Wal-Mart tests Neighborhood Market in China: Combo format is key to future expansion - Wal-Mart to open Neighborhood Market store in Shenzhen, China - Brief Article

DSN Retailing Today, April 22, 2002 by Mike Troy

SHENZHEN, CHINA -- Wal-Mart may be able to successfully operate Neighborhood Market stores in the wide open spaces of Arkansas, Oklahoma and Texas, but can the format work in a major city in the world's most densely populated market? Since there's only one way to find out, Wal-Mart opened its first Neighborhood Market store earlier this year in Shenzhen, China, even though, domestically, it only operates 31 units in three states.

Although the Chinese store bears the markings of a Neighborhood Market, those familiar with the domestic version of the format would find the differences striking. For starters, the Shenzhen store is underground. Wal-Mart operates large underground and multilevel stores in other densely populated areas of China and Korea, so it was no problem to shoehorn the Neighborhood Market into the basement of the Kerry Center office building in the Luohu business district about a block from Wal-Mart's Chinese headquarters.

From the street, the only visible markings that a Wal-Mart store is nearby are two green signs, roughly 5 feet tall and 10 feet wide, with "Neighborhood Market" written in white letters in English, as well as corresponding markings in Chinese.

These signs are affixed to the top of glass enclosures positioned over escalators that provide entry and exit points to the surface.

This 28,000-square-foot store also is smaller than the 31 Neighborhood Markets that exist in the United States, which are typically 40,000 square feet; however, six units are larger than 50,000 square feet. Despite the smaller size of the Chinese store, it is set up to accommodate the higher customer traffic and smaller transaction sizes typical of urban locations where most customers walk or use mass transit to reach the store. For example, checkstands are smaller and there are more of them than found in U.S. Neighborhood Markets that employ the classic conveyor belt checkout configuration. The Chinese store has approximately 20 checkstands that resemble the smaller express lane checkstands found in domestic Wal-Mart supercenters.

From a merchandising standpoint, the mix of product is fairly similar to domestic Neighborhood Markets in that half of the sales are generated by food and the remainder from non-food items, such as paper products, household chemicals and health and beauty care.

If the concept proves successful, it would provide Wal-Mart another vehicle to reach a vast Chinese market where expansion has recently begun accelerating. Wal-Mart opened eight stores in China last year and ended the year with 15 supercenters, three Sam's Clubs and one Neighborhood Market. Seven of the 19 units operating in China are located in the Shenzhen area where Wal-Mart opened its first two stores in August 1996.

The recent growth surge in China took place after Wal-Mart International ceo John Menzer told DSN Retailing Today early last year, "We now feel comfortable about growing much faster in China."

This year, the company hasn't said what type or how many of a planned 120 to 130 international store openings will occur in China, but analysts are forecasting at least a dozen new stores in China, which would give Wal-Mart a year-end store count in excess of 30 units.

"We continue to believe that, for all its risks, China is indispensable to Wal-Mart as the only market in the world where the company could conceivably replicate its vast U.S. operations over time," Goldman Sachs analyst George Strachan noted in a report on Wal-Mart's Chinese operations last fall.

It is a possibility Menzer has alluded to in the past. China's enormous population of 1.2 billion people, emerging consumer economy and strong acceptance of Wal-Mart's brand of retail offer a tremendous long-term opportunity. It is too early to tell what role Neighborhood Market will play in Chinese expansion. However, considering China's population is four times that of the United States and analysts are forecasting Wal-Mart will be operating several thousand domestic Neighborhood Markets by the end of the decade, it is not hard to imagine a similar number of stores in China.

Even if the recently opened underground urban version of the Neighborhood Market doesn't prove viable, it will provide insight into how to tap other highly urbanized markets in Korea, Japan and perhaps even American cities with small-format stores.