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Wal-Mart Prepares Launch
Of Its ‘Marketside’ Concept

Jim Prevor’s Perishable Pundit, August 19, 2008

Wal-Mart’s new small store concept, which, as we discussed here, supposedly is going to be called Marketside, made the news recently due to some Help Wanted ads the chain was running.

The Financial Times ran a piece entitled, Wal-Mart Sees Marketside as a $10bn Chain that explained:

Wal-Mart’s executives have described the Marketside stores as a pilot project, although it is the first new store format to be launched by the company in a decade. But a job advertisement for the retailer indicates the scale of its ambitions for Marketside, saying the format “is expected to start with 10 stores and evolve to between 1,000-1,500 stores with over $10bn annual sales”.

When Wal-Mart was contacted by the newspaper, it emphasized it was just a pilot project and took the explanatory language off the web site.

So what is it? A pilot project? Or a 1,000-plus store rollout? Is Wal-Mart being coy? Did a lowly ad copywriter reveal a secret truth?

The whole contretemps is kind of ridiculous. Wal-Mart is a giant company; it probably wouldn’t launch any concept unless it could see the potential for a substantial business. On a small footprint store, that means it has to perceive the opportunity for many stores.

That it hopes for the concept to open over a thousand stores and sell $10 billion is not surprising — why else would it bother?

It is just as obvious that no company does more than sketch out how a thousand store rollout might work when it hasn’t opened even a single store.

Wal-Mart hasn’t signed a thousand leases or done any other concrete action to commit to opening a thousand stores. It is more correct to call such an expression a hope than a plan.

What is surely true is that in hiring executives Wal-Mart is looking for people capable of handling a roll-out and so the ad copy is an attempt to attract that kind of person. In much the way that Bruce Peterson didn’t sign up at Wal-Mart to run produce for a seven-store chain, he signed up because Sam Walton told him they would be the biggest grocer in America.

Sam Walton was right. Will current management be as well?

Well the ad itself gives us a clue. One thousand stores generating $10 billion in sales, implies sales of $10 million per store per year. Interestingly this number works out to just about $200,000 per week per store, which is precisely the expectation Tesco had for its new Fresh & Easy stores.

Now Tesco failed dramatically to achieve those numbers. As we chronicled, initial estimates were that sales were running around $50,000 per week per store. Time has led to improvements, but much of this has been driven by heavy use of promotional pricing and couponing, so much of the increase in business has not been profitable business.

Is there reason to think that Wal-Mart will be more successful? Well, the Wal-Mart stores are believed to be at least 50% larger than Fresh & Easy, so that $200,000 per store per week represents an expectation for significantly lower sales per square foot. This should make obtaining that goal more plausible.

It is also expected that as with Safeway’s small store format that we spoke of here and here, Wal-Mart will offer a full range of perishable departments, including a service deli. These departments tend to price higher and thus raise the average ring.

We can also expect Wal-Mart’s venture to focus more heavily on well known brands rather than private label.

All this, combined with Wal-Mart’s knowledge of the US consumer, extensive real estate expertise, distribution and logistics capabilities, and heft with the supplier base, all may make for a potentially more successful concept.

Yet there are also reasons to think the prospects for the division are not that great. A big red flag was recently unfurled when David Wild, who had been spearheading the development of this new concept for Wal-Mart as the Vice President for Business Development suddenly left Wal-Mart in June to accept a position in the UK as CEO of Halfords Group, a British retail group. Wild was previously managing director at Wal-Mart Germany before doing 18 years at Tesco.

It is always difficult to surmise much from personal decisions. Perhaps Mr. Wild or his family didn’t thrive in the US and were looking for a way back home to Britain. Perhaps Mr. Wild really wanted to be a CEO. Maybe Wal-Mart whispered to him that he wouldn’t be put in charge of the roll-out and he should look for other opportunities. Many plausible explanations can be theorized.

Still it raises doubts. Although the conceptual work on the project was pretty much done by the time he left and so his departure will have little direct impact, it raises concerns about Wal-Mart’s commitment to the project.

Although Wal-Mart CEO Lee Scott has said that Tesco stole a march on Wal-Mart’s ASDA Division in the UK when Tesco seized the convenience market with its Tesco Express stores — and presumably he is dead-set against that happening in the US — there are real limits to the price most public companies will pay to achieve these kinds of goals.

In fact, even what one could identify as a great strategic goal for Wal-Mart — keeping Tesco out of North America — has not prompted much action on Wal-Mart’s part. After all, when Tesco announced its venture in the US, had Wal-Mart really wanted to signal an aggressive fight, the place to hit Tesco would be in the UK, where its dominant market share means that any price war would be enormously expensive for Tesco.

An aggressive private company thinking strategically might have chosen to lose a lot of money in the UK as a signal to Tesco: Don’t tread on our turf. It would have worked too. Tesco is also public and the City — London’s version of Wall Street — would probably have objected strenuously to investing billions in America if the UK operation was hemorrhaging money.

Even now, we are often asked if Tesco will withdraw from the United States. The answer depends as much on what is going on at home as with how this little Fresh & Easy division is doing.

Sainsbury’s sold Shaws because of a need to focus on its home turf. Ford just sold its European Auto Group for the same reason. If Wal-Mart is concerned about Tesco in a strategic sense, developing little stores to compete mano-a-mano is a weak response.

By building a giant distribution center, sending a large management team over from the UK and signing many leases, Tesco showed real commitment. The personal prestige of the CEO was committed to the project and the best and brightest of Tesco’s management team was sent over.

It obviously is of strategic importance for Tesco to establish a presence in the largest market in the world and it seems prepared to pay a substantial price to do so.

Wal-Mart does not seem prepared to pay the price necessary to prevent that from happening.

So, on at least some level, David Wild leaving may have signaled that he doubted Wal-Mart’s commitment to the project. Sure Wal-Mart would love to have another successful store concept in America. Much as it would have loved to have its Neighborhood Market concept roll out across the USA.

In the end, though, it didn’t roll out the Neighborhood Market concept because it did not get the return on investment from those stores that it required. It always could make higher returns by devoting its efforts to building more supercenters.

There is zero indication that Wal-Mart will build these small format stores as a strategic initiative to fill the market niche to prevent others from doing so. It is only going to build these stores if it can make a good return on investment.

That may be a decision Wal-Mart regrets when Tesco buys Meijer, as we discussed here, or starts building its own supercenters.

Of course, there is one other option for Wal-Mart. Most chains make their money on a small percentage of high performing stores. If Tesco builds 200 stores initially and Wal-Mart identifies the 20% that probably supply 80% of the profits, and if Wal-Mart opens 40 Marketside stores as close as possible to the 40 top performing Fresh & Easy stores, neither will probably make a profit. That is insignificant to Wal-Mart’s US operation, but devastating to Tesco’s US division.

Yet our sense is that Wal-Mart is not thinking this way. Wal-Mart is simply trying a new concept. It would help Wal-Mart in the many markets in which supercenter size stores are difficult to open. Wal-Mart likes that it can typically open this size store “as of right” without the need for special permitting. And, of course, if Tesco has identified a new niche, Wal-Mart wants its piece.

So far though, Sir Terry Leahy at Tesco is showing a willingness to bleed to establish this beachhead in America and this format. Lee Scott, CEO at Wal-Mart, is showing no such inclination. That may speak to the result of this battle more than the virtues of their respective concepts.

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