Tesco's Fresh & Easy Isn't the Only Food & Grocery Retailer With its Eyes on Bakersfield: Wal-Mart's Bakersfield Push and Central Valley, CA Strategy

California's Central Valley region (detailed in the map of California above), stretching from Bakersfield and Kern County in the south to Stockton and San Joaquin County in the north, is the largest single-producing and most diverse -- cotton, grains, fruits, vegetables, nuts, milk, beef cattle, chickens, eggs and more -- agricultural region in the world. Additionally, one fourth of all the food produced in the U.S. comes from the Central Valley region, which also is home to such well-known global companies and brands as E.J. Gallo (Modesto, CA), the largest family-owned winery in the world, and the second-largest overall seller of wine globally.

The Central Valley is a diverse region as well. Kern County (Bakersfield area) is one of the top oil producing regions in America, for example, in addition to being a major agricultural region, as well as being considered by many to be the second home of American country music after Nashville, Tennessee. And when it comes to college sports, the Fresno State University Bulldogs are among the top college football teams in the nation. Stockton, in the north, was in the 1930's -through- 1960's one of the centers for both amateur and profesional boxing in America. So much so in fact that the famous boxing movie, "Fat City" was set in Stockton.

The Central Valley also is home to a few famous brands when it comes to individual celebrities. For example, famed movie director and producer George Lucas was born and raised in Modesto, which was the setting of his award-winning movie "American Graffiti." The late Pulitzer Prize winning writer and playright William Soroyan (author of The Time of Your Life and numerous other plays and books) is from Fresno, and country music greats Merle Haggard and Buck Owens hail from Bakersfield, which often is called "Nashville-West" for its fame in country music circles.

Bakersfield and Beyond:
Central Valley, California Market Region Report and Analysis

Earlier today we reported that Tesco will open its third and newest Fresh & Easy Neighborhood Market combination grocery and fresh foods market in Bakersfield, California on February 25. [Read that post here: Tesco to Open Third Bakersfield, California Fresh & Easy Store On February 25.]

The new store is one of nine Fresh & Easy units planned thus far by the grocer for the Bakersfield Metropolitan market region, which is in California's southern Central Valley. The first two Fresh & Easy markets opened on the same day in Bakersfield on December 3, 2008. [December 3, 2008: Tesco Opens its First Two California Fresh & Easy Stores Outside of Southern California in the Central Valley City of Bakersfield Today.] Seven of the nine Fresh & Easy stores are located in the city of Bakersfield. One is planned for nearby Wasco, and the other for the nearby city of Delano.

Wal-Mart's Bakersfield market region push

Tesco's entry into the Bakersfield Market region is going to add new competition into the region which has an economy based primarily on agriculture, oil production and increasingly on service businesses. [May 24, 2008: Upcoming New Markets Special Report: The Changing 'Face' of Retailing in Bakersfield, California.] [March 10, 2008: Bakersfield, California Region Next Up On the Fresh & Easy Neighborhood Market New Store Parade.] [May 15, 2008: Fresh But Never Easy: Tesco's Long But Rapid South-North March in the Nation-State of California.]

But Tesco isn't the only food and grocery retailer looking to add a new competitive retailing element in the Bakersfield market. Bentonville, Arkansas-based mega-retailer Wal-Mart Stores, Inc. also is targeting the Bakersfield market region aggressively, and plans to soon open its first Supercenters in the city of Bakersfield and in the region.

Wal-Mart currently operates three of its Wal-Mart discount format stores in Bakersfield. But has none of its combination food, grocery and general merchandise mega-Supercenters in the city -- yet.

The Wal-Mart discount format stores, at well over 100,000 square feet, sell only a limited assortment of food and grocery items and consumer packaged goods, mostly shelf-stable products, but also some perishables in the refrigerated and frozen foods categories. Additionally, unlike the Supercenters, the discount format stores don't offer fresh produce, fresh meats or in-store deli and bakery departments, as well as not offering a full supermarket-like selection of food and grocery items.

But Wal-Mart is out to change that in the Bakersfield market -- and beyond in the Central Valley.

Here is what we know based on our research:

>First, just last week the Bakersfield Planning Commission approved a request by Wal-Mart to remodel and add an additional 46,000 square feet to its Wal-Mart discount store (one of the three in the city) in northeast Bakersfield at 2701 Fashion Place, turning the store into one of the retailer's hybrid Supercenters, as we call them. All of the new, additional 46,000 square feet, along with some added space from the store remodeling, will be devoted to food and grocery, including fresh produce, meats, an in-store deli and bakery. The additional square footage will come from Wal-Mart's taking over an empty building next door that used to be a Vons supermarket, operated by Safeway Stores, Inc. before it was closed by the supermarket chain.

The Bakersfield City Council must vote in favor of the planning commission's approval. But a vote in favor of the project by the city council going forward looks likely, according to members of the Bakersfield Planning Commission.

>Second, Wal-Mart is looking to try to add additional square footage in a similar way to its other two Wal-Mart discount format stores in Bakersfield, using the added space to include a full supermarket inside and create a hybrid Supercenter like its doing with the northeast Bakersfield store.

Wal-Mart is converting existing discount format stores into these hybrid Supercenters throughout the U.S. For example, the retailer is in the process of converting 30 or more of its Wal-Mart discount stores stores in Southern California into the hybrid Supercenter format so that it can offer a full selection of food and grocery products for sale in the units, as we've previously reported and written about. [September 15, 2008: Wal-Mart Expanding its Discount Store-to-Supercenter Conversion Program As Part of its Strategy to Grab Even More Food and Grocery Sales Market Share.]

As we've also previously reported, Wal-Mart is using the hybrid Supercenter conversion process throughout the Central Valley, not just in Bakersfield. For example, the retailer plans to convert an exiting Wal-Mart discount store in Los Banos, California (Merced County) into a hybrid Supercenter that will offer a full range of food and grocery products, and is looking to do the same with a dicount format store in Merced and another in Turlock (Stanislaus County) if it can find the added space in the respective shopping centers to do so, and get approvals from the respective cities for the conversions, if the additional square footage can be found. [Click here to read a selection of past stories about the hybrid Supercenters and related Wal-Mart topics.]

In the fall of 2008 Wal-Mart opened its first "hybrid" Supercenter, located in a vacant big box building that it completely gutted and remodeled, on McHenry Avenue in the Central Valley city of Modesto, which is in Stanislaus County, about 10 miles from Turlock, 35 miles from Merced, and about 45 miles from Los Banos.

Wal-Mart took the about 100,000 square foot vacant building that used to house a warehouse format supermarket in one half and a drug store in the other, gutted it, then remodeled it into the 100,000 square foot combination food, grocery and general merchandise hybrid Supercenter. [April 25, 2008: Going Smaller: Wal-Mart Might have Found A Solution or Two to Much of the Opposition to its Mega-Supercenter Stores in the USA]

At 100,000 square feet the store is nearly half the size of the average Wal-Mart Supercenter, which are about 180,000 square feet and often larger. As an example, Wal-Mart is building a brand new Supercenter in Ceres, which is right next door to Modesto. That store is about 215,000 square feet.

>Third, Wal-Mart has had a partially built new combination food, grocery and general merchandise Supercenter sitting at a site at Panama Lane and Highway 99 in Bakersfield for about five years. Wal-Mart started construction of the store in 2003-2004 and then was hit with a series of lawsuits from environmental groups over various environmental aspects related to the store location. In late January (last month) the Bakersfield Planning Commission and Wal-Mart said those lawsuits have been resolved. Wal-Mart further announced two weeks ago that it is preparing to resume construction on the site and hopes to have the Supercenter completed in time to open in the fall of this year.

>Fourth, Wal-Mart has another site approved to build a new Supercenter at in Bakersfield. That site in on Gosford Road in the city. It was approved in 2002, just like the Panama Lane and Highway 99 site was. Wal-Mart decided not to start construction at the Gosford Road location because of the lawsuits filed against the Panama Road project. Now that the retailer has resolved those lawsuits and is completing construction on the Panama Road Supercenter, it's likely it will soon move forward with the start of construction on the approved site on Gosford Road.

>Fifth, Wal-Mart also is proposing building a Supercenter at a site in Delano, which is close to Bakersfield in the market region, and is where Tesco also plans to open a Fresh & Easy market. The city of Delano has approved the project and supports the hundreds of new jobs and added retail sales tax revenue the new Supercenter coming to down would bring. Delano is a rural city and the average income of is residents is at the very low end.

A citizen's group in Delano though is against the project and has filed a lawsuit against its going forward. The group says the Wal-Mart Supercenter will hurt and drive out local small businesses who can't compete against mega-Wal-Mart. Wal-Mart runs into such opposition with nearly every Supercenter it proposes in California, although in this current bad economy numerous California cities that in the past didn't want anything to do with a Wal-Mart Supercenter are now looking much more favorably on the prospect of the retailer bringing one to their respective town.

This Friday a court in Bakersfield will hear the Delano group's lawsuit against the Wal-Mart Supercenter going in their city. The judge will rule on the lawsuit following the hearings.

We're told it's likely Wal-Mart, and the city of Delano, will prevail in winning the lawsuit and getting the Supercenter in Delano built.

>Lastly, in addition to hoping it can find the additional space, and if it does to gain approval from the city of Bakersfield to expand and remodel its other two Bakersfield Wal-Mart discount format stores into hybrid combination food, grocery and general merchandise Supercenters, the retailer is looking for additional new Supercenter sites in and around Bakersfield as part of its strategy to become a serious player in food and grocery retailing in the region.

Wal-Mart's Central Valley strategy

Wal-Mart's plans to aggressively convert discount format stores into hybrid Supercenters and to open new Supercenters in the Bakersfield region of the Central Valley isn't an isolated strategy. Rather it's part of the retailer's overall strategic plan to become a major player in food and grocery retailing throughout the Central Valley -- from Bakersfield in the far southern end of the vast valley, and Fresno and Merced County in the middle of the region, to Stanislaus County and San Joaquin County in the Northern Central/San Joaquin Valley. Nearly 5 million people live in the Central Valley, from Bakersfield north to Stockton in San Joaquin County

The key to Wal-Mart's Central Valley strategy is its proposal to open a big, new distribution facility in the city of Merced, the county seat of Merced County. Wal-Mart submitted plans for the new 500,000 -to- 600,000 square foot facility early last year.

The proposal has been making its way through the various local government agencies responsible for approval. There has been objections to the huge facility from a number of groups in the region, and Wal-Mart has made some changes to its original proposal because of those objections. The objections center around environmental impacts like traffic congestion and other related issues.

Last year it looked like the proposed new Wal-Mart distribution center in Merced might not gain approval. However, according to sources in the region, the economic recession has changed that. Merced County has one of the highest housing foreclosure percentages of any county in the U.S., at times being number one, and one of the highest unemployment rates in the country at its current whopping 16%, which is almost twice the rate of the state of California (9.4%). The region is bleeding jobs and the Wal-Mart distribution center, which would bring hundreds of badly needed jobs to the area, now looks like it will soon gain approval, we are told.

With the new Merced distribution center, Wal-Mart will be able to supply fresh foods, grocery products and other goods without a hitch to basically all of the new and hybrid Supercenters and other format stores it wants to remodel and build in the Central Valley -- south to Bakersfield and Fresno and north to Stanislaus County and San Joaquin County, as well as up into the Sacramento region and even into the nearby San Francisco Bay Area -- where the retailer has a near-zero presence and wants to open many new stores, including Supercenters, if it can gain approval of them by Bay Area cities and counties, something the retailer has found near-impossible to do to in the past with its Supercenters because of so much opposition to the mega-big box stores. (That's one reason the retailer created its small-format Marketside grocery and fresh foods stores as an alternative food and grocery retailing format to help Wal-Mart increase market share in such difficult to enter with Supercenter markets.)

As we mentioned earlier in this piece, Wal-Mart opened its first Supercenter in Modesto in November of last year -- the 100,000 square foot hybrid store in the vacant big box retail building. The retailer also has a discount format store in the city it would like to convert into a hybrid Supercenter if it can find the the space next to the existing store to add the additional square footage. Wal-Mart also is looking for other vacant big box buildings in other parts of Modesto where it can create a hybrid Supercenter like it did with the one on McHenry Avenue in the city that opened in the fall of 2008. [Related story - November 21, 2008: Breaking News: Wal-Mart Stores, Inc. Names New CEO to Replace Lee Scott; USA Chief Castro-Wright Elevated to Vice Chairman Effective Immediatley.]

The retailer previously tried to gain approval for a new, built from the ground-up Supercenter in Modesto a number of years earlier, but met objection from the city and various community groups. That's why it went with the hybrid Supercenter in the vacant building concept instead.

Fresh & Easy Buzz has identified and reported on two locations thus far Tesco's Fresh & Easy has leased for planned stores in Modesto. [Those reports are here and here.] Tesco hasn't publicly announced or confirmed the Modesto locations as of yet.

The process of putting a store in a vacant building like Wal-Mart did in Modesto doesn't require the same extensive approval and environmental impact process that building a Supercenter from the ground up does in the city and in most California cities. As a result, even though there were groups opposed to the Modesto store, they couldn't stop Wal-Mart because like any other retailer its able to convert an existing vacant building into what they want it to be without an elaborate planning process like with new store construction, and particularly like new big box store construction. Instead Wal-Mart just needed to meet the essentially simple approval process for remodeling a vacant store building in Modesto, just as all other retailers are required to do.

As we also mentioned earlier in this piece, Wal-Mart is building a huge, new Supercenter (over 200,000 square feet) in Ceres, which is on Modesto's southern border. The two cities basically run into one another. That store is set to open sometime this year. The store was supported by the city of Ceres and met with little opposition from members of the community, with the exception of some traffic issues that were resolved by Wal-Mart and the city. [Related story - November 19, 2008: Competitor News: Wal-Mart Lowering Prices on Holiday Items and Staples; New Formats Coming; Online Grocery Sales; Hundreds of New Stores FY 2009-2010.]

Wal-Mart also has applied to build a brand new 158,000 square foot Supercenter in the Stanislaus County city of Patterson. Patterson, which has about 35,000 residents, is located about 20 miles from Modesto on the county's west side. The proposed Supercenter is right across the street from an existing Save Mart supermarket, operated by Modesto-based Save Mart Stores, Inc., which is the market share leader in the region.

Additionally, Wal-Mart plans to turn its existing discount format store in the city of Los Banos (Merced County) into a hybrid Supercenter. We're told the city of Los Banos has no objection to that since the city of about 30,000 is understored in terms of supermarkets, having only one major supermarket, a branch of Modesto, California-based Save Mart, curently operating in town. There's also an independent supermarket in Los Banos, but it is an older and fairly small store. Los Banos is located about 20 miles from Merced, where Wal-Mart hopes to open its new Central Valley distribution center.

Further, Wal-Mart building a new Supercenter in the Merced County city of Livingston, which is a small city of about 20,000 people located just a few miles from Merced. That store will serve a much larger population base than just the residents of the Livingston though because numerous people live in the nearby unincorporated parts of rather rural and agriculture-based Merced County, in addition to living in the county's incorporated cities. It's also expected that residents of other towns just a few miles away will shop at the Livingston Supercenter when it opens.

Merced County has a current population of about 260,000 residents. Merced is the largest city in the county with about 80,000 residents. Next door Stanislaus County, of which Modesto (about 205,000 population) is the county seat, has a population of about 560,000. The two counties are right next to each other in one geographical block.

Merced is only about 40 miles from Fresno, where Wal-Mart has been opening up numerous new Supercenters and has plans to open more. The Fresno Metropolitan region has a population of over 1 million people, and has been one of the fastest-growing regions in California, as have Merced and Stanislaus Counties, until the housing foreclosure crisis and recession hit.

If it can gain approval, Wal-Mart wants to open numerous build new Supercenters and create hybrids, in some cases adding on to existing discount format stores and in other cases putting hybrid Supercenters in remodeled vacant big box buildings like the one on McHenry Avenue in Modesto, throughout the Central Valley. It will be able to do so aggressively once it gets the Merced distribution center open, which it wants to do no later than 2010.

Tesco's Fresh & Easy in the Central Valley

In addition to the two Fresh & Easy Neighborhood market combination grocery and fresh foods stores already opened in the city of Bakersfield and the other seven planned for the market region, and the Modesto stores we've discovered and reported on, the retailer has leased numerous sites in Fresno and the Fresno Metropolitan regions where it is either building or converting vacant buildings into Fresh & Easy markets it plans on opening in the near future.

Tesco plans to eventually open and operate Fresh & Easy stores throughout the Central Valley and Northern California, from Bakersfield in the south to the Northern San Joaquin Valley, and into the Sacramento Valley region and San Francisco Bay Area, as we've previously reported on and written about extensively in Fresh & Easy Buzz.

The retailer continues work on a number of its Fresno region stores but no opening dates have been announced. Work has yet to begin on the two Modesto sites, both set to be stores located in vacant buildings that formerly housed supermarkets.

Additionally, as we reported here, Tesco has postponed its Northern California launch, the first stores of which it originally planned to start opening in 2008, then changed to early 2009, and now has postponed indefinately.

California's Great Central Valley, as its often called, is suffering significantly in the current recession with high unemployment, massive housing foreclosures, growing poverty and other serious economic probelms. That's actually a good perscription for Wal-Mart's brand of discount retailing, which is why the retailer is moving forward with its strategic growth plan throughout the region.

The region also offers opportunity for Tesco's Fresh & Easy if it focuses its merchandising on creating a solid, comprehensive value proposition and communicates it well in the Central Valley, rather than one week positioning itself as a discount grocer, then the next week as a specialty foods market, and the third week as a prepared foods market that also happens to be an environmentally-friendly-focused grocery chain, as in our analysis it has been doing since it opened the first stores in November, 2007. There are some signs Tesco's Fresh & Easy is taking our advice though and starting to better create, develop and communicate a solid value proposition. It's far from being there yet though.

All those things are fine -- selling specialty foods and prepared foods and being a "green" grocer. But they need to be additions to the overall discount grocer value proposition, which should be Fresh & Easy's hub on the wheel of food retailing, with all the other aspects of its merchandising being the spokes on that wheel.

If Tesco does that with Fresh & Easy in the meat and potatoes Central Valley -- focuses on being a discount food and grocery retailer with a solid value proposition first, with all else coming after -- it stands a chance of doing well in the region, in our analysis. If it doesn't, or fails in trying, things are going to be very difficult, paticularly with Wal-Mart now joining the already competitive Central Valley food and grocery retailing market in a big way.