pressure to grow because of Wall Street. However, as real estate becomes limited, they start filling in markets and cannibalization can become a huge issue.

He noted that big-box operators with a food component are better able to fill in than other power retailers such as Home Depot or PetSmart. "Wal-Mart and Target can do it because they are cannibalizing on the general merchandise side, but it doesn't matter because the shopping trips are generated for food," Green said. "Their [supercenter] site location strategy is more similar to a supermarket than it is to a discount department store."

While big-box retailers may be saturating certain markets, most developers say there is still plenty of room in suburbia for more boxes. However, the trend is to move closer to cities and urban locations even though communities continue to put a squeeze on big-box structures.

In high-density areas in New England and along the Eastern Seaboard, there are fewer sites and options for development available, said Len Cubellis, president, founder and chief executive officer of Cubellis Associates, Boston. Flexibility is the new mantra for big-box expansion, said Cubellis, whose firm works with developers on site approvals and master plans and with retailers on competitive positioning.

"With fewer sites and options, big boxes are much more willing to adapt to particular site constraints, whether it be from a design or image standpoint," he said.

Sometimes, big-box operators must sacrifice coveted square footage to gain rights to a specific location.

Cubellis cited BJ's Wholesale Club downsizing from its regular 120,000-square-foot box to 68,000 square feet in order to move into a Hyannis, Mass., location. "Retailers are considering what they can get approved, and they are more willing to adapt their product offerings to that."

While prime real estate is sometimes difficult to secure, land development costs are also rising as much as 25%-50%, Cubellis said, because of various issues such as wetlands and environmental cleanup. But big-box retailers seem willing to absorb the extra cost.

"It might end up costing them 20%-30% more on the site, and that might add several million dollars more," Cubellis said. "But in the overall assessment of the economics of the deal, it is generally small."

Urban Migration

Development trends noted by Cubellis and others are the growth of mixed-use sites - those that contain residential, retail and commercial properties - and the population drive back to urban and inner-city areas.

Barry Seifer, principal, Cubellis Marco Retail (owned by Cubellis Associates), Northville, Mich., a retail design and brand strategy consultant, noted that within the next 20-30 years, 70% of the global population will live in cities. "The pressures on development will not abate because land use will continue to be a very serious issue," he said.

Hershey, who is working on a mixed-use property within the inner loop of Houston, said, "I've seen the same thing in Dallas, Phoenix, Chicago and where people are coming back into the city and moving into condos and low-to-high residential developments, resulting in high density."

While a big box may have to adopt with a smaller footprint in such urban locations, retailers still can achieve the sales per square foot that they need, Hershey said.

Green sees more big-box operators tackling "brown-field" development. "These are in board [close to major cities] areas that have been really overlooked and may have environmental hazards to clean up. They are not your suburban green-field sites that are easier to build on."

He cited Wal-Mart tearing down an old warehouse in Oakland, Calif., as an example. While such efforts are more costly, it does offer the retailer the best potential for new sales while reaching an ethnically diverse shopping base, Green noted.

Several years ago, Cubellis Associates did mostly single-use retail development. Now 75% of the firm's retail projects have mixed-use elements, Cubellis said.

Sometimes big boxes enable such sites to get built, he said. "We just finished an 850,000- to 900,000-square-foot, 100-acre site in Plymouth, Mass., and both Wal-Mart and Sam's Club are the anchors. Without Wal-Mart, all the other lifestyle center retailers and junior anchors wouldn't have located there."

A loop road connects the three distinct retailer groups that are situated in different locations on the Plymouth property.

Besides land development challenges and escalating costs, communities and consumer activists continue to fight back. Even if they don't succeed in stopping big-box development, they are winning concessions.

Examples include Freehold, N.J.; Gaithersburg, Md.; Centennial, Colo.; Long Beach, Calif.; and Round Rock, Texas, where various big-box retailers have had to make design adjustments in order to get community acceptance.

"One of the first things any community that makes demands on the big box tries to do is diminish its scale," said Tim Morrison, studio principal and partner, Little, a diversified architectural consulting firm in Charlotte, N.C. Design changes are often made to the facade or landscape elements that are added, but it usually doesn't change the overall size.

"There are ways to bring the project back down in scale to make people more comfortable," Morrison said.

When that happens, the big box doesn't want to be overlooked by shoppers hurrying by on the highway, but it doesn't have to scream for attention to make its point, Morrison said. "More developers today are sensitive to just making a good compositional statement from the street and not necessarily making the size of the box itself the presentation."

NIMBY

According to a survey conducted last year by the Saint Consulting Group, Hingham, Mass., which studies contested neighborhood projects, 83% of suburban Americans said they did not want new development in their communities, and 73% said their community was fine as is or already over-developed. A majority of those surveyed said they were happy to shop Wal-Mart but did not want to be affected by the issues commonly associated with supercenters.

"Most big boxes have a challenge in general because most people don't want them in small communities or in their back yard," Kelly said.

The classic example of Wal-Mart supercenter opposition was when Inglewood, Calif., voters were called to the polls several years ago after the city council rejected a Wal-Mart proposal. After spending a reported $1 million to promote its case, Wal-Mart was only turned down again for a proposed 650,000-square-foot site that included other shops and restaurants.

"It used to be a controversial approach reserved for designers, but it has hit mainstream and even a political level," Kelly said. "We are seeing a tipping point in society. Everybody is saying, 'We want a kinder, gentler development.'"

Bill Bishop, president, Willard Bishop, said about Wal-Mart, "They definitely have more community-based issues to deal with than any other retailer."

But over the long term, Bishop sees big-box retailers like Wal-Mart succeeding. "It is just not that easy politically to oppose access to lower prices, and the sheer economic impact of the big box on the community.

"The community is making a real roll of the dice when they say 'no thank you' and the guy next door says 'please.'"

The economic impact can be seen in the recent openings of six Wal-Mart supercenters earlier this year in Ohio where 1,480 new jobs were created and $160,948 was donated to local civic and charitable organizations in the communities where the stores are located, according to local media reports.

Superstore Mania

Some traditional food retailers such as Kroger, H.E. Butt Grocery Co., Loblaw and Weis Markets have been enticed by the big-box mentality and are experimenting with their own versions of superstores.

"It's an if you can't beat 'em, join 'em strategy," said Neil Stern, senior partner, McMillan-Doolittle, Chicago. "Most of these supermarkets are taking a hybrid approach to it by expanding general merchandise closest to what their food shoppers want."

"We are all making about the same number of shopping trips for consumables and spreading them out across a number of places," Bishop said. "The question becomes, where do you play to economically take advantage of the greatest value from the reduced number of trips you are going to get? In the case of H-E-B and Kroger, they probably said, 'We are going to get fewer trips of the conventional type but are going to get more of another type.'"

For such supermarkets, big can be better if they can drive frequent shopping trips through higher-margin general merchandise on top of a solid food offering, resulting in larger marketbaskets.

With a carefully honed selection of general merchandise that complements their food offering, conventional supermarket chains are hoping to provide their own wedge against Wal-Mart with their superstores that can range over 100,000 square feet, in the case of Kroger's Marketplace concept.

The challenge for these retailers, Morrison said, is to be creative and different. "There is no doubt that when you have never done one of these, it is really easy to go out and look at what everybody else is doing. The question is, once you've pulled in all the data and looked at supercenters that are viable, can you modify what you know and not lose your soul? Can you pull this off without being a Wal-Mart with a different name?"

But even Wal-Mart and others are fine-tuning their models to make them not only community friendly, but also shopper friendly for a broader demographic.

"Wal-Mart is smack dab in the middle of a big-league reinvention," Bishop said. "More than anyone realizes, they are going to be more targeted and upscale. They have much opportunity to adjust the merchandising and the product to the store of the community."

Minneapolis-based Target, seen as Wal-Mart's nemesis, has to do a better job of integrating food into its SuperTarget format, consultants said.

"The disconnect between nonfood and perishable is something Target is well aware of, and they have been working on a solution for quite a while. So just wait," Seifer of Cubellis Marco Retail said.

Meijer, Grand Rapids, Mich., often cited as the originator of the superstore, hired New York designer David Rockwell, known for his theatrical statements and restaurant - Planet Hollywood - interiors, to create a new look and design for Meijer.

Kelly gives Meijer an A for effort, but said it missed the mark. "It's a little too derivative of Target. Let's make it cool. So they brought in the ultimate coolmeister. He touched it and sprinkled his dust. It's a dent in a giant sea."

Such efforts to humanize the big box illustrate that the one-size-fits-all rule no longer applies even for the biggest of operators.

"There are different ways to go after food and nonfood," Stern said. "Target is taking a different approach and Meijer is also trying to differentiate vs. Wal-Mart. Ultimately, big-box retailers are significant. They are clearly growing at the expense of conventional stores. However, when it comes to food they won't dominate. Conventional [food] stores will still be the dominant format."

Big-Box Facts

Big boxes, often large discount superstores that combine nonfood with a supermarket, are said to have evolved from the European hypermarket. But an early forerunner of supercenters was Fred Meyer, a subsidiary of Kroger Co., which opened its first supercenter in 1922 in Portland, Ore. Before Wal-Mart Stores began to test hypermarts in the late '80s, Meijer launched its first superstore in 1962. Many credit it with pioneering the format. Some consultants also mentioned Harry's Farmers Market's mega-stores in Atlanta as a pioneer of the superstore. Harry's was sold to Whole Foods Market in 2000.

In partnership with Cullum Cos., Wal-Mart opened several hypermarkets from 1987 to 1990. At 220,000 square feet, Wal-Mart found the box too costly to operate during an economic recession. The format was downsized to a more manageable 125,000 square feet with Wal-Mart's first supercenter in 1988 that opened in Washington, Mo. A more profitable format, Wal-Mart began to aggressively roll out its supercenters, which today range from 99,000 to 261,000 square feet. As of May 2006, there were 2,056 Wal-Mart supercenters, with another 280 slated to open next year.

Kmart opened its first supercenter in 1991 and still operates about 60 big-box locations. Target opened its first SuperTarget in 1995, and as of the beginning of this year, there were just over 155 SuperTarget locations.

Not to be confused with superstores, warehouse membership clubs are predicated on bulk nonfood and food sales. They also offered a new type of shopping experience with a carefully edited selection of products. The first club store, Fed-Mart was founded by Sol Price in 1954. After closing Fed-Mart, he opened Price Club in San Diego in 1976. In 1983, Costco Wholesale and PACE Wholesale Club started operations. Wal-Mart opened Sam's Club in 1983, and BJ's Wholesale Club opened soon thereafter. According to Willard Bishop Consulting, in 2004, there were approximately 11,500 superstores, warehouse clubs and supercenters in the United States, accounting for $321 billion in sales.

The financial model of big-box stores is dependent on consistent big volume. Jeff Green, president, Jeff Green Partners, Mill Valley, Calif., lists ballpark sales-per-square-foot figures of the big-box operators.

Annual Average Sales per Square Foot

Consumer Electronic Superstores: $700-$1,000

Supercenters: $300-$500

Warehouse Clubs: $300-$500

Home/housewares Superstores: $200-$300

Pet Superstores: $200 or less

2004 Marketshare

(Grocery and Consumables)

Number of Stores; Avg. No. of SKUs; Dollar Share; Annual Sales

Traditional Grocery

Conventional: 14,690; 26,167; 12.4%; $420.0 billion

Superstore: 8,225; 42,351; 20.1%; $162.5 billion

Non-Traditional Grocery

Supercenter: 2,293; 82,159; 12.9%; $104.0 billion

Wholesale Club: 1,050; 33,341; 6.7%; $54.3 billion

Source: Willard Bishop and FMI Speaks 2006

Getting Past Fatigue

Since launching its first Marketplace store under the Fry's banner six years ago, Cincinnati-based Kroger has slowly rolled out the 80,000- to 105,000-square-foot format to about 25 locations in Arizona, Utah and Ohio. Kevin Kelly, principal/brand strategy, Shook Kelly, Los Angeles, worked on the design of the first Marketplace store in Arizona. The format, a scaled down supercenter, is supported and inspired by Fred Meyer, which Kroger acquired in 1999.

Prior to the redesign, Kelly was given the assignment to "walk" Fry's store. He described the visual experience as "junk mail to the mind."

"Your brain has a hard time concentrating, and it becomes anxious and wants to leave," he said.

To create excitement, Kelly broke the store up into a "series of digestible chunks." Five neighborhoods were created: fresh, value, home, health and occasion. He then focused on mind-set zones to stimulate impulsive purchases. Lifestyle settings were created from various departments, and products were brought together in suggestive selling vignettes.

"We created little constellations throughout the store that were really cool ideas of things you never thought of," Kelly said - for example, bringing together perishables and nonperishables in a Mexican or Chinese theme to spark impulse and excitement in the store.

Kelly said merchandising was built around consumer needs and how the consumer felt. The goal was to break up the shopping fatigue found in the old Fry's and sell lifestyle.

While Wall Street analysts have given Kroger good marks for its Marketplace concept, the California labor strike in 2003 curtailed a faster rollout, Kelly said.

Marketplace stores offer full grocery, pharmacy and an expanded general merchandise area that includes outdoor living, electronics, home goods, toys and other services. Marketplace stores require an average investment of $13.5 million, including real estate, according to Kroger.

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Ultimate Big-Box Retailer

The big box of the future may not have four walls or real estate at all. Consider the launch last month of Amazon.com's Web-based grocery-shopping service with an offering of more than 10,000 nonperishable items. "If you look at the entire landscape of food, hard-goods and soft-goods retailing, you have to consider the virtual retailers," said Barry Seifer, principal, Cubellis Marco Retail, Northville, Mich., owned by Cubellis Associates, Boston.

Amazon.com's mission is to be the "earth's most customer-centric company, to build a place where people can come to find and discover anything they might want to buy online."

"When you are talking about the big box, isn't Amazon in some people's mind the biggest box even though it isn't a box at all?" Seifer noted. He said 75 million Americans have been born into the digital world. Many of them are millennials, born between 1982 and 2002, who are accustomed to buying consumer goods through the Internet. When the younger people come of age and become the dominate shoppers, it is expected to result in another sea change of the retail landscape, he said.

Jupiter Research projects online spending by this generation to exceed $13 billion by 2006. Research shows that 15% of the total spending by youth is done via the Internet.

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