CSP Magazine

Filling the Gap

Slowly but surely, Walmart Express turning from a test concept into a formidable format.

Two years since if rest leaving the station, the little engine that could significantly affect the increasingly competitive railway that inconvenience retailing is still chugging along, only perhaps not on the fast track that was forecast earlier.

But while some consider this small footprint train a long shot to outpace its rivals, its engine is powered by Wal-Mart—a juggernaut force that seems determined to leave c-stores, dollar stores, pharmacy chains and other retailers in its dust.

When it opened its if rest two WalmartExpress stores in northwest Arkansas in the summer of 2011, Wal-Mart got the retailing world’s attention by introducing a mini-mart version obits Supercenter in an approximately15,000-square-foot box—roughly half the size of most dollar stores. The Express formula for success would focus on the if all-in trip for shoppers in urban and rural locations that lacked a Supercenter [CSP—July ’11, p. 42].

Wal-Mart Express functions as a c-store hybrid that features a broad selection of grocery items, including fresh produce, dairy and meats, as well as a wide variety of consumables, health and beauty aids, and over-the-counter medicines. Most Express units offer 11,000 to 13,000 SKUs, pharmacies, if facial services such as food-stamp acceptance and check cashing, and “site-to-store” pickup availability for online purchases at Walmart.com. Some locations are also equipped with gas pumps.

“Wal-Mart Express is a pilot format designed to serve customers who have limited access to Wal-Mart’s everyday low price promise,” says Bill Wertz, director of communications/East for Wal-Mart.“At 12,000 to 15,000 square feet and 20to 25 [employees], Wal-Mart Express is smaller than most Wal-Mart stores, buts designed to provide our customers an everyday-low-price experience in a more convenient format.”

When asked if and how WalmartExpress’ strategy has changed or evolved since its rollout two years ago, Wertz says that strategy “has remained pretty much the same.”

Offering small-format stores allows the company to access parts of the country where customers currently have limited access to Wal-Mart, including food-desert areas that lack healthy and staple food options due to economic distress or location.

“Wal-Mart Express can be part of the solution in urban and rural communities where residents don’t have convenient access to healthy, affordable food, “says Wertz.

Gradual Growth

Six months after the debut of the firstWalmart Express, 10 more opened their doors. Four new Express units opened in the if rest quarter of 2013, and the latest debut was in Coats, N.C., where an approximately 12,000-square-foot store opened in July.

However, Express stores haven’t exactly been popping up on street corners from coast to coast. There are only Wal-Mart Express locations open in three states—North Carolina, Arkansas and Illinois (metro Chicago). In fact, the 10,000-square-foot Express site in Chicago’s West Chatham neighborhood closed one year to the day after it first opened in July 2011.

Considering that there are approximately 149,000 c-stores, 61,000 pharmacies and 20,000 dollar stores nationwide, Wal-Mart Express has a lot of store building to do if it intends to steal serious market share from its competitors.

Its parent company certainly has the muscle—Bentonville, Ark.-based Wal-Mart Stores Inc. enjoyed if scald-year 2013 sales of approximately $466 billion; it has more than 10,600 stores under 69 banners in 27 countries and e-commerce websites in 10 countries. But Wertz says  Wal-Mart has not provided a projection for the number of Express stores it may build annually, despite reports in the media in 2011 that Wal-Mart saw the potential to build approximately 350 Express stores per year.

Wertz says Wal-Mart expects to “test, learn and refine these (Express) stores during this pilot phase. No decision has-been made on a larger-scale program for this format.”

Smaller-Store Playground

Express isn’t the only small-footprint concept that Wal-Mart has rolled outing recent years. The retailing giant alohas approximately 260 Neighborhood Market units across the country, which generally span from 40,000 to 50,000 square feet. The first store opened in 1998, and the latest—a 49,000-square foot unit—debuted in Levittown, N.Y., in July. The company estimates it will have 500 Neighborhood Market locations across the country by fiscal year 2016, yielding more than $10 billion in sales.

Wal-Mart also dabbled in a 15,000-square-foot experimental grocery concept it called Market side in 2008 in four Arizona locations, but all four stores closed by late 2011.

Wal-Mart has pushed the small-format strategy in response to evolving habits of time-strapped consumers who desire simpler, closer shopping solutions and alternatives to big-box retailers. The choice to go small was also a reaction tithe lingering economic downturn and the chance to open and succeed where Wal-Mart’s Supercenters cannot. Also, units with smaller footprints are generally considered less risky because they require a smaller investment, are easier to find and aim for a smaller, more targeted niche of customers.

Earlier this year, Bill Simon, president and CEO of Wal-Mart U.S., said Wal-Mart Stores Inc.’s plans for smaller-format locations would account for 40% obits new store openings in the next fiscal year—which amounts to 95 to 115 small-format stores (including Neighborhood Markets and Wal-Mart Express units) planned for fiscal year 2014. The company added 76 small-format units in fiscal year 2013.

Lately, Wal-Mart’s emphasis on small has paid dividends: In fiscal year 2013, the company reported double-digit positive comparable sales and positive traffic every quarter for Wal-Mart Express stores (with particularly solid growth in prescription drugs), as well as more than a 2% increase in traffic every quarter for Neighborhood Markets across all geographies.

Getting the Industry’s Attention

Wal-Mart’s slow but steady momentum in small-format retailing has made many industry experts sit up and take notice.

“By creating Express stores, Wal-Mart’s able to create a more consumer-centric environment and adapt to the needs and desires of the next generation of consumers. These consumers prefer environments they perceive as being convenient and offering affordably priced products, “says Kevin Coupe, owner/editor of MorningNewsBeat.com, a retail news blog.

Craig Johnson, president of Customer Growth Partners, a New Canaan, Conn.-based retail trends consulting and research firm, says he’s impressed with the fact that Wal-Mart is “at least exploring this as an opportunity and doing it very slowly and methodically. They’ve been ceding a lot of the convenience trip and the small-basket market to other operators, whether it’s the classic convenience stores, dollar stores or drug stores. So unless [Wal-Mart] did something, they’ll lose this small-basket trip, which is the fastest-growing shopping mission.”

Wal-Mart Express is strategically positioned to fill a void that Wal-Mart corporate itself created after its Supercenters helped push out independent grocery stores in many markets during the past three decades or so, according to Jim Fisher, founder/president of IMSTCorp., a Houston-based retail sales and fuel forecasting firm. He likens a Supercenter to a mother ship that is supported by carefully positioned satellites in the form of Express stores that collectively make up a powerful network that fills multiple niches—including fill-in shopping—in each market they serve.

“In small markets, [Express stores]can be the fill-in or even primary locations for shoppers,” says Fisher. “The greatest opportunity for Express is in thinner-city and urban areas experiencing renewal and regeneration. The fresh produce and meat with pharmacy concept can do very well in high-density core urban areas that need to be developed.”

Fisher sees Express locations as magnified versions of supersized specialty retail formats that offer fresh produce and packaged meat offerings. “It’s an expansion of the ‘usherette’ concept of an enlarged convenience/specialty store that offers specific categories of fresh foods, like the INGA of the ’70s and ’80s,” says Fisher.

“Wal-Mart Express and Neighborhood Market stores are very similar to convenience stores—they have the same beer, beverages and beef jerky. But they’re different in that they’re heavy up on groceries, not just salty snacks but fresh produce and meats,” says Johnson. “That will be the big differentiator between Express stores and traditional c-stores, dollar stores and drug stores. Conventional-stores will have shelf-stable foods, but the big improvement Express offers is fresh. You don’t have to drive 15 to 25 minutes to a real grocery store to get good quality, fresh produce and meat.”

However, Johnson says the small-format grocery concept is by no means slam-dunk for Wal-Mart. He cites Tesco’s failed Fresh & Easy stores as a cautionary tale. Five years following the launch of the grocery chain, Tesco is pulling out of the U.S. market and is looking to sell its approximately 200 stores—each about 10,000 square feet in size—in California, Nevada and Arizona.

“The real key for success in small-format grocery is fresh meats and produce,” says Johnson. “You have to do this right and display these products well or it’s a recipe for failure. I’m sure Wal-Mart has been watching these competitors closely over the last few years to avoid the same mistakes.”

Perfecting the Format

Johnson believes Wal-Mart wants to optimize Express’ success based on two primary parameters: “One, they want to get the presentation right and work out all the technical details of keeping foods fresh in a small-format store. Two, they want to get the balance right regarding where a medium-sized Neighborhood Market or a smaller-sized Express store is most appropriate.”

Fisher predicts that Wal-Mart Express stores will continue to refine their offerings and focus on fresher products coupled with a faster shopping trip.

“The competition has gotten a lot tougher and learned how to fight back against Wal-Mart. So Wal-Mart knows they have to broaden their approach if they want to have a sustainable business for a long time to come,” says Coupe.“That approach also involves more-commerce.”

Wal-Mart must be concerned about industry estimates that Amazon—the world’s largest online retailer—may catch up to Wal-Mart—the planet’s largest retail chain—in annual sales within just a few years. To better compete in the online realm, says Coupe, Wal-Mart needs to better use its Express locations as delivery depots for products that shoppers can order online and pick up at their local c-stores, much as Amazon does now by partnering with 7-Eleven stores. (At some locations, Amazon customers can retrieve their packages stored in special lockers in the convenience stores.) While Wal-Mart already offers site-to-store shipping of online-ordered products at its Supercenters and Express stores, it is also reportedly planning to test the use of Amazon-like storage lockers in its brick and-mortar locations.

Wal-Mart will undoubtedly need to tweak and strengthen its Express strategy to keep up with changing trends, says Coupe: “Any retailer that doesn’t shift or evolve to the changes in the market is doomed to be irrelevant and obsolete.”

Contending for the Crown

While Wal-Mart’s blueprint for increased register rings in a small-format model may appear impressive, many aren’t convinced that Express poses a serious threat to traditional c-store retailers.

“I think there will always remain a gap between what Wal-Mart Express offers and the need-fulfillment convenience of a c-store,” Fisher says. “A trip to a WalmartExpress is an intended shopping trip; it’s not a convenient location to shop. When it comes to staples and things like milk sales, will they [compete with] c-stores? Yes. But with consumables and grab and-go items, no—they don’t have the convenience factor.”

Coupe says Wal-Mart can pick off its weak competitors, yet historically, it has not excelled at competing in other formats.“Wal-Mart is genetically engineered to do everything it can to protect its Supercenter business. They’re not particularly good at [being a convenience store or an online retailer] because they haven’t invested in them wholeheartedly,” Coupe says.

Rob Rzewski, president and CEO formats LLC in Deerfield, Ill., which operates five c-stores in the Chicago market, says many c-store operators have a built-in advantage: a better understanding of the neighborhoods they’re in and an innate sense of what can and cannot be accomplished with fresh food offerings. Also, Express stores are likely aiming fore much wider demographic than the 18-to 35-year-old males that most c-stores continue to target, he says.

“We’d love to have a broader base, but that’s not our market. If you’re looking for groceries or pantyhose, you’re probably not coming to my stores. But if you want a fountain or energy drink, tobacco product or basic foodservice item, you’re likely coming to me,” says Rzewski.

Whether you’re a wildly successful oar mediocre retailer, if a Wal-Mart Express opens across the street from you, it’ll be threat, says Coupe.

“You may view that threat differently if you’re a Wawa or Sheets than if you’re small-fry store, but there’s no such things an unassailable business model. Somebody can always do it better, faster and cheaper,” Coupe says. “So smart retailers should keep one eye on their customers and the other on their competition.”

Rzewski, however, isn’t concerned about Wal-Mart Express cutting into his profits.“The question is: Are they nimble enough to compete head on with the convenience retail industry as a whole? I don’t think so,” says Rzewski. “Their footprints are big, their costs are expensive, and if you don’t have the volume and you’re not turning merchandise, you ‘rein trouble.”

The Convenience Counterpunch

To outmaneuver rising challengers such as Wal-Mart Express, smart c-store retailers must learn to adapt and experiment when possible. That means, for example, being prepared to provide more foodservice and fresh food choices as a way of keeping up with the Express Joneses of the world.

“C-store operators have to bring more innovation and newness into the business, “says Johnson. “They’re offering more prepared foods, which is good, but they’re never going to be able to replicate fresh meat and produce like WalmartExpress is doing. Maybe selectively, they can say, ‘We can’t do A through Z, but maybe we can do A, B and C in our approach to fresh.’ ”

Fisher suggests keeping an eye on competitors and being proactive and creative in your strategies to compete with them.

“Don’t be afraid of change or reinventing yourself,” Fisher says. “Everybody across the retail board should be paying attention to what’s going on in other sectors and channels, as Wal-Mart is.”

Coupe says if he were operating in market where an Express store was coming, “I’d also make sure I was hooked into the local community and reflecting their needs and desires as much as possible. I’d customize my offerings based on what local customers want.”In addition, Coupe recommends exploring partnerships with outside delivery providers. For example, installing Amazon delivery lockers can excite shoppers seeking a convenient place topic up online goods. And it may not belong before Peapod can offer a virtual grocery store within convenience retail locations via a board embedded with Arcades.“Look for those kinds of alliances to drive traffic and build market share, “Coupe says. 

Thinking Convenience Outside the Box

 David Portalatin, executive director of industry analysis for The NPD Group, Port Washington, N.Y., says consumers today are redefine nine the very defy nation of what convenience store is.

“We continue to see a growing percentage of consumers who tell us that they’re exploring convenience purchase occasions at nontraditional convenience(NTC) stores,” says Portalatin.

In fact, NPD Group data reveals that, year to date through June 2013, 14% of customers reported making convenience purchases at NTC stores, which includes dollar, drug, mass and grocery retailers—up from 10% in 2011 and 12% in 2012. Factors that are compelling customers to make more convenience-oriented purchase sat NTC retailers include accessible location, price, selection, discounts and bargains, and reward and loyalty programs.

“Consumers are much more likely to tell us that the availability of a deal or discount was the reason they selected a particular (NTC) retailer,” says Portalatin.“They’re are also using reward programs as a reason for going to these stores at about double the rate of traditional c-stores.”

Also, 67% of NPD Group survey respondents reveal that the purchases they make at NTC retailers are consumed within an hour after buying them. “It’s clear to us that consumers are telling us about a convenience-driven purchase occasion they’re making at (NTC) stores,” Portalatin says. “Perhaps they’re doing these things in conjunction with other shopping activities.”

Portalatin’s data shows that NTC store shoppers are more likely to buy a relatively high percentage of typical convenience items such as salty snacks, candy, gum and single-serving prepackaged foods. But during the same shopping trip, they’re also purchasing products that suggest if all-in shopping, such as perishable groceries, dairy, frozen foods and health and beauty products.

“Consumers are consolidating their shopping trips and leveraging their convenience occasions to pick up other non-convenience items. Consider that broader selection was one of the reasons that drove the purchase decision at these (NTC)outlets,” says Portalatin.

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