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Wal-Mart Takes On Tesco
With 20,000-Square-Foot Stores

Jim Prevor’s Perishable Pundit, January 15, 2008

The name is supposedly “Marketside,” but maybe people will just call it Small-Mart. The Financial Times reports that Wal-Mart will open four new stores in Arizona under the Marketside banner. Each store is about 20,000 square feet and the logo — green lettering, a stylized tomato, egg and grape — all topped by a Wal-Mart blue star, seems to suggest an emphasis on fresh foods:

Wal-Mart goes small to take on UK’s Tesco

Wal-Mart will open small-format grocery stores in Arizona this year under the trade name, “Marketside”, going head to head with the new Fresh & Easy markets being rolled out in the US by Tesco, the UK grocer.

The new pilot stores are about 20,000 sq ft, a 10th of the size of the Supercenters that have been driving Wal-Mart’s growth over the past two decades.

The retailer has secured leases on four properties south-east of Phoenix, some of them only a mile from locations where Tesco is setting up its 10,000 sq ft discount grocery stores.

The stores, likely to be open by the summer, are the first new concept launched by the retailer in the US for a decade, and are being developed as the company slows its planned growth of Supercenters.

Unlike the giant stores, the planning process for the new Marketside stores does not require public consultation, potentially creating a way for Wal-Mart to grow into cities and states where its Supercenter expansion has been slowed by union-backed political opposition.

In addition to its 2,435 US Supercenters, Wal-Mart also sells food at 128 Neighborhood Markets, a grocery format the company launched in 1998.

Wal-Mart declined to give details of the new stores, but the company characterized them as comparable with its existing Neighborhood Markets, which it uses to “fill in” between Supercenters. At about 35,000 sq ft, the Neighborhood Markets are roughly the size of a traditional US supermarket.

“We trial and test lots of different new formats and this would be an example of that,” the company said.

But its new logo, filed in planning documents in Arizona and consisting of green lettering with a stylized tomato, egg and grape topped by a Wal-Mart blue star, suggests the format will — like Tesco’s Fresh & Easy — have a far stronger stress on fresh foods.

The retailer has also registered a number of new trade names in recent months, such as City Thyme and Field & Vine, which some industry analysts believe could be used for new private-label fresh-food offerings.

Wal-Mart recently hired Jack Sinclair, a veteran of the UK grocery industry, to head its supermarket business.

Operating the smaller stores is likely to require a significant shift in an operation developed to serve the Supercenter.

All the stores are in street-corner properties that were formerly occupied by drug stores. The company has applied for wine and beer licenses for stores in the fast-growing cities of Gilbert, Tempe and Mesa, and has additional leases in the city of Chandler.

There are already 12 Supercenters and five Neighborhood Markets in the area southeast of Phoenix. All the buildings were previously drug stores that were acquired and then sold off by CVS, the pharmacy group, as part of the break-up of the old Albertson’s supermarket group in 2006.

The four stores are located at:

Mesa: 7561 E Baseline Road
Gilbert: 910 E Elliott Road
Chandler: 950 N McQueen Road
Tempe: 838 W Elliott Road.

We are not sure how much this means. We ran a piece, Clash of Corporate Cultures Seen In Contrast Between Wal-Mart/ASDA Essentials And Tesco/Fresh & Easy, in which we pointed out that in the United Kingdom, Wal-Mart’s wholly owned subsidiary ASDA opened two small format stores called ASDA Essentials, which were designed to compete with Tesco’s Express brand stores — then promptly abandoned the rollout and closed one of the two prototypes.

Tesco is having plenty of problems in the U.S., but by investing so substantially in the Fresh & Easy concept, it created an enormous corporate imperative to get things right.

So the best bet is that despite many problems, Tesco will fix them and come to be a major player in the U.S. market.

In contrast, ASDA opened Essentials in response to a corporate recognition, articulated by Lee Scott, Wal-Mart’s CEO, that “a lot of Tesco’s growth has come from the small convenience chain. Andy [Bond, the CEO of ASDA] and his team have got to look and see where the opportunity is for us with that kind of space.”

Perhaps the test in the U.S. is Lee Scott’s expression that he is not going to let Tesco in the U.S. do what it did in Britain… gain substantial market share through the small store route.

Yet, without a major investment, it is also possible that Wal-Mart won’t have the commitment to overcome problems and will abandon the concept if it isn’t quickly successful.

The concept itself, at 20,000 square feet, is interesting. It could be seen as bloat onto the Tesco concept. Wal-Mart looked at each thing Tesco is doing and vowed to offer a little better and a little more. This is the kind of bloat we sometimes see with automobiles, where a car keeps getting a little bigger and a little heavier with each model year as the designers try to make it “better”.

Another possibility is that Wal-Mart’s Marketside at 20,000 square feet is more in tune with real estate availability than Tesco’s 10,000-square-foot format.

All four of the Marketside stores are being put in old CVS stores — there are a lot of sites like that available. In fact, Tesco has gotten caught with extra square footage on several sites. It rented the space available — say an old drug store — but only used enough space for its Fresh & Easy Stores and is trying to sublet the extra space. So far the extra space is just sitting, and Tesco is paying rent on the extra square footage.

One doesn’t have to be an expert in retail to know that Wal-Mart could use a profitable small store format. Small stores don’t require the kind of public process that getting a supercenter requires. It also would create an access route in dense urban areas where supercenter-scale real estate is not available.

In fact, it could help Supercenter expansion. It is easy now for, say, New York City politicians to oppose Wal-Mart. Let Wal-Mart open a bunch of little stores in town and it starts building its own political constituency. Local workers can get promoted to better jobs when a supercenter opens, local vendors can boost sales, local landlords urge the politicians to cooperate, and local charities become beneficiaries of Wal-Mart’s local operations — it becomes much tougher to simply object to Wal-Mart coming into the market.

However…you need a lot of little stores to equal one Supercenter and, as of yet, there is no evidence that consumers want this format. Wal-Mart has only inchingly rolled out its Neighborhood Market concept because its return on investment has never matched the Supercenter. It will be quite surprising if this 20,000-square-foot box does either.

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