WAL-MART SETS PROTOTYPE UNIT FOR ENTRY INTO SUPERMARKETS

ELLIOT ZWIEBACH / JENNIFER OWENS

BENTONVILLE, Ark. -- Wal-Mart Stores is about to get directly into the supermarket business with a new 40,000-square-foot prototype store -- a development observers see as a longterm threat to the food industry.

The new format is expected to provide the most frequently purchased items at convenient locations and at Wal-Mart's everyday low prices, with a pharmacy, "and there's no question that it will be another very competitive format that supermarkets and drug stores will have to deal with," Don Spindel, a securities analyst with A.G. Edwards & Sons, St. Louis, told SN.

"Anything that potentially takes market share is a threat," he said.

Wal-Mart said at its annual meeting here that it will open three experimental units of the new food-and-pharmacy format in Arkansas this fall.

"Mostly they are laboratories for us," David Glass, Wal-Mart president and chief executive officer, told the crowd of 18,000 shareholders at the meeting. "But it's really no different than any other experiment Wal-Mart has tried."

He said the stores will carry groceries, perishables and some general merchandise, including health and beauty care items, and will include in-store pharmacies with drive-through service windows.

The company said it has not yet selected a name for the stores, although observers said plans for the prototype refer to the format as "Wal-Mart Food and Drug Express."

In a fact sheet distributed at the meeting, Wal-Mart said the three stores will be located here; in Springdale, Ark., about 20 miles north; and in Sherwood, Ark. (near Little Rock), about 150 miles south.

"Trying new concepts is nothing new for Wal-Mart," the fact sheet said. "The stores will allow Wal-Mart to try new merchandise and customer concepts. Any additional development of the concept will be based on the performance and customer acceptance of the stores."

Spindel told SN it's still too early to assess the ultimate effect of the new prototype, "but Wal-Mart has said it plans to dominate the food industry, and this is an extension of how it plans to get there."

According to Spindel, Glass told analysts several years ago "that he sees a real opportunity for a retail format smaller than a supercenter that fills the void between supercenters and 7-Eleven stores, and this is apparently Wal-Mart's first attempt to create such a vehicle."

Spindel said he sees the new format as "a next-generation convenience store that fills the void" between discount stores, which devote about 20% of space to supermarket items, and supercenters, which devote 35% to 40% of space to that merchandise.

"The ultimate store that Wal-Mart rolls out may not look like the prototype -- it could be larger or smaller, and the product mix or the layout could change. Wal-Mart will probably modify it as it goes along, so we can't assume the first stores will be typical. But eventually it will develop a format that it's pleased with, as it did with supercenters."

With distribution facilities for its supercenters already in place, "Wal-Mart has the infrastructure to deliver perishables to these stores, which will enable it to leverage that investment."

Spindel said he wasn't sure what kind of volumes the stores will do, but he estimated it might take four or five 40,000-square-foot units to equal the sales of a single supercenter, "so these stores won't be significant for Wal-Mart until there are hundreds of them, which may take three to five years."

Debra Levin, an analyst with Morgan Stanley Dillon Read, New York, said the short-term effect of the new Wal-Mart format will be minimal, "since we're only talking about three stores. But longer term, this could definitely be a threat to the industry because these stores will carry the kind of consumables and nonfoods that supermarkets typically carry."

If Wal-Mart decides to expand the format following the tests, "it will probably be a fairly rapid rollout because the company has substantial cash flow," Levin said.

She said she anticipates Wal-Mart will build additional units, "but if it could acquire real estate, that would certainly be another option."

In other highlights of the annual meeting:

Wal-Mart said it plans to open two more grocery distribution centers this year.

The company said it will add pharmacies and expand fresh foods at a number of Sam's Club outlets.

Wal-Mart said it will open at least 120 supercenters, up from 100 last year.

The company said it will continue to test on-line retailing.

The retailer said it plans to open two new domestic grocery distribution centers that will be used to supply wholesale clubs as well.

One new facility, in Cessna, Bedford County, Pa., will be 830,000 square feet and is scheduled to open this summer; the other, in Los Lunas, N.M., will be 600,000 square feet and is scheduled to open in early 1999, the company said. Wal-Mart said it also expects to open a new general merchandise facility in Hermiston, Ore., this year.

Wal-Mart also told shareholders it plans to introduce pharmacies for the first time at Sam's Club stores; it also said it will add fresh-food departments at the 120 locations, with items including produce, meat, bakery and prepared entrees.

Glass told shareholders that expansion this year will include 50 new Wal-Mart discount stores (the same number as opened last year); at least 120 supercenters, including 90 relocations or expansions (compared with 100 new supercenters last year, which included 70 relocations or expansions); 10 new Sam's Clubs (the same number as last year); and 50 to 60 new international units (compared with 35 last year).

Wal-Mart introduced on-line retailing last year and, despite sluggish growth, the company plans to stick with it this year, Glass said. "Although it hasn't achieved a size that is significant to the company, it continues to grow," he said, adding that Wal-Mart expects on-line shopping to be a major sales force going forward.

Wal-Mart operates 3,422 stores worldwide, including 1,899 discount stores in the United States and 608 abroad (404 in Mexico, 145 in Canada, 21 in Germany, 14 in Puerto Rico, 12 in Argentina, nine in Brazil and three in China), 469 Sam's Clubs and 446 supercenters.

Glass told shareholders the company's sales grew 12% last year -- bringing sales to $118 billion -- while inventories shrank 4%, for a savings of $1.4 billion.

Glass predicted that Wal-Mart's sales momentum would continue this year, noting that first-quarter earnings rose 27%, total sales were up 17% and same-store sales jumped 9%, including a gain in comps of 9.3% at Wal-Mart discount stores -- the highest in six years, he noted -- and 7.6% at Sam's.

"We've just had the best first quarter we've ever had, and there's no reason, with the momentum we have, that we can't continue to improve on that performance," Glass said.

He said sales at Sam's Clubs jumped 10.9% in May to $1.7 billion, compared with $1.55 billion a year ago. For the first quarter Sam's sales rose 9% to $5 billion, compared with $4.6 billion last year.

"Sam's is growing and we're expanding this business," Glass said. "The [people there] have rejuvenated that business."

Mark Hanson, president of the Sam's Club division, said the retailer has 30 million member households, representing 23% of all U.S. households. Sam's has been concentrating on membership development, Hanson said, noting that membership is up 4.4% from a year ago.