When Wal-Mart introduced its Marketside concept, we hailed it as a triumph but with a big proviso in a piece we titled, A Triumph In Phoenix — Wal-Mart’s Marketside Hits The Trifecta. One Open Question: Do Suburban Consumers Want Small Grocery Stores? We carried this line of thought in a follow-up piece titled, More Thoughts About Wal-Mart’s Marketside.
Here is the way we explained the issue:
What is still unclear to us is whether 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.
After the initial four stores in Phoenix, no new Marketside stores have opened. The plan for one in Peoria, Arizona, which was for an imminent opening, was put on hold. Viewed in and of itself, this may be understandable. The Peoria site was a tough site… one could rationalize that the Marketside team should focus its efforts around more densely populated urban and inner suburban areas. In contrast, the Peoria site was a low-medium density, in an area with lots of foreclosures. There is, however, a brand new Walgreens next to the Marketside site that appears to be one of its “store of the future” models, but it is realizing very low traffic currently.
Yet it is obviously more than a real estate issue with this one store. Marketside hasn’t exactly rushed to open its California stores either.
Now there are dozens of reasons and justifications for all this, but the one obvious fact is that they didn’t slow down the test because the stores were making too much money.
This was alluded to in comments by Wal-Mart Vice Chairman Eduardo Castro-Wright immediately after Wal-Mart’s annual meeting:
Wal-Mart Stores Inc. said on Friday that it is not accelerating the test of its convenience-sized grocery stores, called Marketside, given the economic climate.
“We’re pleased with it, but at this point in time given the current condition in the marketplace, with a significant reduction in demand … we are not accelerating that effort until we have better data to make a decision,” Wal-Mart Vice Chairman Eduardo Castro-Wright told reporters after the retailer’s annual meeting.
In October, Wal-Mart officially opened four Marketside stores in the Phoenix area. The stores seek to woo shoppers who are looking for ready-to-eat meals and fresh produce, and might not have time for a trip to a full-scale grocery store.
Marketside stores are roughly 15,000 square feet, while Wal-Mart’s supercenters average 187,000 square feet.
The Marketside test came after British grocer and rival Tesco opened Fresh & Easy stores in the United States in late 2007.
Tesco is now making major changes in its Fresh & Easy stores as analysts worry that the U.S. chain is still searching for a successful niche.
In what it calls an “evolution,” Tesco is putting more focus on value and adding about 1,000 items to Fresh & Easy stores’ current 3,500-product assortment, which represents about 10 percent of what a typical U.S. supermarket carries.
Retailers like to blame the weather and the economy for all their problems but, in theory, Marketside — and Fresh & Easy — should do well in a down economy as people trade down from restaurant meals to ready-meals. Besides, Wal-Mart operates on a massive scale. If it is a promising concept but the problem is foreclosures in Phoenix, it knows how to open stores in Boston too.
Although Tesco’s Fresh & Easy and Wal-Mart’s Marketside are quite different in many ways, they share four foundational concepts:
1. Both are small format stores.
2. Both are located outside of high density corridors.
3. They are both designed to appeal to a mass market.
4. Both are built around a “ready-meal” offering.
At this point in time, we have more than enough experience to say that concepts combining these four attributes don’t work in the American context.
With an investment in Fresh & Easy approaching a billion dollars and a great strategic reason to gain a foothold in North America, plus the personal prestige of both the CEO and the former CEO’s son-in-law riding on the effort, Tesco may stick it out and continue experiments in the hope it will find a way to operate these stores profitably.
Wal-Mart probably has very little patience for operating four little stores in Phoenix. For awhile the company may see it as a useful laboratory for a ready-meals effort and, perhaps, a contingency in case Tesco stumbles on something that works, but we can’t see these stores as long for this world if they don’t start making money.
The learning from these efforts is not that any one of the four foundational concepts mentioned above is flawed; it is that, combined, they create a non-viable retail concept.
Small format stores thrive in Manhattan and urban cores, plus they exist profitably across the country in specialized concepts including Trader Joe’s, Aldi, and many ethnic specialty stores. But there are few examples, indeed, of small format stores, geared to the mass market, competing effectively in areas where consumers will shop via automobile as opposed to picking items up after getting off mass transit.
So it may just be that consumers prefer large supermarkets to small grocery stores, which is actually something King Kullen, Piggly Wiggly and The Great Atlantic & Pacific Tea Company taught us some time ago.
We happen to be writing this while attending the International Dairy, Deli, Bakery Association (IDDBA) show in Atlanta, and evidence is that retailers are still wrestling with the whole idea of ready-meals and prepared foods.
It is well known that Wal-Mart has been running a three-city test of a new prepared foods offering and that Safeway is preparing for a fall rollout as well.
We’ve dealt with issues related to prepared foods before in pieces such as Question For Fresh & Easy And Marketside: Are Americans Really Ready For “Ready-Meals”? and Why Do Ready-Meal Programs Fail?
Yet the simple fact remains that, although individual market opportunities,of course,vary, the only big foodservice segments that retailers do well at nationally are chicken — both rotisserie and fried — pizza and sub and sandwich programs.
If we had to identify a fatal flaw in the Fresh & Easy and Marketside concepts, it would be that they are both built around ready-meals and Americans don’t eat many of these British-type offerings.
Both Tesco and Wal-Mart would have done better to look at some of the top convenience store foodservice offerings, such as those we mentioned here as being offered by Sheetz.These offerings,typically with a mechanized ordering device,allow consumers to shop while their food is being prepared. The food is typical American fare,and the whole concept is, well, both actually fresh — as it is cooked to order — and easy — as one can gas up, shop and leave with a hot breakfast,lunch or dinner.
It is not clear if suburban and rural Americans will ever develop a taste for supermarket “ready-meals” but if they will, we suspect it will be at the largest, highest volume stores.Small format, local markets generate low traffic counts. It is simply impossible to offer a wide range of ready-meals and sell each variety in sufficient quantity to keep stocking the whole range at these small format stores in low traffic locations.Inevitably the stores will scale back the offering and then they are no longer selling a true ready-meals program; they are just selling lasagna.
The only hope for these programs is in the large, high-traffic stores where, maybe, sufficient consumer traffic can sustain a full offering.
It is a tough row to hoe. Whole Foods does a good job with its upscale orientation.A concept such as The Market by Vons, which we discussed here, can work in specialized locations such as its beach area site. Mostly though, Americans who want ready-meals use take-out services from the many inexpensive restaurants that dot the American landscape.
Despite both Tesco and Wal-Mart giving it their best, there is just no evidence that American consumers in car-oriented locales yearn to buy ready-meals in superette-sized stores.