Sunday, May 18, 2008

Wal-Mart Looking For Sites in California For it's Small-Format 'Marketside' Grocery Stores

As we reported late last year and have followed up on throughout this year, Wal-Mart plans to open an initial four of its small-format (about 15,000 square foot) Marketside grocery markets this summer in the Arizona cities of Mesa, Gilbert, Chandler and Tempe. Tesco Fresh & Easy stores are located nearby the Wal-Mart Marketside locations in each of these cities.

As we previously reported, the small-format Marketside stores will be similar to Fresh & Easy grocery markets in that they will offer a limited assortment of discount-priced food and grocery items and fresh foods like produce, meats and other perishables.

In the category of fresh, prepared foods however, Marketside will differ from Fresh & Easy in that the Wal-Mart-owned small-format grocery stores will have kitchens in-store, along with small eating counters, where all of the fresh, prepared foods will be prepared right in the stores. Fresh & Easy's fresh, prepared foods are produced in a kitchen at the Southern California distribution center and delivered to the stores.

The Marketside kitchens will prepare foods for customers to "eat-in" at seating that holds about 9-10 customers at a time, but more importantly for take-out, which will be the majority of the stores' business in terms of the in-store kitchen created prepared foods.

The four Arizona stores could open as early as next month, but no later than August, Fresh & Easy Buzz has learned. Wal-Mart is currently hiring for store managers and assistant managers on this website:

Wal-Mart looking to California for Marketside

Fresh & Easy Buzz also has learned Wal-Mart executives have been seriously looking for sites in both Southern and Northern California for the small-format Marketside stores, which will put a major emphasis on fresh, quality foods, along with offering new store branded food and grocery products in them.

As we've reported before, Wal-Mart has trademarked the brand names "City Thyme" and "Field and Vine." We expect to see food and grocery products under these store brands in the Marketside stores, along with perhaps another.

Our sources, who've been very good thus far, tell Fresh & Easy Buzz Wal-Mart is looking at both urban and suburban locations in Southern and Northern California for the Marketside stores.

Wal-Mart has had a difficult time getting approval for its Supercenters in California because of widespread opposition--and even laws prohibiting them--from counties, cities and community groups.

The retailer believes it will have no such problems with the 15,000 square foot Marketside stores, as they are the opposite in every way to the huge Supercenters, thereby making the arguments if they do come up anti Wal-Mart rather than anti-Supercenter, which is an argument the retailer thinks it can win.

According to our sources, Wal-Mart is particularly interested in using the Marketside format as an urban strategy in California, in big, dense cities like San Francisco, San Jose, Los Angeles and a few others.

Wal-Mart has little or no presence in food and grocery retailing in places like the 7-million resident-strong San Francisco Bay Area, and wants to use Marketside to create that presence. The same is the case in Los Angeles, as well as in San Jose and San Diego, since between space (real estate)limitations and political opposition it's nearly impossible for Wal-Mart to locate Supercenters in these cities, along with many others in California.

The retailer also sees Marketside as part of a multi-format strategy in California. For example, in the Golden State Wal-Mart has focused primarily on its discount store and Supercenter formats. However, having so many cities reject Supercenter permit applications has actually helped make Wal-Mart more creative from a multi-format perspective.

For example, it put a smaller-version (about 100,000 square feet compared to the average 180,000 square feet a Supercenter is) in a renovated big box building in Sanger, a suburb of Fresno last year. Wal-Mart is in the process of renovating a building of the same size in Modesto, California currently. It will be the retailer's second shrunken Supercenter in the state when it opens at the end of this year or early in 2009.

The retailer faced strong opposition in the past when it tried to build 200,000 square foot brand new Supercenters in both cities. However, since all that's required to buy and renovate and old buildings like the two mentioned above is to get the proper permits, neither Sanger or Modesto could prohibit Wal-Mart from renovating the empty buildings like they can in the case of new construction.

Wal-Mart also is adding square footage on to a number of its discount format stores in Southern California. The additions--of about 25,000 -to- 50,000 square feet--will all be used for food and grocery products, turning these stores into hybrid Wal-Mart Supercenters similar to the Sanger and Modesto stores. Rather than ranging from 180,000 -to- 200,00 square feet like the typical Supercenter, these Southern California hybrids will range from about 100,000 -to- 120,000 square feet.

These strategies still don't solve all of Wal-Mart's problems in California. In fact, for whatever reasons, the retailer hasn't proposed building very many of its average 45,000 square foot Wal-Mart Neighborhood Markets in the state as well historically.

That's changing as well. Along with the Supercenter hybrid strategy, and the new Marketside format, Wal-Mart plans to open more of the mid-range "Neighborhood Market " stores in California as well.

But Marketside isn't just a alternative, smaller format strategy for the retailer. It's also entirely new positioning--fresh, prepared and specialty foods and groceries combined with basic grocery items at discount prices. Sounds a little like Tesco's Fresh & Easy, doesn't it.

The format is after new customers--fresh food and quality food shoppers- for example--as well as new markets.

Based on our information, the Marketside stores' design will be more upscale than Fresh & Easy's, but they won't be fancy food shops. Wal-Mart wants an upscale look and feel, but also for the format's discount price and value messages to be reflected in the design.

In California, as in Arizona, Wal-Mart hopes the stores will get them more of the higher-income shopper dollar. That's another reason the San Francisco Bay Area looks so good to Wal-Mart. The region has about the highest average income of anywhere in the Golden State; and its residents spend a higher percentage of their income on food and related products overall than people who live in the other regions of California.

Wal-Mart's Marketside development team spent lots of time in the Bay Area while they were creating the format. This included studying the regions grocers--from Safeway to upscale single store independents with superior fresh, prepared foods' operations.

This time in the Bay Area also gave the team time to scout out various locations where they believe the Marketside stores will do well. This includes in the city of San Francisco proper.

A Bay Area commercial real estate agent told us late last year, and again earlier this year, that Wal-Mart representatives have talked to landlords and developers about various potential sites for the Marketside stores in the Bay Area.

We've been told the same from a Southern California source. Both sources said they have no idea if Wal-Mart has signed any leases for sites in California, but describe the conversations they are aware of as "serious" ones, rather than mere inquiries.

Tesco plans to start opening 18 Fresh & Easy stores in the Bay Area early next year, along with 19 in the Sacramento region. Safeway also will likely open up to four of its new "The Market" small format grocery stores in the Bay Area beginning this summer. As we reported Thursday, the first store in the format, the "Market by Vons," opened Thursday in Long Beach in Southern California.

Regarding Southern California, that's Tesco Fresh & Easy's home turf and number one target market. The retailer's corporate headquarters and distribution center is in Riverside County in the region, and about half of its current 61 small-format grocery stores are located in Southern California, with Arizona next and Nevada third in terms of store counts.

Southern California also is home to the original small-format success story, Trader Joe's. Trader Joe's was founded in Southern California and its corporate headquarters--along with operating numerous stores--remains in the region, even though the chain is owned by German family members who also are majority owners of Aldi International, based in Germany.

With Safeway, which operates hundreds of supermarkets in Southern California under the Vons and Vons Pavillions banners, dipping its small-format food retailing toes in the water in Southern California with its "The Market" format stores, and the high probability of Wal-Mart coming to the Golden State in the not so distant future with Marketside--as well as Trader Joe's opening more stores in the region--Tesco will find itself with some heavy small-format food and grocery retailing competition in the market.

Safeway also operates a large supermarket division in Arizona, and it's likely we will see "Market by Safeway" stores open there as well. Safeway is pursuing two strategies with its small-format operation: putting the stores in converted supermarkets deemed too small to convert to its Lifestyle format, which it is converting all of its U.S. supermarkets to, and building new stores from the ground-up.

We believe the new stores, however, will come later; that the focus right now is on putting "The Market" format in any smaller, older supermarkets the grocer has already decided to not convert to Lifestyle format supermarkets, assuming the stores are in neighborhoods with the proper demographics and other characteristics for the small-format grocery stores.

There are a few smaller, older stores in Arizona which meet this criteria. Therefore, we wouldn't be surprised to see some of those supermarkets become the "Market by Safeway" small-format stores in the near future.

Beginning in as little as a month, and at least by August, we will see the already hot Arizona market heat up even more when the four initial Wal-Mart Marketside stores open in the respective cities. All four stores are fairly close to Fresh & Easy stores, so that should make for an interesting--and convenient--store-to-store comparison.

Even more interesting will be when Wal-Mart starts inking some deals for locations in California. The mega-retailer has long been frustrated about not being able to get a stronghold in the state's huge food and grocery sales market. It just could use Marketside in part to attempt to grab a big chunk of the Golden State market as part of its growing multi-format strategy.

Note: For more information, details and some additional analysis about Wal-Mart's Marketside, we suggest this recent story in the food and grocery industry blog Natural~Specialty Foods Memo.

The blog also is running what it's calling a "small-format food retailing special feature." There are a number of pieces, ranging from a story about French retailer Carrefour's small-format stores in Asia and a piece on Fresh & Easy, to a story about small-format natural foods' retailer Sprouts Farmers Markets, which is a fast-growing discount natural foods grocer with stores in Arizona, Southern California and elsewhere in the Western U.S.

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