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New formats alter food landscape


LAS VEGAS AND SAN DIEGO —The introduction of Tesco’s Fresh & Easy Neighborhood Market concept in Southern California and Las Vegas, and the opening of a Wal-Mart super-center prototype with an upgraded food presentation near Dallas, left the supermarket industry with a case of the jitters as the competitive implications of the recent developments were assessed.

Success was conceded to Tesco even before its first units opened last month. The company is considered one of the world’s largest and most successful food retailers and as such, it was deemed more than capable of introducing a new 10,000-square-foot format and then rapidly expanding the network of small stores.

The supermarket industry already knows what Wal-Mart is capable of. It rose to dominance as a food retailer thanks to rapid expansion of supercenters backed by an efficient supply chain and the proposition of low prices, despite the fact that the merchandising of fresh categories lagged that of leading food retailers. Wal-Mart changed that situation at its newest store in Highland Village, Texas, and the big opportunity going forward is to incorporate its improved presentation of food in new and remodeled stores.

While much has been made of the head-to-head competition of these two powerhouse retailers on Wal-Mart’s home turf due to their rivalry in the United Kingdom where Tesco dominates Wal-Mart’s ASDA, the reality in the United States is that the competitive scenario will be quite different. Tesco’s new concept and Wal-Mart supercenters have nothing in common aside from the fact that they spell trouble for conventional food retailers and represent different takes on satisfying consumers in an industry valued at $546 billion by the U.S. Department of Agriculture.

In Tesco’s case, its assault on the United States began on the western flank with the opening of five stores in Los Angeles on Nov. 8, and five more in Las Vegas on Nov. 14. Since then, it moved into Phoenix with five openings on Dec. 5, and into the San Diego market with two stores, bringing its total count to 17. The retail giant plans to have 50 Fresh & Easy stores open by the end of February 2008, and 150 to 200 stores by the end of the upcoming year.

For its U.S. invasion, Tesco chose a small format that sidestepped rivals like Safeway, Kroger and Supervalu in the Southwest. Its 10,000-square-foot stores are designed for a quick and easy shopping experience with an emphasis on fresh food and prepared meals. The stores also emphasizes private label products, which account for 50% of their merchandise mix, and low prices. The retailer the stores most resembles is Trader Joe’s, and they’ve acknowledged that rivalry by under-cutting the chain on some of its famously low price points, most notably by selling bananas for 18 cents each, compared to Trader Joe’s price of 19 cents.

Tesco’s strategy is to target what it calls “under-served markets” in California, Arizona and Nevada. So far, many of its stores have been in working class markets with large Hispanic populations and, to date, its low prices have been a great draw. At the opening of its Los Angeles store on Nov. 8, hundreds of people were lined up waiting to get in and Tesco reported similar crowds at openings in other markets.

In the Las Vegas market, where Tesco has five stores open and another 12 under construction, it will have the greatest opportunity to compete head-to-head with Wal-Mart, since Las Vegas is home to 10 of Wal-Mart’s Neighborhood Markets. It is a concept Wal-Mart introduced nearly 10 years ago and has been slow to expand as it continued to tweak the format and pursued more profitable super-center growth.

At a current prototype size of 40,000 square feet, Wal-Mart’s Neighborhood Market is still much larger than Tesco’s format, but that situation could be changing. There has been ample speculation about Wal-Mart developing a new format to counter Tesco. The more likely scenario is that Wal-Mart will continue to modify the existing Neighborhood Market, rather than introduce an entirely new brand. The format’s size could be easily reduced by eliminating non-productive departments, shrinking the size of others and streamlining assortments. The combination of those factors would enable Wal-Mart to get Neighborhood Market under 30,000 square feet.

The more immediate opportunity, however, is to incorporate changes found inside the Highland Village supercenter to existing supercenters in order to rejuvenate fresh departments. For example, substantial changes involve new exterior signage, which brands the department as “market and pharmacy.”

However, it is inside the store where Wal-Mart has infused the fresh departments with a heavy dose of theater to inspire food shoppers. For example, the entire fresh department was transformed with the addition of new elements, such as a pastry shop, an open hearth bakery and an upgraded, circular deli department that is now located in the space previously occupied by refrigerated produce and the frozen department.

The deli department and meal solutions area is now the first department customers see when they enter the store. Directly across the aisle, in an effort to make the shopping experience more convenient, is the pharmacy and related health and beauty care categories.

Refrigerated produce displays line the left front corner of the store and wrap around to a new open hearth bakery, the pastry shop and a full service fresh meat department, where seafood is displayed on ice and choice cuts of beef and Wal-Mart’s new Steak House brand of beef are available. Immediately behind the deli area and adjacent to the assortment of gourmet cheeses is an extensive wine and beer shop.

Aside from the new departments that place a greater emphasis on service, the overall experience of navigating the large store has been addressed through a variety of means. In dry grocery, about half of the gondolas feature breaks in the middle so that customers can cut through to the next aisle. Paper products and household chemicals have also been removed from the food area and are now located along a rear wall where they can be more easily replenished without disrupting customers.

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