Talking shop: Major US chains eye small-format growth
By Hannah Abdulla | 5 February 2014
Wal-Mart set to focus more on smaller formats, like Express, in next 12 months
The convenience channel has become a source of growth for larger grocers in a number of markets. Even in the US, home of the big-box store, major players have tested the water, albeit with patchy success. The likes of Wal-Mart are upping their focus on smaller stores and, although they will not represent a short-term threat to America's 'Cokes and smokes' c-stores, indie operators need to be wary. Hannah Abdulla reports.
Convenience has become a key trend driving shopping habits in a number of markets. Time-poor consumers have turned to smaller outlets closer to their homes or place of work; shoppers also believe they can better manage their budgets by buying less, more often at smaller stores.
Major hypermarket and supermarket retailers in countries like the UK and France have expanded heavily into the convenience channel in the last decade or more.
However, in the US, the convenience channel is quite different. According to the National Association of Convenience Stores (NACS), the association that represents convenience and fuel retailers in the US, of the 149,000-plus c-stores in the country, 63% are owned and operated by someone with just one outlet. C-stores in the US are - predominantly - linked to fuel stations and sell, in the main, tobacco, snacks and beer.
Nevertheless, the mainstream larger retailers in the US have been monitoring the channel, which continues to grow. Data from the NACS issued last month showed there was a 1.4% increase in the number of convenience stores in the US in 2013 to 151,282 outlets.
"Today's time-starved consumers need quick and convenient access to food, fuel and beverages. No other retail channel comes close to filling these needs than America's convenience stores, which is why our industry continues to grow," NACS chairman Brad Call said.
Executives at the major grocers in the US would no doubt agree. However, their attempts to break into the channel have not gone smoothly so far.
Wal-Mart, perhaps the epitome of the big-box retailer, opened a smaller type of store, called Neighbourhood Market, in 1998. The format is still up and running - and Wal-Mart plans to open more this year - but, at 38,000 square feet, is not quite competing with a typical c-store.
In 2008, Wal-Mart tested a much smaller outlet of around 16,000 sq ft called Marketside. The move was seen to have been sparked by Tesco's launch of its US business Fresh & Easy. That said, during the Noughties, Safeway, in California, and Supervalu Inc, with its Urban Fresh outlet in Chicago, opened smaller formats, while Giant Eagle opened its first Giant Eagle Express store in Pittsburgh in 2007.
In 2009, Wal-Mart announced it would not build on the Marketside trial and the four outlets under the chain closed in 2011. Supervalu's Urban Fresh outlet in the Windy City closed in 2009 after just a year.
However, Wal-Mart dusted itself down and started again, testing a new, Walmart Express format in June 2011. And, last October, as Wal-Mart set out its investment programme for 2014, the company indicated it was looking to put more focus on its smaller banners, Neighbourhood Market and Express.
William Blair & Co analyst Mark Miller suggested Wal-Mart believes it can use smaller stores to "fill in the blanks" on the map in the US - with smaller outlets feeding into its existing distribution network and providing a boost for its e-commerce business by expanding the number of pick-up points.
"One of the more interesting developments is the company's decision to accelerate the growth of smaller-format stores. While this has been anticipated for some time, 2014 will be the first year that the number of Neighbourhood Markets and Express store formats will outpace the growth of Supercenters," Miller wrote in a note to investors in October. "Returns on smaller-format locations are similar to Supercenters, according to management, and by "filling in" its markets, the company hopes to leverage distribution capabilities and drive higher in-store pick up for e-commerce orders."
However, industry watchers believe there is still a way to go before larger US food retailers make serious inroads into the channel. While retailers like Wal-Mart and Kroger replicate US-style convenience stores, the "real threat is yet to materialise", says Neil Stern, senior partner for US retail consultants McMillanDoolittle.
Stern argues that, as yet, no traditional chains have, "really succeeded" with the convenience store. "They have not figured out the economics to take the idea to scale. The Market by Vons from Safeway, Walmart Express, etc are all still in test or not rolled out," he tells just-food.
"The notion of a Tesco Express or Sainsbury Local does not exist in the US. Our convenience stores are in the snack business, Cokes and smokes and gas and the more progressive ones are in the foodservice business - subs, pizza - not in grocery fill-in."
Bill Bishop, chief architect of Brick Meets Click, argues that, realistically, only Kroger "is making a concerted effort into convenience retailing".
Target, Wal-Mart, Publix, and HEB are all looking at smaller-than-usual formats "to open new markets so they can continue their growth", Bishop explains, but not the same size of store as indie operators. "Others are looking at smaller stores, just not [ones] under 5,000 square feet; i.e. where convenience retailers usually play."
Stern and Bishop agree that location is key when planning both smaller format and convenience stores which can compete effectively. The success of such stores rely upon the local population. "Urban areas where space and parking is at a premium would be the logical places to focus on," says Stern.
Bishop acknowledges Walmart is a "good example" of a retailer that has benefited by placing smaller stores in "a neighbourhood market."
So what lies ahead? Which of the major retailers could see their cautious moves into smaller stores pay off?
Industry watchers believe growth continues to lie ahead for the small, individual store owners and the larger chains opening smaller stores. Stern points to moves like that made by Giant Eagle last month to enter Indianapolis with a GetGo convenience and gas store. He also cites farmers-market type stores with a "small footprint" and "more simplicity".
"I see that kind of [farmers-market] store beginning to really grow because of the economics of it - the simplicity of opening these stores in existing real estate, in all kinds of empty boxes that are 20,000 to 25,000 square feet," says Stern.
However, major operators need to be wary. Bishop notes Target's efforts to move into smaller stores in urban markets "have not been impressive." And, some say that, while Walmart is focusing more of its energy on c-stores, it could impact its core business. "The risk is that there could be a higher level of cannibalisation at existing Supercenters, and we believe that it could weigh modestly on return on capital over time," says Miller.
Whatever the case, one thing is certain: single c-store retailers will need to review their businesses to ensure they can withstand the slow encroachment of larger players onto their turf.
According to Playbook for Success a report from the NACS and the Coca-Cola Retailing Research Councils, there are a number of things existing c-store operators need to focus on getting right. These include cleanliness and safety, frustration-free shopping and consistent value.
"My feeling is that the pressure on single-store convenience retailers is primarily coming from their own lack of capability to compete effectively in the 21st century rather than strong competition from larger retailers."
However, the likes of Wal-Mart and Kroger are continuing to feel their way into the territory of smaller stores and c-store operators would be wise to take notice.
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Talking shop: Major US chains eye small-format growth