Friday, August 8, 2008

Analysis & Commentary: Wal-Mart's Marketside As Part Of it's Multi-Format Category-Killer Strategy Spells Trouble For Tesco's Fresh & Easy

Yesterday we ran this story from the Financial Times newspaper (along with links to numerous previous Fresh & Easy Buzz original pieces about Wal-Mart's new Marketside format fresh foods and grocery stores) about a posting on Wal-Mart's small-format website that mentioned the mega-retailer's eventual goal with Marketside was to have a division of about 1,000 -to- 1,500 stores in the U.S., doing about $10 billion in annual sales.

Today, most of the supermarket industry trade publications, along with numerous newspaper business sections, ran brief stories quoting the Financial Times' report.

There's also been some discussion today in a number of blogs and on a couple industry websites like about Wal-Mart's possible big "Small-Mart" growth plans for its Marketside division. All of course writing about it, including us, before the first store even has opened. Sounds much like to the run up to Tesco's Fresh & Easy Neighborhood Market chain in fact, doesn't it?

Much of the reaction today has had an exclamation point after it--meaning there are many media perceptions of amazement that Wal-Mart might be thinking so "big" about its small format store Marketside division, the first four stores of which are scheduled to open this fall in the Phoenix, Arizona Metropolitan region.

A few first facts

Unlike Tesco with its small-format Fresh & Easy Neighborhood Market grocery stores, which are Tesco's single-format strategy in the U.S., Wal-Mart's Marketside is merely the newest development of the mega-retailer's multi-format food and grocery retailing strategy in the U.S.

For Wal-Mart, that strategy centers on its huge combination food and general merchandise Supercenters as its primary food and grocery retailing format nationally in the U.S., followed by its 45,000 square foot supermarket-only Wal-Mart Neighborhood Market stores, it's Sam's Club warehouse stores--which sell a very extensive selection of fresh food and grocery items--and even its Wal-Mart general merchandise discount stores, which have grocery product aisles, sell perishable and frozen foods, and stock extensive selections of household cleaning and related items.

And, of course, now there will be Marketside, which are 15,000 -to-20,000 square food combination fresh foods, basic and specialty grocery markets. At the center (literally and figuratively) of the Marketside format is its in-store, fresh prepared foods category or feature.

The Marketside "Small-Mart" stores will have kitchens in them, along with a seating area where shoppers who choose can eat-in. Take-out purchasing of the fresh, prepared foods will be the mainstay of the category's sales however.

A few more facts

Tesco's single-format strategy with its average 13,000 square foot Fresh & Easy grocery markets, which are combination fresh foods and basic grocery stores that also feature a selection of organic products and specialty wines, is to concentrate for the first two or three years on three U.S. states--California, Nevada and Arizona--opening numerous (probably 300 -to-400 by the end of 2010) stores in selected markets in these states within a couple of miles of each other to achieve what we've termed a "critical mass" strategy. (Think Walgreens drug stores and Starbucks cafes in terms of stores in close proximity to each other in a market.)

As part of this single-format strategy, Tesco tried to create small-format grocery stores (Fresh & Easy) that would appeal to everybody in its analysis. In fact, when asked what the target consumer market is for its Fresh & Easy stores, Tesco executives will even use that word. They are for "everybody," is the answer you're likely to get from a "Fresh & Easier."

That's easier said than done of course. As anybody who has spend some years in the U.S. food and grocery industry knows, appealing to "everybody" with a 65,000 square foot supermarket, let alone a 13,000 square foot grocery store, isn't an easy task, assuming a retailer even wants to try it.

It's no accident the three leading small-format food and grocery retailers in the U.S.--SuperValue, Inc.'s Sav-A-Lot (about 1,600 stores in the U.S.), Aldi USA (about 900 stores) and Trader Joe's (about 300 stores)--are tightly focused and positioned small-formats. Sav-A-Lot and Aldi are price-focused, no frills discount grocery stores. Trader Joe's is a specialty grocery store with a focus on selling specialty and natural-organic products (primarily under its own brands) at discount prices.

In other words, the positioning of all three of these small-format grocers is well defined. Sav-A-Lot and Aldi are focusing on the price-conscious shopper and Trader Joe's on the specialty consumer who wants unique specialty products for a reasonable price. None of the three are trying to get "everybody" to shop in their respective stores. If "everybody" shops them, they will be pleased. But its not the positioning.

Back to Wal-Mart

Wal-Mart didn't get to be the largest corporation and retailer in the world, along with recently becoming the number one seller of food and grocery products in the U.S. passing Kroger Co. for the honor, by not understanding format development, and particularly the power of a multi-format strategy. The same can be said for Tesco, the third largest retailer in the world. Tesco operates numerous formats, ranging from hypermarkets to small-format Tesco Express hybrid grocery and convenience stores at home in the UK, for example.

Wal-Mart didn't even start out as a seller of food and groceries. Rather, Sam Walton founded the company--and operated it for many years--strictly as a general merchandise discount chain with a single format--Wal-Mart discount stores. Those stores sold a limited assortment of shelf-stable food and grocery products, but it was an afterthought rather than a focus.

It was with the Sam's Club warehouse format stores and then the Supercenters (which at first were called hypermarts under the European model) that Wal-Mart starting getting into food and grocery retailing. Later, it developed its Neighborhood Market supermarkets as the third leg of its multi-format food retailing strategy.

Now along comes Marketside, which will be Wal-Mart's fifth format and its fourth one with a focus on food and groceries.

Instead of merely doing a smaller version of its 45,000 square foot Wal-Mart Neighborhood Market supermarket format Wal-Mart understood that wouldn't be smart and came up with the proposition of centering the stores around in-store, fresh prepared foods, including having an "eat-in" area, which is really more for atmosphere than profit, and then building a fresh foods (produce, meats, perishables) and grocery (dry grocery and specialties) store around the prepared foods proposition.

Tesco's Fresh & Easy stores have a focus on fresh, prepared foods as well. However, its prepared foods are made at a kitchen facility in Southern California and then shipped to its California, Nevada and Arizona stores. Some say Wal-Mart's fresh, prepared foods focus is copied from Tesco's Fresh & Easy. Wal-Mart says it isn't.

In the U.S., consumers (and the industry) have generally perceived fresh, prepared foods made in-store to be fresher and better tasting than those prepared off-site and delivered to the stores. In fact, in the late 1980's/early 1990's a very well-funded company in the San Francisco Bay Area launched a company in which using the European sous-vide cooking method, its professional chefs created an extensive line of fresh, prepared foods.

The company created an extensive DSD delivery system and supply chain with the millions of dollars it raised and launched the premium quality prepared foods, starting in a number of Bay Area supermarkets the expanding nationally. The prepared foods were tasty and of a high quality, but the company failed after about five years because consumers prefered shopping at stores featuring in-store prepared foods items.

Wal-Mart's multi-format strategy

What many analysts, writers and others fail to realize when comparing Tesco's Fresh & Easy to Wal-Mart or even Safeway Stores, Inc.'s (with its "The Market" stores) entry into small-format food and grocery retailing is just this fact--that for Wal-Mart and Safeway, Marketside and "The Market" are just parts of a multi-format national food retailing strategy. Conversely, for Tesco--at least until it makes a U.S. acquisition--Fresh & Easy is the whole enchilada. And its a regional whole enchilada at that.

Geographically, the United States is a big country. Add in Canada and you have an even bigger North American canvas. Eventually opening 1,500 small-format (15,000 -to- 20,000 square foot) Marketside stores in the U.S. and Canada, where Wal-Mart is becoming a major player, is a very reasonable proposition. Especially if you remember that Marketside is a national format and concept, just like Wal-Mart's Supercenters, discount stores and Sam's club are--and the Wal-Mart Neighborhood Market supermarkets are becoming.

Wal-Mart has far more than 1,500 of its huge (average 180,000 square feet) Supercenters in the U.S., and has been and is opening as many new ones as it can throughout the country.

Unlike the huge Supercenters--which not only have finding enough room (real estate) to put them as a limiting factor, along with all the political challenges Wal-Mart has even getting one approved, not to mention how long the mega-stores take to build once approved--the small-format Marketside stores can be built nearly anywhere the retailer wants to place them. This includes in urban downtowns and city neighborhoods as well as in suburbs.

For example, Wal-Mart can't open a Supercenter in the city of San Francisco for space and political reasons, but it likely can open five or six (or more) Marketside stores in that city of residential neighborhoods. The same is the case in big cities throughout the U.S., such as Los Angeles, downtown Phoenix, New York City, Boston, Chicago and many others where lack of available space and political issues make locating Supercenters impossible.

Thinking about it that way--that Marketside is an urban, suburban and even in some cases a small town adaptable format--makes the thought of 1,500 of the stores in the U.S. and Canada actually sound perhaps to few over the long term.

For example, 100 -to- 125 Marketside stores a year for ten years is an attainable goal for Wal-Mart, especially when an urban strategy is a significant part of the new store development. (Wal-Mart will open about 100 mega-Supercenters in the U.S. this year. That's the equivalent of over one thousand 15,000 square foot Marketside stores in terms of total square footage.) City's throughout the U.S. are understored, so this opens up a real opportunity for Wal-Mart with Marketside. It also just so happens that city's are where the fewest--and in many cases where they have none--Wal-Mart Supercenters are located, for the reasons detailed earlier.

Wal-Mart Marketside in Arizona

It's no accident that the first four Wal-Mart Marketside small-format fresh food and grocery stores to open will be in the Phoenix, Arizona Metropolitan region.

There are two primary reasons the Phoenix Metro market is first up.

Yes, one of those reasons is because that is where Tesco has chosen to focus its Fresh & Easy Neighborhood Market business, along with in Southern California and in the Las Vegas, Nevada Metro region.

But that is the secondary reason. Primary reason number one that the first four Marketside stores will open in the Phoenix Metro market in Arizona is because Wal-Mart has staked a claim strategically to become the food and grocery sales market share leader in Arizona, eventually beating out Safeway Stores, Inc. and Arizona-based Bashas, the top two sellers of food and groceries in the state.

It's no accident Arizona has been and is one of the top three states in terms of Wal-Mart's opening new Supercenters and its 45,000 square foot Neighborhood Market supermarkets, as well as adding Sam's Club stores. Now comes Marketside.

As we said, Wal-Mart's goal in Arizona is to become the state's, which is one of the fastest growing in the U.S., number one retailer of food and grocery products--and to do so by crushing the competition with four formats: Supercenters, Neighborhood Markets, Sam's Club and Marketside. Each format has its primary customer base. Each format is designed to eat into the specialties of its competitors.

For example, Wal-Mart doesn't expect to sell more basic groceries in the Marketside stores than say even a Tesco Fresh & Easy will. It wants to. But that's not the primary goal. It doesn't need to. It has Supercenters, Neigborhood Market supermarkets and Sam's Club stores all nearby that can achieve that task.

What Wal-Mart does plan to do is to eat into most of Fresh & Easy's fresh, prepared foods sales with its Marketside in-store, fresh prepared foods offering. In turn, Wal-Mart then believes the other three formats will eat into most of the basic grocery sales at Fresh & Easy, thereby crushing the stores from all sides with its four different food and grocery retailing formats.

Wal-Mart hopes to do the same to Safeway and Bashas as well. But with hundreds of supermarkets each in Arizona already, these two retailers are far less vulnerable to the Wal-Mart multi-format machine than Tesco's Fresh & Easy is.

If you look at where Wal-Mart is opening its first four Marketside stores in the Phoenix Metro market, you will find they are very close to Tesco Fresh & Easy Neighborhood Market stores. All four Marketside stores also have Wal-Mart Supercenters and Neighborhood Market supermarkets nearby. Wonder why that is? Each format has a primary purpose. Each format serves a primary need. That's why. All that is secondary from each format is gravy in Wal-Mart thinking.

General George Washington, who later became America's first President, finally defeated the British in the war of independence by figuring out that his best strategy, which took him losing thousands of men and numerous battles to finally arrive at, was to concentrate a critical mass of soldiers in fewer battles, thereby inflicting maximum damage, and then retreating. Sort of the cuts by a thousand knives strategy. He lost lots of battles but ultimately won the war.

In many ways that's the strategy Wal-Mart is conducting in Arizona with its current three food and grocery retailing formats--Supercenters, Neighborhood Market supermarkets and Sam's Club warehouse stores--and soon to be fourth format: Marketside. Toss in the Wal-Mart discount stores as well as gravy.

It goes something like this: If the Wal-Mart Supercenters and Sam's Club warehouse stores don't kill you (a grocer) all by themselves in terms of siphoning off lots of you're primary shoppers, there's a Wal-Mart Neighborhood Market supermarket to absorb you're remaining primary as well as secondary shoppers.

And like this: Sell in-store fresh, prepared foods Mr. grocer? That's your niche? You say let consumers buy most of their basic groceries at the Supercenter and Sam's? That you want consumers' fresh, prepared and specialty/natural foods dollars mainly anyway? After all, it brings you higher margins anyway, right?

But wait: along comes Marketside this fall to start siphoning some of those valued fresh, prepared and specialty/natural foods sales dollars you are counting on so much away from your stores. And, those shoppers have now become significant primary and secondary shoppers in your grocery markets. What to do? Perhaps go out an get another format of your own? Good idea. But doing so does take some time.

Of course that's the theory and the strategy in Wal-Mart world seen through our analytical lenses. However, American supermarket chains and independents have a history of beating back the Wal-Mart's of the world when it comes to competing. Wal-Mart's competitors like Bashas and Safeway may lose lots of share in Arizona, but that doesn't mean the competitors are going away. After all, they've been right where they are for a very long time, growing, evolving and changing all the while generally. Nor does it not mean they won't innovate to counter Wal-Mart's multi-format machine.

What we don't know is if Tesco can do what these American supermarket chains and independents have done in fighting back against the Wal-Mart's of the world since day one in the U.S., which is to largely survive and often even to thrive against the giants.

You see, Tesco is a world class food and grocery retailer. It controls 31% of the market in its home country of the United Kingdom. Wal-Mart has about a 20% share nationally in the U.S. as America's leading retailer of food and groceries.

Tesco also has done very well internationally in Eastern Europe, parts of Asia and elsewhere.

But Tesco has never played in a market as big in dollar terms or as competitive as the U.S. The state of California all by itself has nearly the total annual grocery sales volume as the entire United Kingdom, for example.

The U.S. also is a regional food and grocery retailing market, with giant regional supermarket chains in addition to the national chains. In just California alone you have Save Mart, Inc., which does about $6.5 billion annually with stores in just Northern and Central California. You have Raley's, which does nearly $4 billion with stores only in roughly the same part of the state as Save Mart.

In Southern California, regional chain Stater Bros does nearly $4 billion a year having stores only in the Southern California region. Bashas in Arizona has sales of about $3 billion with 160 stores, all but a handful of them being in its home state. There are scores more regional chains and multi-store independent operations on top of that, in addition to a few thousand single store independents.

It's like that throughout the U.S.--north to south and in between. Scores of regional mega-chains doing billions annually in sales, along with hundreds more doing in the hundreds of millions, and even more multi and single-store independents doing in the tens of millions annually.

In the UK, there are five grocery chains that control about 80% of the total food and grocery sales in the nation. Tesco is number one, Wal-Mart-owned Asda is number three, right behind number two Sainsbury's.

In the U.S. its these regional mega-chains that usually are the market share regions throughout the country, with just a few exceptions.

America is a whole new ballgame for Tesco. It has never done business in a nation that even approaches the competition offered in the U.S. in the food retailing industry. We aren't sure the folks running Tesco's Fresh & Easy Neighborhood Market USA division have an appreciation for that fact, based on our observations. They should.

But Tesco is a learning corporation, so anybody that counts the retailer out in the U.S. does so at their own peril, in our analysis.

For some reason Tesco's Fresh & Easy senior executives haven't felt the need to do much learning about the U.S. food retailing culture and industry though, based on what we've been told by more than one former Fresh & Easy corporate headquarters employee, as well as numerous suppiers. The concept of hubris and trying to fit British food retailing methods and systems into the American market comes up again and again in conversations with these sources. It's not our opinion--it's what we've been told again and again.

Raising (and learning from) Arizona

From a strictly learning perspective, Arizona, and especially the Phoenix Metropolitan region market, will be a great classroom for the next couple years, as Wal-Mart opens more and more Supercenters, Sam's Club stores, Neighborhood Market supermarkets and its new small-format Marketside food and groery stores, as part of its strategy to become that state's number one multi-format food and grocery retailing market share leader.

From a competitive perspective it could be rough--and expensive. Wal Mart has the buying and supply chain machine, along with the marketing and merchandising system, that if it wants, it can make things very difficult and extremely expensive for its international retailing rival Tesco in Arizona.

Sort of a death by a thousand knives (four Wal-Mart formats, each aimed at killing Fresh & Easy's two key categories, basic groceries and fresh, prepared foods) strategy.


John said...

Walmart is virtually everywhere they are allowed to be and now risk cannibalization if they do nothing else than follow their current trajectory. The competitive advantages upon which Walmart was founded are slowly fading.

Walmart had its strongest growth by serving underserved towns too small for then-market leaders like Kmart and Sears. This "blue ocean" of small towns is becoming shallower by the day. Also, the proprietary Walmart IT system, which could predict that sales of Poptarts would spike during a hurricane, is now being outsourced to IT companies that can easily offer competitors with comparable solutions.

One could pose the hypothesis that Walmart is relegated to growing through different formats not by choice but rather by necessity. While the US market is far from uncompetitive, it is not as hypercompetitve as foreign markets like Germany and South Korea that lived through lean times following brutal wars fought on home soil. Walmart attempted to replicate its North American successes in those markets only to cede defeat billions of losses later. Like hyenas that feast on defenseless gazelles, fighting a predatory adversary could lead to a completely different outcome.

The fact that, unlike Walmart, F&E is not a multi-format retailer is not a disadvantage. They are the new kid on the block and have no market share to lose. Also, coming from Europe, F&E's Tesco management knows firsthand the value of customer proximity.

I could imagine that Walmart specifically chose Phoenix to give F&E a headache. The majority of urban shoppers in the US are on the East Coast so they could have had a much easier time in establishing its customer base there.

Multi-format is also not a guarantee for success. GAP and Abercrombie & Fitch have both endured significant cannabilization due to their dependance on the same (US) customer and a lack of international success.

Therefore, I would reword the title of this post to "Tesco's F&E As Part of it's Novel Strategy Spells Trouble for Walmart Multi-Format Strategy".

The Village Postmaster said...

Wal-mart or is it Walmart(?)know how to manage mega stores profitably, but smaller formats are a different challenge.

It will be interesting to see how they do it.

Tesco have been using the Express format in the UK and elsewhere to learn just how that is don't.

A very interesting post.


Anonymous said...

John, I can tell you first hand Fresh & Easy is losing tons of money, with no end in sight for at least the next year. Gross margin also is about 10% below competitors. The buyers are being pushed hard to increase the margin but that's not where the problem is. I don't know of one division internationally where Walmart is losing money.

Anonymous said...

Fresh and Easy is going where others stores have not. The US shopper should be glad of it. And creating new jobs into the bargain. Competition is good for the shopper.