PREVIEW-Wal-Mart tests small grocery store as market shifts

Fri Oct 3, 2008 3:46pm EDT

Related Topics

* What: Wal-Mart Stores opens Marketside grocery stores

* When: Oct. 4

* Wal-Mart foray comes as rivals test small-store format

By Nicole Maestri and Lisa Baertlein

NEW YORK/LOS ANGELES, Oct 3 (Reuters) - Wal-Mart Stores Inc (WMT.N) launches a handful of convenience-sized grocery stores this weekend to stake its claim in an industry experimenting with smaller store formats.

On Oct. 4, Wal-Mart marks the official opening of four Marketside stores in the Phoenix area. The retailer, which operates more than 3,630 namesake U.S. stores, has downplayed their importance -- saying they are just a test.

Wal-Mart's U.S. stores rang up $239.53 billion in sales last year and Sanford C. Bernstein retail analyst Uta Werner said in a research note that any Marketside roll-out "would be only modestly incremental to the company's results."

But Wal-Mart is taking steps now to protect its future market share, analysts said.

Grocery store rivals have already opened smaller outlets to woo U.S. shoppers who want ready-to-eat meals or fresh produce, but who do not have time for a trip to a supermarket.

British grocer Tesco Plc (TSCO.L) has opened Fresh & Easy stores in California, Nevada and Arizona, while Safeway Inc (SWY.N) and Supervalu Inc (SVU.N) are testing small stores.

That could create new competition for Wal-Mart, which sells groceries inside its vastly larger and harder to navigate, supercenters.

"If Fresh & Easy comes up ... with 1,000 of these over the next couple of years, then it's going to be the death of 1,000 pricks for Wal-Mart and they wouldn't be able to compete," said Bill Bishop, chairman of consulting firm Willard Bishop, which advises retailers and supermarkets.

The industry is eager to see if Wal-Mart, which has specialized in running stores three times the size of a U.S. football field, can replicate that success on a small scale.

The key will be to keep prices reasonably low and offer cash-strapped consumers an attractive and quick alternative to preparing their own meals, even as many choose to eat out less in a weak U.S. economy. But that can pose a challenge to profits.

"If you're small, cheap and convenient, and actually have some good food, you're going to do really well," Bishop said.

"The only caveat is not all retailers can do all retailing and Wal-Mart is an exceptional retailer at bringing every day low price and high volume through big stores."

FORMAT OF THE FUTURE?

The U.S. retail landscape is saturated with large supermarkets that offer shoppers an ever-growing array of products. Wal-Mart's supercenters, which average 187,000 square feet, combine a discount store with a full grocery store.

Phil Lempert, editor of SupermarketGuru.com, said the expansive selection at these stores can overwhelm shoppers.

"We've inundated people with far too many choices, far too many products," he said, adding that shoppers want small stores and convenience. "This new format ... is the future."

Marketside stores will be roughly 15,000 square feet, while Tesco's Fresh & Easy stores are around 10,000 square feet.

"With the population aging, stores probably getting smaller, we are looking at how we build more efficient stores and how we develop a broader portfolio of formats beyond the 195,000 foot supercenters," Wal-Mart's chief merchandising officer John Fleming said at a conference last month.

Marketside's website says it is designed "with the quick grocery trip in mind." It will sell prepared meals, like steak fajitas with onions and rice for $6 and a family-sized lasagna for $8, alongside produce, poultry and shampoo.

In addition to prepared food like single-serve salads and sandwiches that sell for around $4 and beef lasagna that serves three for $5, Fresh & Easy stores also sell fresh produce, dairy goods, cereal, frozen food, beer and wine, and personal-care items such as toothpaste and deodorant.

Josie Gonzales has been going to a Fresh & Easy twice a week since one opened near her last year in Chandler, Arizona.

"At supermarkets, you have to stand in line and wait too long," said the 72-year-old cafeteria worker as she held a bag of groceries on a recent afternoon. "It's great to be able to get in and out of here when I'm on my way home."

WAL-MART'S DILEMMA

But Fresh & Easy got off to a rocky start, and earlier this year, Tesco put expansion plans on ice for three months. It since has resumed new construction and renovated existing stores with fresh paint and new signage in a bid to make them seem less institutional.

On Tuesday, Tesco said Fresh & Easy recorded a loss of 60 million pounds ($106.58 million) in the first half and sales of 76 million pounds ($135 million).

"The dilemma for Wal-Mart is that it's virtually impossible for these stores to be as profitable as their big stores because the mix of products isn't there," Bishop said.

In a supercenter, Wal-Mart can balance the small profit it makes on food with sales of more profitable goods, like clothes. In a small store, it does not have that luxury.

"The margin structure is going to be important," said Scott Mushkin, grocery analyst at Jefferies & Co, of Marketside. (Additional reporting by David Schwartz in Phoenix; Editing by Andre Grenon)

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