BENTONVILLE, Ark. -- Twelve years ago, Wal-Mart Stores Inc. executives welcomed Terry Leahy to the company's Bentonville, Ark., headquarters. Leahy, then newly promoted at Tesco PLC and considering an overhaul of the British retailer, spent an afternoon discussing operations with Wal-Mart executives.
Today, Wal-Mart is doing everything it can to stop Leahy from crashing its last big growth business: groceries. It has a team of executives hunkered down far from Bentonville in the San Francisco Bay area devising two new small-footprint stores, including [image-nocss] a response to the November launch of Tesco's U.S. grocery stores, according to people familiar with the group, reported The Wall Street Journal.
Their brainchildren represent an unlikely step for staid Wal-Mart:
One idea calls for urban convenience stores less than a tenth of the size of the company's supercenters and stocked with groceries geared to more affluent tastes.
Another plan calls for stand-alone stores offering a variety of health services and products. The new outlets are being prepared for introduction early next year, the people say, according to WSJ.
David Wild, the Wal-Mart senior vice president of new business development, is leading the initiatives. He declined to comment to the newspaper. A Wal-Mart spokesman wouldn't provide specifics but told The Journal, "Our business is constantly evolving, and we're always looking for new and innovative ways to serve our customers."
The company may have waited too long to develop successors to its big-box U.S. stores. Analysts now chopping their profit estimates for this and next year say Wal-Mart has seemed tone-deaf to consumer trends. Failed pushes in women's fashions and home decor continue to sap profits, and high gasoline prices are eating into supercenter visits. Recently, Wal-Mart has tried running ads promoting its low prices as worth the extra travel.
Nonetheless, the smaller stores could help Wal-Mart do more than fend off Tesco. The retailer has been largely shut out from upper-income and urban markets, including those in California and New York. High land costs and local opposition have limited the discounter to just 28 supercenters in California, a tenth of the number in Texas. Smaller stores are less likely to stir up opponents than the hulking 200,000-square-foot big-box stores.
The world's largest retailer hopes to begin rolling out the new convenience and health-care stores early next year, and it's looking at locations in California for the pilots. A Wal-Mart spokesman said the company "regularly tests new formats" but declined to describe the effort further.
California has been an embarrassing stumbling block for the Arkansas retail giant, according to the newspaper report. "Wal-Mart doesn't have a format that works in California," said Burt P. Flickinger III, managing director of retail consultant Strategic Resource Group. He believes the convenience-store effort is based in the San Francisco area because it is home to the Trader Joe's chain, retailer of prepared foods and groceries, and it has become the biggest market for Whole Foods Inc. "Wal-Mart really needs to take a strategic stand" in the state, he said.
Tesco's impending arrival in the U.S. Southwest has accelerated Wal-Mart's plans. The British retailer is expected to open 30 Fresh & Easy Neighborhood Market stores by February and invest $2 billion in the U.S. rollout over the next five years, according to a spokesman for Tesco's U.S. operation, which is based in El Segundo, Calif. After the first stores are launched, the company has 70 more stores in its pipeline for early 2008.
"The impact on the competition depends on how fast Tesco rolls out. I think it'll be fast," David McCarthy, a London-based deputy head of equity research for Citigroup, told The Journal. He estimates Tesco could have 500 U.S. stores and U.S. revenue of $5 billion by 2010.
The proposed Wal-Mart stores would fit with U.S. chief Eduardo Castro-Wright's goal of localizing the retailer's business. As part of its effort to appeal to a broader range of consumers, Wal-Mart has begun tailoring merchandise and food selections to regional and ethnic groups and tastes. It recently asked fruit vendors to package apples, now sold in plastic bags, in paper sacks similar to those at roadside orchards. And it is reaching out to major suppliers, including Johnson & Johnson and Procter & Gamble Co., for advice.
Tesco isnt the only target on the West Coast for Wal-Mart. FamilyMart Co., the third-largest convenience-store operator in Japan, has opened 12 Famima c-stores in the Los Angeles area and plans 250 U.S. stores by 2009. "This is a big, big target," Hidenari Sato, Famima's vice president of U.S. operations, told WSJ.
Analysts say Wal-Mart hasn't been able to penetrate the markets where wealthier America resides. "In the Northeast Corridor, California and Chicago you have 33% of U.S. income and retail sales. Yet these areas account for 10% of [Wal-Mart] stores and less than 2% of their supercenters," said Greg Melich, a retail analyst at Morgan Stanley.
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