THE SUPERCENTER JUGGERNAUT 1995-07-24 (9)

GLEN A. BERES

BENTONVILLE, Ark. -- Wal-Mart Stores here continues its onslaught on the food industry by aggressively expanding its supercenter division.

But other than refining fresh food offerings in its supercenters, the company is not expected to significantly alter its current U.S. strategies for the format -- at least for the next few years, according to industry observers.

Those proven strategies include gearing expansion toward rural markets; focusing future supercenter growth on conversions and replacements of existing discount stores, rather than entering new territories, and rolling out the concept at the impressive pace of about 100 supercenters per year.

Wal-Mart, with 174 of the combination supermarket-discount store units, is the nation's largest supercenter operator, and the retailer plans to increase its lead this year.

The company has quietly added 32 supercenters since Jan. 25, when it opened a record 23 of the stores in a single day. And at its annual meeting last month, Wal-Mart executives told shareholders the retailer expects to open 92 to 97 supercenters by the end of the fiscal year in January, including 80 to 85 conversions and 12 new units.

"This year you'll see Wal-Mart continue its replacement strategy," said Joseph Ronning, an analyst with Brown Brothers Harriman & Co., New York. "What they are doing is taking a store where Wal-Mart is a known quantity, has an established customer base and has been successful, and they add a supermarket onto that. They plunk down supercenters in place of undersized, high-performing [discount] stores that are ready for expansion anyway.

"It's a very successful strategy for them, and they've made no bones about it that you've already seen the highest number of discount stores you'll ever see from them. This is their growth vehicle of the future, and they'll continue to roll out the [supercenter] concept and convert their discount stores."

The Wal-Mart supercenter team includes Don Cannon, vice president of merchandising for the supercenter division, and Nick White, executive vice president of the division.

The company is so bullish on the supercenter format that it is planning many of its new traditional discount units with expansion capabilities, observers told SN.

"With a lot of the new [discount] units, they're building on parcels of land where they can knock out a wall on one side of the building and expand," said Don Spindel, an analyst with A.G. Edwards, St. Louis.

Wal-Mart's conversion/replacement strategy goes hand in hand with its focus on rural expansion, observers said. With nearly 2,000 U.S. discount stores -- most of which are in rural markets -- the company still has plenty of candidates for supercenter conversion or replacement, according to observers.

And the factors that made rural expansion attractive to Wal-Mart in the first place -- less competition than suburban and urban areas; cheaper real estate; cheaper labor costs (because of less union activity), and fewer regulatory issues -- further bolster a rural expansion strategy for Wal-Mart supercenters, observers added.

"It doesn't look like Wal-Mart has any metro expansion on the horizon," said Edward Comeau, an analyst at Lehman Bros., New York. "They have had a high degree of success with the replacement/conversion program in rural markets because it attacks weaker competition but doesn't bring them face to face with the big chains they'd have to battle in metro markets. "I believe they could still do several years of replacements of 100 to 120 stores per year without saturating the [supercenter] market. They could easily convert another 500 stores."

At its projected pace of 100 supercenter openings per year (including another 40 scheduled for the remainder of this year), Wal-Mart should easily surpass its previously stated goal of 500 in operation by the year 2000. Indeed, the retailer would go over the 600 mark at that rate.

With annual sales of about $56 million per store (according to some analysts' estimates) and grocery sales accounting for an estimated 35% to 40% of supercenter volume, 600 supercenters would generate between $11.8 billion and $13.4 billion in total grocery sales for the company by the end of the decade.

Some analysts say the retailer has the potential to roll the concept out even more quickly because of its size, strength and resources -- and because the food presentation bolsters Wal-Mart's already strong general merchandise offerings.

"The supercenter concept is the strongest approach to retailing today," said Bernie Sosnick, an analyst with Oppenheimer & Co., New York. "No one has been able to stop [Wal-Mart] from gaining market share with their discount stores, and I don't think anyone will be able to stop their supercenters, either.

"I believe that they are getting cross-shopping [customers buying food and general merchandise on the same trip] because they are replacing their most productive stores with supercenters -- and they wouldn't do that if they weren't getting the returns to justify the investment.

"There is tremendous growth potential in the supercenter, and I think it's brought us to the dusk of the discount store era. I believe Wal-Mart will continue to replace their discount stores with supercenters and other [discounters] will follow. [Wal-Mart] could be operating as many as 800 to 900 supercenters by 2000."

Comeau offered a similar assessment, dismissing some observers' arguments that Wal-Mart is losing money on the food side but is content to use it to lure more general merchandise customers into the store.

"I don't think Wal-Mart would run a third of their [supercenters] in food, with all the costs involved, at a loss just to drive business on the other side of the store where they already dominate to begin with," he explained.

In fact, the company's only flaw in its rural expansion strategy may be getting enough good employees to man the supercenters -- particularly on the food side, some analysts said.

"They have brought in a tremendous amount of skilled talent from the supermarket industry and have also augmented it by training their own people," Spindel said. "Financially, they can probably open a lot more supercenters. But the big thing is, they're limited by their staff capabilities. You need to make sure you have enough good people to run an operation."

One aspect of the supercenter format that Wal-Mart has targeted for improvement is its perishables offering. Traditionally, fresh foods have been considered the Achilles heel of many supercenters -- and an area in which many observers believe that conventional supermarket operators are far superior in terms of presentation, selection, quality and service.

At the annual meeting, the company said it is refining its merchandise mix in produce, bakery, meats and fish. However, some analysts maintain that the retailer already has made great strides in its fresh approach.

"I have never seen [Wal-Mart] as having a perishables problem," Comeau said. "They're not pizzazzy, but they offer basic items that are fresh, ripe and well priced.

"I don't think their produce departments have the turnover of an Albertson's, Kroger or Stop & Shop in the metro markets, but [Wal-Mart] is doing sufficient volume. Their rural stores are doing about $350,000 to $400,000 per week in food, while the average supermarket does about $500,000."

Although most analysts expect the company to stick with its current strategies, several told SN they expect Wal-Mart at some point to make a successful move into the metro markets. Currently, the only bona fide urban market it operates a supercenter in is Phoenix, according to analysts.

"I think when they do go into metro areas -- and I firmly believe they will -- they'll go in with six or seven supercenters rather than one," Spindel said.

"It makes more sense because the urban markets are more competitive with better, larger operators, and it's easier for them to gang up on one store.

"Assuming [Wal-Mart] can do an adequate job in presentation, particularly in perishables, where they are getting better and better, they'll be a difficult format to compete against." Analysts also expect Wal-Mart to continue to selectively test some new markets, like the company did in January when it brought supercenters to three new states with units in Culpeper, Va., Clearfield, Pa., and Rome, N.Y. Several speculated that the company has considered building a distribution center in the Northeast to support further expansion there -- possibly in Pennsylvania or upstate New York.

"They're still testing and learning the limits of the supercenter concept in the Northeast," Spindel said. "I think they want to see how they'll perform there before they decide to open a few more."