Tuesday Talking Points Memo

Wal-Mart USA Chief Says Smaller Stores Key to New Strategy

At a meeting with stock analysts today Eduardo Castro-Wright, chief of Wal-Mart USA operations, confirmed that new smaller Format stores are a key part of the retailer's new strategy.

The map above shows the concentration of Wal-Mart stores (all formats) in the U.S. as of 2004. Many more stores have been built over the last three years, especially in the Western and Midwestern U.S., where Wal-Mart has less store concentration.

Eduardo Castro-Wright, head of Wal-Mart's U.S. operations, said today the mega-retailer plans on improving its returns on investment by building fewer stores and stores that are smaller than its current Discount, Supercenter and Neighborhood Market formats. Castro-Wright made this comment today at Wal-Mart's stock analysts meeting, which was broadcast over the internet. The two-day meeting concludes tomorrow.

Yesterday we wrote about a report from the Financial Times newspaper that Wal-Mart has trademarked two names--"City Thyme" and "Field and Vine"-- to be used for "unspecified retail grocery store services," according to the trademark filing. You can read our piece from yesterday here.

Additionally, Natural~Specialty Foods Memo (NSFM) was one of the first publications to report (on August 22, 2007) that Wal-Mart has a team of executives in San Francisco, California researching and developing two small footprint stores--one an upscale, convenience-type grocery market similar to Tesco's Fresh & Easy Neighborhood Market stores and the other a small footprint health and Wellness store, which in addition to selling health and wellness products would have a health clinic in-store, among other features. (Read our August 22 article here. When you get to the page linked, scroll down to "Mid-Week Natural~Specialty Foods Roundup.")

Today's announcement from Castro-Wright indicates to us that what we call the "Small Mart" format development--the upscale convenience-type store and the health & wellness concept--are likely to be part of the retailer's new "smaller store" strategy. Additionally, from a grocery retailing perspective, Wal-Mart is likely to build more of its 42,000 square-foot Neighborhood Markets.

As an example, Wal-Mart is entering the California grocery market with its Neighborhood Market format for the first time. The retailer is building two of the 42,000 square-foot stores in Southern California's desert region, in the cities of La Quinta and Coachella. Both stores are set to open in 2008. (For our take on Wal-Mart's Neighborhood Market format you can read this August 30, 2007 piece, What Wal-Mart Should Do With its Neighborhood Market Format. When you get to the page linked, scroll to the bottom of the page to "Thursday Talking Points Memo.")

The new "Small Marts" in development by the San Francisco-based team are the most interesting to us in terms of the retailer's now confirmed strategy to focus on building smaller stores and building less stores. In a September 6, 2007 piece, The Invasion of the 'Small Marts": Will There be a Small Format Revolution by U.S. Retailers, we discussed Wal-Mart's research and development of the upscale, convenience-type grocery market and small foot print health and wellness-oriented stores in light of UK-based Tesco's launch of its Fresh & Easy Neighborhood Market stores next month.

Tesco's first six Fresh & Easy upscale, convenience-type markets, which put a major emphasis on fresh, prepared foods, open on November 8 in Southern California. Over 100 stores are currently in the pipeline for Southern California, Arizona and Nevada, and stores in those two states--as well as more in Southern California--will begin opening at a rapid pace after the first six open on November 8. Tesco also will build stores in Northern California in 2008, beginning with its first one in San Jose, which we reported here last Friday.

Our sense from talking to industry observers and following the "Small Marts" development very closely is that Wal-Mart is likely to develop and rollout the upscale, convenience-type format stores first. It's not by chance CEO Lee Scott sent his team to California to develop the format(s). After all that's where major global retailing rival Tesco has based its Fresh & Easy Neighborhood Markets headquarters and huge new distribution center--and where it will build and open the majority of its stores. And having the team based in San Francisco we believe is because Wal-Mart is looking initially at an urban strategy for the two "Small Mart" stores.

Both the upscale convenience format and health & Wellness concept would make sense in urban San Francisco, San Jose and Los Angeles initially for example, and then rolling them out to the suburbs after that, either in the same format or with some changes. Wal-Mart is basically unable to build Supercenters in these urban areas, both because of a lack of land and due to stiff opposition from municipal governments, citizen's groups and others, to the Supercenter format. These "Small Marts" would allow the chain to gain market share in highly populated, high-dollar markets where it currently isn't a player. In other words it would be all new dollars for Wal-Mart.

The other comment from Castro-Wright at today's analysts meeting, that the retailer will build fewer Supercenter and Discount format stores, we see as fitting-in well with the new small store initiative. Wal-Mart had planned to open 265-270 Supercenters in the U.S. this fiscal year. However, Castro-Wright said today he expects only 190-200 of those stores to open. And as part of the reduction in Supercenter building strategy the retailer will build only 170 Supercenters next fiscal year and "the figure will likely be less than 170 in future years," he said.

This development obviously opens the door to the "Small Mart" format stores, more Neighborhood Markets, and any other smaller store formats we either don't know about at present or that Wal-Mart doesn't even know about itself yet.

Wal-Mart also plans on focusing more internationally as it feels it's reaching saturation in the U.S. to a certain extent. The retailer said today by 2010 40% of its spending on new stores would be spent abroad, up 10% from current overseas new store development spending of 30%. Currently, international sales account for about 23% of Wal-Mart's revenues.

The chain has been under pressure from investors over declining returns on its 4,000 U.S. stores business. The strategy of building fewer Supercenters and Discount stores, and the development of smaller stores, is in part designed to address Wal-Street's concerns. Wal-Mart is cutting its capital expenditure budget from its original forecast of $17 billion for this fiscal year to about $15 billion , according to CFO Tom Schoewe. The retailer says building smaller stores and fewer Supercenters takes less money, thus the $2 billion or so reduction in capital expenditures.

The Wal-Mart analysts meeting continues tomorrow in Arkansas. Tomorrow's meeting also is being webcast. We will be looking for any further comments regarding the "Small Mart" format developments, and will bring them to our readers here if they happen.