The Wal-Mart fear factor is surging for food retailers operating in urban areas.
Wal-Mart Stores has expressed more of an interest in entering these markets and hopes such an initiative would benefit from its store format experience in Latin America. We'll know more about the retailer's plans this week when Wal-Mart conducts a meeting for analysts on Oct. 13.
But we already know two important things. First, Wal-Mart is taking urban seriously, and second, a rollout of stores could have a big impact on competitors.
Wal-Mart's attraction to urban is simple, according to Scott Mushkin, managing director, Jefferies & Co., who discussed this subject with me last week. The giant retailer is under-represented in many American cities.
“If they're going to grow their business in the U.S., they've got to go urban,” said Mushkin.
Wal-Mart's growth vehicles could include a range of formats, including supercenters and smaller outlets in the 20,000-square-foot range that would more flexibly fit into urban landscapes. The latter type of store has proven successful for Wal-Mart in Latin America.
Mushkin said the biggest urban U.S. opportunities are in the East — the Washington-to-Boston corridor — and the West, especially California. Meanwhile, Wal-Mart has already said it hopes to advance in Chicago and other urban markets by using a mix of store types, including reduced-size supercenters and other small units.
The impact on urban competitors could be severe if Wal-Mart goes all out, Mushkin said. “Look at New England. Is Shaw's going to be there if Wal-Mart is successful? Where does Shaw's fit?”
Wal-Mart's urban efforts could also have a big effect on non-supermarket operators. “If Wal-Mart is successful in New England, it could impact a company like BJ's,” he said. “The sales have got to come from someplace because consumables growth in the industry isn't accelerating that fast.”
The biggest casualties could be in market areas already crowded with retailers, such as Philadelphia. That market would likely see shakeouts if Wal-Mart boosted its presence, Mushkin said.
Before fearful urban competitors decide to close up shop, they should consider the case of another Wal-Mart format, Neighborhood Market, which was filled with potential and buzz when it was first launched in 1998. At the time some observers warned supermarkets would be seriously threatened by this new food retail concept. However, Neighborhood Market underwent years of testing and was never expanded in the big way some anticipated, largely because the returns weren't optimal. Likewise, an urban format ultimately would have to meet expectations in order to be rolled out.
So while urban operators need to be on guard for Wal-Mart, they shouldn't panic. In fact, companies that were successful in battling Wal-Mart over the years were precisely those that didn't panic.