Sunday, May 18, 2008

Small Format Food Retailing Special Report: Raising (the stakes in) Arizona: Wal-Mart On-Track to Open First Marketside Stores in Arizona This Summer

Wal-Mart, Inc. is on track to open the first four of its new small-format Marketside grocery stores in Arizona this summer. Natural~Specialty Foods Memo was one of the first publications to report and write about the development of Wal-Mart's small-format Marketside last year.

The mega-retailer has added an employment web page to its website to recruit store managers and assistant managers for the four 15,000 square foot Arizona stores, which will be in the cities of Chandler, Tempe, Mesa and Gilbert. You can view the website at:

As Natural~Specialty Foods Memo described the Marketside format in our previous pieces, Wal Mart is positioning the 15,000 square foot food and grocery markets as being for consumers who "have a passion for fresh and delicious food."

As a result, the stores set to open this summer will offer a mix of basic food and grocery products across all categories, with an emphasis on fresh foods: produce, meats, cheeses, perishables of all kinds and most interesting, fresh, prepared foods prepared right in the stores.

The stores also will offer a limited but strong assortment of basic food and grocery products, including new store brands designed especially for the Marketside stores.

In fact, according to planning documents filed in Arizona, Wal-Mart plans to offer the in-store prepared foods for eating right in the store as well as to take home. The planning documents show in-store kitchens in the Marketside stores, along with food counters or eating bars and seating for about nine -to- 10 people at a time.

The Financial Times newspaper was the first to report this aspect of the Marketside stores on Thursday. Natural~Specialty Foods Memo confirmed it with our Arizona sources, who were among the first to tip us off last year about Arizona being the first U.S. region in which Wal-Mart would open the small-format grocery markets.

Our Arizona commercial real estate sources, who were right on before, also tell us Wal-Mart is searching for additional locations in Arizona for its Marketside stores, especially in the Phoenix Metropolitan region.

In-store venues mixes-up prepared foods game

Preparing fresh foods in-store, and including an in-store eating venue, really mixes-up what is currently the norm in prepared foods' category merchandising in the majority of small-format food and grocery retailing chain stores in the U.S. to date.

For example, although Tesco's Fresh & Easy Neighborhood Market grocery stores have as a major part of their offering the merchandising of lots of fresh, prepared foods; the ready-to-eat and ready-to-heat prepared foods items are all made at a central kitchen in Southern California. [Arizona, along with Southern California and Nevada, are the three market regions where Tesco currently has its 61, 10,000 -to- 13,000 average square foot Fresh & Easy combination basic grocery and fresh foods markets.]

Virtually none of the chain's operating small-format grocery stores--Trader Joe's, Aldi USA, SuperValue Inc.'s Sav-A-Lot, Safeway's new "The Market" small format, and others--prepare ready-to-eat foods in-store in a kitchen and offer "eat"-in seating for customers.

In the case of Safeway, as we reported on Thursday, the grocery chain opened its first "The Market" small format store, called the "Market by Vons," on Thursday in Long Beach, California. Although Safeway isn't preparing foods in-store, it owns a restaurant named Citrine in Redwood City in the San Francisco Bay Area, who's chefs created the prepared foods for sale in the "Market by Vons."

The fresh, prepared foods items, branded under the "World Cuisine" label, are prepared using the chefs' recipes at a central facility or kitchen, then distributed to the store, as they will be to all of Safeway's "The Market" format stores, which average about 15,000 square feet like Wal-Mart's Marketside format.

Tesco's Fresh & Easy Neighborhood Market also had chefs create the prepared foods recipes for its fresh & easy brand ready-to-eat and ready-to-eat items it sells in its small-format stores. The items are made in a large kitchen facility at the grocery chain's distribution center in Riverside County, California and then delivered to the stores in Southern California, Arizona and Nevada.

In-store prepared foods as a point of difference

Wal-Mart could be on to something by preparing the foods in-store rather than at a central commissary. Consumer surveys for years in the U.S., asking shoppers if they prefer in-store prepared foods or those prepared at an outside kitchen and shipped to the stores, have overwhelming shown a preference on the part of consumers for in-store prepared foods rather than those produced at a central commissary or kitchen and shipped to the stores.

Consumers say they believe in-store prepared foods are fresher, healthier and taste better than those from a central kitchen facility. They also say in the surveys they like the idea of knowing the prepared food items were prepared right in the store rather than outside and shipped in because that way they have a better idea as to the freshness of the product.

Having a kitchen along with seating in the Marketside stores also should add a better since of place and atmosphere to the small-format grocery markets, something Tesco's Fresh & Easy grocery stores are lacking in our analysis. It also could offer a significant point of difference for the Marketside stores, especially compared to Tesco's Fresh & Easy stores.

The in-store kitchen and seating area also should reinforce Wal-Mart's "freshness" and "quality" positioning for the Marketside stores, since generally preparing food in-store like Whole Foods' Market and many other upscale grocers do is a sign of a commitment to freshness, especially in terms of consumer perceptions.

Of course, the food prepared in the Marketside stores for eating in-store or taking home needs to taste good and be fairly healthy in terms of ingredients, otherwise in-store prepared vs. central kitchen prepared really becomes a moot point. Quality-control also must be high. After all, the kitchen is right there for all to see. Do it wrong or do it in a messy way and its a negative.

As we reported here, Wal-Mart's Marketside team did its initial research and development for the small-format food stores in the San Francisco Bay Area, spending time staying in the region and studying various successful upscale grocers' in-store prepared foods programs while there.

Team Marketside also met with a number of culinary professionals while in the bay Area, as well as doing so elsewhere, to discuss potential fresh, prepared foods concepts, ideas and strategies.

We've learned Wal-Mart retained a chef or two, we can't confirm they are from the Bay Area but believe so, to create the recipes for the Marketside menu, both the foods prepared in-store for eating there and those prepared in-store for take-out.

In other words, it appears Wal-Mart not only did its research, looking for best practices in in-store prepared foods operations, but also retained highly-trained, experienced chefs to create the recipes for the retailer's prepared foods program. It's going to be very interesting to see the quality level of the Marketside in-store prepared foods when the stores open in a month or two in Arizona.

We also know pricing in the Marketside stores, in dry grocery as well as fresh foods, is going to be discount and competitive. We've learned that although the grocery prices might be a bit higher than those in Wal-Mart's Supercenters, if so it won't be by much at all.

Additionally, the Marketside store prices will be no higher than those in the retailer's Wal-Mart Neighborhood market supermarkets, which at about 45,000 square feet are still three-times larger than the Marketside format stores.

Wal-Mart plans to introduce some new store brand grocery items when it opens the Marketside stores. These new private label products will be discount-priced. As we reported before, the retailer has trademarked two brand names, "City Thyme" and Field and Vine," which we expect to see on various food and grocery products when the Marketside stores open this summer. There could be other brand names as well.

Wal-Mart also is opening an office in Phoenix, Arizona, which the retailer will operate the Marketside stores from, which also indicates more units will be on the way. Retailers seldom open central offices for just four stores.
Going for market dominance in Arizona

That Wal-Mart chose the Arizona market to launch its new small-format Marketside stores is hardly an accident. Arizona is one of the retailer's top U.S. markets. It's also one of Wal-Mart's top U.S. growth markets.

Wal-Mart currently operates 60 Supercenters in Arizona, ranging from about 180,000 square feet -to- its two newest units which are over 200,000 square feet, including even more of that space devoted to selling food and groceries than earlier Supercenter format stores.

The brawny big-box (and now small-box as well) retailer from Bentonville (Arkansas) also operates 14 of its Sam's Club Warehouse stores, which sell lots of groceries and fresh foods, and 17 of its 45,000 square foot Neighborhood market supermarkets An the state.

Wal-Mart also has a couple more Supercenters in the works for the state, and has plans to open at least three more Neighborhood Markets this year and early next year.

We don't need to do the math for you; as you can add up, Wal-Mart has lots of food and grocery retailing square footage in Arizona, with more on the way, both with the additional Supercenters and Neighborhood Markets, and the four new Marketside grocery stores set to open before the summer is over.

Just add up all the current and coming on line food and grocery retailing square footage for Wal-Mart in Arizona. Even if Tesco were to open 100 more Fresh & Easy stores in the market, it wouldn't come close to matching Wal-Mart's total square footage.

Of course, Arizona also is the number two target market for Tesco, after Southern California, for its Fresh & Easy small-format grocery stores. The retailer currently has about 18 of the combination basic grocery and fresh foods markets in Arizona, with many more on the way.

However, although we believe Wal-Mart is likely to open more than the four initial Marketside stores in Arizona, the retailer isn't looking at a mass store rollout like Tesco is doing in the state with its Fresh & Easy.

[At a recent commercial real estate industry conference in Arizona, Tesco's Fresh & Easy Neighborhood Market said it believes Arizona has room for it to open an additional 100 of its small-format grocery stores in the state. We aren't real sure about that. In fact, we think the Arizona market is approaching "over-stored" status.]

After all, with Marketside, Wal-Mart will be conducting a multi-format food and grocery retailing strategy in Arizona: Supercenters, Wal-Mart discount stores (which also sell lots of food and grocery products) Neighborhood Markets and Marketside. Therefore, we believe the retailer will use the Marketside format more strategically in the Arizona market in conjunction with the other formats it operates in the state.

Wal-Mart also recently opened its first store dedicated entirely to Hispanic consumers in Texas. Since Arizona has one of the highest per-capita Hispanic or Latino populations in the U.S., don't be surprised if Wal-Mart adds this other new format to the mix in Arizona. [Read our piece on Wal-Mart's new Hispanic format store here.]

Marketside & Fresh & Easy

However, it's important to note all four of the initial Arizona Marketside stores are being located near existing Tesco Fresh & Easy Neighborhood Market stores. While Wal-Mart says the Marketside format is merely an evolution in ongoing new format development for the retailer, the stores basic grocery and fresh foods positioning--with a few twists like the in-store prepared foods--also is directly aimed at Tesco's Fresh & Easy.

And Wal-Mart's initial location targeting could be tough for Tesco's fledgling Fresh & Easy chain, especially in Arizona where it now won't only be faced with competing against Wal-Mart's Supercenters and Neighborhood Markets (a number of which are close to Fresh & Easy stores as well) but also the myriad of other grocers in what is arguably today the most competitive food and grocery retailing market in the U.S.

Along with Wal-Mart in the Arizona market, there's hometown-based Bashas, Safeway Stores' Arizona division, Albertsons, Trader Joe's, Whole Foods Market, Sprouts Farmers Markets, Sunflower Farmers Market, and a host of others including some very competitive independents and and ethnic grocers. It seems to us there's only so much "share of stomach" in any market, and it will be interesting to see if all these players can survive in Arizona.

As we've written before, in addition to possibly putting Tesco on the ropes, Marketside offers Wal-Mart a host of other win-win options.

For example, it allows the retailer a format it can pop into places where getting one of its Supercenters approved by a county or city is impossible, or will require a big fight.

Marketside also gives Wal-Mart an urban format. For example, it can now have a food and grocery retailing presence in cities like San Francisco and urban Los Angeles in California, New York City and Boston on the east coast, and elsewhere (Seattle, Denver) where urban density (and often politics) prohibits a Supercenter, and in many cases even a Wal-Mart Neighborhood Market, from being located.

For example, the city of Chicago just last week shot down plans Wal-Mart had to build a Supercenter in the city. We doubt the city of Chicago would be as likely to deny Wal-Mart a permit for a 15,000 square foot (or numerous 15,000 square foot) Marketside grocery stores in the city, especially in the inner-city where there is a shortage of grocery stores.

Wal-Mart isn't using the Wal-Mart name on Marketside, like it does with all of its other formats. This is by design, as the retailer believes it will do better with the small-format, more upscale stores by branding them merely Marketside, sans the Wal-Mart name.

Interestingly, Tesco doesn't use "Tesco" at all in regards to its Fresh & Easy Neighborhood Market small-format USA venture: not in the name, in the branding, or even in its press releases. This is the opposite of what the United Kingdom-based international retailer does in the rest of the world, where it uses and associates the Tesco name in all its retail formats, like "Tesco Express," Tesco Extra," and the like.

On the other hand, Safeway is using the "Safeway" name and brand prominently in its new small-format food retailing venture. It's 'The market" format co-brands the region's chain banner with the "Market" name. For example, the first store which opened in Long Beach, California last Thursday is called the "Market by Vons." Safeway operates Vons-banner stores in the region. All "The Market" format stores in Southern California will be named the "Market by Vons."

In Northern California, the Pacific Northwest, Arizona, Colorado, and the Washington D.C.-Maryland-Virgina tri-state region where Safeway's stores fly under the "Safeway" banner, the stores will be named the "Market by Safeway." In other Safeway market regions the stores will go by whatever banner the retailer operates in that given region: "The Market" by...Dominick's, Genuardis, Carrs, for example.

Small-format food and grocery retailing revolution marches on

Last year, Natural~Specialty Foods Memo proclaimed there is a small format food and grocery retailing revolution going on in the United States. Some people said that was an exaggeration. We politely told them to wait and see.

Well, the largest corporation and retailer in the world as well as in the U.S., Wal-Mart, is now a participant in the small-format food retailing game in its home country of the U.S., with its 15,000 square foot Marketside stores soon to open in Arizona. (Wal-Mart has operated small-format stores, not Marketside but somewhat similar, for some time now in parts of Latin America.)

Additionally, the world's number three retailer, Tesco, is staking much of its reputation and cash on its Fresh & Easy USA small-format grocery retailing venture.

Further, the number two--SuperValu, Inc.--and number three--Safeway Stores, Inc.--supermarket chains in the U.S. are participants in the small-format food and grocery retailing revolution in in the U.S. SuperValue, with its small-format discount Sav-A-Lot chain and Safeway, with its new "The Market" format venture.

If that's not enough evidence, major small-format players include Wawa Markets in Pennsylvania, which has been a successful operator of hundreds of small-format hybrid convenience/grocery stores featuring lots of fresh, prepared foods along with basic groceries for decades.

Then there's Aldi USA, with nearly 900 small-format discount stores in the USA, and plans to build up to 100 new stores per-year over the next five years. [Aldi doesn't mess around with banners. It's uses Aldi on its small-format stores throughout the world.]

Whole Foods Market, Inc. also is entering small-format retailing with its Whole Foods Express format, which will feature lots of fresh, prepared foods, along with natural and organic products in a 15,00 -to- 20,000 square foot format store. The first Whole Foods Express store is set to open soon in a converted Wild Oats natural foods market in Boulder, Colorado.

The small-format food and grocery store retailing revolution might not be televised, but its happening anyway. And, we are covering it completely, and regularly. Stay tuned.

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