WAL-MART AIM: TO INCREASE FOOD MARKET PENETRATION

CAROL EMERT

FAYETTEVILLE, Ark. (FNS) -- Wal-Mart Stores aims to snare the market penetration in food that it has achieved in hard- and soft-line goods, John Menzer, chief financial officer, told about 17,000 shareholders, store associates and analysts at the company's annual meeting here.

The retail giant, which posts more than a 10% market share in many nonfood categories, plans to ramp up its food share through swift supercenter expansion, chiefly through conversions of its discount stores, he said.

Wal-Mart's market share in food "is growing very, very rapidly," said Menzer, also an executive vice president at the Bentonville, Ark.-based retail giant. Achieving dominance in food is easier than in hard and soft lines because the grocery sector is much more fragmented, he noted. Wal-Mart is "seeking the same opportunities in the $425 billion food industry" as in discounting, he said.

Last year, Wal-Mart had a 3.16% dollar share of the food retail market, projected to rise to 8.67% by the year 2000, according to figures from Donaldson, Lufkin & Jenrette, New York. In 1995, Wal-Mart had a 7.25% share of the drug category, projected to rise to 13.58% by 2000. In other nonfood categories, its 1995 share

was as follows, DLJ reported: apparel, 10.17%; toys, 16.26%; consumer electronics, 10.06%; home improvement, 5.86%; automotive, 2.77%; sporting goods, 10.69%; and furniture, 1.64%.

Speaking in the Bud Walton Arena at the University of Arkansas here, Menzer described supercenters as "a proven concept [that is undergoing] explosive growth." International stores are the company's second most important growth vehicle, he said.

Menzer attributed part of his optimism about supercenters to the success of a smaller prototype being tested, with three units in Arkansas and Missouri. If those stores are profitable, the 109,000-square-foot units would allow Wal-Mart to serve smaller markets, he said.

"Early results are very encouraging, which gives even more growth opportunity for supercenters," Menzer said. Most of Wal-Mart's existing supercenters are 167,000 or 188,000 square feet.

This year, Wal-Mart plans to open 100 to 110 supercenters, 90 of which will be conversions or relocations of existing stores. The company also plans 60 to 70 new discount stores and five to 10 Sam's Club warehouse units. It also expects to open 25 to 30 international stores, some of which will be supercenters.

"The supercenters are doing a great job, and we're excited about that potential," said David Glass, president and chief executive officer. "We've laid the framework to be the dominant retailer in North America . . . and we can be a very important force in retailing in South America."

Wal-Mart is "quite satisfied" with the performance of supercenters, despite criticism from Wall Street, Jay Fitzsimmons, senior vice president of finance, told SN after the meeting. Moody's Investor Service downgraded Wal-Mart's debt earlier this year, citing a slow return on investment for supercenters, among other reasons.

"Earnings on those investments will occur later" than with discount stores, but Wal-Mart "is not at all disappointed with where we are on the supercenters," Fitzsimmons said. Comparable-store sales among supercenters were very strong in the first quarter, he said, but he would not disclose any numbers.

Converting discount stores into supercenters is a key element of Wal-Mart's efforts to control costs, raise margins and boost its return on capital, according to Menzer. Instead of building new stores, the company is converting discount units into supercenters as often as possible, he said. Wal-Mart also has cut remodeling costs in half by replacing fixtures as needed, rather than conducting an overhaul of each renovated store, he added.

Wal-Mart's top financial priority currently is to reverse a five-year slide on return on capital, which has resulted from expensive land and franchise acquisitions, Menzer said. According to Fitzsimmons, Wal-Mart expects to have enough cash on hand by next year to make more acquisitions, split its stock or pay a higher dividend.

By the end of this year, cash flows are expected to cover the company's capital expenditures and working capital, Fitzsimmons said. By the end of 1997, cash flows are expected to cover capital expenditures, working capital and dividends, leaving cash to spare.

Wal-Mart continues to expect sales of between $107 billion and $108 billion this year, Fitzsimmons said. "By the end of the year we expect earnings growth to exceed sales growth," he added.

Jay Allen, Wal-Mart's vice president for corporate affairs, said the Sam's Clubs converted from Pace stores continue to operate at a loss, but the company hopes they will be profitable by next year.