Here’s a phrase you have probably never heard before: smaller Wal-mart. But that is what the firm is talking about (Wal-Mart Plans to Grow by Shrinking, Fast Company, Oct 22).
During its annual analyst conference in Bentonville, Ark., executives told retail analysts that future Wal-Mart stores will be 8 percent smaller, cost 16 percent less to build, and run more efficiently than current stores.
How will this impact their performance? Supposedly not at all. The company claims that “We’ve found ways to increase sales with new designs, re-merchandising, and the application of technology.” It should be noted that a shrunken Wal-Mart is still a pretty big store. Currently, the typical location clocks in at over 100,000 and super centers are around 200,000 square feet.
Two points to note. First, the article raises questions about what happens to existing stores. If Wal-Mart were to systematically move all of their locations to this new format, that would leave a lot of empty big boxes across America. Not many other firms are in a position to fill such a large space and many shopping centers would be left with gaping holes to fill. On the other hand, one has to wonder whether Wal-Mart can capture most of the benefits of smaller stores within their existing real estate. If gains are driven by improved technology etc, couldn’t much of the benefit be had without relocating outlets?
The other point in the article is that a smaller footprint is part of a grand plan to move into more urban (ie expensive) areas. That raises a question of how well smaller stores will fare. The day after Wal-Mart’s announcement, Jewel-Osco (one of the major Chicagoland supermarket chains) announced that it was closing down a concept test store called Urban Fresh (Jewel’s Urban Fresh concept closing, Chicago Tribune, Oct 23). It may simply be that smaller stores are trickier to get right. The basic proposition of Wal-Mart is clear: a wide variety of categories priced low. Smaller stores require a sacrifice on something (eg less variety because of less shelf space or higher prices because of a lack of scale). One consultant said the following about Urban Fresh:
But grocery consultant Paul Weitzel surmises the pilot store was too much like a typical Jewel squeezed into a smaller space. “Most smaller-footprint stores are either very convenience-driven or foodie-driven,” said Weitzel, managing partner at Willard Bishop, a Barrington-based supermarket research and consulting firm. “If you’re in between, I’m not sure shoppers understand the difference.”
A firm that has made serious trade offs in opening smaller stores is British retailer Tesco. They have a chain called Fresh & Easy here in the US (in Southern California, Nevada, and Arizona). These are smaller stores with exceptionally lean staffing. I’ve been in one in Arizona. I gotta say it’s kind of eerie to be in a functioning grocery store that basically has just one employee in it. Of course, this is a tough time to break into the US market and the chain so far is bleeding cash (Fresh & Easy is expected to lose $259 million in fiscal year, LA Times, Oct 7). Part of the issue is overhead. They supposedly have an infrastructure to support hundreds of stores but so have just 130. That says profitability may only be a question of increasing scale. On the other hand, maybe they haven’t completely figured out the US market:
Everything has gone awry, from store operations to pricing to variety and selection to their locations. You could not do much worse unless you did it on purpose,” said David J. Livingston, a Waukesha, Wis., grocery industry consultant. “They were arrogant and totally misjudged the American consumer.”