(Aug. 30) Retailers — especially those outside the Old South — should look for more market-share pressure in the next five years from Wal-Mart Stores Inc., according to a new report.
The Bentonville, Ark.-based retail giant could double in size by 2007, and much of the growth will likely come from the same category that fueled its phenomenal growth over the past decade — food sales.
According to the market research firm Retail Forward, formerly part of PricewaterhouseCoopers, Wal-Mart should open its 2,000th supercenter by 2006. It had 1,156 as of July 31 and will have 1,199 by Sept. 18.
Ira Kalish, the firm’s chief economist and author of the report, “The Age of Wal-Mart,” said he projects that two-thirds of the new supercenters will be conversions of its existing stores that do not sell perishables. That is significant, he said, because 52% of the chain’s supercenters are in the 11 states of the Old South but 69% of its traditional stores are outside the South.
“Safeway, for example, hasn’t had to compete as much, but that’s about to change,” Kalish said.
Reaching the 2,000-supercenter plateau so quickly merely means a continuation of Wal-Mart’s expansion rate of 180 or so supercenters per year, Kalish pointed out, adding, “I think they can sustain that growth.”
At that rate, by his calculations, Wal-Mart alone will account for one-third of the increase in U.S. food spending.
That’s an eye-popping statistic, Kalish concedes, but not as startling as it might seem. Food spending is a relatively stable number not prone to quick increases, so the raw dollars involved aren’t as big as one might presume. But Kalish said each new supercenter represents an additional $70 million to $80 million in annual sales, half of which is in food.
In addition to continued food forays, according to the report, Wal-Mart will probably focus its growth plans on several key strategies:
- Boosting its foreign presence, where the everyday-low-pricing model by itself won’t work on a global scale;
- Expanding its new formats, such as Neighborhood Market stores and urban supercenters;
- Developing its fringe businesses, such as fueling stations and foodservice distribution;
- Attracting a more affluent customer by more aggressively merchandising apparel and home goods.
Although Wal-Mart officers, in a recent second-quarter earnings report, cited strong performance in Mexico, Canada and the United Kingdom as evidence its low-price model was working internationally, Kalish said those results mask a larger problem.
“They’ve had some problems in some of the areas they’ve gone,” he said, noting that Germany, Brazil and Indonesia are among the countries where performance has been less than stellar. “Even though they’re a global retailer, they’re not as global as they’d like to be.”
Kalish said Wal-Mart, in many countries, needs to do a better job of developing local management and integrating those people into its corporate philosophy.
In the U.S., Wal-Mart’s 60,000-square-foot Neighborhood Market stores could grow rapidly in coming years after a long gestation period, much like the growth curve of the supercenter format, Kalish said. The strategy nationwide could mirror what Wal-Mart has done around Oklahoma City: saturate a given market with both supercenters and Neighborhood Market stores.
Published reports in recent weeks from real estate sources suggest Wal-Mart is interested in opening Neighborhood Market stores in Tampa, Fla.; Nashville, Tenn.; and Indianapolis. It already operates more than three dozen locations in Arkansas, Oklahoma, Texas and Mississippi.
Kalish said the widely held belief that supermarket chains across the U.S. — indeed, worldwide — remain unsettled by the growth of Wal-Mart’s food business is largely correct.
“I don’t know if they’re running scared, but they certainly have been challenged,” he said. “What we have found is that the Kroger’s and Albertson’s survive, but the small mom-and-pops don’t.”
Still, even Albertson’s has pulled out of certain markets, and Kroger has taken hits to its margins by trying to match Wal-Mart’s low prices in some areas, Kalish said.
Research suggests there’s a big overlap in the customers who frequent Wal-Mart and Kmart but not Wal-Mart and Target, he noted. Extrapolating from that, one could draw the conclusion that supermarket chains with a higher-end clientele are better positioned to respond to the Wal-Mart competition.
Said Kalish: “I would think the more price-oriented retailers are going to be more challenged.”