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11/01/2014

Walmart Looking to Downsize

Throughout most of its history, Walmart has striven to be two things: the place with everything, and the place where everything is cheapest.

The second imperative is still very much in place. But the first one is getting a bit stretched.

The big box stores that came to define Walmart–the ones where shoppers can seemingly find every SKU of anything they want–have not been a bright spot on the company's balance sheet lately. Same-store sales have been declining, with an 0.4 percent drop in the last holiday season and no growth in the most recent quarter. Groceries, the category where Walmart now makes more than half of its money, isn't doing any better; it's been hit by cuts in food stamps, higher payroll taxes, stagnant wages and other blows to its core shopper constituency.

Competition is beginning to pinch that constituency. Shoppers who wanted the best prices on general merchandise, including groceries, basically had Walmart, Target and few other options. Coping with the size of the store, and the inconvenience involved in finding what you wanted among a vast array, was basically the work the shopper put in for the low price. But dollar stores are increasingly cutting into that section of the market. The possible consolidation of the major players will intensify that competition, especially as they continue adding coolers and otherwise adapting themselves to sell more food.

As with most smaller-format stores, a good assortment of fresh food is the difference for Neighborhood Markets.

That's why going small is a big part of Walmart's future.

Walmart, like Target and other competitors, has experimented with smaller stores for years. The experimentation is coalescing around the concept of Neighborhood Markets, stores of about 45,000 square feet. That's about half the size of a regular Walmart, and about a quarter the size of a Supercenter.

The small stores have made a big impact, at least in terms of their potential. Their same-store sales were up 4 percent last year and 5.6 percent in the last quarter. Walmart has responded by accelerating their growth. It had originally planned to open no more than 150 of them in this fiscal year; it's now doubling those plans and will build between 270 and 300 of them. (By contrast, Walmart plans to open about 115 new Supercenters.)

SUCCESS FACTORS

What accounts for this success?

For one thing, the Neighborhood Markets are more of a match for dollar stores in both price and convenience. Walmart can bring its famous logistical efficiency to bear, keeping prices down while making shopping easier.

But the major competition for Walmart Neighborhood Market stores is not dollar stores but supermarkets, says Craig Johnson, a consultant and head of Customer Growth Partners. The smaller stores keep the emphasis on food, which is appropriate, given that it's both a traffic driver and the top revenue stream for Walmart.

Smaller-format Neighborhood Markets, like this one in downtown Chicago, allow Walmarts to enter urban areas where land might otherwise be unavailable or too costly.

Small-format doesn't always equal success, especially when you're trying to sell food. Tesco learned that lesson when its Fresh & Easy chain in the southwestern U.S. floundered into bankruptcy. Johnson says that, at about 7,500 square feet, the Fresh & Easy stores were too small.

"It's very difficult to [run a store that small] without delisting major categories of food," he says. The key to a successful grocery store, of any size, is an appealing array of fresh food: "Meat and produce sections are the differentiator between a successful smaller format store and unsuccessful ones."

The fresh food and a good selection of center-store products, plus speedier checkout, is a winning formula. "The Neighborhood Market brings the mountain to Mohammed," Johnson says. "You're closer to the customer, and you're allowing the mom to get in and out of the place quickly."

RIGHTSIZING

The Neighborhood Market formula didn't emerge fully formed; Walmart did, and to some extent is still doing, experimentation to get the right fit. This included stores even smaller than the Neighborhood Markets, called Walmart Express, of about 15,000 square feet. Walmart established 21 Walmart Express stores by 2014, but decided this fall to rebrand them as Neighborhood Markets.

Walmart's chief development officer, in an internal memo quoted in the Arkansas Democrat-Gazette, noted that Walmart Express and Neighborhood Markets were serving the same purposes for shoppers: "[C]ustomers rely mostly on the stores for grocery fill-in trips, last-minute dinners and prescription pickups."

Johnson traces the development of Walmart's small-store strategy in part to the influence of Greg Foran, promoted in July to CEO of Walmart U.S. Foran had been a top executive with Woolworths, Australia's leading grocer, where smaller-format stores are more common. Johnson notes that Walmart had experimented with the Walmart Express concept for about seven years with mediocre results.

"Meanwhile, on a related but separate track, they started optimizing the Neighborhood Markets," he said. "In the last two to three years, they've really sort of goosed up the whole Neighborhood Market concept, they've fine-tuned it, they've optimized it. And beginning about a year and a half ago, things finally kind of clicked. In other words, they got the formula right on it. They got the right balance of grocery and general merchandise, which basically means they somewhat reduced the general merchandise."

One of the biggest advantages of the smaller-format stores is that it will enable Walmart to enter urban areas where land is too expensive for a full-sized store. "It's a hell of a lot easier to site smaller stores," Johnson says.

It's also more competitive. A small-format Walmart, especially in a densely populated area, faces more direct competition from supermarkets, both chains and independents. The Walmart name might be an advantage in such cases, at least insofar as it's associated with lower prices.

"In some of the big cities, some of the labor-union types might not like [Walmart], but your average Joe Six-Pack, or Mrs. Six-Pack, out there buying groceries, she sees the Walmart name, and she'll see stuff lower than she'll be able to get anywhere else," Johnson says. "It's just a fact of life."

Keeping the economies of scale that enable those low prices might be tricky in smaller stores, but not if Walmart can successfully integrate them into a supply chain that uses larger stores as staging grounds. About a year ago, the company announced a plan to test out using the back rooms of certain Supercenters as "mini-warehouses" to supply nearby smaller stores. The plan was rolled out early this year in three unspecified markets.