Wal-Mart Stores: The 'Neighborhood' Bully

By Mel Duvall  |  Posted 2004-02-05 Print this article Print

Muscling in on a smaller scale.

Wal-Mart's new Neighborhood Market stores are designed to go toe-to-toe and tomato-to-tomato against the more traditional grocery stores that populate U.S. cities. By all appearances they have the same products and services offered by any Albertson's or Kroger, from a bakery to a full-service drug department. A peek at a recently opened Neighborhood Market in South Ogden, Utah, shows aisles that are wide, cement floors made attractive with a glazed brown finish, and an open ceiling with steel beams painted black. The store, open 24 hours a day, offers a drive-through pharmacy and a pizza-to-go stand.

But the look of luxury hides unseen savings.

A glass window in the back of the store, for instance, allows customers to watch an oven at work. The scene leads to an obvious assumption: the bread, buns and other baked goods stacked high out front are baked fresh on the premises. Instead, bread and other baked goods are trucked in daily in partially-baked form and finished off in a browning oven. There is no baker.

The amply stocked meat and deli sections also seem to benefit from an in-store butcher. But as with the baked goods, the meat, too, is shipped in daily—in pre-packaged containers from Wal-Mart's distribution facilities. Anyone can put it in the freezer. The store avoids the cost of a professional butcher.

More efficiencies can be seen at the front of the store. A single clerk oversees a bank of six NCR FastLane self-checkout registers. Two other lanes are staffed by regular cashiers as manager Kelly Kirby leads a visitor through the store. But the self-checkout registers cut down on the need for salaried employees.

Like all Wal-Mart stores, the Neighborhood Markets are plugged by satellite into the company's famed Retail Link network. That way Wal-Mart and its suppliers know exactly what's flying off the shelves each day, and can have trucks loaded with fresh stocks on the road the next morning. It's the technological answer to an in-store butcher or baker.

The various measures mean that Wal-Mart is able to operate the Neighborhood Markets with about 10% less staff than traditional grocery stores, says Kirby. He's in a position to know, having worked in the business for about 30 years.

The result: Neighborhood Markets can sell products for the same low prices that Wal-Mart offers at its giant Supercenters, and still maintain a healthy profit.

On this day, Jamie Hammond, with her two young boys in tow, is making her first visit to the store. She usually shops at an Albertson's store closer to her home, but she was curious to see what the Neighborhood Market had to offer. Her impression: "The Albertson's where I usually shop is more attractive, and has a bigger selection," she says, "but the prices are definitely better here." Will she switch to the Neighborhood Market for the better prices? "I don't know," she says.

The Neighborhood Markets haven't yet started to seriously eat into the profits of traditional grocery stores. There are only about 60 across the country, averaging 40,000 square feet in size. Wal-Mart plans to open 30 to 40 of the stores each year, usually targeting metropolitan areas such as Salt Lake City or Dallas. As big as Wal-Mart is, the company sees no reason to leave any part of the market on the table.

"Supercenters effectively serve a large trade area, but we think there may be some business that we are not getting purely because they may not be as close to the customer or convenient for small shopping trips," former Wal-Mart chief executive officer David Glass said in explaining the concept in the company's 1999 annual report.

The jury is still out on how successful the concept will be. The company admits it makes more money from its Supercenters, giant stores which range up to about 230,000 square feet in size with about 60,000 square feet dedicated to groceries. An average 200,000-square-foot Supercenter employs 350 workers, sells $61 million in goods each year and makes a profit of about $2 million on those sales. By contrast, a Neighborhood Market averages $19 million in sales and employs about 90, but some analysts believe Wal-Mart isn't getting the same 3.3% profit margin on those sales. A more conservative estimate of 2.3%—still well above typical grocery-store margins—puts profits at about $437,000 per store. On a per-employee basis, the Supercenters earn about $5,714 compared to the Neighborhood Markets' $4,855. On a square-foot basis, however, the Supercenters are earning only about $10 per square foot and the Neighborhood Markets $10.92.

Either way, Wal-Mart needs to open four Neighborhood Markets to gain the same total profits as opening one Supercenter.

But no matter how their earnings are tallied, the Neighborhood Markets serve as a warning to Albertson's and other grocers that even the element of convenience is no longer a safe defense against Wal-Mart.

Contributing Editor
Mel Duvall is a veteran business and technology journalist, having written for a variety of daily newspapers and magazines for 17 years. Most recently he was the Business Commerce Editor for Interactive Week, and previously served as a senior business writer for The Financial Post.


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