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Wal-Mart’s Marketside Format
Opens In Fresh & Easy’s Back Yard

Simultaneously with Tesco’s release of financial results that will provide some hard numbers on its Fresh & Easy chain, Wal-Mart will open the doors on its first four Marketside stores in the Phoenix area.

Although British newspapers have portrayed the Marketside concept as a response to Tesco’s Fresh & Easy venture, we think that this point can be overstated.

Wal-Mart has many reasons to be interested in smaller stores. In its existing markets, they may serve to help keep fill-in business between trips to Supercenters in Wal-Mart’s hands. In big unionized cities where a combination of scarce real estate and political opposition have made it difficult for Wal-Mart to open supercenters, a new smaller concept may provide a point of entry. Wal-Mart also has plenty of worries regarding deep discounters such as Aldi, and this concept might be a tool to deal with these competitors.

We understand that Lee Scott, Wal-Mart’s CEO, is very interested in exporting the concept back to the UK. He is on record as saying that Wal-Mart’s ASDA group made a mistake in failing to seize the small store space that Tesco did with its Tesco Express model.

Certainly no one at Wal-Mart dismisses Tesco’s retail acumen. Indeed no less a figure than Lee Scott himself has said as much:

The success of Tesco’s fledgling US venture, Fresh & Easy, has been endorsed by the most unlikely of advocates — bitter rival Wal-Mart’s chief executive, Lee Scott.

Tesco’s push into the US — which has proved a graveyard for UK store groups’ ambitions in the past — is regarded by many observers as a high-risk enterprise.

However, Scott’s comments, which he made to an audience of investors at last week’s Goldman Sachs retail conference in New York, may well convince skeptics to revise their opinion.

Responding to a question, Scott said he had heard mixed reports about how Fresh & Easy was faring, but that he was convinced the business would perform well.

He said: “The thing that bothers me is Tesco is a very good retailer. I have a lot of faith that they will find their direction and it is something we need to pay attention to.”

Yet this is in a sense only a back–handed compliment. Mr. Scott points to no particular innovation or characteristic that makes Fresh & Easy great; he is only saying that Tesco is “a very good retailer” and that “they will find their direction.” Indeed, the great strength of Fresh & Easy since its opening has not been its concept — which is, at best, uncertain — not its distribution — which has been a mess — not its consumer appeal — which has been lukewarm — not its real estate department — which has secured many poor locations… What has been the salvation of Fresh & Easy was Sir Terry Leahy coming out and saying that Fresh & Easy was not a test, it was a rollout.

By putting his own and Tesco’s prestige behind the launch, Sir Terry Leahy allowed all sins to be forgiven because any failure could instantly be attributed to a learning curve. If Fresh & Easy was failing, it made little difference as version 2.0, 3.0 or 4.0 would surely be sterling.

In contrast, Wal-Mart’s new Marketside has received no such commitment from Wal-Mart’s CEO. Indeed Wal-Mart has made a point of emphasizing that this is most definitely a test, rather than a roll-out. Although there was hullabaloo over a newspaper help-wanted ad suggesting that Marketside was going to grow into a 1,000 store chain, and we talked about this here, that ad was more an expression of a wish than an actual plan.

Now with Wal-Mart’s Marketside stores about to open, we will find answers to key questions. What we know about the concept is that it will emphasize brands more heavily that Fresh & Easy does. There will not be all this needless repacking of fresh produce. There is some confusion regarding in-store services, however. At an earlier stage in its evolution, the concept was slated to have a service deli, but with the turn in the economy and, perhaps, with Fresh & Easy’s turn to a more promotional price structure, the focus seems to have moved a bit to providing a more economical product and, at least for the initial test stores, the service deli is out.

Despite this, we have been advised that precisely because these stores are tests, they have been designed with great flexibility including excess plumbing and electric so that they can be reconfigured quickly if the market should so indicate.

Although Wal-Mart has only announced these initial four stores in Arizona, it has also been signing leases in California, including downtown San Diego and Oceanside.

Key questions not yet answered: What will the pricing strategy be? Wal-Mart has kept prices at its Neighborhood Market concept identical to its Supercenters. What will it do in this new venue? How great will the assortment and quality of the prepared foods section be? Earlier in the process, each store was going to make its own prepared foods on site. It is unclear if this plan has survived. And if it has, how will each store deal with food safety and variety challenges?

But mostly, the question is how dedicated is Wal-Mart to the concept? Everyone has been speaking grandly about Tesco’s rollout on Fresh & Easy, but these are small stores. Wal-Mart has rolled out many multiples of the square footage of Fresh & Easy — even today all the Fresh & Easy stores open in the country could fit in five supercenters –so if Wal-Mart likes the concept, with its pre-existing distribution centers and large real estate team, it will quickly cover the country.

But in all likelihood, even if successful, such small stores won’t provide a return on investment adequate to encourage Wal-Mart to commit capital to such a rollout. We think the smart thing to do for Wal-Mart would be something similar to the Sav-a-Lot division of Supervalu. Wal-Mart should franchise out the stores, then it would have hard-working entrepreneurs and their families keeping the stores in great shape while Wal-Mart could use its real estate arm to develop and lease the stores as McDonald’s has and use its procurement and logistics abilities to supply the stores.

Basically with owner-operators, Marketside will get a quality and commitment from management that the small size of the stores will make difficult to afford in a hired employee. It will also get people who are expert in their local communities, often from the dominant ethnic or religious group, and thus likely to know what products to stock and what community organizations to support.

And what of the great battle between Wal-Mart and Tesco supposedly about to play out in the deserts of Arizona? It may be decided closer to Piccadilly Circus. Tesco’s real problem now is that in its core market, food price inflation — boosted by the fall of the British currency — is zooming and that is playing in the hands of the discounters. Wal-Mart’s ASDA division is a big beneficiary, but the real threat is Aldi, Lidl, Netto, Iceland — the so-called “hard discounters.” Tesco’s market share has been slipping despite substantial capital expenditures.

In the past, British retailers have withdrawn from America not so much because of problems in their American divisions but because of problems back home. Sainsbury’s sold Shaws, and Marks & Spencer sold Kings because attention was needed back home.

Now Tesco is a much more international company, but Fresh & Easy is also a less established concept, and it is losing large amounts of money in a way Shaw’s and Kings never did. It is true that Sir Terry Leahy has said this is a launch not a trial, but then again California does strange things to such commitments. California Governor Ronald Reagan once said that his “feet were set in concrete” in opposition to tax-withholding. When Governor Reagan announced that he would sign the bill back in 1971, he told reporters “That sound you hear is the concrete breaking up around my feet.”

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