WAL-MART SET TO BROADEN NEIGHBORHOOD MARKETS TEST

ELLIOT ZWIEBACH

BENTONVILLE, Ark. -- Wal-Mart Stores here said last week it will expand its four-store test of Neighborhood Markets with five to 10 additional units, all located in Arkansas or Oklahoma.

That announcement represents good news for U.S. supermarket operators, observers told SN -- giving them at least one more year before Wal-Mart considers rolling the format out all over the United States.

"Wal-Mart had indicated it would reach a decision on a major expansion of Neighborhood Markets by early 2000," Gary Giblen, New York-based managing director of Banc of America Montgomery Securities, San Francisco, told SN last week, "which meant there was a possibility it could have opened 100 or more stores next year.

"But that won't happen now that Wal-Mart has decided simply to expand the test period in two states."

Wal-Mart operates Neighborhood Markets -- 40,000-square-foot conventional grocery stores with drive-through pharmacies -- in four Arkansas locations, all of which opened in the fall of 1998. The company said the additional stores will open as part of an ongoing test of the format during its fiscal year 2001, which begins Feb. 1.

Les Copeland, a spokesman for Wal-Mart, said the Neighborhood Markets' performance "has so far met our expectations, and now we're ready to expand the test to other markets to get a feel for how consumers 200 miles away from here will respond. "Operating Neighborhood Markets in Oklahoma City and Tulsa will give us a look at bigger marketing areas with more urban demographics and a more diverse population than northwest Arkansas," Copeland told SN.

He said Wal-Mart wants to continue to evaluate the format and performance of the Neighborhood Markets, as it did with supercenters, before making a decision to roll them out more extensively. The next Neighborhood Market will open in either Oklahoma City or Fayetteville, Ark., before the end of the company's fiscal year in January, Copeland said.

Wal-Mart said last week its expansion plans for other formats in fiscal 2001 include the following:

An increase in the number of supercenter openings to 160 to 165 next year -- up from 150 this year -- with new locations targeted primarily for New England and the Southwest, including Colorado and Arizona.

Construction of 10 new distribution centers, including four food-distribution facilities and two fresh-food centers, in undisclosed locations.

The addition of 20 to 25 new Sam's Clubs, up from 10 to 15 scheduled to open this year, and 40 discount stores, identical to this year.

The opening of 90 to 100 stores overseas, all in countries where Wal-Mart already operates, compared with 75 to 80 international stores this year.

Copeland declined to pinpoint what kind of capital budget Wal-Mart has set for this year or fiscal 2001.

According to Giblen, Wal-Mart's decision to limit its short-term expansion of Neighborhood Markets to a handful of stores in Arkansas and Oklahoma represents a more measured approach than the company has taken in the past. "Wal-Mart will continue testing Neighborhood Markets in areas of primarily low competition where there's a lot of easy market share to be gained, whereas in the past it has occasionally sought out very tough competition to try something.

"For example, when it tested a new fresh-food section, it tried it out in Richmond, Va., where it went head-to-head with Ukrop's. In this case it's chosen not to do something similar with the Neighborhood Markets."

Copeland told SN the Neighborhood Markets are continuing to evolve. "We're treating those stores as a test," he explained. "Just as we did with supercenters, we're opening a few, evaluating their performance and making changes before beginning a rollout."

The four stores are located here; in nearby Springdale and Fort Smith, and in Little Rock, three hours away.

"We've done a lot of different things since we opened them -- we've changed the merchandise selection and placement within the stores, and we've listened to what customers are telling us about what they want to buy," Copeland said.

"Having the stores so close to Bentonville has been helpful because our merchandisers can get to the stores and talk to customers, watch people's buying habits, pay close attention to detail and learn what will sell best."

"The number of supercenters scheduled to open next year -- between 160 and 165 -- is slightly ahead of Wal-Mart's pace of 150 openings over the last few years, although, coming off a larger base, it represents about the same growth rate, Giblen told SN. Wal-Mart operates 650 supercenters.

Copeland said the increase in the number of projected supercenter openings is a result of "strong consumer acceptance for the format and its strong financial performance."

Of the new units slated to open, approximately 100 will be replacements for or expansions of existing discount stores -- an increase in the number of supercenters Wal-Mart will build, Giblen pointed out.

"In the past, 85% of supercenters have been replacements or expanded discount stores," he said, "but the company is apparently putting more effort and capital into developing green-field centers, with only about 66% of the stores being conversions."

Copeland said supercenters will be added in areas where Wal-Mart has been opening such units in the past few years, including New England, where it has four supercenters; Colorado, where it has four; and Arizona, where it has one.

Stores will range from 109,000 square feet up to 220,000 square feet, depending on the population base, Copeland said.

Of the 10 distribution centers planned for 2001, four will be general-merchandise centers for the company's traditional Wal-Mart discount stores. Of the other six, four will be food-distribution centers and two will be fresh-food centers, although the company declined to say where they will be located.

Copeland said Wal-Mart is opening four food-distribution centers next year: one in Tomah, Wis., scheduled to open in the spring; centers in Johnstown, N.Y., and Opelika, Ala., set to open next June; and one in Corrine, Utah, due late next summer.

The company also has its first two fresh-food facilities under construction, with both scheduled to open in August in Monroe, Ga., and Terrell, Texas.

Giblen said the opening of two fresh-food facilities next year and two more the following year demonstrates Wal-Mart's interest in improving its perishables operations. "That's the weakest part of the Wal-Mart operation, and the company needs to focus on that. With its own dedicated facilities, the hope is it can achieve faster deliveries to the stores and fresher product on the shelves, and operating its own facilities will be more cost-effective because the handling process is different than for dry goods."