After touring British retail operations — including those of Tesco and Wal-Mart — and speaking at the annual Citi Retail Conference in London, we zoomed into Phoenix to catch the unannounced “quiet opening” of Wal-Mart’s new Marketside concept. The official opening of the first four stores is today, October 4, 2008.
We were hardly alone. Just walking around the stores the night before the grand opening we met representatives of many of the nation’s top retailers plus many suppliers. Although Tesco’s launch of its Fresh & Easy concept, which we have chronicled here — has attracted great interest. It has always been something of a novelty for the American trade, something of a novelty, an interesting prospect for business and competition. In contrast, Wal-Mart is the biggest buyer and biggest retailer in the world and even more so in America. What it does is of immense importance to both its suppliers and competitors.
Despite press perceptions that this launch is solely about battling Tesco, Wal-Mart has had its challenges, as we have chronicled here, and so has many reasons to be interested in small store concepts. Wal-Mart could acquire learning that will help with supercenters — what if a Marketside was put in the front of every supercenter to accommodate fast in and out trips by consumers? The concept may be a way into markets that due to politics or land availability have traditionally been difficult for Wal-Mart to access. Perhaps a Marketside like concept can help Wal-Mart hold onto its shoppers between Supercenter visits? Maybe even the concept could be trialed in the UK, where Wal-Mart’s ASDA division has been hobbled by its inability to get sites for large stores. It is notable that Wal-Mart elected not to use the Wal-Mart name on Marketside — perhaps just as the Grande Dame of greeting cards, Hallmark, set up Shoebox as a “tiny little division of Hallmark” as a way to do things just a little too offbeat for consumers to accept from the main brand. So, perhaps, Marketside can be an entrée into the psyche of consumers who are not open to a conventional Wal-Mart pitch.
Still the narrative is irresistible: the two largest retailers rooted in the English-speaking world conduct a world war of battles in China, in India, in Japan, yet now the smaller of the two, Tesco, signals it is prepared to challenge Wal-Mart for global leadership in retail by opening its Fresh & Easy division in Wal-Mart’s home territory. So the Bentonville behemoth strikes back, opening a concept that is directly competitive with Tesco’s new venture, in a regional market Tesco has tried to seize. It is Wal-Mart saying to Tesco: “Not on my turf.”
So we visited all four stores and went to see several local Fresh & Easy operations and studied carefully to see if Wal-Mart offered the consumer a more or less compelling proposition. Our conclusion: Although much depends on day to day execution and certainly there are things we will recommend Wal-Mart reconsider, the new Marketside format is a triumph and, in almost all cases in which Marketside might compete directly with Fresh & Easy for American consumers, those consumers will strongly prefer Wal-Mart’s Marketside over Tesco’s Fresh & Easy. There are three reasons why:
- The Brands America Has Grown Up With
Virtually 100% of the grocery offering consists of well-known brands. Folgers Coffee was a prominent opening day special and aisle after aisle is filled with a pantheon of names Americans know and love. This means that Marketside does not have to convince consumers of the quality of its products, consumers know and trust the quality.
It also means that Marketside is able to instantly offer consumers good prices — and thus compelling value proposition — on products consumers believe in. Fresh & Easy is left to offer “deals” but since consumers have no reference points for the value of these private label products, they don’t know if it is a bargain or not.
This branding approach reaches into perishables as well. The bananas and pineapples are from Dole, the Western citrus from Sunkist, the lettuce Tanimura & Antle, the blueberries Naturipe, the strawberries, Well-Pict, lots of Melissa’s product, Apples from Stemilt, Sliced apples are marketed under both the Crunch-Pak and the Disney Gardens brands, salad dressings are Marie’s and Litehouse, chicken is Foster Farms, the deli, Dietz & Watson. Consumers will instantly be comfortable and will quickly perceive if Marketside offers a good deal.
- Freshness, In-store Cooking and the Halo Effect
The Fresh & Easy stores have struggled since day one to deal with the American conception of freshness which, basically, means cooked right in front of my eyes. In contrast Marketside plays to this perception as it offers a service deli with a man slicing meats and cheeses, a pizza program where the pizza is cooked in a prominently placed oven, an in-store rotisserie, in some stores we even saw sushi chefs. In each store it is obvious that real fresh food is being made at the store and this resonates with American conceptions of fresh. In fact, even the prepared foods, salads, soups etc. that are not made at store level will surely benefit as consumers perceive these to have been made right at the store.
- Farmstand like bulk produce displays with no minimums or need to buy multiple packages.
Although fresh produce has been the single most successful category at Fresh & Easy the chain has struggled both with the economics of buying everything and repacking it under the Fresh & Easy name and with the fact that many consumers are turned off by all the packaging, sometimes for environmental reasons, sometimes because they are not used to it and sometimes because they don’t like the quantity in the package. They may need one red pepper and resent having to buy two. Or a big Hispanic family may need twelve cactus leaves but feel ridiculous buying twelve packages because they are packed individually. In contrast the bulk displays of produce at Marketside both conform to American notions of freshness and allow for consumer choice of quantity.
These three points — selling the products Americans want, in a way they consider fresh and in the quantities they want — are not such novel concepts. But in walking through Fresh & Easy after walking through Marketside one realizes that the Tesco store feels like a stranger in a strange land. Credit Tesco with either brilliant leadership or colossal arrogance because it created a store not so much to serve American consumers but to change the consumer culture in America — this is among the most difficult things to do in consumer marketing. We suspect Tesco would have done better to focus on introducing consumers to the Fresh & Easy store concept by initially selling items with names and methods that American consumers were used to. Then, with time, as it gained the trust of consumers, Tesco could always have experimented to test consumer acceptance of its British ideas.
The Wal-Mart Marketside concept is not as pretty or as upscale as Safeway’s “the Market by Vons” that we visited here but that single store is in a unique demographic and a unique location; it seems unlikely to roll out across the heartland of America.
As a business proposition Wal-Mart did something very intelligent: it worked with vendors such as Ready Pac, Sky Chefs and Harry’s Fresh Foods and leveraged its existing real estate and logistics capabilities to avoid spending hundreds of millions on the launch. It turned to a distributor who provided a ready made specialty cheese program that adds just the right upscale touch. It did such a good job it makes you wonder what was the point of, for example, Tesco bringing in a British vendor and enticing them to build a new fresh-cut plant when Ready Pac — with all its knowledge of what sells and what doesn’t — already had a plant right down the road from Fresh & Easy headquarters?
The success of this concept, although harkening back to Sam Walton’s preference for selling national brands at bargain prices, shows the utility of setting up something as a “Intrepreneurial” company within the confines of a large organization. This team played on Wal-Mart’s capabilities but did so without carrying any baggage from Wal-Mart. It will be a case study in business schools for years to come.
We have our quibbles. Wal-Mart pulled back from a fresh in-store sandwich program and we think that would help reinforce the fresh image. In fact we think small stores should be less like small grocery stores and more like large convenience stores with an array of in-store cooking, such as a good Sheetz or Wawa would have plus an expanded array of groceries. Since the stores are ex-drug stores and they have closed off the drive-throughs, we would have liked to have seen them used to create a truly “easy” experience for the consumer. Or at least offer curbside pick-up service as has become common among restaurants. We are also mindful that Wal-Mart’s problems have typically been with store level execution. And so we will wait to see if a smaller store is easier or harder for Wal-Mart to manage.
Right now the values are incredible — $6.00 prepared food entrees for 6 cents! But these are opening specials and we will have to see how the pricing settles down. National brands are a double edged sword — they offer the best opportunity for a retailer to prove price leadership — they also offer the best opportunity for consumers to note that there are less expensive opportunities elsewhere.
Obviously assortment will change as customer sales data starts to come in. We noted, however, that the prepared foods offering was not an attempt to copy Fresh & Easy but, rather, there was heavy emphasis on prepared food products that grew out of the Arizona milieu and culture. Will Marketside also have an assortment that works specifically for the new California stores and for each subsequent market? One of Fresh & Easy’s challenges has been its attempt to offer a uniform offering in very different communities.
These are reasonable concerns but, all in all, Wal-Mart has quite an accomplishment here… a small store close to the heartbeat of America’s consumers The achievement should not be underestimated.
What is still unclear to us is if American consumers in places such as Phoenix need or want a small store alternative. These consumers have to drive anyway to the store so we can’t help but feel that they will want the broad selection offered by a conventional supermarket and the occasional stimulation of a Club Store, Whole Foods or Supercenter. It is notable that Kroger, in many ways America’s most admired large food retailer, certainly by financial analysts, and one with experience in small stores through its convenience store division, has not rushed to produce small format grocery stores. Perhaps it questions whether consumers will find abbreviated assortments acceptable.
We see Marketside and imagine Wal-Mart as the largest grocer in Manhattan, downtown San Francisco, Boston, Philadelphia, Chicago — other places with high real estate costs and few large supermarket sites available at any price. And we see it as a triple win: first Wal-Mart will gain new customers and make money on the stores; second the stores will give Wal-Mart new employees and vendors in cities where it has few advocates now. So being the biggest grocer in Manhattan may be just the trick for getting approval to open supercenters and club stores in the outer boroughs of New York City, in the Bronx, Brooklyn, Queens, etc.
Mostly though the winner would be the urban consumer who would get an assortment of high quality foods at a value price. There is little question that the Marketside format will beat Fresh & Easy, in America if the Fresh & Easy concept doesn’t change. But winning the battle over Fresh & Easy in Phoenix may not be enough to make the stores profitable — much less to realize a return on investment higher than Wal-Mart can achieve by building more supercenters or investing in India.
This is Tesco’s ace in the hole. It is so much more important for Tesco to establish a beachhead in America than it is for Wal-Mart to run a successful chain of small stores in America, that one suspects that if this Wal-Mart test is not quickly profitable, Wal-Mart may lose interest, whereas Tesco may be willing to lose a lot of money and revamp many times to score a win in the American market.
This is all, though, a concern for another day. Today a flower blooms in the deserts of Arizona and in the American retail landscape. It is Wal-Mart’s Marketside concept and it is a triumph.