Wal-Mart: is small really beautiful?

Implications: Wal-Mart is to open small-format, 20,000 sq ft, grocery stores under the name "Marketside" to compete with Tesco's Fresh & Easy stores. With slowing domestic growth and plans to open fewer Supercenters, the development of a smaller format is a critical step that will allow Wal-Mart to tap into lucrative local markets which it has so far ignored.

Analysis:

This year Wal-Mart’s Supercenter format celebrates its twentieth anniversary. The concept was unveiled in 1988 and was designed to be the ultimate in convenience: a store open 24/7, set across 187,000 square feet of space and selling well over 140,000 products from grocery to general merchandise.

 

Historically the Supercenter, of which there are now more than 2,400 across the US, has served Wal-Mart well. They have helped deliver impressive sales and market share growth and, inevitably, have a far higher rate of return than any other format. No wonder then that the company has rolled them out so aggressively – 281 opened in fiscal 2007. However, there are three issues with Supercenters over which Wal-Mart will have been coming to terms over the past couple of years.

 

The first is an economic point. Opening a huge number of Supercenter stores each and every year is simply not sustainable. While the enormous value of the US retail market and the geographical vastness of the country mean that it is very difficult for any company to approach saturation point, with 2,400 existing Supercenters Wal-Mart will find it increasingly difficult to add new stores in the kind of numbers it has done hitherto. Notably, this fiscal year Wal-Mart will add 30% fewer Supercenters – around 195 – than it did in the previous year; and in the next two years expansion will slow still further. By most retail standards, the scale of Wal-Mart’s physical growth remains impressive – over 30m sq ft of additional Supercenter space this fiscal alone- but by the retailer’s own standards, it’s positively conservative.

 

The second point is that Wal-Mart’s existing format segmentation means it inevitably misses out on some parts of the US retail market. At 42,000 sq ft, Neighbourhood stores are the company’s smallest footprint. However, even at this reduced scale it is virtually impossible to expand into densely concentrated urban areas. Competition in such locations is generally weak and if Wal-Mart could access them with a smaller format they could, collectively at least, offer a lucrative new growth opportunity. 

 

The third point relates to the attitude of many communities to Wal-Mart. Big is not always seen as beautiful and the proposed opening of new Supercenters is frequently greeted with local opposition. Local politics and the planning enquiries they impact on slow development and add a not insubstantial cost to the opening of new large stores. Smaller format stores will not attract the either the same level of hostile attention nor will they need as intense a planning process. They will allow Wal-Mart to ease its way into communities where expansion has so far been difficult.

 

Given a choice, Wal-Mart would not bother with any format other than the Supercenter. Reality, however, mean this is simply not a viable option. With domestic growth rates slowing – forecast 9% this year down from 12% last – Wal-Mart needs to explore the potential new formats can offer. This may come at a very inconvenient time for Tesco which is pursuing its own ambitions through the small Fresh & Easy concept, but while the British retailer has acted as a catalyst, Wal-Mart’s decision was ultimately an inevitable one.