WAL-MART'S SUPERCENTER SURGE

GLEN A. BERES

BENTONVILLE, Ark. -- It's midwinter, but that doesn't mean supercenter action is cooling down.

Wal-Mart Stores here, the nation's largest operator of those giant food and nonfood combination stores, marked the season by celebrating

its biggest ever supercenter opening spectacular by launching no fewer than 23 supercenters on a single day late last month.

The stores span a 13-state area as far north as upstate New York and as far south as Florida; moving outward from Wal-Mart's Arkansas stronghold down into Mississippi and Texas and up into Missouri, Indiana and Nebraska. And three states -- New York, Pennsylvania and Virginia -- represent brand-new territory for Wal-Mart Supercenters. Counting the Jan. 25 spate of openings, plus a converted unit reopened in Louisiana a few days later, Wal-Mart's net supercenter count jumped to 143.

That means Wal-Mart is likely to chalk up total sales of $8 billion on its supercenter units alone, of which some $3.5 billion will be produced by the stores' food side, according to estimates made by securities analysts. They claim each location is capable of generating some $56 million in annual sales, or more than $1 million a week.

Looking at the food sales alone, Wal-Mart could be considered about the nation's 20th largest food retailer.

By comparison, Meijer operates 86 supercenter locations with estimated sales of $4.5 billion.

And the Super Kmart Center strategy, perhaps destined to stall or slow as economic forces and internal turmoil continue to buffet that discounter, weighs in with 67 stores doing an estimated volume of $3.7 billion.

But as for Wal-Mart's expansion strategy, the retailer intends to maintain its aggressive growth plan by adding 75 more supercenters this year and another 100 in 1996. By the year 2000, the company expects to have 500 such stores, which would bring its projected total supercenter sales to $28 billion and its projected grocery sales to more than $12 billion.

"This latest wave of supercenter openings shows Wal-Mart's ability to roll things out," noted Jonathan Ziegler, a securities analyst at Salomon Bros., New York. "It's a dramatic increase and it's sending a message to the industry that Wal-Mart intends to make this its growth vehicle."

Not only is the retailer committed to the supercenter concept, but it also appears to be so assured of the division's long-term success that it is willing to take a few chances.

One indication: In the past, Wal-Mart focused on converting older discount stores to supercenters or shutting down an existing discount store entirely and relocating operations to a new, larger supercenter facility in the same region -- and often in the same parking lot, observers said.

The strategy was to give the new format advantages such as an established work force, a familiar market and an already loyal customer base to lower the risk factor for Wal-Mart, according to observers.

In the latest rollout, however, the company said it opened its first supercenters in three states: New York, Pennsylvania and Virginia. Wal-Mart also said four of the 24 new units opened last month are brand-new facilities built as supercenters from the ground up. They include new supercenters in Rome, N.Y.; Clearfield, Pa.; Texarkana, Texas, and Culpeper, Va. The other 20 replace older discount stores.

"They're convinced that the supercenter format will play out in new markets," said Bernie Sosnick, an analyst at Oppenheimer & Co., New York. "Some of the January openings are in completely new geographical areas for [Wal-Mart supercenters], which is a major departure from their original strategy, and a major sign of confidence."

At 200,000 square feet each, the Rome and Culpeper stores are examples of a larger Wal-Mart prototype and are among the retailer's largest supercenters in the country.

The Culpeper event was the talk of the town in this rural farmland community of 8,000. Even a convenience store clerk on the outskirts of town knew the score when asked how to get to James Madison Highway: "You must be here for the Wal-Mart," she said. A sizable crowd was on hand for the 8 a.m. ceremony, cheering on the town's newest business and eager to shop the aisles.

Although Culpeper County has a population of only 28,000, Wal-Mart hopes to draw from a much larger base in the region. According to Larry Boyd, Culpeper supercenter director, there are 15,000 people within a 15-mile radius, 204,000 people within 30 miles and more than 500,000 people within 60 miles. Washington is roughly 66 miles away.

Whether or not customers will drive 60 miles to go to the Culpeper Wal-Mart is an open question. Jeff Villio, district manager of the Culpeper store, thinks they will. He said the thinking is that those within 15 miles will visit the Culpeper store several times per week, and customers outside those boundaries will still shop there several times per month.

In Culpeper, Wal-Mart's main competitors are Food Lion, Safeway and Super Fresh Food Market. All three are within a few miles of one another off the James Madison Highway, which leads through the center of town, and one operator -- Super Fresh -- is across the street in the Dominion Square shopping center.

Store managers at the three locations would not publicly discuss what in-store strategies they would adopt to combat Wal-Mart; they generally expressed a "wait-and-see" attitude during the grand opening. Local observers, however, said at least one operator -- Super Fresh -- is looking hard at its prices in categories such as meat and produce and upgrading its perishables departments.

While the rollout indicates Wal-Mart's confidence in its supercenter division, some observers wonder whether Wal-Mart's supercenter format has the power to draw enough grocery customers to make that side of its business profitable.

"They're getting good general merchandise sales but they're not doing as well on the grocery side. Can Wal-Mart become a good supermarket operator? Only time will tell," said Gary Giblen, managing director of Smith Barney, New York.

Most observers said Wal-Mart is improving its grocery presentation. They noted that the company does a particularly good job with private label.

Edward Comeau, an analyst at Lehman Bros., New York, said Wal-Mart's private-label program was "stronger than Kroger's." The size and selection of the retailer's grocery side (which accounts for an estimated 25% to 30% of floor space and 40% to 45% of its sales volume) rivals many national supermarket chains.

And the retailer, which uses a combination of promotional and everyday low prices in its supercenter format -- has quickly expanded its low-price image into the food sector through its policy of matching a competitor's advertised price.

"They do a good job on the grocery side," said Don Spindel, a securities analyst at A.G. Edwards, St. Louis. "Initially, they were weak in some areas but they've fine-tuned it and really expanded the presentation."

But Wal-Mart's grocery offering falls short of a traditional supermarket in a number of areas, other observers say. Supermarkets have better produce, perishables and bakery sections, provide better service and do a better job with value-added products, according to those observers.

Yet some say the company is more interested in using food as a traffic builder for nonfood and will continue to focus on grocery -- profitable or not -- as long as the category continues to boost general merchandise sales.

"Wal-Mart says its operating profitability on the food side is more than 4%, which is a good level if the numbers are true," Comeau said. "But Wal-Mart's getting a traditional supermarket's volume of $350,000 per week and no more; they don't have a special format that gives them an inordinate amount of volume.

Much of Wal-Mart's success with supercenters will depend on its ability to generate cross-shopping (buying grocery items and general merchandise on the same visit), according to analysts.

A study by DSR Marketing Systems, Deerfield, Ill., presented at the National Grocers Association annual convention in Las Vegas earlier this month, suggests that about 40% of Wal-Mart supercenter customers made combined purchases at their last visit; only 10% shopped for supermarket-type merchandise only. The numbers for Kmart's supercenters, in comparison, were 39% and 20%, respectively.

To encourage cross-shopping, Wal-Mart has placed two supermarket categories -- health and beauty care and cosmetics -- near the front of its stores and on the opposite side of its food departments. This forces grocery customers to cross over to the general merchandise side of the store to complete their shopping trips.

Another important strategy in Wal-Mart's quest for cross-shopping is the presentation of the center aisle that separates the supermarket departments from general merchandise. This "action alley," as Wal-Mart officials call it, is a transitional area that typically displays food items up front and gradually becomes a general merchandise aisle.

In the Culpeper store, customers seemed to be cross-shopping, particularly parents, who picked up some children's apparel items on their way to the grocery aisles. But some observers say that Wal-Mart needs to refine its technique to boost what has been a light amount of cross-shopping in its supercenters.

"They're doing things 95% right, but health and beauty care doesn't belong on the general merchandise side; it's not a traffic-builder," Comeau said. "And their transition from food to nonfood is a little tight; they need to make that center aisle transition cleaner."

A big question in Wal-Mart's future is what kind of competition in the supercenter sector it will face from national discount chains.

Kmart, which has 67 Super Kmart Centers, last year publicly discussed long-term expansion plans for the division as ambitious as Wal-Mart's. But the company has scaled down its projections to about 25 stores in 1995. Beyond that, it isn't saying.

Analysts said the company needs to iron out its much-publicized internal problems before it can go forward.

In a December research report on Kmart from Prudential Securities, analysts Wayne Hood and Dina Pliotis predicted that Kmart "would scale back or halt" further supercenter growth until it becomes profitable. They further concluded that future Super Kmart Centers will meet "much more stringent return-on-investment requirements."

While Wal-Mart's strategy has been to open supercenters in rural areas where it already has a presence, Kmart has opted instead for urban areas across the country. Originally, Kmart intended to set up its supercenter hub in the Midwest and grow outward from its strength.

But the company abandoned the strategy and instead used its supercenter openings to prop up markets where it was having problems, like Arizona, California and Texas, said Gene Hoffman, president of Corporate Strategies International, a Minneapolis-based consultant who helped Kmart formulate its supercenter program.

"Kmart didn't maximize its original expansion plan," Hoffman said. "They thought they'd better put their best mousetrap in areas that were in trouble. They didn't look at supercenters as an entity of their own -- they saw them as an extension of Kmart."

Target will be the newest addition to the supercenter fray. The company has two supercenters planned for this year: a 195,000-square-foot unit scheduled to open in Omaha, Neb., next month, and a 160,000-square-foot store in Lawrence, Kan., scheduled to open in October. Target has projected six to eight supercenter openings in 1996 and 10 to 12 in 1997, analysts said.

It's unclear what strategy Target will take with its supercenters -- and Target isn't saying. But observers said they wouldn't be surprised to see the company make a major announcement about the division in the near future.