Neighborhood Market format revisited

With a multibillion dollar capital budget at its disposal, Walmart has the means to open smaller format stores at a rapid rate.

When planning commission officials in Northwest Arkansas gave Walmart the go ahead for a 40,000-sq.-ft. store in Bentonville, Ark., back in 1998, it was the retail industry’s biggest story that year.

A few months later, the name Neighborhood Market was revealed, and an early October opening was set for the Bentonville unit and a second location near Little Rock. The openings were a big deal because Walmart was already gobbling market share at an accelerating pace with a rapidly growing base of supercenters and coming off of a year in which same-store sales had increased by 9%. The prospect of another new format to accelerate share gains in the food and consumable space was as intriguing to investors at the time as it was disconcerting 
to competitors.

“Walmart’s assault on the market share of the nation’s supermarket and drug store operators has been expanded with the recent opening of the first two Neighborhood Market stores,” was the takeaway of Drug Store News’ sister publication Retailing Today following the opening. “The 40,000-sq.-ft. units, located in Bentonville and Sherwood, Ark., provide Walmart with a promising new growth vehicle while addressing the reality that its large supercenters, discount stores and Sam’s Clubs don’t always fit customers’ definition of convenience.”

The competitive concern then, as now, was that a company capable of opening 150 supercenters annually — as Walmart planned to do in 1999 — would be able to open three or four times that many smaller stores annually. Walmart did little to quell such thinking.

At the opening, then president and CEO David Glass did say, “We need to get it open and run it and see what happens,” but later offered that the company’s successful discount stores, supercenters and Sam’s Club concepts also had begun as experiments. Former U.S. stores COO Tom Coughlin took things a step further. “You are at the start of something that has the prospect of growing into another great company,” Coughlin told those gathered at the Bentonville store.

Financial analysts felt the same way, and speculation promptly ensued. Richard Church, an analyst at the former Salomon Smith Barney, forecast Walmart could eventually open between 1,000 and 2,000 units with annual sales ranging from $10 billion to $20 billion.

“We believe the testing phase will be short, and a rapid rollout will begin as early as the year 2000,” Merrill Lynch analyst Dan Barry said at the time, further speculating that “acquisitions of smaller supermarket chains that could be converted to [the Neighborhood Market] concept are likely in the future.”

Lehman Brothers analyst Jeff Feiner declared, “We believe, operationally speaking, it represents an excellent complement to 
the supercenter.”

Stephen Long at Prudential Securities offered a voice of reason, noting that Neighborhood Market is a test “that has received a lot more attention than some of the other things they have going on. As for the Neighborhood Market’s prospects going forward, it is much too early 
to speculate.”

Grand expectations for Neighborhood Market may not have materialized within the time frame that some envisioned 14 years ago, but as annual unit growth creeps into the triple-digit range next year, executives are again alluding to the possibility of dramatic growth.

“You know, at our peak, I think we were [opening] over 300 supercenters a year,” Walmart U.S. president and CEO Bill Simon said recently during the company’s investor conference when asked about the pace of expansion. “So if we could do 300 supercenters, I would think smaller stores would far 
exceed that.”

No one knows for sure how many Neighborhood Markets will open or how fast it will take place, but with pressure to remain a growth company ever present and a 
multibillion dollar capital budget at its disposal, Walmart has the motive and means to make a rapid rollout happen.

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