New TNS Retail Forward Study Looks at What We've Called the Small-Format Grocery Store Retail Revolution in America and Quantifies Our Analysis

As regular Natural~Specialty Foods Memo (NSFM) readers know, in August, 2007 we first suggested there was emerging the beginnings of a small-format grocery store retailing revolution occurring in the United States, in which major grocery chains were more-and-more getting into the game by creating and launching stores ranging in size from about 10,000 -to- 25,000 square feet, which is what we in the main define as small-format.

[Do a key-word search in the search box at the top of the blog using phrases such as small-format grocery retailing revolution, small-format grocery stores, small-format food retailing, Small Marts, small-format revolution, small-format stores, small-format food stores and small-format price-impact stores, (one phrase at a time of course) to get a sampling of those pieces. We also suggest reading through the NSFM archives for more pieces.]

We've sited the success in the U.S. of German Retailer Aldi, with its over 850 small-format, price-impact Aldi USA grocery stores, SuperValu, Inc.'s success with it's growing Sav-A-Lot small- format discount grocery chain, the Trader Joe's phenomenon, with the rapid-growth and high demand all over the U.S. for its specialty grocery stores, which now number well over 300, and the entrance into the Western USA by Tesco, with its small-format, convenience-oriented Fresh & Easy Neighborhood Market grocery stores, as examples of this growing small-format grocery store revolution.

And that's not all. From August, 2007 to the present we've also sighted as evidence of a small format grocery store revolution in America, the fact that mega-retailer Wal-Mart has developed its very own small-format grocery store, it's 15,000 -to- 20,000 square foot Marketside banner, the first stores of which are set to open in the Phoenix, Arizona Metropolitan region this summer.

Additionally, we've reported on and written about Safeway Stores, Inc.'s planned intrance into the small-format grocery store segment. Safeway plans on opening four or five 15,000 -to- 25,000 square foot combined grocery and fresh and specialty foods-oriented grocery stores this summer in the San Jose region in the San Francisco Bay Area.

Other players in this small format revolution we've written about include Pennslyvania-based Wawa Food Markets, which operates hundreds of hybrid small-format grocery markets-convenience stores in the Eastern USA, supermarket chain Hy-Vee, which recently opened its first small-format grocery store in Lincoln, Nebraska, supernatural grocery retailer Whole Foods Market, which has created Whole Foods Express, it new small-format store of about 20,000 square feet, the first of which is set to open soon in a remodeled former Wild Oats Market building in Boulder, Colorado.

These players are just the tip of the small-format grocery store retailing revolution in the USA of which we've reported on, written about and analyzed here in Natural~Speciatly Foods Memo.

Lastly, we've also written about the fact that the original small-format food retailer, the local independent grocer, continues to thrive in Americaby building and operating small-format grocery stores. That independent is in fact the model in many ways for the small-format revolution being created by this larger, chain operators.

International small-format grocery store revolution

Further, we've also said there's an international small-format grocery store revolution occurring. Many of the players are the same--with a few more added--internationally.

Tesco, with its rapidly-growing Tesco Express hybrid grocery store/convenience store chain and German grocery chains Aldi and Lidl are leading the international small-format grocery retailing revolution.

France's Carrfour, the second largest retailer in the world, is becoming a major player in the international small-format grocery store revolution as well, especially in Asia.

And of course, many other smaller players, as is the case in the U.S., are part of the growing small-format grocery store revolution throughout parts of the globe.

New TNS Retail Forward small-format grocery store study

It's seems we were somewhat on track beginning nearly ten months ago when we proclaimed a small-format grocery store revolution was occurring in the U.S., as well as in many other parts of the world.

A new study just released by the well-respected market research firm TNS Forward's Columbus, Ohio office says consumers are ready and willing to shop at small-format grocery stores that feature convenience in shopping and fresh, prepared foods.

The study also includes a caution which we use frequently in our pieces here at NSFM, which is that the jury is still out as to whether small-format grocery stores in general will meet consumer expectations, satisfy their needs as a primary or even secondary shopping venue, and provide a return on investment for the stores' owners.

The study also hits on three key points we make often about small-format grocery stores:

>Research: The study says food retailers considering a small-format grocery store strategy must monitor and analyze shopper needs, attitudes and expectations well in advance of launching a small-format store or chain.

>Localism: The report says paying attention and focusing on local (region and neighborhood) culture (and cultural differences) and demographics is key in launching any small-format grocery store venture.

>Partnering: The research study says retailer's launching a small-format grocery store venture need to seek input from grocery, fresh foods and consumer packaged goods suppliers and partners, as they have national knowledge as well as local experience, among other reasons for doing so.

The above three aspects of small-format grocery store retailing, which we summarize as research, localism and partnering, are themes we've been including in out numerous pieces on the small-format grocery store retailing revolution occurring in the U.S. and in other parts of the world for months.

U.S. Consumer attitudes about small-format grocery stores

The TNS Retail Forward study says 64% of U.S. shoppers surveyed said they would either definitely or probably shop at a small-format grocery store. [Based on our own research and some others we think that number is a bit higher.]

The study also notes consumers surveyed indicated the combination of the small-format (convenience), combined with fresh, prepared foods offerings is a compelling offer for "the time-pressed shopper."

Jennifer Halterman, a senior consultant at TNS Retail Forward and the primary author of the study says, "The small-store trend is part of an ongoing evolution in the retail food sector, and we expect more players to throw their hats into the ring."

We agree completely with the latter part of her quote--that more retailers are throwing, and getting ready to throw, their small-format grocery store retailing hats in the ring. I

In fact, we invite Ms. Halterman--and our readers--to stay tuned over the next couple of weeks as we will be reporting and writing about some new entrants into the small-format grocery store retailing revolution who nobody else has reported on yet. In fact, look for one or more of those fresh pieces later today, along with lots of upcoming analysis in the weeks ahead.

Retail Memo: A Peak Inside a New Trader Joe's Store

On Friday, February 1, a new 13,000 square foot Trader Joe's market will open in the Kercheval Avenue business district in Grosse Pointe City, Michigan, a wealthy city of about 7,000 people in Wayne County, Michigan.

Grosse Point City, often referred to by locals merely as "the city," is a suburb of Detroit, and is about 8 miles from the motor city. It's one of six similar-sized cities--Grosse Pointe Farms, Grosse Pointe Park, Gross Pointe Shores , Grosse Pointe Woods and Lake St. Clair--that are located literally right next to each other in Wayne County. The region is often collectively called "The Pointes."

These six wealthy Detroit suburbs together should make for a healthy market for Trader Joe's and its eclectic selection of specialty and natural foods and products.

Trader Joe's stores are small-format, but are packed with everything from fresh produce and meat departments, wine and craft beers areas, to extensive selections of perishables, frozen foods and fresh, prepared foods, along with shelves of specialty, ethnic, gourmet, natural and organic gorcery products. About 75-80% of the grocery items in the stores are branded under Trader Joe's various private labels. The new Grosse Pointe City TJ's even has an in-store food sampling kiosk where shoppers can taste all kinds of foods and beverages.

Amy Salvagno, a writer for G& G Newspapers, a Michigan chain of publications that serves readers in many cities in the area, got a peek inside the yet to open store, and has a piece in today's paper about what she saw.

We like the piece--it's interesting, descriptive, consise and fairly brief--so decided to share it with our readers. You can read Ms. Salvagno's article here.

Trader Joe's, which is headquartered in Southern California and owned by the German retailer Aldi, currently has about 300 stores in the U.S. All Trader Joe's banner stores are in the USA.

The specialty grocer is expanding rapidly, building and opening new stores throughout the country, from California to New York, and nearly everywhere in between. The grocer is so popular in fact that numerous cities and neighborhood groups, such as those in Albany, New York and Nashville, Tennessee to site just two examples, have launched sophisticated lobbying campaigns to try and convince TJ's to open stores in their towns.

Trader Joe's is the leader in what we've termed the small-format food retailing revolution in America. It's quirky stores, full of specialty, natural and organic products, do so well in part because they make shopping fun. Store associates wear funky tropical island-print shirts, and all the in-store signs are hand-produced works of art, done with colored chalk on black or green chalkboards, rather than ink on paper signs like most grocery stores. All Trader Joe's stores have at least one--and often more than one--employee who's only job is to hand-create in-store product signs.

Trader Joe's private-label branded products also are a big hit with customers. They love the product names, quality, varieties and prices. And of course, TJ's famous "Two-Buck-Chuck" line of $1.99 bottle wines, which have won many awards over wines that cost ten-times the price, are another big hit with shoppers.

The specialty grocer also extends its fun-filled merchandising philosophy to its new store grand openings. The new Grosse Pointe TJ's grand opening, like all new store openings, will begin with a Hawaiian lei cutting (rather than a traditional ribbon) ceremony at 8:45 in the morning. As store officials cut the lei, a live band will play tropical music for those in attendance. Employees will, of course, be dressed as if they just returned from a tropical island vacation.

The grand opening fun also features clowns and face-painting for the kids, lots of free food and drink, and tons of free ballons and stickers, for both real children and children at heart.

Retail Memo: Wal-Mart and Safeway Stores Could 'Box' Tesco in With New Small Format Stores

Analysis & Opinion: The small format food retailing revolution has just gotten even hotter in the Western U.S, with Wal-Mart Inc.'s plans to open its new MarketSide stores in Arizona. And in California, Safeway Stores continues with its plans to open new, small format stores in the San Francisco Bay Area. Meanwhile, Tesco is being pretty quiet about the new developments, but continues to open a Fresh & Easy Neighborhood Market store nearly every other week.

The news that mega-retailer Wal-Mart will build four (to start) 20,000 square foot grocery markets named "MarketSide" in the Phoenix, Arizona metropolitan region adds new, additional competitive pressures to Tesco's Fresh & Easy Neighborhood Market small format stores.

These Wal-Mart "Small Marts," which at 20,000 square feet are about 5,000 to 7,000 square feet bigger than Fresh & Easy stores but half the size of the retailer's Wal_Mart Neighborhood Market format, are likely to be similar in format to British grocer Tesco's small format grocery markets.

Based on what we currently know--from published reports and additional information from our sources--the small format stores will offer a mix of basic groceries, prepared foods, and specialty items. This mix is similar to Fresh & Easy's. At this point, we aren't sure what else the "MarketSide" stores will merchandise, but are rather sure they will feature some version of this basic grocery, fresh foods mix, along with whatever else the stores will sell.

As out readers know, we reported recently that Pleasanton, California-based Safeway Stores, Inc. has secured leases in the San Francisco Bay Area region of San Jose for five new, small format stores the retailer plans to open later this year. While we don't yet know the name of these Safeway small format stores, we have fairly good information they too will offer a mix of basic groceries and prepared foods.

Neither of these developments are good news for Tesco's Fresh & Easy. Just two months ago, Fresh & Easy stood as basically the lone food chain pioneer in this hybrid small format, basic grocery/fresh foods merchandising arena. Had this remained the case, Fresh & Easy would have had plenty of time to rollout its numerous planned stores in California, Arizona and Nevada, perfected its format, and not had to share the media limelight with two powerhouse, US-based retailers--Wal-Mart and Safeway--as they are having to do now.

This won't be the case however. Wal-Mart's initial opening later this year of four stores in Arizona, all four in areas where there are Fresh & Easy stores, and Safeway's opening later this year of five stores in the San Jose region in Northern California, will put a competitive check on Tesco. (Tesco plans to start opening Fresh & Easy stores in Northern California later this year. The grocer also will build a distribution center in Stockton, in Northern California, to serve up to 50 stores in the region it wants to build in the next two years.

Both Wal-Mart and Safeway are major retail brand names. Safeway, which is based in Northern California, will have a major marketing advantage with its small format stores against Fresh & Easy. Safeway also already has all the supply-chain and marketing infrastructure in place to serve these new, small format stores. The grocer operates about 300 supermarkets in Northern California, including numerous stores in and around San Jose. It's corporate headquarters is about 30 miles from the San Jose region. It also has a distribution facility nearby.

Wal-Mart already has a number of Supercenters in Arizona, including in the Phoenix region where it will open the small format "MarketSide" stores. The chain, like Safeway has all of it's logistics in place, to say the least. As the world's largest company and retailer, Wal-Mart will have no problem matching Tesco on selection, price and marketing muscle. Arizona also is one of the best food markets for Wal-Mart. Opening it's first small format stores there is, in addition to going head-to-head against Fresh & Easy, a smart move in general for the retailer.

Like a game of chess on a chessboard, Wal-Mart and Safeway have the ability to box Fresh & Easy in: Wal-Mart in Arizona (to start) and Safeway in Northern California (to start). Safeway also has numerous supermarkets (over 400) in Southern California, where its Vons' stores are the number two food dollar market share leader, just behind Kroger Co.'s Ralph's. Further, the grocery chain also has a retail presence in Nevada.

Safeway already is looking to Southern California to possibly locate some of the new, small format stores, and can do so easily as it has the same fully-developed infrastructure it has in Northern California. (Safeway has this fully-developed supply-chain ability for the entire Western USA. For that matter, for the entire USA.)

Wal-Mart can go anywhere. The mega-retailer actually developed the "MarketSide" stores in the San Francisco Bay Area, where a team of executives spent months developing the format. Expect stores in Northern California (urban and suburban stores), Southern California and elsewhere. The global giant knows no geographical--or supply chain--limitations.

So, just a couple months ago, the United Kingdom's biggest grocer was sitting alone on top of the small format, hybrid grocery/prepared foods format in the U.S. Today, just a blink of the eye later, there are two major competitors--the world's biggest retailer, Wal-Mart, and the number one food retailer in the Western USA, Safeway.

The result of these two retail players getting into the game in the Western U.S. means Tesco's mission has just become even harder than it already was. Creating a completely new enterprise--Fresh & Easy, a new format, supply chain and all else, is hard enough in and of itself. For Tesco to now operate and grow the venture with Wal-Mart and Safeway on its heels will be in many ways an even bigger challenge that those original red-coated British invaders faced when they tried to rest the former colony away from a bunch of upstart Americans who wanted their own, sovereign country.

Tesco is good though, and they shouldn't be discounted. They've built their Tesco Express small format chain into the best in Europe. But Wal-Mart and Safeway are equally good, especially in their food retailing homeland. Of course, Wal-Mart isn't the most nimble of food retailers. It will be interesting to see if the mega-retailer can make the transition from big box, mass food retailing to small format, niche retailing. They've done so to a certain degree with their 45,000 square foot Neighborhood Market format. However, at best they have thus far earned a B- with that format.

Wal-Mart has just hired a veteran of UK food retailing, Jack Sinclair, to run its U.S. grocery operations. Sinclair isn't just any veteran of UK food retailing. He spent many years with Tesco, and knows the British retailer's operations (including small format) well. For those who think Wal-Mart is merely dabbling with the "MarketSide" format and stores, the hiring of Sinclair should lay those thoughts to rest.

Safeway has become as nimble a retailer that exists in the U.S. (and internationally for that matter) these days. The grocer has turned its retail business around with its upscale Lifestyle format. It continues to innovate with the format with its new stores, adding new departments and in-store features.

Safeway also has what is perhaps the most successful premium and organic store brand in the business today, with its O' Organics grocery and fresh foods brand. Think we might see some O' Organics brand products in the new, small format Safeway stores?

Safeway also owns an upscale restaurant in the San Jose area, and has been using it to develop innovative, fresh prepared foods items which we believe will find their way into these new, small format markets. The small format store business isn't something Safeway just thought of. The grocer started a research project targeting Tesco's Fresh & Easy venture at least two years ago, and has been working on its small format development program for at least that long.

As we've been writing about here for nearly six months, there is a small format food store revolution happening in the U.S.--and in Europe and Canada. Doing battle are not only Tesco, and now Wal-Mart and Safeway Stores, but a host of others. German grocer Aldi plans on building as many as 100 of its no frills, price-impact, small format grocery stores a year in the U.S. for the next few years. The retailer already has nearly 900 of the little, no frills discount grocery stores in the country. Aldi also owns California-based small format specialty grocer Trader Joe's, which is another major competitor for Fresh & Easy.

Giant Eagle supermarkets also is building more of its Giant Eagle Express small format stores, which are similar to a Fresh & Easy Neighborhood Market store.

Whole Foods Market, Inc. will open its prototype Whole Foods Express later this year in a former Wild Oats store in Boulder, Colorado. Look for these Express stores from Whole Foods to have lots of fresh, prepared foods items, especially grab-and-go, high-quality but convenient offerings. Also, don't be surprised if some of these Whole Foods' Express stores pop-up in California, one of the supernatural grocers best markets--and one of its top target regions for store development and growth over the next five years.

There's much more going on in this small format revolution. [You can read many of the pieces we've done by typing-in the key words: small format, small format revolution, small format retail food stores, small format grocers, Small Marts, Fresh & Easy and similar phrases in the search box at the top of the blog. Type just one phrase at a time in though. Also use the tags at the end of this piece as search words.]

Meanwhile, the small format revolution's battlefield is becoming a bit more complex--and more intense--for Tesco's Fresh & Easy.

Wal-Mart and Safeway, independently, are flanking the British grocer from two sides--Wal-Mart in Arizona, Safeway in California. We will see one or both of these retailers converge on the middle--Nevada--soon as well. Of course, the big battle, and the big market, is California, south and north. It's a state of nearly 40 million people, which is bigger than most European countries. We suggest you'll see Tesco, Wal-Mart and Safeway battling it out with small format stores in California beginning later this or in early 2009.

The revolution has just started though. Don't rule Tesco's Fresh & Easy out. But don't underestimate Wal-Mart and Safeway either, especially when it comes to not wanting to loose food dollar market share in their home country--and in Safeway's case, on it's home turf.

This revolution won't likely be televised. But we will continue to report on it and write about and analyze it here for our readers. Stay tuned.

Retail Memo: Breaking News: Wal-Mart to Open New Small Format Grocery Stores in Arizona

The "Small Mart" food retailing battle is enjoined: Wal-Mart will open its first, new small-format grocery markets in Arizona later this year, and do battle with British retailer Tesco's Fresh & Easy Neighborhood Market stores, the first of which opened in Arizona a little over a month ago.

As our readers know, we've been reporting on, writing about, and analyzing the small format retail food store revolution in the U.S. for the last six months or so. A major part of that reporting has been about Wal-Mart's small grocery store format development, which a group of the retailer's key executives worked on for a number of months last year in San Francisco.

(Type in the keywords (one set at a time) Wal-Mart, small marts, small format stores, small format revolution, in the search box at the top of the blog and you can read our numerous pieces on the topic.)

Our (much bigger) friends at the Financial Times have also been covering the Wal-Mart small- format grocery store story and its developments.

The Financial Times is reporting in tomorrow's edition that Wal-Mart will open small-format grocery markets named "MarketSide" in Arizona later this year, going head-to-head with Tesco's Fresh & Easy Neighborhood Market stores in that market.

The new "Small Marts" are about 20,000 square feet in size, a 10th of the size of the retailer's Supercenters, but about 5,000 to 7,000 square feet larger than Tesco's Fresh & Easy stores, which average about 13,000 to 15,000 square feet.

The Financial Times reports Wal-Mart has secured leases on four properties south-east of Phoenix for the 20,000 square foot "MarketSide" grocery stores. Some of these locations are only a mile away from Fresh & Easy store locations in the region.

According to tomorrow's Financial Times, the stores should open this summer. That fits with what our sources have been telling us. They're predicting a July-August opening, although they didn't have the exact store locations.

The logo for the "MarketSide" stores, which is filed in documents with the various municipal planning departments in Arizona, is a stylised tomato, egg and grape topped by Wal-Mart's signature blue star. The lettering is in green.

The logo obviously connotes freshness. We've been reporting in our stories for the last few months that the small-format stores would offer extensive prepared foods selections, like Fresh & Easy stores do, and believe the logo--along with other information we have--reinforces our belief.

We've also reported, as has the Financial Times, that as a result of its San Francisco team's development work, Wal-Mart trademarked the names "City Thyme" and "Field & Vine." We reported these were two of a number of store names the retailer was considering for its new small-format grocery stores, and still believe that to be the case. However, obviously they didn't use either of those names--or any of the others they were considering.

The Financial Times suggests some industry analysts think the retailer might be going to use these names on a new private label line of prepared foods or grocery products (or both) for the new, "MarketSide" stores.

We agree with their analysis. Both names fit well with the "MarketSide" logo described above--and both evoke freshness and naturalness. One of our sources also told us in late December that he was told by someone he trusts that a Wal-Mart executive was talking to a couple of natural foods-oriented companies about private label product "opportunities."

All four of the Wal-Mart "MarketSide" store sites are street-corner properties that were formally occupied by drug stores, the Financial Times reports.

The locations of the four Arizona stores are: Mesa: 7561 E Baseline Road, Gilbert: 910 E. Elliott Road, Chandler: 950 N McQueen Road, Tempe: 838 W Elliott Road.

Fresh & Easy currently has five stores in Arizona, and many more are set to be opened this year. Three of the Arizona Fresh & Easy grocery markets are located in Mesa, one is in Chandler, and the fifth and newest store is in Scottsdale. That market, which is at 10781 N. Frank Lloyd Wright Blvd., opened three weeks ago before the Christmas holiday. Tesco has plans to open stores in Gilbert and Tempe soon.

In addition to its Supercenter grocery and general merchandise stores, and it's basic Wal-Mart stores, the retailer also operates its Neighborhood Market format. These stores are essentially what they sound like: basic, full-line supermarkets. The stores are about 48,000 square feet and sell a complete selection of grocery store items in a somewhat smaller space than a superstore.

Last week, Wal-Mart announced it hired British grocery retailing veteran Jack Sinclair to head its food retailing business. Sinclair worked as an executive for Tesco for many years, as well as being a former exec for UK Safeway, which is now part of the Morrisons' chain.

Sinclair knows Tesco well, and has been observing its launch of the Fresh & Easy Neighborhood market stores in the Western USA closely. Upon hearing of his hire, we knew it would be a go for Wal-Mart's small-format stores. The fit was just too tight for it not to happen.

The development of and decision making process to go forward with the "Small Marts" hasn't been easy within Wal-Mart. And until recently it wasn't a lock that the mega-retailer would go forward with the program. However, the world's largest retailer doesn't want the world's third-largest retailer, Tesco, to steal market share from it on its home turf--the USA.

Tesco and Wal-Mart, which owns the UK supermarket chain Asda, are battling for market share in Britain, Tesco's home turf, so--the battle is now fully-enjoined on both sides of the Atlantic.

Editor's Note: We're following this story closely, and will have some further information and developments to report as we are able to talk with our sources on Monday. Additionally, we're working on an analysis piece about how Wal-Mart's decision to finally join the small retail food store format revolution will impact the other retail players already in the game. Stay tuned.

Monday Morning Java: Safeway Small Format Stores On the Way

The small food store format invasion is coming: Safeway, perhaps Wal-Mart, to counter Tesco's Fresh & Easy Neighborhood Markets' San Francisco Bay Area entry

As our readers know, we've been reporting on and writing extensively about Tesco's Fresh & Easy Neighborhood Market format. In particular, we've been among the first publications to break news about the retailer's Northern California plans. (Read our December 5 story about Fresh & Easy store developments in Northern California and the Bay Area here.)

We also were one of the first publications to report that Wal-Mart has had a high-level team in the San Francisco Bay Area working on the development of two small format retail stores--one a small footprint, convenience-oriented grocery store similar in concept to Tesco's Fresh & Easy markets, and the other a stand-alone health and wellness-style format which would feature an in-store health and wellness clinic and sell a wide range of health-oriented goods, including natural products. (Wal-Mart has trademarked two retail store names, "City Thyme" and "Field & Vine," as we reported here.)

We named the Wal-Mart small format project--along with the Fresh & Easy format and other new age convenience-style stores from the likes of Giant Eagle (Giant Eagle Express) and Whole Foods Market (Whole Foods Market Express; a prototype store being developed in Boulder, Colorado)--"Small Marts," a play on words combining the Wal-Mart name and the shortened name often used for a retail market or store.

In our September 6, 2007 piece, The invasion of the "Small Marts": Will there be a small format revolution by U.S. retailers, we provided an analysis of what Tesco's Fresh & Easy format could mean in terms of other food retailers following a similar path in the U.S. In addition to discussing Giant Eagle's, (Express) Whole Foods' (Express) and Wal-Mart's developments, we also talked about Pleasanton, California-based Safeway Stores, Inc. It's CEO, Steve Burd, said the grocer is watching Tesco closely, and researching the Fresh & Easy format, it's potential locations, and possible competitive pressures on the retailer's Western U.S. operations, especially in California. (Read more here.)

In the "Invasion of the Small Marts'" piece mentioned above, and in all of our writing on the issue, we've discussed how one market in particular, Northern California and particularly the San Francisco Bay Area, will be the most competitive and difficult for Tesco with its Fresh & Easy stores thus far--compared to Southern California, Nevada and Arizona--where the British grocer now has about 20 stores open.

Among the reasons for this increased competition, we've sighted Safeway Stores--the fact that it's the food retailing market share leader in the region, that the Bay Area is home to it's corporate headquarters, and of course the small format research project articulated by CEO Burd in response to the entering of Fresh & Easy stores in the region.

Additionally, we've discussed the major expansion efforts in Northern California (focused in the Bay Area) by Whole Foods Market, Inc., which plans to build 20-25 large supernatural supermarkets in the region (in addition to the 20-plus it already has) in the next five years, according to former Whole Foods' Northern California president Anthony Gilmore, who left his position with the grocer in October to join Safeway Stores as a director of new store development.

Safeway moving from research to action in small format store development

According to a story today in The Silicon Valley/San Jose Business Journal, CEO Burd and Safeway are moving from the research phase of their smaller format food store project to an action phase. That's right, according to the publication's sources (and confirmed by a number of our own), Safeway Stores is seeking as many as five locations in the San Jose area for stores of about 20,000 square feet, which would feature extensive selections of fresh, prepared foods, Tesco's "stock-in-trade" in it's Fresh & Easy format. At 20,000 square feet, these smaller-format stores would be less than half the size of Safeway's new Lifestyle stores, which average 45,000 to 65,000 square feet, but about double the size of Tesco's Fresh & Easy markets.

According to the Business Journal story, Safeway has retained Cornish & Carey Commercial Real Estate Brokerage to find locations for the five stores in and around the San Jose area. This is the same Bay Area region where we reported Tesco has inked a deal for it's first store in the Bay Area, on Bird Avenue in San Jose, and likely will locate as many as ten to twelve stores in the city and it's immediate environs.

Word is Safeway has Cornish & Carey trying to lock up a number of former Albertsons' supermarket buildings in the San Jose area for its new small format food stores. This is interesting since Tesco's Bird Avenue location is a former Albertsons' store, which the grocer closed a couple years ago along with a number of others in Northern California. Tesco has been targeting these empty Albertsons' stores throughout the Bay Area as locations for its Fresh & Easy Neighborhood Markets.

Safeway is a major commercial real estate player in the Bay Area, with almost 300 stores. In other words, it's a priority customer for shopping center and other commercial real estate managers. As such, it looks like the grocer is playing some store location hardball with Tesco in terms of that retailer's sight search. In the Business Journal piece, local commercial real estate sources give Safeway the thumbs up in terms of being the preferred tenant for any of the vacant Albertsons' stores. As we've reported however, Tesco already has a number of store locations locked-up in the Bay Area, with numerous other sights in negotiation.

As mentioned above, some months ago before Tesco opened a single Fresh & Easy store, CEO Burd said Safeway was preparing itself for the British grocer's small format stores, which combine basic private label and nationally branded grocery items with prepared foods offerings. Burd said, among other things, he believes Safeway has an advantage in that the grocer is a well-known brand in California (especially in the Bay Area), especially in the prepared foods niche. In fact, Safeway has been perfecting it's fresh, prepared foods over the last five years in it's Lifestyle format stores, including branding the items with an upscale flavor, using such names as Safeway Signature and Safeway Select.

Along with the extensive prepared foods initiatives in-store in its Lifestyle format supermarkets, Safeway purchased a restaurant in San Jose last summer, where it's been testing various prepared foods entrees it wants to sell in its stores. Ownership of the restaurant, called Citrine New World Bistro, was announced last month by CEO Burd. It's an innovation incubator, and consumer test kitchen for a variety of prepared foods that observers expect will be offered in the new, smaller format food stores.

Anthony Gilmore, the former president of Whole Foods' Northern California division also joined Safeway in October as a director for new store and format development. While in charge of Whole Foods' Northern California operations, Gilmore lead the development of a number of innovative formats, resulting in new stores opening this year. Among them are the European Food Hall format store in Oakland, which opened in October, and the Northern California flagship store in the Silicon Valley city of Campbell, which features a food and wine bistro in-store, along with the supernatural grocers first mini day spa, among other innovative features.

Gilmore was hired in large part to bring that experience in retail food store format innovation to Safeway, where he began his retail grocery career as a courtesy clerk. He's involved in the new small format store development, including the prepared foods offerings, as well as in another new development for Safeway--the design of a "next generation" Lifestyle format, which is part Safeway Lifestyle stores, part Whole Foods Market. As we reported three months ago, Safeway is planning to build this new, Whole Foods-like store in Pleasanton, where it's corporate headquarters is located. (More on this development soon.)

Turf war battle, small format competition could get even hotter in Bay Area

As we mentioned at the beginning of this piece, and first wrote about in August and again in September and November, a high-level team from Wal-Mart was in the Bay Area for some time researching and developing two small retail formats for potential implementation by the retailer. These two formats, a small-footprint grocery market and health and wellness store, would allow Wal-Mart to enter into markets such as the San Francisco Bay Area where they've been unsuccessful in getting permits to build Supercenters do to objections by city officials, community groups and the retail clerks union, which represents workers in nearly every Bay area supermarket.

We've continued to follow this story closely. However, our commercial real estate and industry sources in the region haven't heard much in the last couple months. Here's what we know: First, as reported earlier, Wal-Mart has trademarked two trade names for use on "unspecified retail stores." These names are "City Thyme" and "Field & Vine." Both these names sound like they would fit a retail food store but we can't independently confirm that, nor is Wal-Mart confirming it for us.

Second, we know the Wal-Mart team is no longer in the Bay Area. Our sources told us the group completed their project, at least the on-site aspects of it. We have been told, but can't confirm, that a report on the small format research has been given to Wal-Mart CEO Lee Scott.

We've also been told by multiple sources that, in terms of the small format grocery market, there's a division within the team in terms of going forward with it or just focusing on the retailer's existing smaller format grocery store, Wal-Mart Neighborhood Market. These stores average about 48,000 square feet in size, and are a full-department supermarket. Although much smaller than a Supercenter, they aren't considered "small format" in terms of the supermarket industry. Rather, they're about average size in terms of a stand-alone grocery store.

Regarding the small format health and wellness stores, we've been told Wal-Mart is more excited about their potential, especially the combining of in-store health clinics with the natural, health and wellness-oriented product mix. (Wal-Mart is putting an increasing number of health clinics in its Supercenter stores.) Beyond that, we don't currently have any further specific information we're comfortable reporting in terms of that format's status.

We do know Tesco's rapid rollout of it's Fresh & Easy stores has taken Wal-Mart a bit by surprise, and that the retailer is concerned about Tesco's taking food dollar market share away from the retailer in California. Wal-Mart has only been able to build about half of the number of Supercenters in the state as it planned to build to date, do to the highly-organized campaigns against the big box stores throughout California. As a result, this fact has caused the retailer to lower its projections considerably in terms of the share of retail food sales it planned to have in the Golden State.

Wal-Mart recently announced it would build two Neighborhood Markets in Southern California early next year, its first in the state. This has lead to speculation that the retailer will rollout this format as a way to increase its retail food dollar market share in California as an alternative to its original Supercenter strategy. There's less organized objection to this Wal-Mart format.

If Wal-Mart either rolls out its Neighborhood Market stores in a big way in California--including Northern California and the Bay Area,which is logical as that's where the strongest Supercenter objections are--or goes forward with its "Small Mart" grocery market format, this will add even more heat to the smaller food store competitive landscape in the region. Not only will Safeway be challenging Tesco with it's 20,000 square foot format, but Wal-Mart could pose a serious challenge to both with either its 48,000 square foot Neighborhood Markets or the yet to be officially announced smaller format grocery market (the "Wild Thyme" or "Food & Vine" concepts).

As we've written extensively, Northern California and the Bay Area will be a competitive and operational challenge for Tesco's Fresh & Easy Neighborhood Markets. It also seems the region's going to become a small format food retailing laboratory of sorts as a result of Fresh & Easy's entry into the market next year. Our sources tell us there are a number of other retailers looking at the small format food retailing opportunities for them in the region as well. The small format turf battle and competitive environment in the region is just beginning--and will heat-up even more soon.

Tuesday Talking Points Memo: Eastward-Bound for Fresh & Easy

Tesco is looking beyond the Western U.S., to Chicago and the East Coast, for Fresh & Easy Neighborhood Markets' expansion

"Natural~Specialty Foods' Talking Points Memo expects to see other large retailers look closely at and even get into the "Small Mart" format. We especially believe there's a niche on the East Coast. Thus far all three players-Tesco (Fresh & Easy stores), Wal-Mart (in development) and Whole Foods (Express prototype store soon to open in Boulder, Colorado) are focused on the Western U.S. The East Coast, with its demographics and mix of large cities and suburbs is wide open (for Fresh & Easy-type stores)."

The quote above is from our September 6, 2007 story, "The invasion of the 'Small Marts'--will there be a small format revolution by U.S. retailers?"

Nearly three months ago we were predicting here that the eastern USA is fertile ground for Tesco, with its Fresh & Easy Neighborhood Markets format, and others to launch what we call a "Small Mart" format revolution. "Small Mart's," a term we coined because of Wal-Mart's ongoing research into developing two small format stores, are small footprint grocery markets like Tesco's Fresh & Easy, which the British retailer has started opening in the Western U.S. Thus far, thirteen Fresh & Easy stores are open in the U.S.--eight in Southern California and five in the Las Vegas, Nevada metropolitan area. Two more Fresh & Easy convenience-style grocery markets open tomorrow in Southern California. The first stores open in Arizona in early December.

Two news stories, one on November 25 in the London Times Online and another last week in the publication Retail Week, are reporting that Tesco is scouting the Eastern U.S., particularly New York and New Jersey and down to Florida, and the Chicago metropolitan area, for locations for Fresh & Easy Neighborhood Markets. Additionally, Retail Week reports Tesco is looking for a sight in the Chicago region for a distribution center.

We've heard these rumors of a Midwest and Eastern U.S. expansion from our sources--who've been very reliable to date--for the past month. However, we haven't reported on it as the time- line we've been hearing is 2009. However, it's highly-probable Tesco has moved it's post-Western U.S. expansion time-line up, as the retailer is on the fast-track in terms of it's Fresh & Easy growth strategy.

For example, as we were one of the first to report, Tesco executives are currently combing Northern and Central California for Fresh & Easy store locations and a distribution center to serve the region. It's possible the grocer could build as many as 50-75 stores in Northern and Central California in the next 24 months.

Southern California was initially the primary target region for stores in the state for 2007 and 2008. Tesco plans to have 50 Fresh & Easy stores open in Southern California, Nevada and Arizona by February, 2008, according to Tim Mason, CEO of Tesco USA.

According to Retail Week, a U.S. source told the publication Tesco was "definitely" considering launching a distribution center and Fresh & Easy stores in and around Chicago. However, the source said it's unlikely Tesco would do so before the end of 2008. This source's information to Retail Week fits our sources' information fairly well in terms of the time-line for Midwest and Eastern U.S. expansion plans.

In Saturday's London Times Online story, which includes an interview with Tesco CEO Sir Terry Leahy, the publication reports industry sources in the UK have told it that Tesco officials are "swarming the East Coast of America to check for potential (Fresh & Easy) locations in New York and Florida." Sir Terry wouldn't confirm this to the Times however.

Tesco's rapid geographical expansion in the U.S. makes sense based on the model the British-based international retailer is using for its Fresh & Easy stores. Both Sir Terry and Tim Mason have said Tesco USA's strategy is one similar to Starbucks, in that they want Fresh & Easy markets literally in every neighborhood in their trading regions. By making the green and white bannered convenience-style grocery markets ubiquitous in the regions it chooses to do business in, Tesco can create a "mass retail" effect similar to what Starbucks has done with its upscale coffee shops. It's also what conventional convenience store operators like 7-Eleven and Circle-K have done in the U.S. for decades.

Rapid U.S. geographical expansion also fits into Tesco's overall corporate strategy in terms of its growth and sales goals. Sir Terry told the Times Tesco's target is to have more than half its sales from outside Britain in the next five to ten years. Currently, less than a third of Tesco's sales come from outside Britain, where it's the second largest food retailer after number one J. Sainsbury.

International expansion has been the hallmark of Sir Terry's decade as the head of Tesco. In addition to the Fresh & Easy venture in the U.S., Tesco has gone into Eastern Europe in a big way. The retailer also is currently working on plans to expand into Russia. Today, Tesco has stores in 12 countries outside the UK. In the ten years since Sir Terry has been in charge, Tesco's sales have doubled, the majority of those sales coming from international operations.

In many ways the U.S. will be the retailer's biggest challenge though. Other British retailers like Marks & Spencer and J. Sainsbury tried stores in the U.S. in the past--but failed. Further, the Fresh & Easy format--stores that average about 10,000 square feet and offer a combination of up-market fresh prepared foods along with basic national brand and private label groceries--is a gamble in a country where Wal-Mart Supercenters, Costco Wholesale Stores, Whole Foods, Trader Joe's, Safeway Stores, Kroger, Supervalu and so many others divide up the competitive food retailing pie using a variety of strategies--ranging from super upscale and organic foods marketing to deep discount pricing strategies.

Tesco has been extremely successful with its "Express" grocery market format however in the UK and throughout Europe. Fresh & Easy is a variation of that proven format. As such, many believe there's a space in the U.S. food retailing scene for just such an operation--a combination basic grocery market and upscale prepared foods retailer housed in a smaller, more convenient format.

With its sights set beyond the West Coast, to America's heartland and East Coast, Tesco is betting with its corporate wallet that such a food retailing space exists in the U.S. They just might be right?