Walmart Collateral Damage
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\"RRWhat if Walmart opened a big fleet of new-format stores and no one came?

We might find out really soon. After years of tinkering with its small-format, food driven Neighborhood Market model, Walmart has started to roll them out in earnest. There are now about 350 Neighborhood Markets and Walmart expects to open them at the rate of about 200 per year, ultimately achieving about 2,000 stores.

At about 40,000 square feet each, Neighborhood Markets are integral to Walmart’s strategy for future growth. Its main store model, the huge food and nonfood supercenter, needs a boost since it has just about reached market saturation and is facing dwindling consumer engagement.

And in an unexpected twist, Neighborhood Markets in many areas are pulling dollars from the pockets of the same supercenters shoppers, so net sales increases aren’t growing at the anticipated rate. In fact, Walmart’s net sales are actually dropping in some areas. And guess what? Local supermarket operators are starting to relax about the competitive threat Neighborhood Markets pose.

A Brief History

To get a better understanding of Walmart’s neighborhood strategy for sales growth, let’s back up and take a quick look at the retailer’s recent history and evolution. It’s easy to forget that Walmart’s once-unassailable big-box food and nonfood supercenters didn’t spring up in full bloom—in fact, far from it. From the beginning, the supercenter has been the product of constant evolution and experimentation.

Sam Walton was a prescient man and anticipated that Walmart’s nonfood discount stores would reach a saturation point. Always the innovator, he believed some form of food retailing would shape Walmart’s future. Of course at the time, Walmart had absolutely no institutional expertise in food retailing.

Not a problem. Walton decided to do something about that himself. In 1981, and for the five years to follow, Walton sat on the board of Winn-Dixie Stores, a then-huge supermarket powerhouse in the Southeast, to get a free education in food retailing. In retrospect, it seems improbable that the Davises, Winn-Dixie’s controlling family, could possibly have let Walton sit on its board. My guess is that they probably took comfort knowing that Walmart was a smaller company and non-competitive in the food retail market.

Lessons from Across the Pond

Walton continued to fine tune how food could be bolted onto its discount-department-store format. The solution, surprisingly, arrived from Europe.

In the mid 1980s, just as Walmart was ready to take a first step into food retailing, European hypermarkets such as Carrefour and Auchan were starting to attract a lot of notice, principally because they were making plans to open stores in the US.

So in 1987, Walmart opened its own experimental Hypermarket USA store near Dallas. As its name suggests, the format was a direct knockoff of the European hypermarket and also mirrored the successful Meijer stores in the upper Midwest, the first domestic retailer to use the hypermarket model. Since Walmart was uncertain of its ability to operate a competent food section, it partnered with local supermarket operator Cullum Cos.

Sam Walton knew how to play to a crowd, and I will always remember attending opening-day ceremonies of Hypermarket USA when he drove up in his battered pickup truck with his famous dog tethered in the truck’s bed.

Soon after, Walmart abandoned the Hypermarket USA banner in favor of the Walmart Supercenter brand. The concept of a “mall without walls” was born. With necessity as the mother of invention, Walmart was forced to become an overnight food retail expert when Cullum abandoned it partnership.

Market Shifts

The fortunes of both Winn-Dixie and Cullum eventually turned sour. Winn-Dixie entered a lengthy period of decline and no longer exists as an operating company, although its banner soldiers on. Cullum sold its retailing assets many years ago and ceased to operate in any form.

As supercenters became successful and spread across the world, the concept of the Neighborhood Market started to take root in 1998 in anticipation of supercenters market saturation. The big idea was that Neighborhood Markets would offer fast-moving food items, plus pharmacy and fuel, to make them attractive for short fill-in shopping trips, a consumer niche Walmart never fulfilled. The original concept was that eight or so Neighborhood Markets would encircle a supercenter, which would become a supply depot for the smaller stores. The circle of stores idea endures, but the supply depot strategy fell to the wayside.

Unintended Consequences

Walmart is now losing market share in about a third of the areas that have Neighborhood Markets, notably Dallas-Fort Worth, Phoenix, Las Vegas and Houston. The reason is that many shoppers are finding out that the high-volume, low-priced products offered at Neighborhood Markets are just the ticket for fill-in buying. And instead of returning to Walmart supercenters for pantry stock-up trips, shoppers are doing more stock-up buying at, say, Kroger. Kroger is the nation’s largest conventional-supermarket operator and has been most successful in matching Walmart’s food prices, or coming close enough so that shoppers no longer feel compelled to shop the comparatively inconvenient Walmart supercenters.

Kroger is a big presence in the areas where Walmart’s sales are flagging. Kroger’s equity has been upgraded by at least one securities firm as a result of the diminished competitive threat from Walmart. Another has downgraded Walmart’s equity, specifically citing market underperformance associated with Neighborhood Markets. And call it fine-tuning or competitive crush, Walmart has dropped the supercenter designation from the name of most of its stores.

Sam’s Crystal Ball

So what’s next for Walmart? If its foray into Neighborhood Markets isn’t the key to future sales gains, what could be the next sales driver? The question is particularly vexing considering the headwinds faced by all big-box retailers and shopping malls. Walmart must move into retailing areas that hold more promise, most obviously, Internet sales. Walmart has belatedly taken real and costly actions to develop online retailing. It is also late to the party in developing a rapid-delivery service, especially for food product.

The solution for Walmart Neighborhood Market doldrums might once again come from Europe. In France, an online grocery retailer Chronodrive has found great success with operating small stores that also serve as pickup points for large orders placed online. Chronodrive understands shopping behavior; customers often come to pick up their orders, then go into the store to get a couple of more items. The perfect upsell!

This could be just the very sort of reinvention Walmart needs for its Neighborhood Markets.

Sam Walton wouldn’t be surprised at any of this. Neighborhood Markets are now the very kind of work in progress that led him to his successful formula in the first place. By the time it’s over, Neighborhood Markets may yet become the tool Walmart needs to rout out Kroger and its other nemesis, dollar stores.

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