May 2, 2007
The Battle of the Neighborhood Markets
Tesco is coming and Wal-Mart, according to a New York Post report, is thinking small as it gets ready to do battle with its rival from the U.K.
The British grocery market leader has announced plans to open 100 Fresh & Easy Neighborhood Markets in Arizona, California and Nevada by the end of next year and Wal-Mart has seen enough of what Tesco can do in other markets to understand it needs to take preemptive action.
That action is likely to be an increased emphasis on Wal-Mart’s Neighborhood Market concept. It could also mean the development of a new, even smaller format store.
“As Wal-Mart’s existing formats rapidly run out of room for growth in the domestic market, we believe the company is actively exploring some newer, more innovative formats of a smaller footprint that would target the convenience-type user,” Craig Johnson, president of Customer Growth Partners, told the Post.
Speculation that Wal-Mart will seek to counter Tesco with smaller footprint stores was fueled by the promotion last month of David Wild to senior vice president, new business development. Mr. Wild is a Tesco alumni and while at that company was involved in the development of its convenience store business.
Wal-Mart’s Neighborhood Market format tends to run larger (42,000 to 55,000 square-feet) than those stores Tesco is reportedly looking to open. The largest store announced so far for Tesco is a 32,500 square-foot former Albertsons in the Glassell Park section of Los Angeles.
Should Wal-Mart go to a smaller footprint it will not be on entirely new turf. As the Post article pointed out, Wal-Mart Mexico operates stores under 20,000 square-feet. The former head of that business, Eduardo Castro-Wright, now runs Wal-Mart’s U.S. operation.
Discussion Questions: Is Tesco going to be targeting Wal-Mart consumers as it enters the U.S. market? Does Wal-Mart need a new format to compete with Tesco? What will Tesco’s entry mean for Target?
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Tesco will be targeting Wal-Mart’s customers, Target’s customers, Safeway’s customers, 7-Eleven’s customers, etc. Tesco is currently, and will continue to take their time to understand their target customers in order to offer new and better products and services in the U.S. If Wal-Mart wants to slow Tesco’s growth in the U.S. market they will have to compete head to head with them, including adding new formats, otherwise Tesco will undoubtedly continue to grow and add additional formats that will infringe on Wal-Mart’s business.
Wal-Mart’s small store Neighborhood Market is still about three times larger than those proposed Tesco stores. Wal-Mart Neighborhood Market is also a drug store. Considering the limited size Tesco has proposed, I doubt Wal-Mart or Target will be impacted very much. No competitor should be taken too lightly. I think with all the hype, Tesco should get a good start out of the gate. Does Wal-Mart need a new format to compete with Tesco? I don’t think so. They haven’t developed a format to compete with Whole Foods, Wild Oates, Trader Joe’s or 7-Eleven so why start with Tesco? Wal-Mart would need a better class of labor force in order to compete on the proposed level Tesco is talking about and Wal-Mart will not go that route. So far Tesco has failed to get just one store open. Wal-Mart is opening a few hundred new Supercenters each year 15 times the size of the proposed Tesco’s with ease. Maybe we should wait and see if Tesco can get a store open first.
Fresh & Easy and Neighborhood Market are more likely to take market share from mediocre operators than become a threat to each other. Tesco and Wal-Mart are both well capitalized, professionally run organizations with unlimited resources. The undercapitalized family-run independents don’t have the management depth, access to low-cost capital, or comparable sourcing connections and skills.
Furthermore, independents usually aren’t “credit tenants.” Credit tenants get to pick from the best locations. Landlords prefer leasing to firms with AAA credit ratings, not companies that banks never heard of. And “location, location, location” is the name of the game.
Although I am not familiar with all of Tesco’s real estate locations in the U.S., I’m guessing they will be more suburban-urban in their targeted markets.
I do not think that Wal-Mart is as well developed in the Western U.S. as they are in other areas–I believe Tesco’s West Coast target has two platforms…1)the busy West Coast lifestyle with emphasis on HMR and Green initiatives and 2) a market where Wal-Mart is not as well developed giving Tesco a better chance for success.
If Tesco’s plan is to accelerate the number of locations they will operate in the U.S., it appears that getting a foothold and concentration of outlets in the market before Wal-Mart can will be an advantage!
The Tesco approach seems to be to provide American consumers with a retail format that focuses on the food side of life and offers a shopping experience designed for local tastes.
In some sense, they are simply planning to fill a space left behind by American retailers in their rush to super-size everything and obsession with filling shoppers baskets.
I don’t feel that Tesco is targeting Wal-Mart so much as they are targeting an apparent need in the marketplace.
Is Tesco going to be targeting Wal-Mart consumers as it enters the U.S. market? Absolutely. Tesco’s target market is very much the same as Wal-Mart’s, which is, “almost everybody.” Wal-Mart and Tesco attract shoppers from a far wider variety of demographics and need than most people recognize. Does Wal-Mart need a new format to compete with Tesco? No, in fact, I view this in the opposite way; Tesco will have their own hands full competing with Wal-Mart’s strong position in the U.S., on Wal-Mart’s home turf. Tesco has not had to compete with any retailer abroad that is as strong as Wal-Mart is in the U.S. The Wal-Mart business model is as solid as any retail model we have ever had in the United States, including even the Sears model in its heyday back in the 1950s and 1960s. However, Wal-Mart will need to make certain tweaks and adjustments along the way, to retain all of its customers day to day, as consumers will be intrigued with Tesco on the basis of its newness, and the initial fanfare, novelty, and all the publicity. What will Tesco’s entry mean for Target? This remains to be seen. If Tesco hits the west coast with Target-like trends and flair, Target could be in a battle where they currently have a stronghold. My inclination however is that Tesco will be bigger, wider, and more general, than what the Target “guest” prefers.
Although it’s hard to find anyone who has not shopped in a Wal-Mart, it does not seem likely that Tesco is basing its strategy on those that shop there. Tesco is counting on an urban shopper that values time over money, and Wal-Mart shoppers demonstrate the opposite behavior. In my opinion, Tesco is going after those that shop the grocery perimeter, where the margins are. This might justify a response to accelerate expansion of the Neighborhood Market concept, but they would have to get better at it first, and I’m not sure Wal-Mart (or any mass retailer for that matter) stands to lose much business from this anyway.
Tesco is attempting the bring an updated version of our once quite popular urban markethouses. Will it succeed? Yes, if consumers value convenience. No, if the pocketbook prevails as gasoline prices rise to record levels.
Tesco is blanketing a specific region. It doesn’t have the benefit of multi-regional diversity in store locations which A&P benefited from for so many years and what Safeway, Kroger and SuperValu integrate into their market strategies today. So if high gasoline prices turn off the car culture consumer and forces them to shop locally and less frequently, then these consumers will have to decide between convenience and perceived value.
Tesco will be treading on egg shells and balancing a high wire act all at the same time if this roll out does not succeed. I would advise Starbucks and Jamba Juice’s realty divisions to look at these Tesco sites if any of them don’t succeed.
The smaller footprint Wal-Mart is just what is needed for urban neighborhoods where real estate is extremely high and there is great density of customers. It should be the primary strategy for Wal-Mart entering the major urban centers of North America, such as New York City, Philadelphia, Boston, Washington, Toronto, Montreal, and Chicago.
In the Northeast urban centers, Grocery customers take mass transit, drive hybrids, do a lot of entertaining, and like to buy prepared meals. That’s perfect customer behavior for a smaller format store.
Other American and Canadian cites are spread out. Real estate is cheaper. It is easier to drive to super stores. There is no advantage to a smaller format. Tesco’s small format store in the sprawl of the southwest shows that they don’t understand Americans who are happy to fill up their SUVs, huge refrigerators and oversized pantries.
It seems to me that the more relevant question is whether Tesco is targeting the same shopping occasions as Wal-Mart stores and from a distance, the answer appears to be no.
Tesco is targeting a new niche in grocery retailing, i.e., convenience shopping with an emphasis on quality fresh and prepared products, while the Neighborhood Markets target traditional shopping occasions.
If Tesco is correct, they will–at least for the short term–be in that wonderful blue ocean, while Wal-Mart Neighborhood Stores and most of the rest of food retailing remain in the bloody red ocean.
From what I’ve read of Tesco’s plans they are not planning to be a traditional supermarket. They are, as Bill Bishop said, targeting a different shopping experience: pick up fresh food for consumption within a short time. The market is not being targeted by demographics but by shopping occasion or experience. CA is a good choice of place for Tesco to begin because Wal-Mart has no supercenters in CA so doesn’t have a “fresh food” presence here. The same demographic may shop at Wal-Mart and at Tesco’s new stores so the question is not about WHICH shoppers will go to each store, but where they will shop for what products for what occasions.
I wrote the following on March 5th.
The Neighborhood market concept was developed, not so much as a small store concept unto itself but rather to tap into the “fill in” shopping needs of the Wal-Mart customer. Additional benefits were that the NM would take pressure off of the already over crowded Supercenters on the weekends and allow the company to tap dollars which were being spent by those who for convenience sake were shopping at other retailers for in-between shopping trip needs.
It was a good concept at the time it was developed and launched but in effect, was a sort of “mini-me” for Wal-Mart. Initially, the stores had a much larger selection of GM, largish seasonal offerings and a smallish fresh section. Also the store size at 30-40,000 square feet was still pretty darn big.
Over time the NMs have been fine tuned to reduce GM, increase fresh and reduce seasonal offerings (other than candy). They still remain in my view a scaled down version of a supercenter however. The NM’s are not really convenient and are not tapping the existing markets for smaller and more conveniently located true “neighborhood” markets.
Convenience markets will become a significant retailing force in the country in the future as small becomes big. Tesco recognizes this as their entry niche and other conventional convenience store operators in the US are trying to change their models to adapt and take advantage of this growing trend. Aldi is a company with a history of success in Europe whose offer will become increasingly accepted here in the U.S. They operate small stores, placed within residential reach with limited skus and deep discount pricing.
Big Boxers like Wal-Mart, if they are to maintain volume, will need to address this growing trend for smaller footprint stores that offer compelling assortments and convenience.
My bet is that Wal-Mart will roll out a “convenience” concept store prototype within the next 12 months.
Herb is right on. Especially in the Northeast and West Coast where broadband connections are becoming ubiquitous and the population is concentrated. The retailer who will flourish is the one who can combine the internet experience with the local presence. By supplying the cold-chain facilities locally to hold the customer’s internet selection and supplementing it with items of immediate gratification such as prepared foods and produce, this type of retail outlet will be able to really win the customer traffic.
For internet businesses, they all call it “The Long Tail.” The Netflix business model is a perfect example. There are literally thousands of movies that only a few customers order. But because the business model supports a small transaction cost, even these movies generate a profit for Netflix. In fact they have learned that the Long Tail generates as much profit as the fast movers. The supermarket retailer who learns how to replace the Long Tail of dusty supermarket shelf space with the low cost presence on a website will win the game.
There is a hole in American food retailing big enough to drive a truck through. The simple, absolute facts are that there are 30,000+ individual items in the typical supermarket, and the typical household buys about 300 SKUs per year! Combine that fact with the fact that 1-5 item purchases constitute about 50% of ALL supermarket purchases, and it is obvious that no one builds a supermarket specifically to address the needs of shoppers. Don’t kid yourself that those other 29,700 items are there to satisfy the OTHER shoppers. Bull pucky! (See also “The Paradox of Choice” by Schwartz.)
I think its high time for people to quit pretending that supermarkets are all about filling the needs of the shoppers. The whole growth of the Wal-Mart phenomena is more predicated on a frontal assault on American trade promotion practices (the foundation) than on low prices (the cutting edge.) And now Tesco is upping the ante by going for what the shopper wants–just what they need, right handy to where they are, and convenient to get with a minimum of “store experience.” I predict a massive success for Tesco, but Wal-Mart will respond quickly enough to not get bowled over. Some others are probably going to get their lunches eaten.
Home field advantage. It’s a powerful concept in favor of Wal-Mart, Target, Trader Joe’s and other U.S. retailers. A difficult factor for Tesco to overcome. Plus, the winning strategy for U.S. retailers has been to carve out their “niche” in the market. What will Tesco’s niche be? Better be something U.S. consumers can embrace right away. Otherwise, Tesco will suffer the same fate as soccer (or football if you will).
My first comment is that I find it odd to launch a “neighborhood” market concept in Arizona, California and Nevada, three states more known for sprawl than for actual, walkable neighborhoods. Nonetheless, I also agree with Mr. Sorenson that smaller is better. In Chicago, everyone I know RAVES about Trader Joe’s. Do you know how many there are in the city? Just three. One in River North, one in Lincoln Park and one in Lakeview. Odd thing is, no one I know lives in any of those neighborhoods. People travel out of their way to go there. I suspect one of the reasons is the ease of shopping in a store that doesn’t carry two dozen different kinds of oatmeal. (Go ahead, try and find the regular oatmeal at Jewel or Dominick’s). So if its emphasis is on “easy,” I think Tesco will have a lot of success.
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Tesco will be targeting Wal-Mart’s customers, Target’s customers, Safeway’s customers, 7-Eleven’s customers, etc. Tesco is currently, and will continue to take their time to understand their target customers in order to offer new and better products and services in the U.S. If Wal-Mart wants to slow Tesco’s growth in the U.S. market they will have to compete head to head with them, including adding new formats, otherwise Tesco will undoubtedly continue to grow and add additional formats that will infringe on Wal-Mart’s business.
Wal-Mart’s small store Neighborhood Market is still about three times larger than those proposed Tesco stores. Wal-Mart Neighborhood Market is also a drug store. Considering the limited size Tesco has proposed, I doubt Wal-Mart or Target will be impacted very much. No competitor should be taken too lightly. I think with all the hype, Tesco should get a good start out of the gate. Does Wal-Mart need a new format to compete with Tesco? I don’t think so. They haven’t developed a format to compete with Whole Foods, Wild Oates, Trader Joe’s or 7-Eleven so why start with Tesco? Wal-Mart would need a better class of labor force in order to compete on the proposed level Tesco is talking about and Wal-Mart will not go that route. So far Tesco has failed to get just one store open. Wal-Mart is opening a few hundred new Supercenters each year 15 times the size of the proposed Tesco’s with ease. Maybe we should wait and see if Tesco can get a store open first.
Fresh & Easy and Neighborhood Market are more likely to take market share from mediocre operators than become a threat to each other. Tesco and Wal-Mart are both well capitalized, professionally run organizations with unlimited resources. The undercapitalized family-run independents don’t have the management depth, access to low-cost capital, or comparable sourcing connections and skills.
Furthermore, independents usually aren’t “credit tenants.” Credit tenants get to pick from the best locations. Landlords prefer leasing to firms with AAA credit ratings, not companies that banks never heard of. And “location, location, location” is the name of the game.
Although I am not familiar with all of Tesco’s real estate locations in the U.S., I’m guessing they will be more suburban-urban in their targeted markets.
I do not think that Wal-Mart is as well developed in the Western U.S. as they are in other areas–I believe Tesco’s West Coast target has two platforms…1)the busy West Coast lifestyle with emphasis on HMR and Green initiatives and 2) a market where Wal-Mart is not as well developed giving Tesco a better chance for success.
If Tesco’s plan is to accelerate the number of locations they will operate in the U.S., it appears that getting a foothold and concentration of outlets in the market before Wal-Mart can will be an advantage!
The Tesco approach seems to be to provide American consumers with a retail format that focuses on the food side of life and offers a shopping experience designed for local tastes.
In some sense, they are simply planning to fill a space left behind by American retailers in their rush to super-size everything and obsession with filling shoppers baskets.
I don’t feel that Tesco is targeting Wal-Mart so much as they are targeting an apparent need in the marketplace.
Is Tesco going to be targeting Wal-Mart consumers as it enters the U.S. market? Absolutely. Tesco’s target market is very much the same as Wal-Mart’s, which is, “almost everybody.” Wal-Mart and Tesco attract shoppers from a far wider variety of demographics and need than most people recognize. Does Wal-Mart need a new format to compete with Tesco? No, in fact, I view this in the opposite way; Tesco will have their own hands full competing with Wal-Mart’s strong position in the U.S., on Wal-Mart’s home turf. Tesco has not had to compete with any retailer abroad that is as strong as Wal-Mart is in the U.S. The Wal-Mart business model is as solid as any retail model we have ever had in the United States, including even the Sears model in its heyday back in the 1950s and 1960s. However, Wal-Mart will need to make certain tweaks and adjustments along the way, to retain all of its customers day to day, as consumers will be intrigued with Tesco on the basis of its newness, and the initial fanfare, novelty, and all the publicity. What will Tesco’s entry mean for Target? This remains to be seen. If Tesco hits the west coast with Target-like trends and flair, Target could be in a battle where they currently have a stronghold. My inclination however is that Tesco will be bigger, wider, and more general, than what the Target “guest” prefers.
Although it’s hard to find anyone who has not shopped in a Wal-Mart, it does not seem likely that Tesco is basing its strategy on those that shop there. Tesco is counting on an urban shopper that values time over money, and Wal-Mart shoppers demonstrate the opposite behavior. In my opinion, Tesco is going after those that shop the grocery perimeter, where the margins are. This might justify a response to accelerate expansion of the Neighborhood Market concept, but they would have to get better at it first, and I’m not sure Wal-Mart (or any mass retailer for that matter) stands to lose much business from this anyway.
Tesco is attempting the bring an updated version of our once quite popular urban markethouses. Will it succeed? Yes, if consumers value convenience. No, if the pocketbook prevails as gasoline prices rise to record levels.
Tesco is blanketing a specific region. It doesn’t have the benefit of multi-regional diversity in store locations which A&P benefited from for so many years and what Safeway, Kroger and SuperValu integrate into their market strategies today. So if high gasoline prices turn off the car culture consumer and forces them to shop locally and less frequently, then these consumers will have to decide between convenience and perceived value.
Tesco will be treading on egg shells and balancing a high wire act all at the same time if this roll out does not succeed. I would advise Starbucks and Jamba Juice’s realty divisions to look at these Tesco sites if any of them don’t succeed.
The smaller footprint Wal-Mart is just what is needed for urban neighborhoods where real estate is extremely high and there is great density of customers. It should be the primary strategy for Wal-Mart entering the major urban centers of North America, such as New York City, Philadelphia, Boston, Washington, Toronto, Montreal, and Chicago.
In the Northeast urban centers, Grocery customers take mass transit, drive hybrids, do a lot of entertaining, and like to buy prepared meals. That’s perfect customer behavior for a smaller format store.
Other American and Canadian cites are spread out. Real estate is cheaper. It is easier to drive to super stores. There is no advantage to a smaller format. Tesco’s small format store in the sprawl of the southwest shows that they don’t understand Americans who are happy to fill up their SUVs, huge refrigerators and oversized pantries.
It seems to me that the more relevant question is whether Tesco is targeting the same shopping occasions as Wal-Mart stores and from a distance, the answer appears to be no.
Tesco is targeting a new niche in grocery retailing, i.e., convenience shopping with an emphasis on quality fresh and prepared products, while the Neighborhood Markets target traditional shopping occasions.
If Tesco is correct, they will–at least for the short term–be in that wonderful blue ocean, while Wal-Mart Neighborhood Stores and most of the rest of food retailing remain in the bloody red ocean.
From what I’ve read of Tesco’s plans they are not planning to be a traditional supermarket. They are, as Bill Bishop said, targeting a different shopping experience: pick up fresh food for consumption within a short time. The market is not being targeted by demographics but by shopping occasion or experience. CA is a good choice of place for Tesco to begin because Wal-Mart has no supercenters in CA so doesn’t have a “fresh food” presence here. The same demographic may shop at Wal-Mart and at Tesco’s new stores so the question is not about WHICH shoppers will go to each store, but where they will shop for what products for what occasions.
I wrote the following on March 5th.
The Neighborhood market concept was developed, not so much as a small store concept unto itself but rather to tap into the “fill in” shopping needs of the Wal-Mart customer. Additional benefits were that the NM would take pressure off of the already over crowded Supercenters on the weekends and allow the company to tap dollars which were being spent by those who for convenience sake were shopping at other retailers for in-between shopping trip needs.
It was a good concept at the time it was developed and launched but in effect, was a sort of “mini-me” for Wal-Mart. Initially, the stores had a much larger selection of GM, largish seasonal offerings and a smallish fresh section. Also the store size at 30-40,000 square feet was still pretty darn big.
Over time the NMs have been fine tuned to reduce GM, increase fresh and reduce seasonal offerings (other than candy). They still remain in my view a scaled down version of a supercenter however. The NM’s are not really convenient and are not tapping the existing markets for smaller and more conveniently located true “neighborhood” markets.
Convenience markets will become a significant retailing force in the country in the future as small becomes big. Tesco recognizes this as their entry niche and other conventional convenience store operators in the US are trying to change their models to adapt and take advantage of this growing trend. Aldi is a company with a history of success in Europe whose offer will become increasingly accepted here in the U.S. They operate small stores, placed within residential reach with limited skus and deep discount pricing.
Big Boxers like Wal-Mart, if they are to maintain volume, will need to address this growing trend for smaller footprint stores that offer compelling assortments and convenience.
My bet is that Wal-Mart will roll out a “convenience” concept store prototype within the next 12 months.
Herb is right on. Especially in the Northeast and West Coast where broadband connections are becoming ubiquitous and the population is concentrated. The retailer who will flourish is the one who can combine the internet experience with the local presence. By supplying the cold-chain facilities locally to hold the customer’s internet selection and supplementing it with items of immediate gratification such as prepared foods and produce, this type of retail outlet will be able to really win the customer traffic.
For internet businesses, they all call it “The Long Tail.” The Netflix business model is a perfect example. There are literally thousands of movies that only a few customers order. But because the business model supports a small transaction cost, even these movies generate a profit for Netflix. In fact they have learned that the Long Tail generates as much profit as the fast movers. The supermarket retailer who learns how to replace the Long Tail of dusty supermarket shelf space with the low cost presence on a website will win the game.
There is a hole in American food retailing big enough to drive a truck through. The simple, absolute facts are that there are 30,000+ individual items in the typical supermarket, and the typical household buys about 300 SKUs per year! Combine that fact with the fact that 1-5 item purchases constitute about 50% of ALL supermarket purchases, and it is obvious that no one builds a supermarket specifically to address the needs of shoppers. Don’t kid yourself that those other 29,700 items are there to satisfy the OTHER shoppers. Bull pucky! (See also “The Paradox of Choice” by Schwartz.)
I think its high time for people to quit pretending that supermarkets are all about filling the needs of the shoppers. The whole growth of the Wal-Mart phenomena is more predicated on a frontal assault on American trade promotion practices (the foundation) than on low prices (the cutting edge.) And now Tesco is upping the ante by going for what the shopper wants–just what they need, right handy to where they are, and convenient to get with a minimum of “store experience.” I predict a massive success for Tesco, but Wal-Mart will respond quickly enough to not get bowled over. Some others are probably going to get their lunches eaten.
Home field advantage. It’s a powerful concept in favor of Wal-Mart, Target, Trader Joe’s and other U.S. retailers. A difficult factor for Tesco to overcome. Plus, the winning strategy for U.S. retailers has been to carve out their “niche” in the market. What will Tesco’s niche be? Better be something U.S. consumers can embrace right away. Otherwise, Tesco will suffer the same fate as soccer (or football if you will).
My first comment is that I find it odd to launch a “neighborhood” market concept in Arizona, California and Nevada, three states more known for sprawl than for actual, walkable neighborhoods. Nonetheless, I also agree with Mr. Sorenson that smaller is better. In Chicago, everyone I know RAVES about Trader Joe’s. Do you know how many there are in the city? Just three. One in River North, one in Lincoln Park and one in Lakeview. Odd thing is, no one I know lives in any of those neighborhoods. People travel out of their way to go there. I suspect one of the reasons is the ease of shopping in a store that doesn’t carry two dozen different kinds of oatmeal. (Go ahead, try and find the regular oatmeal at Jewel or Dominick’s). So if its emphasis is on “easy,” I think Tesco will have a lot of success.