Neighborhood Market Push Creates Supplier Opportunities

Wal-Mart’s grocery store model is not a new idea but it’s been nearly 20 years since the retail giant has been this aggressive rolling out new Neighborhood Markets.

It’s roughly a $6 billion business today on track to grow by $2 billion each year though 2017. Analysts agree it’s a grand opportunity for suppliers looking to share the journey.

“Few companies today will more than double their size like Neighborhood Market in the next few years. It’s one of the better growth opportunities within Wal-Mart and part of a shifting paradigm for the mass merchandiser,” said Leon Nicholas, senior vice president of retail insights for Kantar Retail.

John Aden, chief marketing officer for Wal-Mart Stores, said last week the number of new Neighborhood Markets will increase 50% over the next two years. He called on suppliers to allocate top people to their new store opening teams saying the next five months will be a real test for the next few years as Wal-Mart shifts more focus to “fresh” grocery categories.

This year Wal-Mart will build just under 100 of these smaller format grocery stores seeking to fill in markets where they already have supercenters. By 2017, the grocery format will have 681 stores drawing an estimated revenue of $14 billion, according to Kanter Retail.

SHIFTING PARADIGM
Nicholas said another reason Wal-Mart is rolling out these smaller format grocery stores is because they know the demographic around the supercenter has dramatically changed in recent years.

He said the days of suburban moms and grandmas filling up their mini-vans at a one-stop giant supercenter are shifting toward shoppers who buy more online which has the decreased the trip frequency to brick and mortar venues.

“With these smaller Neighborhood Markets, Wal-Mart is also after urban areas like St. Louis hoping to woo Generation Y professionals and Baby Boomers choosing to live in the bigger cities.

“Gone are the days when dads like me drove the mini-van around burning gasoline and looking for the cheapest diapers. A large number of parents today buy them online, auto delivery, just one example of the paradigm shift,” Nicholas said.

An interesting statistic that somewhat characterizes this ongoing shift is that one in five Generation Y – Millenial households are Amazon Prime members. Not to mention, the largest buying demographic – Baby Boomers – spend nearly $7 billion per year online.

According to a Forrester Research study released in November 2011, Boomers (age 51-66) outspent the younger generations online doling out an average of $367 in the prior three months.

Generation X (age 32- 50) were the next biggest spenders at $318. The Gen Y-Millenials (age 20-31) spent an average of $311 in the 90-day period, according to the report.

Nicholas also believes this paradigm shift is making it harder for the supercenter to achieve comparable sales above 2%, which is why he expects Wal-Mart to continue adding more smaller format stores that cost less to build and operate.

Carol Spieckerman, CEO of New Market Builders in Bentonville, said the timing for this push is right. She gives Wal-Mart a lot of credit for testing the smaller grocery models as they provide a wide range of opportunities and challenges for the retailer.

“Wal-Mart continues to talk about its River North store in urban Chicago. They did a really good job managing this anomaly. It is unique customer base, with logistical challenges for on-time fresh deliveries that resonate with this local neighborhood. They don’t have any critical mass in this area so replenishing the store is almost like a special occasion,” Spieckerman said.

Nicholas and Aden agreed the River North store is by all indications a success and a 180 degree departure from the supercenter model.

“They could have waited to bake the perfect cake, but it’s good to see them push that accelerator at this point now that they managed the anomaly store,” Spieckerman added.

SUPPLIER OPPORTUNITY
Aden said Wal-Mart can tell 45 days into a new store opening what the sales trajectory will be for years to come.

“Wal-Mart has to get this right.  Neighborhood Market is a relatively new banner for them and they are still in the ‘prove it’ stage with this format. It’s a great opportunity for suppliers to step up and help make sure these new stores rock,” Spieckerman said.

The first instinct when a supplier hears of smaller formats is often concern for the loss of shelf space, this is also being exacerbated by Wal-Mart’s aggressive push to localize product offerings through its “fresh” initiative.

It’s quite possible in this push for local assortments, that the number of store counts could be decreased for some national brands of consumables.

Spieckerman urges suppliers to look at the bigger picture and take solutions to the retailer’s bargaining table. In the long run, she said those suppliers who can help Wal-Mart’s success across multiple formats will participate in future growth opportunities.

Brands that have consistently dealt with urban drug store chains like Duane Reade/Walgreens can take some of that insight to the Wal-Mart table. Logistics, replenishment, in-stock solutions that traditionally worked in smaller formats can likely be transferred to Wal-Mart business.

Nicholas says suppliers can also look for ways to plug into the major platforms Wal-Mart has established for social good.

“Wal-Mart very much wants to be recognized as good corporate citizen. Suppliers need to figure out how they can help sell that message whether it’s local sourcing, empowering women or the healthy food initiative, suppliers who reach out to Wal-Mart with a shared message will be the big winners,” he added.

Aden also recently spoke passionately about collaboration, saying Wal-Mart is at its best when its working in sync with its supplier base to help its customers save money and live better – sentiment borrowed from Sam Walton himself.

FRESH FOCUS
Wal-Mart has made no secret about its “fresh” initiative and analysts say it’s a win-win proposition for retailers but it also raises the complexity of the game.

“Who knew ‘fresh’ would ever be the sexy consumable category it has become today. It’s not just Wal-Mart, but convenient stores, drug stores, upscale urban markets and dollar stores are all in the ‘fresh’ game. It’s a major trip driver for consumers, but it raises the performance bar way up for retailers.

“Fresh drives frequency, which is why Target launched it’s PFresh campaign to better compete with Wal-Mart and Neighborhood Markets in this consumable category,” Spieckerman said.

The term “fresh” is just that, consumers want wider assortments of fresh baked breads, fruit and vegetable produce, local and regional dairy and meat products. Fresh product is deemed healthier in many circles as it does not contain added preservatives that extend shelf life.

From a logistics perspective retailers know time to market is key in the “fresh” game because consumers are unforgiving when a product they need for that night’s dinner is not available after they have driven to the store.

Aden says Wal-Mart continues to source more consumable products from local vendors which can radically cut down the shipping time and costs and reduce its carbon footprint while also helping support local growers in the process.

But the complexity around localization is also an issue as Wal-Mart is dealing with thousands of new suppliers.

For instance, two years ago, Aden said there were 800 modulars of ice cream, but now with the company’s efforts to pull in local and regional brands that number has risen to 4,000.

Reduced shelf life for ‘fresh’ product also requires accurate ordering and keen forecasting techniques in addition to the unique logistics and replenishment needs.

Spieckerman said “fresh” is unlocking a playground of opportunities for those suppliers who can help Wal-Mart get these thousands of products where they need to be in a timely manner.

These products don’t fill up large distribution centers days in advance.  Often, they will be harvested and transported to the stores within 24 hours.

“Those companies who help with faster logistics and ongoing replenishment of fresh products will likely be the ones who benefit with Wal-Mart in this massive initiative,” she said.