Wal-Mart’s small format push not new, but offers new opportunities

Timing is everything when it comes to hitting the curve balls that are the constantly changing trajectories of the retail sector. History is also a great coach, which is something Wal-Mart’s top executive teams know too well if you look at the retailer’s smaller format push. Wal-Mart’s small format push of today was an idea honed under former CEO David Glass’ tenure in the early 1980s, according to company historians.

One of those historians is retired Walmart executive Andy Wilson.

“Think back to the discount stores in the late 1970s that averaged about 40,000 square feet. I know I managed one of the first smaller 29,000 square feet stores in 1979 when Wal-Mart began expanding east of the Mississippi River,” Wilson said. “At that time Wal-Mart was testing various-sized formats learning then how to create successful models for staffing and managing profitability of operations and volume levels.”

Wilson said in the early 1980s he was on the management team that traveled to large urban areas like Atlanta and Chicago and there were 30 small urban formats on the board that far back. He said they were aware of how well the dollar stores were doing in urban areas more than 30 years ago. 

He said the only constant at Wal-Mart is change and more times than not, the store format innovations of the last few years were discussed and planned decades earlier. The only exception being the e-commerce pickup capabilities because the internet had not yet been conceived.

“David Glass had a vision for a small store format,” Wilson said. “We had been trying the Hypermarts and they were not profitable, but we knew there could be money made in grocery back then. Trying to find the right balance between food, fresh, deli and general merchandise was somewhat of a struggle,” Wilson said.

He said Sam Walton and David Glass spent a lot of time talking with the management teams about various format sizes, and eventually settled on the supercenter as the higher generator of profit among the various models tried. Wilson said the lull in small formats development, mainly neighborhood markets, resulted when the top management began to focus on international growth in later 1990s.

“In the past few years Wal-Mart began to take notice of the rapid expansion of Dollar General and management sought to reinvent itself once again,” Wilson said.

Wilson and analysts agree the Neighborhood Market formats are easier to get into towns than traditional supercenters that saturated the landscape over the past 15 years.

“Think of it this way: Wal-Mart focused on supercenters at a time when it resonated with consumers. Had Wal-Mart not built out its supercenter network of stores then perhaps K-Mart or Target Stores would have done so instead,” said Tom Coughlin, former Wal-Mart executive and now a retail and supplier consultant. “Today it makes more sense to build out the smaller formats.”

NEW VISION
Wal-Mart announced it was doubling the number of its Neighborhood Market stores in 2013 with 73 new openings. In 2014 there were 107 more added only to double again in 2015  with 233 new small stores opened. The retailer recently just opened its 500th Neighborhood Market and there are dozens more in the construction phase. By 2017, the grocery format will have 681 stores drawing an estimated revenue of $14 billion, according to Kantar Retail. Just two years ago this market was an estimated $6 billion in annual sales for the retail giant.

Analysts with Kantar have said this push toward smaller grocery formats makes sense for Wal-Mart given that more consumers of all ages want faster ways to do their grocery shopping. 

Two and sometimes three typical Neighborhood Markets will into the space of one supercenter, but the sales comps on the smaller grocery formats are trending higher than the supercenter stores, according to commentary from Walmart U.S. CEO Greg Foran during the last earnings call.

Wal-Mart has said its small format comps rose 5.5% in the recent quarter ending Oct. 31. This compared to 0.5% comps for the retailer’s U.S. stores at a whole.

SUPPLIER OPPORTUNITY
Carol Spieckerman CEO of newmarketbuilders in Bentonville, suppliers will need to evolve with Wal-Mart to gain opportunity in the format shift.

“The best way for suppliers to take advantage of the small format push is to acknowledge and address the inherent uniqueness of the model. Just as Sam’s Club suppliers can’t get away with simply super-sizing items that they sell to Wal-Mart, successful small format suppliers will evaluate every aspect of their offerings including logistics, packaging, displays and through a small format lens. Wal-Mart is continually parsing the commonalities and differences among its formats and suppliers should solicit these insights from Wal-Mart and act upon them,” Spieckerman said.

Spieckerman said it makes “incredible sense” for suppliers to participate in small market opportunities because even though there is less shelf space and few items stocked in the smaller format, they are also “the gateway to Wal-Mart and other retailer’s endless digital aisles.” 

“Walmart is particularly intent upon synergizing online offerings with its growing small format scale and leveraging its physical locations to facilitate online orders. For suppliers, that means that the shelf space and inventory in a given store in no way limits their volume potential,” she said.

PICKUP, ONLINE, OTHER OPTIONS
Wal-Mart recently tweaked the design of its Neighborhood Markets to move the Pickup and Services stations to the front of the store to save time for those wanting to access those service options. Foran made that announcement last year shortly after he was named to lead the U.S. division.

Spieckerman said small format creates a balancing act for Wal-Mart to calibrate which items work best in a physical sales environment, from a size, price, margin, and frequency perspective, and which are well-suited to online, site-to-store, site-to-home, etc. 

“Suppliers that can bring insights in these areas will be ahead of those who are waiting for orders,” she said.

Wal-Mart continues to openly court suppliers to bring their innovations and learnings to the table so customers may get the products they dream of as soon as possible.

Spieckerman there is an open-air mentality at Wal-Mart today that welcomes suppliers trying direct-to-consumer business because any lessons learned in the process are worth gaining. That has not always been the case. Spieckerman said there was a time when retailers punished suppliers that “dared to compete” in a direct way.
 
“While doing so can still create tension in some relationships, retailers’ tolerance for brand marketers that pursuing multi-channel expansion has greatly increased. Retailers have shifted to more of an ‘it’s all good’ mindset because as consumer attention continues to fragment, isolating a brand in a single channel, or even in an exclusive relationship, can be a ticket to obscurity,” Spieckerman said. “Brand marketers that operate direct-to-consumer businesses are also armed with insights that benefit their wholesale relationships.”

STORE LOCALIZATION, CANNIBALIZATION
Coughlin agreed that suppliers have plenty of new opportunities with the burst of small format grocery stores because Wal-Mart is reaching much deeper into many more neighborhoods and creating more opportunities for store localization of content.

He said there is no time to lament less shelf space and fewer product offerings which are also a reality of the smaller store footprint.

Experts interviewed for this piece negate the notion of cannibalization from the extensive expansion in small formats over the past two years. They believe the new Walmart grocery model will draw some shoppers away from other retailers creating new grocery sales that a supercenter might not have ever seen. They also say the Neighborhood Market does not prevent the need to visit a supercenter for things like oil changes, tires, stock-up trips, party items or other general merchandise.