Retail Memo: The Small Format Revolution Continues to Heat Up

German food retailer ALDI is planning a major expansion of its small format, no-frills, price-impact supermarket chain in the U.S. The small format food retailing revolution in the USA is growing fast at both ends (low and high) of the food retailing spectrum, as well as in the middle. Where is it going? How fast will it get there?

ALDI USA's small format, limited assortment supermarkets (above) have about 15,000 square feet of retail selling space. The small format grocery stores are attractive but basic in design.

As our regular readers are aware, we've been writing about what we believe is nothing short of a small format food retailing revolution taking place in the U.S. It's not that small, neighborhood-style grocery stores haven't existed in the U.S. forever--they have. Rather, the reason we're calling it a small-format food retailing revolution is do to the scale of what's occurring, how fast it's happening, and the involvement of two large international retailers--Tesco and ALDI--who are leading the charge.

The catalyst for this so called small-format food retailing revolution is British grocer Tesco, which launched it's first Fresh & Easy Neighborhood Markets stores in Southern California and Las Vegas, Nevada in mid-November, and in Arizona three weeks ago. Tesco has opened nearly 30 of the small format grocery markets in just a little over a month. The retailer plans to have 200 of the stores open by the end of 2008, and up to 500 stores in the U.S. in five years.

In addition to Southern California, Nevada and Arizona, Tesco will begin opening Fresh & Easy grocery markets in Northern California next year. Further, as we've reported and written about here, the grocer is looking for store sights in New York, Florida and Chicago, along with land to built a distribution center on near Chicago.

Fresh & Easy grocery markets average about 10,000 to 13,000 square feet. They're a hybrid basic neighborhood grocery store and semi-upscale prepared, fresh food retailer. We describe the store format as low-price leader, limited format grocery store meets Trader Joe's.

Price-point is a big focus on the basic grocery side of the operation. The stores' thus far opened have lower retails on national brand (a limited selection though) grocery items than traditional supermarkets like Ralph's, Von's, Stater Bros. and others in their trading regions. In fact, the prices are more in-line with the deep-discount limited assortment and warehouse format stores in Fresh & Easy's current operating areas.

On the fresh, prepared foods side of the business, Fresh & Easy offers a wide variety of ready-to-eat, ready-to-heat and grab-and-go prepared foods. These range from basics like mac n' cheese and meat loaf, to more high-end offerings like Beef Tips in Burgundy Sauce and upscale, ethnic prepared foods featuring Indian, Asian and other cuisines. The stores' even sell fully-prepared complete meals that come with dessert and a bottle of wine. The prices on the prepared foods, which are all branded under the Fresh & Easy private label, are very reasonable.

In addition to the basic grocery items and prepared foods, the stores' offer fresh produce, fresh meats, other perishables and a selection of specialty and natural grocery items. About 65% of the items in the grocery markets' are private label, including fresh milk and eggs, and about 35% are national brands.

Aldi to expand its small format, no frills, limited assortment supermarkets

German food retailer ALDI was operating in the U.S. long before Tesco even thought about and created its Fresh & Easy Neighborhood Markets concept and venture. Unlike the big splash--and rapid store opening strategy--Tesco made in the U.S. with Fresh & Easy, ALDI USA's venture has followed a low-key, low-publicity, gradual-growth model.

The international food retailer first entered the U.S. market in 1976 with a handful of stores in southeastern Iowa. Today, nearly 32 years later, the international grocer with stores in 18 countries, is a major player in U.S. food retailing.

ALDI USA currently operates over 850 stores in 26 states, and is ranked as the country's 24th highest grossing (sales) supermarket chain. The stores' are located from the Midwestern USA (Kansas, Iowa, Illinois) to the Eastern Seaboard. (you can view a map of all 26 states ALDI USA has stores in here. When you get to the linked page, go to "What is ALDI and click where it says "view a map of where we operate and divisional offices."

The German grocer's U.S. supermarkets not only are small format (they average about 15,000 square feet), limited product assortment, and price-impact focused, they're also totally no-frills. The stores' design is attractive but bare bones. If customers want to use a shopping cart they have to pay 25-cents to do so. Aldi USA stores also charge for paper and plastic grocery bags, and encourage shoppers to bring their own reusable grocery carriers. The chain's retail positioning can be summed up as "Less is More."

The small format stores' sell their own branded private label grocery items almost exclusively; with the exception of a handful of national brands, which they primarily offer only on an in-and-out basis. The grocer uses sku rationalization to its fullest, constantly evaluating categories and items and adjusting store category and item assortments. The no-frills markets offer fresh produce, fresh meats, perishables, frozen foods and non-food items, all based on that same limited-assortment merchandising philosophy.

The no-frills markets carry a total of slightly over 1,000 items across all categories. Low-price is the prime category-wide focus of the small format stores. In their trading areas, the stores' generally undercut all food retailing formats on price, including Wal-Mart, warehouse stores, and other deep discounters. ALDI supermarkets have the reputation as being the low-price leader stores in the communities they operate in.

Bring on the revolution: ALDI USA's slow growth model is about to change

With 850 stores in the USA, ALDI is considered a major food retailing player based on any score card one uses. That it is 24th in the U.S. in gross sales is impressive considering its stores are a third or more smaller than today's average American supermarket.

But the small-format, price-impact grocer is about to explode on the American food retailing scene in an even bigger way. ALDI USA just announced it is going to excelerate its new store building program in the U.S. from about 20-30 stores per year, which is it's current rate, to as many as 100 stores a year beginning next year. Additionally, the small-format grocer is going to enter Florida and Rhode Island for the first time next year, and is planning a major new expansion into Texas in 2009.

With stores in Texas and Florida, the grocer will be entering two of the most competitive and lucrative states for food retailing in the U.S., as well as establishing a retail presence in the number two and three largest states in the country respectively.

It might be televised, but the small format revolution is real

ALDI USA's rapid growth plan is predicated on the huge success the grocer has had with its 850-plus store chain. It, along with others like Supervalu Inc.'s Save-A-Lot small format, price-impact chain, have proven not only the viability but success of the format at the lower-end of the food retailing spectrum.

Of course, the international grocer isn't a stranger to high-end, small store format food retailing in the U.S. either. It owns the fabulously successful Trader Joe's specialty grocery chain, which is expanding rapidly into new markets in the U.S. as well.

We don't think it's an accident Tesco positioned it's Fresh & Easy grocery markets as a combination price-impact, specialty and prepared foods hybrid market. They saw the success of no-frills, small format operations like ALDI USA , Save-A-Lot and others--as well as the success of Trader Joe's on the higher, specialty end. In part, this influenced Tesco to craft a format they believe can serve both customer demographics--price-conscious, basic grocery shoppers tired of huge superstores, and time-pressed consumers who are looking for specialty-oriented and convenient prepared foods at not out of this world prices. Like we said earlier, it's low-price, limited assortment grocery market meets Trader Joe's.

Of course the jury is still out on Fresh & Easy. They just opened their first stores last month after all. However, Tesco's plans are to have as many as 500 stores operating in the U.S. in five years. As such, Fresh & Easy isn't an experiment. Rather, it's a full-fledged venture.

Onward small format food retailing revolution

We see what we are calling the small format food retailing revolution going full-steam ahead. As we've reported recently, Safeway Stores, Inc. is currently negotiating with real estate interests in the San Jose, California area of the San Francisco Bay Area for locations to build five stores of a new and yet unnamed small format food retailing venture. The stores will be about 20,000 square feet, and it's believed will offer a wide variety of fresh, prepared foods in addition to groceries and other offerings.

We've also written much about Wal-Mart's research into two small store formats--one a small footprint grocery/food market and the other a small format health and wellness-oriented store, which would include a health clinic in-store. The mega-retailer had a team of executives working on the concepts in the San Francisco Bay Area for a number of months earlier this year. We expect some announcements as to what they might--or might not--do in terms of their small format retailing plans by early next year.

Other retailers like supermarket chain Giant Eagle are testing the small format food retailing waters. The chain, which operates primarily superstores and conventional supermarkets, has opened two Giant Eagle Express stores. The grocery markets are about 15,000 square feet and feature a mix of basic groceries, fresh produce and meats, and upscale offerings, including prepared foods, along with specialty, natural and organic groceries. The express markets also offer some standard convenience store items and have fueling pumps next door.

Further, supernatural grocer Whole Foods Market, Inc. plans to open a small format, convenience-oriented prototype store early next year in a former Wild Oats store in Boulder, Colorado. The grocer is currently remodeling the store into its Whole Foods Express prototype format. The express store will offer lots of prepared foods, especially convenient grab-and-go items. It's also expected to have a limited assortment of natural and organic groceries, fresh produce and meats. An in-store cafe also is likely.

Other food retailers are looking closely at the small format concept and thinking about whether or not it's something they should experiment with. And of course, the original small format food retailer, the neighborhood independent grocer, is smiling and thinking perhaps he was right all along.

We also must mention Pennsylvania-based Wawa Food Markets, which is the prime chain store innovator in the U.S. in terms of mixing convenience store-type retailing and more upscale grocery and specialty store merchandising into a single format.

For decades, Wawa has been successful in building a large chain of such hybrid stores throughout the eastern U.S. The retailer also is one of the early pioneers in offering quality prepared foods offerings in a convenience store setting. Its also one of the first chains to include larger than average grocery and perishables sections in its convenience stores, offering basic groceries at a decent price, compared to the normal convenience store retail prices in the category.

Hold on to your shopping carts folks. We're just seeing the beginnings of a small format food retailing revolution. The format's success on the no-frills, price-impact end is proven--and growing. Success stories like Wawa Food Markets and Trader Joe's--and the initial popularity of Tesco's first Fresh & Easy stores--are beginning to suggest that the small format hybrid food store concept also could become a big success at the middle-to-higher end of the spectrum as well.

Which retailer will be next to test the small format store retail waters; be it low-end, high-end, in the middle, or some combination of all three? We'll let you know. And, if you know of one--do let us know.

[To read numerous stories on the small format food retailing revolution search the blog using key words: Fresh and Easy, Fresh & Easy Neighborhood Markets, Small Marts, The Invasion of the Small Marts, Whole Foods Express, Whole Foods Market, Giant Eagle Express, Wawa Food Markets, Safeway Stores, Inc. and Small Format Food Retailing.]

Monday Memo: Wal-Mart

Tales From the Big Box Boneyard: Group Launches Pre-Halloween Wal-Mart Horror Story Spooktacular

The folks over at Wakeup Walmart.com, a group dedicated to changing a number of the ways in which retailer Wal-Mart does business, is celebrating Halloween (which is Wednesday, October 31) with a new feature they call Tales From the Big Box Boneyard.

The group says "Wal-Mart and it's addiction to cheap, unsafe Chinese goods has been all over the news recently. This month, at least 40 people were sickened with the kind of tainted beef sold at Wal-Mart stores, prompting the second largest beef recall in history. Toxic chemicals like melamine have been found in Wal-Mart's pet food, and its shelves are stocked with lead-laced children's toys," the group says.

"It sounds like a cheap horror novel but, unfortunately, its all true," the group says on their website in introducing the Tales From the Big Box Boneyard feature. Further, they say "The situation is critical, and now is the perfect time of the year to spread the word. So, in keeping with the spirit of Halloween, and Wal-Mart's terrifying product safety record, we've decided to host a feature called Tales From the Big Box Boneyard.

Wakeup Walmart.com is encouraging consumers to write them at the website with their most disturbing Wal-Mart horror stories. After Halloween the group will feature what they deem to be five of the most "ghastly tales" (and their authors) on their website. Wal-Mart shoppers can post their comments/stories at a link on the website here.

The group says they aren't looking for anything specific in terms of the stories but "the more shocking, terrifying and stomach turning the better," they add. "It is Halloween after all, and we know there is no shortage of horror stories from the aisles of Wal-Mart," Wake up Walmart.com says. Ouch.

As an example of their assertion, the group has a dozen articles culled from recent newspapers posted on their website, which they say more than proves the point that there's no shortage of Wal-Mart product and other horror stories out there. Not all of the 12 stories the group has posted are about dangerous product purchases at Wal-Mart stores. Some involve political or other social issues as well.

We will share the group's first example with you. It's a product safety issue example, to say the least. Then you can go here if you want to read the other examples the group has posted on its website.

Below is one example from the group's website, taken from an article in the Salt Lake Tribune newspaper (10-02-07). We've fact-checked the quotes we used below from the Wakeup Walmart.com website against the original Tribune article. We have corrected anything from the group's website that isn't properly attributed from the Tribune article. (See our note after the article quote below.)

From: Salt Lake Tribune, 10-02-07, "That's Not Ratatouille: Utah woman finds rodent head in her can of green beans." Story summary below:

"Earlier this month, a Utah woman was preparing lunch for her children when she noticed something peculiar floating in the green beans she had bought from Wal-Mart. It was the severed head of a mouse.

No, it's not Stephen King's remake of the Pixar classic. It actually happened to Marianne Watson. 'I'm quesy just talking about it,' she said in an interview with the Salt Lake Tribune. 'Thank goodness it ended up on the top and not the bottom, so I didn't serve it [to my family].'

Now, her refrigerator is a makeshift morgue where she keeps the frozen head of the offending mouse, as the matter could take up to two years to be fully resolved.

Fair and Balanced notes:

>Wal-Mart spokeswoman Diesha Galbeth told the Tribune, "food safety is a top priority, and we are investigating this situation thoroughly. Our store has inspected similar product on our shelves and feel confident that this complaint is an isolated incident."

>The green beans, packed and marketed by Allen Canning, were in a can. As such Wal-Mart couldn't know there was a rodent head inside. Allen Canning is an American company and says the canned green beans in question were grown and canned in the U.S. and not in China or any other foreign country.

>Wal-Mart representatives have talked with Ms. Watson about the situation.

>Ms Watson says in the Tribune story she would consider shopping at Wal-Mart again, but doubts she would buy the Allen brand. "Until I'm reassured that it's just an isolated incident, I won't," (buy the Allen brand) she says. On their website, Wakeup Wal-Mart.com has changed this quote (either by omission or intentionally) from the Tribune story.

On their website they print: "When asked if she would consider returning to Wal-Mart, Watson said, 'Until I'm reassured that it's just an isolated incident, I won't.' " That's not what Ms. Watson said to the Tribune, as our quote taken directly out of the Tribune story shows. In fact, the way Wakeup Walmart.com has changed it (either by omission or on purpose, we'll let you be the judge) changes the meaning of Watson's words. She said she would consider shopping at Wal-Mart again. Not that she won't, as the omission or changes on the WakeupWalmart.com website say.

Because of this omission or intentional quote change on the group's website, we checked all of the quotes we used above against the actual story in the Tribune. We've used only those quotes that we verified from the original Tribune article.

We suspect Wal-Mart would prefer something other than this feature from the group as a Halloween surprise. And, as our readers know, and what a quick "Wal-Mart" search in our blog "search box will show, is that we write positively about Wal-Mart often as well as being critical when we feel it's warranted.

We generally give the retailer high marks for its environmental initiatives, overall retail pricing structure, new focus on natural and organic foods and some other issues. However, we also aren't here to shill for anybody, and we don't. In the case(s) of it's Chinese imported products policy, its employee wages and benefits policy, and a number of other issues, we give Wal-Mart low grades. There's much room for improvement, and we take every opportunity to encourage the mega-retailer to do so.

In the case of the abundance of imported Chinese goods with lead content, we simply say to the retailer: "For heaven's sake use your huge buying power and position as the world's number one retailer to get the lead out." There's no excuse for so many lead-based products in Wal-Mart stores. If Chinese products have lead, just don't buy them and offer them for sale. Imagine if a U.S-based manufacturer tried to sell a Wal-Mart buyer a product, such as a child's toy, that contained lead? We think Wal-mart would likely ban that vendor from its Arkansas buying offices once the lead content in the product was discovered.

We aren't a member of nor do we support or not support Wakeup Walmart.com. We're neutral on the group. We're merely writing about their side of the issue and balancing it with Wal-Mart's side as we did in the case of the rodent head in the canned greens beans story above.

In our view zealots on either the left or the right are very seldom right. We prefer reasoned discussion and thought. (We aren't saying anyone here is a zealot by the way.) As such we like to bring both sides of an issue to the table when possible. Wakeup Walmart.com has some very valid points (but also tends to criticize Wal-Mart using a very broad brush overall), and sometimes it takes a feature like the group's Tales From the Big Box Boneyard to stimulate action and get a response from a huge corporation. As such, we hope the group is willing to enter into a reasonable dialogue with Wal-Mart rather than merely bash the retailer if that opportunity arises. Also, we think Wal-Mart should be open to talking with the group if that conversation can be open, civil and reasonable.

Meanwhile, we expect there will be some interesting stories posted on Wakeup Walmart.com's website after Halloween. In closing, I hope we don't seem too trite after writing this piece to, in the spirit of Halloween, say: "Trick or Treat."