Wal-Mart circling Los Angeles as superstores fall on city

Discount Store News, Dec 5, 1994

LOS ANGELES -- Wal-Mart is on its way to The City of Angels, although no one seems to know exactly when. Apart from urban New York, metro Los Angeles marks the last major market in which Wal-Mart has little presence.

Phillip Lee, regional manager for Best Buy, which invaded L.A. in early November, has spearheaded that chain's acquisition of real estate, and noted that it's not impossible to find "A-1 sites."

However, Best Buy requires about six acres per site, and found several through the arduous task of purchasing the leases from two or three businesses, and then razing the property and building its 58,000-sq.-ft. megastore. Wal-Mart, which requires about 15 acres for its new prototypes, will most likely have to negotiate with five or six existing businesses to find the necessary room.

The nation's largest consumer market, consisting of some eight million persons, is also its least advanced in terms of modern discount retailing. In Los Angeles, discounters have been kept at bay by expensive real estate, the sheer volume of stores needed to serve the market and the nation's most expensive media, which can cost 40% more than in other major markets.

It's no surprise, then, that Wal-Mart has been slow to approach the market, avoiding the downtown sections of L.A., instead concentrating on Southern California for store sites. That has left the city to Wal-Mart's two major national rivals, Kmart and Target, as well as local membership-only discounter, Fedco.

The strategy has been so marked that Wal-Mart has only one store in all of Los Angeles county's 40 square miles, compared to 30 Kmarts, 28 Targets and four Fedcos. Sam's has invaded the market, and now operates about eight clubs, compared to an approximate 15 clubs for PriceCostco.

Los Angeles county store count

Chain      # of stores
Kmart           30
Target          28
Fedco           4
Wal-Mart        1
Total           63

Source: DSN Research

To the south, in the booming Orange County market, Kmart operates 12 stores, Target 15, and Wal-Mart none. Sam's has four clubs in the market, compared to PriceCostco's seven. And in Ventura County, Kmart operates six stores, Target three and Wal-Mart none. Sam's and PriceCostco each operate one club.

But in more rural areas of the market, the story changes. There, Wal-Mart has opened modern stores much larger than the older stores of its competitors. For instance, until last year, when Wal-Mart entered Palmdale, about 60 miles northeast of L.A., the city was served only by an aging 71,000-sq.-ft. Kmart and, since 1991, a 90,000-sq.-ft. Target. Wal-Mart's entrance prompted Kmart to upgrade to a new 145,000-sq.-ft. store, placing three of the nation's top discounters, as well as modern Best Buy and Service Merchandise megastores, in head-to-head competition.

But Palmdale is not the exception. Target and Kmart have responded to Wal-Mart's invasion of their turf, replacing older stores with up-to-date prototypes and sharpening prices.

Until two years ago, Wal-Mart was hardly a threat in the state, but that will almost certainly change. Los Angeles' commercial real estate circles are buzzing with rumors that Wal-Mart will arrive soon, and neither Target nor Kmart is invulnerable. Both are operating some of the oldest and least attractive of their national collection of stores in Los Angeles, in large part because the room for expansion simply doesn't exist. Target purchased the Gemco chain in 1986 and converted those already aging stores to its own format. Many of those stores, like one on Victory Boulevard in North Hollywood, are showing their age and will be very difficult to expand or upgrade.

However, the much greater interest in the market shown by specialty discounters in consumer electronics and home goods should spur rapid modernization. For instance, Adray's of Los Angeles, a market leader in electronics, debuted three brand-new superstores in August, hoping to forestall Best Buy, which debuted seven megastores in November. Adray's stores are their first new units in several years (with up to 20 more on the way), and mark an impressive upgrading of the company's retail image.

Similar upgrades have occurred in home furnishings (Bed Bath & Beyond's growth inspired an upgraded superstore from local power Stroud's) and home centers, where new Home Depot stores are forcing local chains to upgrade. The Good Guys and Virgin Megastores have also sharply upgraded stores.

The probable casualties in the market will be the independent retailers that have maintained far more market share than is the rule in major American cities. Smaller general merchandise operators have been forced out of business by the rise of power centers along L.A.'s major arteries, and the entry of chains like Best Buy will almost certainly impact the hundreds of independent consumer electronics and entertainment software stores throughout L.A.

Wal-Mart will have a tough time finding sites, but the task is not impossible, noted Best Buy's Lee. "They've pretty much laced up the outlying areas, and we've heard that they're coming soon"