Wal-Mart, target gain supercenter share: distribution issues gain attention - Special Report

DSN Retailing Today, Feb 24, 2003 by Debbie Howell

Fallout in the supercenter industry and continued WalMart emphasis on growing its grocery business could result in dramatic market share shifts this year as strong mass retailers expand their food focus while others retreat.

Kmart's financial troubles led it to shutter 57 of its 117 supercenters and put an estimated $2.4 billion in revenue up for grabs. Adding in impact from the 260 discount stores that Kmart also will close, the result is a loss of $5.4 billion in annual revenue, by the retailer's own estimate.

Whether the remaining supercenters will fit into Kmart's strategy going forward is questionable, leaving an even wider field of market share potentially open for the taking.

Based on Kmart's store-closure plan, analyst Emme Kozloff of Bernstein Research estimated Wal-Mart would capture 60% of sales from the closed Kmarts and Target would gain 25%. In dollars, that means at least $2 billion more in annual revenue for Wal-Mart and $800 million going to Target.

"Kmart's loss is Wal-Mart's and Target's gain. Our analysis suggests that both Wal-Mart and Target are well-positioned to benefit from the latest round of store closings," Kozloff wrote in a January research report.

For Wal-Mart, its position as the nation's largest food retailer should grow even stronger, widening the gap in consumables sales between it and rival food retailers. Kozloff estimated Wal-Mart's grocery share at 12% in the U.S., followed by No. 2 player Kroger with an 11% share and Albertson's and Safeway both at 8%.

As Wal-Mart adds more supercenters, the importance of food grows accordingly. Kozloff forecasts grocery, tobacco, pharmacy and drug store items will generate $79 billion in Wal-Mart store revenue this year, or 42% of the division's sales.

The addition of more food products in Wal-Mart's discount stores, along with a slow rollout of its Neighborhood Market concept are also contributing to food share gains.

With an estimated 1,258 supercenters now in the United States, WalMart is eight times the size of its next largest competitor, Meijer, which operates 156 stores in Illinois, Indiana, Kentucky, Michigan and Ohio. This year, Wal-Mart plans to open 200 to 210 domestic supercenters, of which two-thirds will be relocations or expansions of its discount stores. By 2004, Wal-Mart's supercenter count will exceed that of its discount stores. The sheer volume of supercenter openings guarantees Wal-Mart the lead spot well into the future.

By 2006, Wal-Mart's supercenter revenue could double that of 2002 to grow to $163 billion, according to a Merrill Lynch estimate, based on current expansion rates.

Wal-Mart operates supercenters in 43 states, lacking units in Alaska, Hawaii, California, New Jersey, North Dakota, Rhode Island and Vermont. California is the next frontier, with 40 units planned within the next five years, the first two of which will open in 2004 in Bakersfield and Palm Springs.

Since its first supercenter opening in 1988, Wal-Mart has grown its grocery market share to exceed 10% in 42 of the nation's 100 largest markets, according to JPMorgan research. Its greatest food share is in Springfield, Mo., where Wal-Mart has grabbed 33% of grocery sales. Among major markets, Dallas-Fort Worth is the strongest, with Wal-Mart owning an estimated 14% share.

Many independents have failed due to Wal-Mart's inroads, while the top supermarket chains in the nation admit feeling an impact from the retailer's market share gains. Wal-Mart's effective self-distribution network and a growing consumer base attracted to low food prices are proving a challenge for traditional grocers. Albertson's. for example, has left several Texas markets due to difficulty gaining share in the shadow of Wal-Mart.

Meanwhile, Wal-Mart hasn't stopped working to improve its supercenter format. A current focus is the Store of the Community initiative, in which grocery assortments are tailored based on demographics. Another test is its Kid Connection candy shop, which is in about 60 stores now.

On the fresh side, Wal-Mart has been credited with improving its perishables, deli and bakery offerings, areas that some still view as inferior to supermarkets.

Neighborhood Market, which is basically a combination supermarket and drug store, could be a major strategic weapon going forward. At 50 units now, Wal-Mart will add 20 to 25 stores this year. Once expansion ramps up, the concept is expected to gain significant share from traditional supermarkets.

With Wal-Mart attracting so much attention, the question arises whether enough business remains for other mass retailers intent on expanding their food operations. So far, Target, Meijer and Fred Meyer have shown a commitment to supercenters, while Kmart's food strategy seems up in the air.

Before Kmart ended up in bankruptcy, supercenter expansion was its top priority. Now the opposite appears true, considering Kmart's move to close half of its supercenters. And with Fleming's decision to terminate its grocery supply agreement, the food business may be more trouble than Kmart needs. So far, however, Kmart hasn't indicated it will abandon supercenters or pull its pantry program, which offers a wide range of food in discount stores.