Sunday, October 5, 2008

Wal-Mart's Marketside is More Than the Sum of the Parts of its Other Formats; While Time and Consumers Will Judge, We See the Format As A Stategic Fit

Observation, Analysis and Commentary

Yesterday and today Fresh & Easy Buzz was able to visit each of the four Wal-Mart Marketside stores in Gilbert, Chandler, Mesa and Tempe, Arizona which officially opened yesterday, October 4, although as we previously reported had soft openings on Thursday and Friday.

We spent a considerable amount of time in each store not only analyzing the store design, merchandising, pricing and prepared foods offerings but also talking to shoppers and employees.

First though some back story. As we've been writing since January, 2008, Wal-Mart's retail strategy with its small-format (the four Phoenix, Arizona region stores range from about 15,000 -to- a little over 17,000 square feet) combination grocery and fresh foods Marketside stores is not the same as Tesco's strategy with its small-format (10,000 -to- 13,000 square foot) Fresh & Easy Neighborhood Market combination grocery and fresh foods stores.

For Tesco, Fresh & Easy is (at least currently) a single format food and grocery retailing strategy for the Western U.S. -- California, Nevada and Arizona at present. The plan is to open around 300 of the stores by sometime in 2010. In other words, right now Fresh & Easy is a single-play strategy in the U.S. for Tesco, which is a multi-format retailer at home in the UK and elsewhere throughout the world.

Additionally, a part of that single-format strategy is to locate the Fresh & Easy stores within a couple miles of each other in the respective market regions so as to create what we call a "critical mass" retailing strategy. Think of it as Fresh & Easy attempting to become the de facto neighborhood grocery store in the various neighborhoods in these respective market regions by virtue of having so many stores located in a concentrated area so close to one another. Tesco's models in this regard are the drug store chain Walgreens and Starbucks in the coffee retailing space, both which use a "critical mass" retail store location strategy. In many ways this is a logical store location tactic for a retailer conducting a single format food retailing strategy.

On the other hand, as we written about before, Marketside is a part (the most recent addition) of Wal-Mart's national (U.S.) multi-format food and grocery retailing strategy.

The lead horse of that strategy is the Wal-Mart Supercenter, the retailer's mega-combination food, grocery and general merchandise stores that average about 187,000 square feet.

Along with the Supercenter, Wal-Mart operates Sam's Club membership warehouse stores which carry a strong selection of fresh food and grocery products at discount prices.

Along with these two food and grocery selling formats, Wal-Mart also has its 40,000 -to-45,000 square foot Wal-Mart Neighborhood Market, which are standalone supermarkets.

And now there is Marketside, the fourth strategic horse so to speak, and smallest format store Wal-Mart has ever created. [We aren't including Wal-Mart discount stores even though they sell a selection of groceries (but not fresh produce or meats) because they aren't part of the modern Wal-Mart food and grocery retailing strategy.]

Some observations

Marketside is a hybrid in some ways of the Wal-Mart Neighborhood Market in that Marketside offers a selection of basic food and grocery items with a focus on national brands. But Marketside's merchandising is qualitatively different than the Wal-Mart Neighborhood Market supermarket format in that its what we call "food-centric," meaning Marketside puts a major positioning focus on fresh foods, even calling the grocery products in the stores "ingredients" rather than groceries.

Marketside also is designed for convenient in-and-out shopping, yet puts a major emphasis on service, offering full-service checkout as well as including a full-service deli in the store. In the service regard Marketside is much more a small version of a modern Whole Foods Market than it is a format similar to Tesco's Fresh & Easy or Trader Joe's. Yet it's more than that because it also sells basic grocery items. Marketside also offers a strong, limited assortment of top organic brands.

These service and "food centric" themes carry over to Marketside's prepared foods offering. There's a kitchen with a wood burning, open hearth oven in-store, along with a small "eat-in" seating area for customer/diners.

Not all of the prepared foods sold in the stores are actually made in the store. However, the in-store kitchen is as much a perception (read fresh) creator as it is a functional attribute to Marketside's prepared foods offering.

Our observation from watching shoppers in all four stores, along with talking to many of them, is that the in-store kitchen, along with the eating area, serves as a sort of semiotic signal to shoppers signaling "fresh."

The Marketside in-store kitchen/service deli offers Wolfgang Puck-type artisanal pizzas which are cooked in the kitchen's wood burning oven, as well as whole chickens which are prepared in-store on a rotisserie, for example. This isn't anything radical -- upscale U.S independents have been doing both things for decades and many big chain supermarkets do it now -- but it is different in terms of what the major small-format U.S. players thus far -- Tesco's Fresh & Easy, Trader Joe's, and on the hard-discount end Sav-A-Lot and Aldi -- are doing with prepared foods. it also fits into the "food centric" positioning of Marketside.

There also are sushi chefs (a concept taken from Whole Foods and numerous other upscale food retailers) preparing sushi right in-store.

The Marketside stores' fresh produce departments were full, abundant and fresh-looking on our visits. They also feature, as we've been reporting they would for months, mostly bulk produce displayed farmers market style. Additionally, most of the pre-packaged produce is branded with well known names like Dole, Fresh Express and the like, as is the case in most U.S. supermarkets -- and in Wal-Mart's Supercenters and other food retailing format stores.

This in our analysis is a smart thing for Wal-Mart to do with the fresh produce category in the Marketside stores based on the overall "food-centric" gestalt of the stores and what Wal-Mart is trying to do positioning-wise with the format.

For example, although Trader Joe's does very well with its pre-packaged produce and Fresh & Easy has seen fresh produce category sales progressively increase with its nearly 100% pre-packaged produce program, it's our analysis American consumers still prefer having a majority of bulk produce to choose from in their food stores.

U.S consumers like value-added pre-packaged produce considerably -- salad kits and the like -- and also like and often prefer certain items pre-packaged -- berries, herbs, spinach and some others. But in the main the preference remains for bulk, both because it offers more choice in terms of item purchases (you can buy one cucumber or Italian squash rather than a package of three for example) but also because bulk, abundant produce displays appeal to American (especially in the west) consumers' concept of fresh. It's a cultural-socio--psychological characteristic. For example, if you've ever experienced how a Brit or Irishman reacts when served a pint of Guiness ice cold rather than room temperature in an American bar, you understand what we mean by a cultural-socio-pychological characteristic vis-a-vis bulk and pre-packaged fresh produce among the majority of American consumers.

Basic groceries

A significant aspect of the Marketside store format is that the stores offer a strong but limited assortment of basic shelf-stable food and grocery items -- packaged goods. The vast majority of these products are well-known U.S. national and regional brands -- Folgers Coffee, Best Foods Mayo, Heinz Tomato Ketchup and the like, rather than store brands or private label.

We think Wal-Mart did this for three primary reasons.

>It's the safe way (no retail chain pun intended) to start out. Last year Wal-Mart trademarked a couple new store brand names -- "Wild Thymes" and Field and Vine --" specifically with Marketside in mind. However, instead of using those store brand names to create a store brand mix of say about 65% store brand -to- about 35% national and regional brands like Fresh & Easy and Trader Joe's (more like 75% store brands 25% other for TJ's) using say these two new brands, Wal-Mart has opted to focus on the national and regional manufacturers' brands in the stores for now.

> The second reason we believe Wal-Mart put this focus on the national and regional manufacturer's brands in the packaged goods category (and it's related to the reason above in part) is because it allows Wal-Mart to further leverage it dominance as the number one retail customer (buyer) of manufacturers' brands in the U.S. There's tons of street and promotional money Wal-Mart can get from these vendors, which Fresh & Easy and TJ's for example can't because both chains carry so view a percentage of the "big brands," which will come in handy for its Marketside startup.

>Third (and related to one and two above), Wal-Mart knows based on the information in its extensive consumer data base that even though store brands are experiencing a significant gain in popularity in the U.S., American consumers still tend to prefer national and regional manufacturers' brands, as long as they are priced well. This is the case in Wal-Mart's Supercenters. With manufacturer coupon use by consumers at an all time high in the U.S. do to high food inflation and thus soaring retail prices, this offers another plus for the Marketside national brand strategy.

National brands: Price

With this in mind, we paid close attention to the retail prices of numerous national branded packaged goods items in the four Marketside stores we visited yesterday and today. We then visited a Wal-Mart Neighborhood Market supermarket and a Wal-Mart Supercenter, comparing the prices on some of the same items offered in Marketside and the two other Wal-Mart format stores.

What we found in the main is that the prices on the items in the Marketside and Wal-Mart Neighborhood Market supermarkets were about the same, exclusive of items on promotion at either format store. The Marketside prices were however higher on the same items at the Supercenter in the range of about 5 -to- 15%.

We also checked two supermarkets, a Safeway Store and a Bashas. Overall Marketside prices on national branded packaged goods items were in line with the everyday prices in those two stores, exclusive of advertised or in-store promotions.

Prices on like basic items at two Fresh & Easy stores (fresh & easy store brand items compared to like or similar national brand items) were lower than they are at the Marketside store by about 6 -to-12%, based on the 15 or so key items we compared. We aren't suggesting we took a market basket survey. By design and time constraints it was a small comparison of key grocery items.

Pricing the branded packaged goods items in the Marketside stores a bit higher than in the Supercenters makes sense for Wal-Mart to do. After all, as we've said, Marketside is merely one part of a current four-format (by the way there's going to be a new, fifth national food and grocery Wal-Mart format we will be reporting on soon. Hint: it isn't small-format) food and grocery retailing strategy. And of course, the stores just opened. Pricing will be adjusted of course, as it is by all retailers.

Analysis: The Marketside format and more

It's our analysis Wal-Mart has created its own, differentiated format with Marketside. It's neither a copycat of Trader Joe's or Tesco's Fresh & Easy (many similarities of course) and it certainly isn't a copycat of Sav-A-Lot or Aldi.

Marketside also has numerous similarities to the hybrid eastern USA convenience store/ grocery store chain Wawa, which we've written often about as being a small-format pioneer in the U.S. However it's far from a Wawa clone either.

Their also are similarities between Marketside and Giant Eagle, Inc.'s small-format hybrid grocery/convenience-oriented format Giant Eagle Express, which we've also written about in the past. But the qualitative differences in Marketside far outweigh the similarities.

The closest chain store small-format relatives to Marketside are Safeway's "The Market" format, which is currently represented by just one store, "the market by Vons" in Long Beach, California, and Supervalu, Inc.-owned Jewel-Osco supermarkets' "Urban Fresh by Jewel." The first store of the format recently opened in Chicago, Illinois.

Wal-Mart actually began development of Marketside (late 2006-early 2007) before Safeway (mid-2007) did with its "The Market" format or Supervalu's Jewel (early 2008) did its development of "Urban Fresh." Therefore it's fair to say Safeway's "The Market" and Jewel Osco's "Urban Fresh" are the younger cousins of Wal-Mart's Marketside even though each of those two chain's stores opened first.

Marketside also isn't a clone of Tesco's Fresh & Easy. There are obviously many similarities. Chief among them the basic premise of offering a combination of basic groceries and prepared foods, which Tesco certainly did first with Fresh & Easy. And there's the convenience-orientation of both stores. Again Fresh & Easy was first.

But there are enough differences in Wal-Mart's Marketside format for us to conclude the retailer has created its own small-format store, rather than merely reacting to Tesco's Fresh & Easy, Trader Joe's or others.

Of course, as we've reported for months now, the decision by Wal-Mart to open the first four Marketside stores in the Phoenix Metropolitan region -- each of the four stores being about 1 -to- 2 miles from Tesco Fresh & Easy stores -- is clearly a signal to Fresh & Easy, and inspired in part by Tesco's making the region on of its first three markets in the Western U.S. Southern California and Metro Las Vegas, Nevada being the other two regional markets for Fresh & Easy.

However, it all depends on which foot that particular retail shoe goes on, to use a footwear metaphor that perhaps lacks a bit of "sole."

For the last five -to- 10 years, Arizona, and particularly the Phoenix Metropolitan regional market, has been one of Wal-Mart's top-three market region focuses in the U.S. Therefore, when Tesco decided to make the Phoenix market one of its first three launch targets for Fresh & Easy, Wal-Mart took that in part as a direct competitive attack by the world's third largest retailer on its (the world's largest retailer) plans to become the dominant food retailer in the region, which it now is with about a 26% market share.

Therefore, perhaps in the corporate eyes of Wal-Mart it's merely returning the favor to Tesco by opening its first four Marketside stores in the region, which after all has been one of its top three focus markets for many years now. An industry analyst at a major investment banking firm told us a few years ago that if you said the word "Arizona" to Wal-Mart CEO Lee Scott at that time, he would almost break out in a song (Glen Campbell's "By the Time I Get to Phoenix" perhaps) and happy dance routine.

Wal-Mart also didn't appreciate that Tesco decided to name Fresh & Easy "Fresh & Easy Neighborhood Market," since it's used "Neighborhood Market" for its standalone Wal-Mart Neighborhood Market supermarkets for over a decade.

Tesco originally was going to call Fresh & Easy Neighborhood Market "Fresh & Easy Community Market." However, Tesco decided to change it to "Neighborhood Market" rather than "Community Market" after focus group research the retailer did showed consumers preferred the more intimate "Neighborhood" wording over the larger "Community" term. Ironically, although Wal-Mart doesn't use it in the store name, it is referring to Marketside in its marketing literature and on its website as "a small community food and grocery store."

{The term "community" has an interesting double meaning and usage in the U.S. On the one hand it has very positive connotations, suggesting people coming together. On the other hand it has negative connotations and is sometimes used in a derisive manner, especially in politics to suggest socialistic leanings. Notice how the Presidential campaign of Republican John McCain has been using the term "Community Organizer" regarding the time when Democratic candidate Barack Obama did that work for a living, for example. It's not meant as a positive.}

Marketside as Wal-Mart's utility infielder format

Since we started the analogy trend above with the footwear reference, we will use one more. That analogy is in our analysis we see Marketside as Wal-Mart's food and grocery format equivalent to the utility infielder on a professional baseball team.

In baseball the utility infielder is the one the team manager can call on to play more than one infield position at different times during a season.

For example, perhaps the team's starting second baseman pulls a muscle in May and is out for 4 weeks. The utility infielder steps in and takes his place at second base for a month.

Then in August the third baseman gets arrested for a DUI and the team owner suspends him from playing for three weeks. The utility guy takes his place at third base while he is on suspension.

Lastly, the team makes it to the playoffs in September, only to have the shortstop trip and fall in the locker room, breaking a leg which puts him out of commission for the entire playoffs. Who are you going to call to fill in? Yes, the same utility infielder who's been rather busy this season. He will cover shortstop for the playoffs and if they win for the World Series.

In a similar regard, since it is part of a multi-format food and grocery retailing strategy for Wal-Mart rather than a single-play format like Fresh & Easy is for Tesco in the U.S., the retailer can use Marketside selectively.

For example, as we've often said, small-format Marketside can be an urban strategy for places like the city of San Francisco and parts of the Bay Area (as well as Los Angeles) where political and community opposition has prevented Wal-Mart from opening anywhere the number of its mega-Supercenters as it's wanted to and tried to open in the respective regions. Also in general Marketside is a good urban strategy just because of the density of such cities and regions, along with space limitations and the often high real estate costs. New York, Chicago, Philadelphia, Washington D.C. -- the list of cities and urban regions in the U.S. is a long one for a Marketside urban retail location strategy.

Additionally, Marketside can be used as a selective suburban region strategy for suburbs in the U.S. that are either already fast-growing or are emerging in affluence and population, like Chandler, Gilbert, Mesa and Tempe, Arizona are. There are lots of those in the U.S. It's also great for suburbs where there's a high population of "foodies," like in Southern California, the Bay Area, New York, Boston, Seattle and many other regions.

Further, Wal-Mart can even use Marketside for what we call a "dual-format" or "co-located" store strategy in selective cases. This is something we've mentioned before in Fresh & Easy Buzz in relation to Marketside but haven't elaborated on much.

Let us explain. The United Supermarkets chain, which among the formats it operates includes an upscale banner called Market Street, has created a "mini" Market Street store called a "Taste of Market Street," which is located in the same parking lot (like two minute walk close) as its "third generation" Market Street supermarket at 98th & Quaker in Lubbock, Texas.

The" co-located" "mini" "Taste of Market Street" store is only 1,300 square feet. It's an upscale format hybrid grocery and convenience store. The "mini" Market Street offers a mix of basic grocery items, organic and specialty foods, some convenience store-style GM and non-foods items and ready-to-eat and ready-to-heat prepared foods items. It has gas pumps as well. It's a tiny version of its big brother supermarket across the way, with a few qualitative differences.

The premise of the "co-located" "Taste of Market Street" store format is to offer a convenient but yet upscale (along with some basics) convenient store as an adjunct to the chain's very nearby Market Street format supermarket. United Supermarkets plans to "co-locate" more of the little stores, which focus on prepared foods and the other items, in parking lots with its Market Street banner supermarkets.

Following the United Supermarkets Market Street and "Taste of Market Street" example and precedent, we can see Wal-Mart in selective cases "co-locating" a Marketside store close by an existing Supercenter. For example, in the front of the Supercenter or near the side. The parking lots are huge after all.

Even more compelling, we could see the retailer "co-locating" Marketside stores on a selective basis nearby existing Wal-Mart Discount Stores, which sell a limited assortment of dry grocery and perishable items in pantry departments but offer no fresh produce, meats, deli or prepared foods. The Marketside stores don't particualrly have to be in the same parking lot as the discount format stores even. They could be strategically located nearby.

In some cases "co-locating" Marketside stores with Sam's Club membership stores also could make good sense.

Additionally, who says all Marketside stores have to range from 15,000 -to- 20,000 square feet? The format is adaptable.

A "Mini Marketside" version 2.0 could be easily created, say a 3,000 -to- 10,000 square foot version, or something similar. The smaller version would put a much greater emphasis on prepared foods and far less on grocery items. After all, being "co-located" near a Supercenter, which offers a full selection of groceries, or a Wal-Mart Discount Store, which offers about as much in the grocery category as a regular Marketside does, would make it a bit redundant to have too many grocery skus in the store. Therefore, a greater emphasis on prepared foods in these "co-located" "Mini Marketside" would make perfect sense.

We call this the Marketside "co-location" strategy, which makes a third form of utility for the format along with the urban and suburban retail strategies we discussed above. The urban, suburban and "co-location" strategies demonstrate how versatile a small-format store can be when it's part of a retailer's multi-format portfolio.

Marketside and Fresh & Easy

Because Wal-Mart's Marketside has in our analysis enough qualitative format differences to make it distinct from Tesco's Fresh & Easy, along with the fact it is one part of a multi-format food and grocery retailing strategy for Wal-Mart, we don't believe the success of Fresh & Easy Neighborhood Market will be based significantly on how Marketside does, even if it performs beyond Wal-Mart's expectations wildly and the retailer grows the store count rapidly over the next couple years in California, Arizona and Nevada.

Rather, we believe Tesco Fresh & Easy's success or lack of success will be the result of the retailer's own making and performance in the main.

Certainly in those cases like the four Arizona cities where Marketside stores are so near Fresh & Easy units there will be competition. Therefore Marketside will be a factor in the success or failure of Fresh & Easy stores in those cases and situations.

However, for the reasons detailed above, overall we believe Fresh & Easy's success or failure rests with Tesco more so than anything Wal-Mart does or will do with Marketside.

This goes against what many are suggesting is the small-format battle and standoff between Wal-Mart and Tesco.

Don't get us wrong, we aren't suggesting Marketside and Fresh & Easy aren't going to be direct small-format store competitors in some cases and perhaps in many ways overall down the road. What we are saying is that Fresh & Easy's sucess depends primarily on Tesco and its execution and operations of the chain rather than it does on anything Wal-Mart does with Marketside. The same can be said for Marketside, although being one part of a multi-format strategy makes it different in both kind and degree.

We also have no idea if Marketside will be a success for Wal-Mart.

However what is a fact in our analysis is achieving success with Marketside for Wal-Mart is far easier than it is for Tesco with Fresh & Easy because Fresh & Easy is that single-format play for Tesco in the U.S., while Marketside is that small part of the overall multi-format strategy for Wal-Mart. Failure also would come at a much lower financial cost for Wal-Mart with Marketside, compared to the financial cost of failure for Tesco with Fresh & Easy based on the respective investments both companies have in each of the banners.

But as we often say the jury remains out on Tesco's Fresh & Easy in our analysis. We suggest those who count them out do so at their own peril, or at least potential embarrasement.

We also believe in many ways if Tesco's Fresh & Easy is a success, it will be a more pronounced one than if Wal-Mart is a success with Marketside.

Tesco's Fresh & Easy format and stores are what we call far more 2.0 version grocery stores than Wal-Mart's Marketside is. With its self-service checkout model, prohibitions against accepting paper personal checks and cashing payroll checks, its majority focus on store brands, near 100% pre-packaged produce, along with a few other things, Tesco's Fresh & Easy stores are a far more radical departure (the 2.0 grocery store title) from maintream food and grocery retailing formats in in the U.S.

Wal-Mart's Marketside on the other hand is as we said a format all to its own but is well within the mainstream of U.S. food and grocery retailing -- full-service checkout, paper checks are fine, more national brand items than store brand, for example.

Therefore, for Tesco with Fresh & Easy its: "Go big or go home." For Wal-Mart with Marketside it's more: "Go moderate or go back to the drawing board."

After all, as we've previously reported, Wal-Mart will open ten initial Marketside stores -- one more in the Phoenix region in the city of Peoria (to open this year) for a total of five and five (at least two will open this year) more in the San Diego region in Southern California -- then plans to evaluate the ten stores before opening further units. Although as we've reported Wal-Mart is in the process of obtaining other sites for new marketside stores, including in Southern and Northern California.

If for example Wal-Mart decided after evaluating the first ten units to shelve the Marketside format and closed the stores, the financial and reputational losses would be minimal. In fact, Wal-Mart likely could use what it learned from the prepared foods aspect of Marketside to improve the category in its Supercenters, Sam's Club stores and Neighborhood Market supermarkets, basically chalking up the Marketside development costs to corporate prepared foods category research and development spending.

Conversly, Tesco has opened 90 Fresh & Easy stores in 11 months, with plans to open at least 200 more in the next 18 months. That's what we mean by the "Go big or go home" proposition.

As a result, if Tesco is successful with its "Go big or go home" Fresh & Easy venture, along with the fact the stores are 2.0 version grocery markets, we believe it would deserve far more praise for doing so than say Wal-Mart would deserve for a similar success with Marketside. Think of it as the risk and reward principle. Of course, if Tesco fails, with Fresh & Easy it will get much more negative attention for doing so than Wal-Mart will if Marketside fails, we believe.

'What's it all about' - Markeside?

What we do believe though is Wal-Mart has created an original format for the company. It could have cut and pasted pieces of its Supercenters, Sams Club stores and Neighborhood Market supermarkets together and ended up with a Marketside.

Instead, based on our observation and analysis, Wal-Mart has created a format, Marketside, that is more than the sum of the parts of its other food and grocery retailing formats. It's a gestalt, the whole.

Marketside isnt' a Trader Joe's clone nor a Tesco Fresh & Easy clone.

It does borrows concepts from Whole Foods Market, Safeway's Lifestyle format and others.

It also borrows numerous merchandising concepts and practices from those upscale independent grocers (all which sell basic grcoeries as well as specialty items) in the San Francisco Bay Area we told you would be the case way back in January of this year and throughout the months after that in our stories about Wal-Mart's development of Marketside.

As you will recall, David Wild, Wal-Mart, Inc.'s former new business development chief who headed the Marketside format development team, had the team do much of its development work in the San Francisco Bay Area where Wild lived and worked out of Wal-Mart's offices there. And as we said then in our various pieces on Marketside in Fresh & Easy Buzz, Wild and the team got much of the inspiration for the Marketside format from a few pioneering Bay Area independents -- multi-store grocers such as Andronico's Markets, Mollie Stone, Draegers, Cosentinos, Lunardi's and a couple others, including some of Whole Foods Market's newer Bay Area Stores.

What Marketside has though that these pionering independents don't have is the buying power of the number one retailer (Wal-Mart) in the world, which also happens to now be the top retailer of food and groceries in the United States. That's a key competitive advantage Wal-Mart can use in many ways -- if used well -- to make Marketside whatever it wants it to be.

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