Neighborhood Market lowers landing gear: Industry anxiously awaits arrival - Cover Story

DSN Retailing Today, May 6, 2002 by Debbie Howell

Despite the troubles supermarket operators have had in growing market share in urban areas saturated with grocery stores, Wal-Mart is set to blow all of its weaker rivals out of the water once it gears up for a full-scale Neighborhood Market rollout.

While it continues fine-tuning the concept, Wal-Mart is growing more sophisticated as a grocery store operator, judging by its latest prototype in Rogers, Ark. In markets where Wal-Mart has established a loyal customer base with its supercenters, the addition of smaller convenience-oriented food and drug stores that deliver the same low-price value equation is a powerful draw for current customers. Because they can be placed where larger supercenters can t be, they will act as a destination for frequent grocery trips by existing Wal-Mart shoppers and new ones, as well.

Some analysts forecast that Wal-Mart's Neighborhood Market has the potential to become a 5,000-store format in the United States, and will grow the retailer's food share 20%.

"The market is never saturated for a superior player," said David Rogers, president of DSR Marketing Systems, a firm that specializes in retail market research. "The format should be taken very seriously. This is an urban format, a way of filling out urban markets for maximum impact."

And that is exactly Wal-Mart's intention. Shoppers of supercenters generally visit once on a weekend, but patronize grocers, drug stores or convenience stores two or more times per week for quick fill-in trips. If Wal-Mart can capture more of these midweek trips, it can significantly boost its food share.

Because of Wal-Mart's lower prices, which one analyst estimates are 30% lower than competitors, Neighborhood Market must keep operating costs to a minimum to drive profits out of a smaller box reliant on low-margin food sales.

With the newest prototype that opened in January in Rogers, Ark., progress has been made on expense control. The store size, 42,000 square feet, is smaller than some units tested, which were as large as 54,762 square feet. Use of lower-cost materials and the expansion of self-checkout are ways Wal-Mart has reduced its costs without sacrificing quality. In fact, the store looks sharper and classier than the first unit that opened in 1998 in nearby Bentonville.

"This new one shows they've learned a lot. I think it's a fairly substantial weapon for them down the road," said Jonathan Ziegler, a food and drugstore analyst for Deutsche Banc Alex. Brown.

As with its strategy in supercenters, Wal-Mart has slowly experimented, adding different services, products, layouts and decor elements to find the perfect mix. Some of the newest units have banks, fuel centers and a separate health and nutrition section. Among the attributes Wal-Mart seems to have settled on are drive-through pharmacies and self-checkouts.

Diverging from earlier versions of the Neighborhood Market, the Rogers store has a dramatically different look. The store uses more metallic fixtures and darker colors, such as black rather than green, the predominant color in former units. Signage is simple, but effective, with nice touches, such as rooftops over banners and old-time town photos on walls above some departments. Aisles are wider and the store seems larger and more open due to effective lighting.

Adjacent perishables, deli and bakery sections running all the way to the rear make an impressive statement in fresh food. Compared to earlier versions with separate food and drug entrances, this prototype has one entrance.

In the health and beauty section, WalMart lowered its gondolas to make viewing of the pharmacy easier, giving the appearance of a larger store. Other new features are a half-hour photo center at the front and a self-serve section called Grab It & Go, where patrons can pick up drinks, newspapers and snacks. Customers can pay using an honor system or pay at the checkout.

"The store makes the product the hero through deft lighting, improved fixturing and attractive perishables displays, while preserving spartan simplicity in the box itself," wrote Goldman Sachs analyst George Strachan in a recent report.

Another new feature is a natural and organic food section called Health & Nutrition. This section, in an alcove near the pharmacy, is similar to one found at another Neighborhood Market that opened in January in Tulsa, Okla,

There's little doubt that Wal-Mart will roll Out the format once it settles on a prototype--possibly the Rogers model--perfects its return on investment and builds a sufficient food distribution network to support growth. WalMart, which now operates 19 dedicated food distribution centers, is expanding its network and plans to have 44 food DCs running by 2005. The next 10 Neighborhood Market openings will be modeled after the Rogers store.

Eastward appears to be the trek that Wal-Mart is heading with this concept. There are now 31 Neighborhood Markets in Texas, Arkansas and Oklahoma, with plans to expand to urban markets in Memphis, Tenn., and Birmingham, Ala. Based on food distribution center openings, Lehman Brothers analyst Jeff Feiner wrote in a report that he expects Neighborhood Markets to open in Louisiana, Georgia, Kentucky, Missouri, Kansas and Nebraska.