Thursday, November 04, 2010

Here Comes Wal-Mart, There Goes the Neighborhood

Supermarket News has an incisive look at the new Wal-Mart strategy to penetrate urban markets-and if possible, current levels of fear and loathing will ratchet even higher: "Now that most supermarkets are learning to co-exist with supercenters, Wal-Mart Stores may create a new round of competitive challenges as it contemplates opening more medium-sized stores and developing a smaller urban model."

Unlike the giant super centers, these new models will try to locate in the heart of neighborhoods-and, if successful, could accelerate the demise of local business in cities like New York: "After months of industry speculation, Wal-Mart formally disclosed plans two weeks ago to begin opening medium-sized units of 30,000 to 60,000 square feet — with close to 40 units scheduled to open during 2011 — and to begin testing a smaller store of under 30,000 square feet as well."

And NYC's supermarkets are definitely in the eye of the storm: “Since traditional supermarkets generally have more expensive cost structures, less flexible unionized labor and preexisting margin pressures, it would be difficult for them to compete on price with these new Wal-Mart stores,” Neil Currie, executive director of UBS, New York, told SN."

Translated: Pay the workers less and be more profitable. But it's not clear whether these mini marts (at least in Wal-Mart terms) will be exclusively food stores; or whether they will also offer other items that will put competitive pressure on the full range of neighborhood retailers. In either case, those that could be sacrificed are the new class of successful immigrant entrepreneurs who have reinvigorated the city's low income neighborhoods-a factor that lead Wal-Mart cheer leader, Mike Bloomberg, has not apparently considered.

Still, the Wal-Mart expansion can't be done without good sites-so locking up the available real estate is sound strategy for local competitors: "Even if Wal-Mart moves forward with an expansion of Neighborhood Market “full force,” Jim Hertel, managing partner at Willard Bishop, Barrington, Ill., told SN, “it will have to find and identify real estate and go through extensive permit processes, so it could be as long as 18 months before it could even start to open stores, which means it could be three to five years before those new-format stores become a real retail threat.”

One factor in the locals favor is that the Walmonster will not expand willy-nilly without first demonstrating that the new formula (remember New Coke?) works: "Once it does decide to move forward, however, the rollout could be rapid, Currie added. “While it may take some time for Wal-Mart to feel it has refined these [new] formats to a point where it is ready for a full-scale rollout, there is potential for it to open more than 400 of these smaller-format stores per year.

On a political front, our suggestion is that opponents need to gear up soon-because once the retail giant gets a head of steam, it will quickly emulate those metastasizing brooms under the less than watchful eye of Sorcerer's Apprentice Mickey Mouse in Fantasia. Our suggestion is to examine those localities that, like San Fransisco, have consciously looked for ways to restrict chain stores:

"A paint company and a landlord in San Francisco's Mission District thought they had a good deal when they signed the lease for a paint store to move into a former video rental shop earlier this year. But the plan had a problem: The paint company, which owns the Glidden brand, is considered a chain store and therefore was not a popular choice. The Planning Commission stopped the move, even though the company wanted to occupy a vacant spot abandoned by bankrupt Hollywood Video, another chain. The fight illustrates how San Francisco - a city that values homegrown companies and neighborhood character - is increasingly hostile to chain stores and restaurants, even if the businesses want to move into empty stores."

There are good rationales for these kinds of restrictions-as Stacy Mitchell and others have underscored. A community's quality of life is threatened when it is overwhelmed by chain stores-not to mention the fact that these stores have less economic value to a community than do locally owned, independent retail outlet.

But opponents better get their act together quickly: "Speaking at the Wal-Mart investor conference two weeks ago, Bill Simon, president and chief executive officer of Walmart U.S., said, “There are hundreds and hundreds if not thousands of opportunities in the U.S. for small formats. Some would be in fill-in markets we have already developed, but many, many, many of them exist in urban markets and small towns where we have no market share.”

Some analysts, however, remain skeptical: "Art Turock, principal with Art Turock & Associates, Kirkland, Wash., was also skeptical. “Wal-Mart talked four years ago about growing Neighborhood Market and nothing happened — and it's opened small stores like Marketside in Phoenix that it doesn't plan to continue. “I was very aware of the threat supercenters posed when the company first started opening them, but I do not have the same fear, worry or anxiety about Wal-Mart doing something small. It certainly has done well with supercenters, which is a more efficient format, but the company's track record indicates it doesn't do that well with smaller stores.”

Still, forewarned is forearmed, and no one should be resting easy in this situation. But this is why the fight over the Gateway Wal-Mart Supercenter is so important. If the Walmonster is successful in its first NYC store, we believe it will smell blood-and the blood it smells could be from all of those local supermarket operators who could soon be hemorrhaging form the predatory pricing Walmonster.

As SN tells us: "Binder said stores under 30,000 square feet are “prevalent and successful” throughout Wal-Mart's international markets, “and the development of a prototype at Walmart U.S. will be drawing off that experience. “The company plans to take this format into high-density urban regions where real estate availability and cost are key issues, and also out to rural markets where populations do not justify a larger format."

All of us who have fought Wal-Mart should be very concerned, but if we think clearly, and marshall all of our considerable political resources, a successful strategy to combat the Walmonster can be devised and implemented. But time is of the essence.