DSN Retailing Today: Smaller format rolls dice with multiple openings in Vegas

Since opening its first Neighborhood Market in 1998, Wal-Mart has taken a deliberate approach to expanding its chain of small supermarket-style stores. As of mid-February, Wal-Mart had only 85 markets scattered across the country, a rate of growth over seven years that is glacial by Wal-Mart standards.

But that may be changing if its recent rollout in Las Vegas is any indication. The chain entered the fast-growing gambling mecca last month with an unusual approach, opening four stores in a single day on Jan. 26.

"We wanted to make a big splash and let the people know that we're here," said Dan Erwin, the chain's Las Vegas regional director. "So we thought the best way would be to open all four stores in one fell swoop."

Erwin said the new Las Vegas stores are about 39,000 square feet and feature drive-through pharmacies, half-hour photo service and a typical mix of groceries, convenience foods and general merchandise. Most of the stores anchor small shopping centers and have competition nearby from supermarket giant Albertson's, discount chain Food 4 Less and a few Wild Oats grocery stores.

On a visit to the stores a week before they opened, it was apparent that Wal-Mart chose high-growth residential areas for its Las Vegas debut. Three of the four stores are in the northwest section of town, which is in the midst of several massive residential developments of three- and four-bedroom homes. The fourth store is located on the opposite end of town, just south of the Strip in an area teeming with construction to accommodate the thousands of new residents that arrive in Las Vegas each month.

Erwin confirmed that Wal-Mart chose high-growth areas to open its first stores and said it's currently scouting for locations to open more. The four new stores were built from the ground up, and it seems organic growth will be the pattern in Las Vegas (if only because they're being built on what were empty stretches of desert just a few years ago).

In addition to the Las Vegas stores, Wal-Mart opened five more Neighborhood Markets in January, including two in a new market in Melbourne, Fla. Wal-Mart has 25 to 30 Neighborhood Market openings planned for fiscal 2005, an increase of more than 30% that would bring the count close to 100 by the end of the year.

Initially, Neighborhood Markets were designed to orbit around supercenters and compete head-to-head with supermarkets and drug stores. But when Wal-Mart discovered that it could open the high-volume, high-profit supercenters just a few miles apart, the need for Neighborhood Market fill-ins didn't materialize as quickly, and the original growth plans had to be retooled.

Retail analyst George Whalin said the big challenge for Wal-Mart, at least early on, was to relearn how to run a small-format store after years of perfecting the operation of giant discount stores and supercenters.

"You have to remember they only opened about 10 stores during the first three or four years because they were doing a lot of tinkering," said Whalin, president of Retail Management Consultants. "And this was something totally new to them because they weren't used to having to edit their merchandise mix to fit in a store that size."

The second challenge was to open them in mature markets in such a way that they wouldn't cannibalize sales at their own stores--a balancing act that's difficult to master. "They had to come up with a plan where they could expand with the right combination of stores," said Whalin. "And they had to do that while they were rolling out two new formats."

Which goes a long way in explaining why Wal-Mart has only 85 Neighborhood Markets open after seven years. But Wal-Mart may have come up with a template for future growth with the setup it has in Dallas.

Wal-Mart built its first Neighborhood Market there in 2002 and now operates eight in the metropolitan area, with four in the city, two in Richardson and one each in Garland and Mesquite. The stores cover a 20-mile radius and don't appear to overlap with other stores in one of the country's toughest markets for grocery chains.

"Dallas seems to be their best market," said Whalin. "They have a good mix of stores covering a large area, and I think that will be a good model for them."