Friday, September 12, 2008

Thinking Out Loud: We Reply to A Reader's Request About Retail Strategy; Tesco's Fresh & Easy and Wal-Mart's Marketside

We received a note via email earlier today from a regular reader who's an executive in the food and grocery industry. The reader has been following our coverage of Wal-Mart's new small-format Marketside store development, including the comparisons and contrasts we've made between the two global retailers' (number one, Wal-Mart, and number three, Tesco) small-format food and grocery retailing concepts, Tesco's Fresh & Easy Neighborhood Market and the yet but soon to open (in the Phoenix, Arizona Metropolitan region) Wal-Mart Marketplace stores.

In the note, among other comments and questions, the Fresh & Easy Buzz reader and industry executive asked us to write about a strategy we would use were we running Wal-Mart's Marketside division, with a focus on keeping Tesco's Fresh & Easy from being successful in Southern California, the Las Vegas, Nevada Metropolitan region, and the Phoenix Metro region in Arizona, where its stores (currently 78) are located.

We accepted the challenge.

Here is one strategy we would potentially use, keeping in mind our focus if we were running Marketside for Wal-Mart would not be one primarily focused on attempting to prevent Tesco's Fresh & Easy from succeeding, although defense has its place as part of a comprehensive success strategy.

The strategy: Background

Tesco's Fresh & Easy Neighborhood Market is conducting a strategy based on rapidly opening stores for three main reasons:

1. It's strategy with Fresh & Easy is based on having a critical mass of stores open close to each other (about 1.5 -to- 2 miles) in its selected market regions. This is based on the Fresh & Easy stores being "neighborhood" markets, along with making it cost effective to advertise, as well as using the stores themselves as the most important marketing medium of all. The medium (store) is the message. Its what we call the Tesco Fresh & Easy "critical mass" strategy.

2. Fresh & Easy is currently a single banner and format strategy for Tesco. Therefore it needs numerous stores as rapidly as possible to build critical mass and sales.

3. Tesco's low frills store design (low overhead), everyday low price strategy with Fresh & Easy requires sales volume. One has to have lots of stores as fast as possible to have a chance of achieving this sales volume (plus high volume for the low margins during the start up years) in order to feed what Tesco has created in terms of its model and infrastructure.

One result however of Tesco's rapid store opening program, 78 stores in a mere 10 months so far, is that in our analysis many of the store locations are poor ones. These include numerous Fresh & Easy stores that are in former Albertsons, Ralphs supermarket and Rite Aid drug store buildings that those respective retailers vacated for various reasons, among those reasons being store sales underperformance at the locations.

It's possible Tesco can succeed in many of those stores where the others didn't because of Fresh & Easy's small-format and operating model. However, its also likely down the road a bit Tesco will evaluate many of those "shotgun opened" locations for underperformance.

This is where our strategy comes in, following our readers request and guideline.

The strategy

Using its own scan-based and proprietary data, along with other available outside data and market intelligence that's available for the Southern California, Metro Las Vegas and Phoenix Metropolitan region markets, we might develop a very well detailed matrix mapping the estimated sales of each Fresh & Easy store by location in each region.

Once completed, this would be our blueprint for where we locate Marketside stores. Using the old rule that 80% of sales come from 20% of the locations (its a bit too high but is illustrative which is why its been in use for so long), we might then strategically place the Marketside stores, which are a bit larger than the Fresh & Easy Markets (10,000 -to- 13,000 for Fresh & Easy, 15,000 -to- 20,000 for Marketside), in such a way so that one Marketside store could potentially do as much in weekly sales (remember they are about 5,000 -to- 6,000 square feet bigger in size) as two or three Fresh & Easy stores (remember Tesco's strategy is to locate the stores 1.5 -to- 2 miles away from each other).

Using this strategy, 50 Marketside stores strategically placed/located against existing Fresh & Easy stores (which is an advantage Wal-Mart has since 78 Fresh & Easy's already exist) could potentially equal the sales of 100 -to- 150 Fresh & Easy Neighborhood Market grocery stores using our theory, if such a strategy worked.

The strategic placement in this way of the Marketside stores also would if successful render numerous Fresh & Easy stores (remember the critical mass strategy of locating the markets 1.5 -to- 2 miles from each other) to be sales underperformers because of the placement/locational effect of the Marketside stores. If one Marketside store could equal the sales of three Fresh & Easy stores in an area, something would have to give, such as eventually closing at least one of the three Fresh & Easy stores since it would be impossible for all three to survive under the strategic theory.

Additionally, keep in mind we are just running Marketside, and not all of Wal-Mart, only per our readers request and guidlines. Having all of Wal-Mart in our strategic sphere of influence would broaden our strategical arsenal dramatically.

In the real world, Wal-Mart, Inc. has its combination grocery and general merchandise Supercenters, its Sams' Club warehouse stores, which sell a full complement of basic groceries and fresh foods, and its 45,000 square foot Neighborhood Market supermarkets to use along with Marketside in a strategic methodology like we describe above. It's all about sales, not the size, format, store banner or number of stores you have.

For example, place a Supercenter four miles from four Fresh & Easy stores. Put a Sam's Club store in the same general area. Locate a 45,000 square foot Wal-Mart Neighborhood Market say just 1 -to- 1.5 miles from two of those three Fresh & Easy stores. Then put a Marketside unit about 1 mile away.

Because the four Wal-Mart formats are different enough, and in the case of the Supercenter and Sam's Club also have extensive general merchandise offerings, it isn't likely the various Wal-Mart formats would cannibalize each other. But they could have negative effects on sales at the four Fresh & Easy stores. Or two out of the four, which achieves the strategic objective of the plan. [By the way, this is the multi-format food and grocery retailing strategy we believe Wal-Mart plans to plug Marketside into.]

We have no inside knowledge that Wal-Mart is following such a strategic plan vis-a-vis Tesco's Fresh & Easy. What we do know, and have reported on, is that Wal-Mart's first four Marketside stores, which open in just a few weeks, will be located in four cities in the Phoenix, Arizona Metro area: Gilbert, Chandler, Mesa and Tempe.

What we do know is the Wal-Mart Marketside stores are within 1 -to- t2 miles from existing Tesco Fresh & Easy grocery markets in each of the four cities. In addition, Wal-Mart has Supercenters, Sam's Club stores and Neighborhood Market supermarkets in and around these four cities. They are strategically located vis-a-vis both the Marketside stores and the Fresh & Easy stores. Additionally, Arizona happens to be one of Wal-Mart's top three new store growth markets in the U.S. for its Supercenters, Sam's Club stores and Neigborhood Market supermarkets.

Further, as we've previously reported, Wal-Mart plans to open a Marketside store in San Diego, California (it is rather close to a Fresh & Easy store in the city) and a store in nearby Oceanside, which also is fairly close to a Fresh & Easy market.

And, as we've also reported, Wal-Mart is very carefully and selectively searching for Marketside store locations in other parts of the Phoenix Metropolitan region, in Nevada, and in Southern and Northern California. We say selectively searching because Wal-Mart does not plan to open Marketside stores at even a rate one-half that in which Tesco is opening Fresh & Easy stores in its first year.

So, based on what we've reported, as you can see, Wal-Mart looks like it may be planning a strategy similar to the one we merely cooked up to accept our loyal reader's challenge, along with hopefully providing some strategic thinking in the minds of our readers as a whole.

As we said at the start of this piece, the strategy is more of a conceptual or academic one designed to offer an idea for our reader and to our readership using the question as the premise of the strategy. However, like so often is the case, it's interesting to watch how observable facts can often seem to look very much like conceptual strategies, at least in part.

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