Testing Ground: Neighborhood Market still evolving as it celebrates 20 years

In 1998, “Titanic” was the top grossing movie at the box office, the Monica Lewinsky scandal with President Bill Clinton dominated the news and a small tech startup known as Google was formed in Menlo Park, Calif.

And in Arkansas, Walmart quietly opened three Neighborhood Market formats in Bentonville, Springdale and Sherwood. The smaller, grocery-only format was the brainchild of then-Walmart CEO David Glass, who also pushed the Walmart Supercenter format, which is
celebrating its 30th anniversary this year. Glass said groceries were a natural extension for Walmart because customers wanted more options. Glass has said during Walmart’s early grocery days, executives spent a lot of time in Texas-based H-E-B studying that operation.

He said the first Hyper-Mart locations, which opened in the mid-1980s, were testing labs for what became the Walmart Supercenter. In 1998, the Neighborhood Market format also became a testing ground for Supercenters. The Neighborhood Market format now tests technology before it goes into Supercenters, said Todd Harbaugh, executive vice president of Neighborhood Markets with Walmart U.S.

Retired Walmart executive Andy Wilson said he remembers the early discussions of a grocery-only format that began to take shape in the early 1990s during a trip with Glass to Chicago. Wilson said the vision was to transfer learnings from the Supercenters and have a format the earliest-aging Baby Boomers could easily shop for essentials like food, pharmacy and fuel.

“We knew the Boomers were going to need smaller, more convenient shopping options, so Walmart set out to try this new format that started slowly at first but then ramped up in the past few years,” Wilson said. “David said we could build one Supercenter or eight to 12 Neighborhood Markets in a community. He saw these formats as a more intimate way to connect with shoppers.”

The Neighborhood Market has been around for 20 years, but it wasn’t until around 2012 when Walmart decided to grow the format. Harbaugh also said the role of Neighborhood Market has been a way for Walmart to get closer to the customers. He said Supercenters began to reach a saturation point around 2010, and the company decided to divert capital away from big-box expansion and focus on filling in communities with smaller grocery formats. By 2013, Walmart created a separate Neighborhood Market management team to focus on growing the format.

Walmart operated 241 Neighborhood Markets in 2012, and that number has grown to more than 700. In the past few years, Walmart has opened more Neighborhood Markets than Supercenters. Harbaugh said the company continues to open a few Neighborhood Market locations but it’s also revamping other stores to better match the new prototype based on customer feedback.

NEWEST PROTOTYPE
Walmart’s newest Neighborhood Market format at the intersection of I Street and Southwest Regional Airport Boulevard in Bentonville has been fully revamped in the new prototype store. At roughly 41,000 square feet, the store has been reconfigured using consumer driven data about shopping occasions.

Harbaugh said the look and feel of the store is different from others in the region as traditional product placement and presentation has been thrown out the window. Instead, the store is merchandising products around the new consumer metrics. For instance, he said bacon is located beside eggs because the majority of consumers who buy eggs also buy bacon, and traditionally those two items are sold in different departments.

The fresh meat case is broken into smaller feature displays, one of which has hamburger patties and chicken breasts in the same case with buns and charcoal. The drinks-to-go refreshment center is located in the front of the store along with the pickup desk and financial services.

The store was also the first in the country to use an outdoor pickup tower, and it has a drive-up window for the pharmacy. About one-third of the store is devoted to fresh foods with low sightlines, and the deli is located in the center of the fresh food section.

SMALL IS BIGGER
Kantar Research has said by 2023, it expects 63% of all brick-and-mortar sales growth to come from formats under 50,000 square feet. That fits squarely into the Neighborhood Market playbook as the formats tend to average about 42,000 square feet.

Harbaugh said it is Walmart’s belief  that omnichannel retail — blending physical stores with online commerce — will be the winning hand long term. He said Neighborhood Markets are players in omnichannel retail as all of them are equipped for online pickup of general merchandise orders, and roughly 300 of them have pickup grocery.

Harbaugh said not all Neighborhood Markets would offer online grocery pickup, but a majority will. He said if they are located within 1 mile or so of a Supercenter, they may not have pickup. Harbaugh said all stores built since about 2015 were constructed with a “future room” in the back of the facility. He said when the time is right, that room is converted into a pickup staging area and refrigeration is added, as is additional personnel including a manager to oversee pickup operations.

Neighborhood Market formats typically don’t generate the same revenue levels of a Supercenter, but Harbaugh said they do compete well against traditional grocery chains. Customers are loyal to the format, helping Neighborhood Markets consistently maintain same-store sales above 5.5% since 2015, according to Kantar Research. This has been a key contributor to the more than 15 quarters of positive same-store sales reported by Walmart U.S.

While Walmart does not separate Neighborhood Market sales, Kantar reports the format’s sales grew from $12.71 billion to $18.57 billion this year. Kantar expects the format will see sales of $22.29 billion by 2022, which represents annual growth of 10.76%. Kantar also notes the format continues to be used by consumers for fill-in trips, which is how a majority of customers choose to shop. Kantar said the format must continue to align its strategies with Walmart’s broader goals of re-evaluating store and shelf space, services and quality of fresh food, as well as integrating technology to drive conveniences and managing store labor for optimum efficiency.

FUTURE STORES
Harbaugh said Walmart does not have formal plans in place for where or how many future Neighborhood Markets will be built. Management has said it will spend more to grow e-commerce than in new physical stores for the foreseeable future.

Harbaugh said there are a couple of baseline metrics Walmart uses when choosing a new store location, and a population of between 20,000 and 25,000 within 5 miles is optimum. He said socioeconomic factors are also examined because the higher the net worth of the households in the neighborhood, the better the store will perform.

He said Walmart looks at five key attributes a store should have if it’s going to be a success. They include a fuel station and convenience store, if possible. Harbaugh said fuel stations are traffic drivers, and the convenience store attached does not cannibalize store sales but provides customers the ability to pick up milk or other staple items when they refuel.

“When we have a convenience store with the fueling station at a Neighborhood Market, we feel like we’re solving for two separate shopping occasions,” Harbaugh said.

Walmart also likes to have a drive-up pharmacy because customers have told the retailer that’s an important factor in them using the service. Harbaugh said a deli department and bakery are also important to the success of Neighborhood Markets. He said stores must be well-managed and staffed, with most stores employing between 80 and 110 workers, which includes one store manager, three assistant managers and several hourly supervisors who can open and close the store. The rest of the employees include hourly full-time and part-time workers.

Wilson said Walmart has always been a company that believes in reinvention and adaptation. He said this again is reflected in even smaller stores (convenience formats) being tested in the Dallas market.

“Walmart’s leadership continues to try and stay out in front of change, and that’s crucial in retail success,” Wilson said.