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Tesco’s Small Store Format Not Unnoticed At Wal-Mart

It is not a surprise that Tesco, in coming to America, elected to use a small store format.

To start with, real estate difficulties bedevil larger formats. Wal-Mart battles for each supercenter in California, and local supermarket chains have the relationships with developers to be offered first those key corner shopping centers. In more mature markets, such as the inner ring suburbs of most major cities, there is so little available land that, without an acquisition, it could take decades for a new entrant to gain critical mass.

So, if Tesco wanted to move in the U.S., its choice was to build large rural stores and directly challenge Wal-Mart or smaller stores for which real estate was available. It elected the second path.

The other reason it is not a surprise: Tesco’s growth has been driven by small format stores.

This fact has not escaped the notice of Wal-Mart’s senior executives. Almost two years ago, Lee Scott, President and CEO of Wal-Mart, told the The Sunday Times of London that Wal-Mart needed to look at alternative formats:

“A lot of Tesco’s growth has come from the small convenience chain. Andy (Bond, the chief executive of Asda) and his team have got to look and see where the opportunity is for us with that kind of space,” he said.

“There are no limits, all we want to do is serve customers. We run multiple formats in different countries. In Mexico we are the second-largest restaurant operator,” he added.

Yet, in the U.S. at least, Wal-Mart has done very little with alternative formats. Even its Wal-Mart Neighborhood Markets concept has grown very slowly. The reason is three-fold: first, the Supercenter still has plenty of geography to expand into. Second, the Supercenter still provides the best return on investment. Third, a behemoth like Wal-Mart really has to build thousands of little stores to impact the top and bottom lines, so going smaller is not necessarily a real desire of management.

Yet, Tesco’s move into the U.S., which we have chronicled here, may have jumpstarted the process in Bentonville, if for no other reason than to be prepared in case Tesco’s concept turns out to be a success. A piece from The Sunday Times of London explains in an article echoed in the New York Post that Wal-Mart has charged David Wild with the task of responding to Tesco and developing a new, smaller format, more convenience-oriented store.

David Wild is now Wal-Mart’s Senior Vice President, New Business Development, but before he joined Wal-Mart Germany as chief merchandising officer, he spent 18 years with Tesco, including six as Tesco’s Chief Executive for Central Europe.

So David Wild knows Tesco and knows how it approaches markets outside its home base in the U.K. — he is thus a logical guy to develop a response to Tesco.

We wonder, though, if there is not more to this. Wal-Mart has also been struggling as Aldi, Save-a-Lot and other deep discounters have undercut Wal-Mart’s low price image. His Tesco experience may make him the perfect guy to plan a response to their initiative, but his Germany experience makes him the perfect guy to develop a response to Aldi and other discounters.

Perhaps Wal-Mart will try and kill two birds with one stone — developing a small, convenient format that is a deep discounter on fresh and prepared foods?

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