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The Verdict On The New Walmart Express Stores: Nice Enough But Non-Responsive To The Challenge Wal-Mart Faces From Aldi, Save-a-Lot, Dollar Stores And Others

Jim Prevor’s Perishable Pundit, July 6, 2011

We paid a visit to Wal-Mart’s new Walmart Express concept visiting the first two stores that just opened in Gentry and Prairie Grove, Arkansas, within driving range of Wal-Mart’s Bentonville headquarters.

About 15,000 square feet each, both with pharmacies and the Gentry store with a gas station, both are perfectly nice little stores.

The design seems to emphasize economy with unadorned polished concrete floors, a ceiling with exposed AC vents and no graphics or adornments on the walls.

In these rural small towns, the stores are made warm by the people in the local community who shop there. Both stores were busy during our mid-day visits and, at both, you found what is often found in small town rural America, people who know each other bumping into each other.

Just sitting in the parking lot for a while, you constantly had people rolling down their windows to say hi to those walking to the car; you heard people inquiring about the health of a sick spouse or parent and inquiring about new babies, what children are doing for the summer and just-started businesses.

We didn’t do a formal study, but it was pretty clear that Wal-Mart was doing a little micro-marketing or, at least, some experimentation. The Prairie Grove store seemed to carry more products on Wal-Mart’s Great Value brand, while the Gentry store seemed to have more national branded product and more expensive lines, such as Hebrew National hot dogs.

There is no service deli, and there was probably some discussion internally at Wal-Mart on whether to use precious space for that purpose. Probably it came down to a pharmacy or a deli, and Wal-Mart probably made the right decision as the barrier to entry in opening an independent sandwich shop or deli is much lower than in opening a pharmacy where, of course, one needs a pharmacist and benefits greatly from negotiating power with insurance companies.

The decision to incorporate gas stations where the location allows it is a winner as well. Not only is this a big business in and of itself, but it encourages the use of the store for quick fill-ins and perishable purchases. Most importantly, it allows Wal-Mart to pay the price for the best locations. In contrast, Tesco’s Fresh & Easy’s decision not to sell gas doomed it to mostly secondary locations.

We received quite a number of calls from British publications who see this new concept as being aimed at competing with Tesco’s Fresh & Easy concept. Although some units may overlap geographically, we doubt that Wal-Mart was very focused on Fresh & Easy in developing this concept as we saw the Marketplace stores, which we wrote about here and here, as much more effective tools to compete with Fresh & Easy. In fact, Wal-Mart cared so little about Marketplace competing with Fresh & Easy that Wal-Mart basically abandoned the project, turning the Marketplace name into a brand for prepared foods and fresh-cuts.

These stores — and Wal-Mart executives have expressed this — are really suitable for rural areas where existing Wal-Mart customers can save 20 minutes by not having to run to a Wal-Mart supercenter. Already familiar with the company and the brands, customers will probably be happy to have the opportunity to shop at this local outpost where they can pick up a prescription, cash a check, etc.

Wal-Mart has added a little sex-appeal to the concept by offering the stores as a depot for picking up things ordered online. This program builds on Wal-Mart’s Site-to-Store and Pick Up Today services and, in giving small stores the assortment of a giant store, may well be a bonus. Still, it is hard to see these as too much of a win. Wal-Mart still can’t offer same-day availability of products that the stores don’t stock, and anyone who buys enough online to purchase a membership in Amazon Prime for $79 can get free two-day deliveries not only to their own home but also for gifts etc.

This same Walmart Express concept, in addition to being a fill-in between supercenters in rural areas, is being touted as an answer to Wal-Mart’s desire to expand into urban areas. Since stores of this scale can open “as of right” almost everywhere — whereas getting 200,000 square foot locations suitable for supercenters in urban areas is almost always very difficult and typically requires zoning variances that enmesh the whole effort in the political arena — this can be an excellent tool to allow Wal-Mart into urban areas. In fact, a Walmart Express is expected to open in Chicago this year.

The success in sales of these stores is likely to be determined by the available competition, and rural towns without good supermarkets as well as urban areas where the competitors are typically small size independents offer good environments for Walmart Express.

As we have pointed out many times during our discussion of Tesco’s Journey to America as Fresh & Easy, Tesco’s big problem has always been with a mismatch between these stores and where they opened. Suburban Phoenix or Las Vegas are car-driven towns with lots of large, modern supermarkets, and consumers will typically use a small store format only as a convenience store because it doesn’t contain the assortment necessary to do a complete shop. So it becomes a pain for most consumers — not “easy” at all — as they have to go both to a large store and to a small store to buy all the products they wish to purchase. A Fresh & Easy might be very successful, sales wise, in Manhattan, for example.

The economics of small stores are not easy. The rural stores may work as they are relatively inexpensive to operate and can be viewed as a business unit in combination with nearby supercenters. By keeping customer business in with Wal-Mart by providing a local option, Wal-Mart may pick up enough business to knock some independents out of the market and keep some chains from coming in. The problem for Wal-Mart is that this is also true of its Neighborhood Market concept, and Wal-Mart has never been reconciled to accepting lower returns on capital than it could earn on supercenters to implement a strategic sales-building strategy.

We doubt the urban stores will work very successfully. Some chains, such as Pathmark, have been successful with urban stores, but Pathmark specialized in working with political leaders to participate in urban development projects that enabled it to operate large scale stores. Craig Carlson used to be VP of Produce and Floral Merchandising at Pathmark and now is a Senior Director of Produce at Wal-Mart with responsibilities supervising procurement and category management for apples, pears, citrus and stone fruit.

 One wonders if the powers that be in Bentonville called Craig in to tap his expertise on operating urban stores. When Craig was still at Pathmark, he gave us a tour on Pathmark’s Harlem Store. One big part of our conversation was the cost of the off-duty New York City police officers that Pathmark hired to provide round-the-clock security.

It was expensive and required a large, high-volume store to justify the cost. If Wal-Mart opens small format urban stores, it will be competing against independents and ethnic marketers that have many advantages. These stores buy produce on the terminal markets, often for less than Wal-Mart pays, and they often are run by large extended families that guard against theft and work on a defacto profit share plan. They have the ability to respond instantly to product offerings and have a laser-like focus on the ethnic groups they serve.

These stores also fly under the regulatory radar and do things Wal-Mart can’t do — from bribing the health inspector to beating up a shoplifter in the basement to locking the nightshift inside to avoid theft, to selling some unlabeled foodservice packs that were available at a bargain price. If Wal-Mart can open its supercenter concept in Brooklyn, the Bronx and Queens, it can have the critical mass to pay for the expense of operating in urban areas and might have its most successful stores. If it tries to operate stores on the scale of independents and ethnic marketers, it will probably lose money.

Yet, whether the Walmart Express concept is adequately profitable where it opens strikes us a secondary question.

The real problem with the Walmart Express concept is that it is not an answer to Wal-Mart’s problem, which is declining public confidence that Wal-Mart offers the best price. On the way from the Prairie Grove store to the Gentry store, the GPS guided us past an Aldi and we stopped in. Physically the stores are similar — the Aldi actually a warmer store with more attractive graphics.

Two seconds in the Aldi store demonstrated that the Walmart Express concept is simply non-responsive to the marketing challenge Wal-Mart faces. The Walmart was designed to look “bargain basement” with concrete and metal exposed — but there was nothing in the function of the store to allow Wal-Mart to operate less expensively… indeed it will probably be more expensive to operate than a supercenter per dollar of sales.

Almost every item was less expensive in Aldi and the quality was often better or certainly would be perceived as better by many consumers. Take a showcase item such as bananas: The Walmart Express stores were selling unbranded bananas with a generic Fruits & Veggies More Matters sticker for 54 cents a lb. Not only was Aldi 44 cents a lb., but it was selling Del Monte brand.

True, the Aldi bananas were bagged so, perhaps, a broke person could buy one or two bananas at WalMart Express and pay less out of pocket. Still, allowing Aldi to sell cheaper and better on a profile item day after day helps educate consumers that Wal-Mart is not a bargain.

In the not too distant past, this would have been culturally unacceptable at Wal-Mart. On a national level, it wouldn’t have been acceptable and, locally, a store manager would have been expected to react to such pricing. In fact, a store manager could have been fired for allowing a competitor to undercut Wal-Mart on such a high profile item.

Wal-Mart needs a concept that is dedicated to underpricing Aldi, Save-a-Lot and Dollar stores and deep discounters of all sort. It also needs to rebuild a culture that is dedicated to providing consumers with satisfaction-guaranteed product at the lowest possible cost.

Walmart Express, whatever its utility, does not seem to be the answer to the challenge Wal-Mart actually faces.

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