BENTONVILLE, Ark. - Wal-Mart Stores may be feeling a bit frustrated as it seeks to open urban supercenters.
Having moved close to a saturation point in rural markets, the retail giant is ready to move into larger markets but is facing opposition from a multitude of labor, environmental and other groups in many of the urban centers it covets.
With only a handful of urban locations - and just a single urban supercenter, in downtown New Orleans - Wal-Mart suffered a major blow to its urban ambitions last month, when the Chicago City Council passed a "living wage" ordinance that has prompted the company to cancel plans for a supercenter that was scheduled to open within the city limits this fall.
Wal-Mart's anxiety over its inability to open stores in urban locations may have been showing a bit earlier last month when it opened a discount store at a former Sears in the downtown section of White Plains, N.Y., just north of New York City. "This is a store that can work in New York City," the store's manager said.
"There's a lot of attention being paid to this store because it's one of the few [Wal-Marts] in an urban area," a company spokesman added. "Wal-Mart is not known for having a downtown, urban location."
It's certainly not for lack of trying. But the chain has run into major opposition in New York, Los Angeles, Chicago and several other large cities over the past few years, forcing it to settle for supercenter or discount store sites just outside major metropolitan areas.
"If it doesn't get the right breaks, Wal-Mart is going to build its stores just outside the major urban centers and make faces over the border," said Mark Husson, New York-based managing director and global head of consumer research for HSBC Securities, London.
If that's the case, then Wal-Mart is "making faces" at New York from a discount store across the Hudson River in Kearney, N.J., as well as from the White Plains store; at Los Angeles from a pair of supercenters more than 50 miles outside the city limits; and at Chicago from a discount store just over the city line in Evergreen Park, Ill.
Wal-Mart spokeswoman Daphne Moore told SN the company does not have "a really tight definition of urban, but in general it refers to locations in close proximity to the downtown area of a major city."
Given that definition, Wal-Mart operates a handful of discount stores in urban sections of Los Angeles and Houston; it has reopened part of the supercenter in downtown New Orleans; and it was scheduled to open its first supercenter within the Chicago city limits this fall on the site of a former shampoo factory before the living wage ordinance passed.
Moore acknowledged that progress in urban areas has been slow "because undeveloped land is certainly more difficult to come by in those markets, though we do see a lot of opportunities for redeveloping former industrial sites, as we're doing at a former steelyard in Cleveland, and the former department store in White Plains, as well as in other locations.
"But the goal for all locations is to get closer to customers we already serve or to get close to those who are underserved."
Moore doesn't think attempts by local governments to create laws to slow Wal-Mart's urban expansion are having much impact. "There have been some isolated instances where some cities have been strongly influenced by labor leaders and other special interest groups. But there have been only a handful of such examples and a lot of attention paid to those instances, compared with the hundreds of stores we open every year." (See related story on Page 18.)
A Potential Plus
According to some industry observers, Wal-Mart's inability to move into urban sites more quickly may be a potential long-term plus, giving the retailer time to develop smaller-sized boxes more suited to urban spaces and more merchandising programs geared to more targeted customer bases than the homogeneous customers served by its rural locations.
"Wal-Mart knows it's near the saturation point with its rural stores, and it's looking for [what to do in] the next act," said Paul Weitzel, vice president at consulting firm Willard Bishop, Barrington, Ill. "It's pretty much squeezed as much as it can out of the supply chain, and now it's planning ahead for the next 10 years to catch the next big growth wave, and that involves meeting the needs of all consumers without regard to income levels.
"The next push involves moving from a focus purely on cost to tailoring its assortments - a prospect that should be very scary for traditional grocers because Wal-Mart poses much more of a threat if it's positioned to go after a more diverse consumer base."
Gary Giblen, senior vice president and director of research for Brean Murray, Carret & Co., New York, said Wal-Mart's move into more urban areas - or areas with a more sophisticated consumer base - "takes away the lack of convenience for shoppers who have avoided Wal-Mart, because the stores will be closer to them rather than somewhere at the edge of town, and as Wal-Mart expands in those areas, it will pose a bigger threat to unionized stores and, in market terms, could bring competition down and reduce wage inflation."
Jonathan Ziegler, a Santa Barbara, Calif.-based analyst with J.M. Dutton Associates, El Dorado, Calif., compared Wal-Mart's urban longings to a teenager working its way through adolescence. "It's like someone just past the single-digit stage facing a whole agenda of new issues, with all the angst that comes with it. But struggling with that pain, as everyone does, will help Wal-Mart become a more constructive 'adult.'"
Husson agreed. "Wal-Mart is in the process of building its level of confidence and experience to make the push [to urban locations] and learn what it has to. It would be foolish not to. The question is, how long will it take Wal-Mart to learn what it has to? Right now, it has a market share of no more than 2% of food dollars in major American cities, and it's moving into those areas very slowly."
One reason for the slow move is the space required for a supercenter - 18 acres - "which is pretty hard to find in urban areas," Husson said. "And another reason is, Wal-Mart doesn't like to pay high rents."
Still, things could get more dicey for Wal-Mart before they get better, Husson said. "The urban markets it's in tend to be in so-called red states, and it's likely to be another five years before the company begins a major push into the blue belt, with all the challenges that may raise."
Ziegler echoed his comments. "When Wal-Mart gets to the dense, politically powerful Northeast, it will really telescope all the issues the company is dealing with today. The Northeast is more liberal and more politically active, and it will put Wal-Mart in everyone's face."
Right now, it sometimes seems as if everyone is already in Wal-Mart's face, including city fathers worried about loss of revenue dollars if Wal-Mart puts smaller local retailers out of business; labor unions worried about the potential for Wal-Mart to alter the wage balance in a market; workers seeking better health care coverage than Wal-Mart offers; and environmentalists and community activists concerned about potentially heavy traffic drawn to supercenters.
Wages and Benefits
One of the issues Wal-Mart has been forced to deal with as it seeks to move into more urban markets is wage rates. "In rural markets, Wal-Mart is often the only game in town, so it can set wage rates," Ziegler pointed out. "But it doesn't have that power in urban or suburban locations. Because it has to find up to 500 employees for each store, it often has to raise the prevailing wage rates to compete for those employees."
Health care - another critical issue for Wal-Mart critics - is really just a side issue, Ziegler said, "that came from the United Food and Commercial Workers Union putting its muscle behind the campaign and letting people know what Wal-Mart was paying."
Ziegler doesn't believe the move to urban locations has forced Wal-Mart to confront these kinds of issues more deliberately. "It would have had to confront a lot of them anyway because of its general growth. But the move into larger cities telescopes the process - it brings it forward maybe a couple of years - and it also reinforces some of those issues in the public eye."
As it sets its sights on more urban locations, Wal-Mart is having to adjust its economic model, Weitzel pointed out. "In its rural locations, the cost to build and run stores is lower, but as it moves into markets with higher real estate and operating costs, it is having to develop a different model. That puts it under pressure because Wal-Mart would really prefer to pay the same rates as it does in other places."
In the process of dealing more and more with its critics, Wal-Mart has learned to become less defensive by going on offense, observers said. "More often than not, Wal-Mart grabs the initiative by asking customers what they want to see and then delivers, which neutralizes some of the more emotional issues and makes it tougher for the naysayers to fire their guns or pull out their swords," Husson explained.
"For example, Wal-Mart already changed health care this year by making it easier for part-timers to achieve coverage for themselves and their families at an affordable price. It's costing Wal-Mart money, but it's taken away one of the key negatives put forth by its opponents."
Wal-Mart has also grabbed the initiative on sustainability - maintaining the environment - "which is not really a part of the red-state agenda," Husson noted.
The company is also working with communities to make its arrival in urban locations more acceptable. In the case of White Plains, it donated $40,000 to a local sculpture garden, with the promise of additional grants totaling $27,000 to 17 local organizations.
Nationally, Wal-Mart introduced a "jobs and opportunity zones" initiative last April where it promised to build more than 50 stores over the next two years in neighborhoods with high crime or unemployment rates, on sites that are environmentally contaminated or in vacant buildings or malls in need of revitalization - programs Wal-Mart said will create 15,000-25,000 new jobs and generate more than $100 million in tax revenues.
It named Chicago its first opportunity zone in April and said it would disclose the other nine zones in succeeding months.
As Wal-Mart continues to pursue more urban locations - or suburban locations close to large cities - it's moving gradually away from its rural roots by segmenting its potential customer base and tailoring assortments to at least five distinct cluster groups: African Americans, Hispanics, baby boomers, affluent shoppers and rural shoppers.
"Wal-Mart has wonderful data on what's selling," Art Turock, a consultant based in Kirkland, Wash., told SN, "so it's taking things one level deeper by experimenting with formats to try to learn how to be better merchandisers."
Wal-Mart may also be working on another tailored approach - one targeted more specifically at the Target customer. According to one observer, the company reportedly has a dark store in Oklahoma City where it's testing concepts that include more upscale varieties in the food and home categories, unique signs and fixtures, less clutter and an overall warmer feel - something closer to a Target than the upscale supercenter Wal-Mart opened earlier this year in Plano, Texas.
Lost in the shuffle in discussions about Wal-Mart's move to urban areas is the Neighborhood Market, which the company once touted as its growth vehicle for urban communities, with a supercenter as the hub for a series of conventional Neighborhood Markets that would operate around it like spokes on a wheel.
But since Wal-Mart determined it could open supercenters closer to each other, Neighborhood Markets are barely mentioned anymore, Turock noted. "It's a pretty quiet subject - mysteriously quiet, to some degree," he said. "My inference would be that the company is getting better results from supercenters, and maybe it wants to keep testing the Neighborhood Market format.
"It's also possible that, if urbanization becomes more difficult, the Neighborhood Market could still emerge as a solution, though it would put Wal-Mart only in the grocery business, not in general merchandise or a broader assortment."
Wal-Mart expects to operate close to 120 Neighborhood Markets by the end of this year, "[and] if there's a downturn in supercenter opportunities, we can expand that format," Lee Scott, Wal-Mart chairman and chief executive officer, told analysts last fall.
At Wal-Mart stores that have been remerchandised and tailored for different shopper segments, several categories have been shifted, with consumables, pet food, pharmacy and cosmetics repositioned adjacent to grocery. The stores also feature a quieter shopping environment, with fewer announcements over the public address system, no in-store radio and quieter cash registers; a redesigned apparel area with dedicated cash registers, more space around displays and a fitting area with more privacy; and more signs and graphics to make it easier for customers to find what they're looking for.
Almost 800 stores had been remerchandised by midyear to reflect the company's localized merchandising approach, with 500 more due for remerchandising by the end of the year.
At the upscale supercenter the company opened in March in Plano, the grocery assortment was expanded significantly to encompass more than 2,000 premium items, including 1,200 wines; gourmet cheeses; made-to-order sandwiches, hot panini sandwiches and hot pizza; expanded organic and natural offerings, with nearly 500 additional perishable items; a fresh sushi bar; and a Wi-Fi-enabled coffee shop.
Wal-Mart discount stores in Houston geared to Hispanics feature an expanded ethnic grocery assortment and baked goods; the discount store in Kearney, N.J., has a Hispanic book section, an expanded selection of Latin music and hair care products for Hispanics; and the store just outside Chicago, geared to African Americans, features a more urban-oriented apparel line, a larger set of ethnic hair care items and a music selection heavy on gospel and rap.
"Wal-Mart is learning how to differentiate its merchandising and retail base according to the neighborhood. It's been pretty homogeneous in its rural stores, but the game is getting tougher," Ziegler said.
Giblen said tailoring assortments is "hugely significant because apparel and fashion have been two of Wal-Mart's biggest weaknesses, along with the lack of a customized assortment. Now it's overcoming those weaknesses."
He said the move to urban locations accelerates Wal-Mart's need to tailor assortments. "For years, Wal-Mart has been able to force merchandise out from its distribution centers to the stores to maintain efficiency because all the stores had the same demand patterns. But that doesn't work if the stores have radically different customer demands."
Most observers interviewed were reluctant to give sole credit for Wal-Mart's move to tailored assortments to Eduardo Castro-Wright, president and CEO for the past year of Wal-Mart USA. However, some said he was instrumental in successfully segmenting the marketplace in Mexico when he ran the company's Wal-Mex division there.
"He made Wal-Mart less homogeneous in Mexico," Giblen said. "He recognized that each part of Mexico is different and there isn't one type of potential customer, and that's what he seems to be doing in the U.S."
Urban Wal-Mart Has Large Grocery Section
WHITE PLAINS, N.Y. - Wal-Mart's new urban store here - one of its closest outlets to New York City - contains elements that the Bentonville, Ark.-based retailer could seek to incorporate into future urban stores, the company said.
The 179,731-square-foot store, spread out on two floors connected by escalators that accommodate shopping carts, is somewhat more upscale than a typical Wal-Mart but apparently not as upscale as the company's recently opened supercenter in Plano, Texas.
The White Plains outlet contains the largest grocery assortment of any Wal-Mart discount store. It has about 20 gondolas, each about 20 feet long, of dry groceries, plus 50 doors of frozen and refrigerated product, SN observed on a recent visit. Although the company said the location was the only discount store with fresh produce, the selection was limited to a few bags of oranges and potatoes, some mushrooms in one-quart containers and a small assortment of bagged salads at one end of the refrigerated cases.
The store does offer some organics, including Paul Newman bagged salads and about four feet of organic dry cereals on one of the gondolas. Other organics integrated in the product mix included oatmeal and breakfast bars.
The store targets Hispanic consumers with bilingual signs in the grocery section and one side of a gondola dedicated to Goya-brand products.
The grocery section also included several pallet displays of beverages, including bottled water, soda and energy drinks.
Endcaps highlighted low prices and included more beverages, snacks and condiments.
The store is located in a downtown area of White Plains, which has a population of 55,000 and is a major transit hub for commuters to New York City.
The area also draws shoppers from surrounding towns and has a Sears, Macy's and Target all within a few blocks of the Wal-Mart. The store is just down the street from the Galleria at White Plains, a 885,000-square-foot enclosed shopping mall that houses the Sears and Macy's.
The store features a parking garage with space for 600 cars. It is also the only Wal-Mart to use smaller delivery trucks because its underground receiving area is too small to accommodate typical Wal-Mart trucks.
"This is the store [Wal-Mart executives] are hoping to show people as an example of a store that can work in New York City," Calvin Lechliter, store manager, told SN sister publication Women's Wear Daily.
"A lot of attention will be placed on this store because it's one of the few urban units in the chain," Steven Restivo, a company spokesman, told WWD. "Wal-Mart isn't known for having a downtown urban experience."