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The Oklahoma City grocery market gives a glimpse into a future Wal-Mart world that could extend throughout much of the United States. As it has done elsewhere, Wal-Mart started small, initially opening three supercenters on the periphery of the market: Yukon (1992), El Reno (1994), and Moore (1995).
Then, in late 1998, a full-fledged assault began that--through 2002--saw the opening of nine more supercenters, seven Neighborhood Markets (all in 2000), and two more Sam's Clubs. Ignoring the Sam's, we estimate that Wal-Mart has opened approximately 814,000 square feet of grocery floor space in the Oklahoma City market since late 1998.
The results of Wal-Mart's deep-pocketed incursion into Oklahoma City have been predictable. According to Scarborough research conducted for The Daily Oklahoman newspaper, Wal-Mart held a combined 35 percent share of the local grocery market through its three store formats by 2001-2002. Supercenters held 23 percent of the market, Neighborhood Markets 10 percent, and Sam's Clubs 2 percent, the research found. This share will continue to grow as Wal-Mart opens additional stores in the market; two more supercenters and another Neighborhood Market are planned.
Wal-Mart's market share gains have obviously come at a cost to other operators. From 1998 through April of this year, 28 competing supermarkets have closed, totaling 1.1 million square feet of grocery floor space. Of these, 10 were chain stores belonging to Albertsons and Homeland, and 18 were independents.
All is not doom and gloom, however, for the preexisting supermarket operators in Oklahoma City. An Image Audit telephone survey we conducted in October-November 2002 indicates that at least two independents—Buy For Less and Crest Foods—are successfully fighting back and expanding in the face of the Wal-Mart onslaught.
Our research also indicates that grocery shoppers in the market neither perceive the Wal-Mart stores to be the lowest-priced, nor do they see the Neighborhood Markets and supercenters to be identically priced. The Neighborhood Markets are seen to have significantly higher prices than their "sister" supercenters. These conclusions are drawn from the image graph presented as Figure 1 (see below), which suggests that both Buy For Less and Crest Foods are successfully communicating that they have lower prices than either of the Wal-Mart formats. And the findings do not encompass the small number of price-emphasis Save-A-Lot stores—for reasons of sample size—or the Aldi stores that are about to enter the Oklahoma City market.
The Wal-Mart supercenters are, however, seen to be very competitive on prices and have other advantages, like wide selections and the convenience of one-stop shopping.
At the same time, consumers see the supercenters as having significant weak points, some of which are being accentuated by their sales success. The slowing speed of checkout service is but one example (see Figure 2 on page 32).
As for the Neighborhood Markets, the Oklahoma City Image Audit repeats our previous findings in the Arkansas cities of Fort Smith and Little Rock. They score strongly with shoppers on all aspects of their convenience offering, including closeness to home, close-in parking enhanced by double entrances, and 24-hour operations.
However, the Oklahoma City research confirms that consumers continue to have trouble accepting the Neighborhood Market concept as a convincing supermarket format. And partly because of excessively close locations, Neighborhood Markets have also drained sales from the supercenters—which may be what Wal-Mart wants in the short term if the supercenters are "overtrading." However, in the long term, it is a potential vulnerability, as previous market-share-oriented retailers have found to their cost.
We are continuing our research in the Oklahoma City market, but to date, there are five clear conclusions that can be drawn:
•First, supermarket retailers and their trade associations must recognize that Wal-Mart does not want a niche in the grocery business, as one industry consultant has recently suggested. At $70 billion to $90 billion in annual sales of supermarket-type merchandise, it already has more than a niche. Rather, the battle for Oklahoma City suggests that Wal-Mart is aiming for a 35 percent share of the industry, or better.
•Second, competing supermarkets should not maintain or raise margins hoping that Wal-Mart will price accordingly. Price compression is a fact of life in the Wal-Mart world. Expenses must be reduced and competing supermarkets must stay close to Wal-Mart on price. This is what has been done successfully to the hypermarkets in France, including Carrefour and Auchan, by the growing number of supermarket chains in that country. As a result, the hypermarket chains are losing their price advantage, and their sales growth is slowing. This could happen to the Wal-Mart supercenters in the future.
With few exceptions, lower prices are the "new normal" in the supermarket industry, especially for dry groceries and consumables. Absent price reductions, supermarkets will be seen to offer the insult pricing that has traditionally afflicted the image of the convenience store industry.
•Third, even though most of the major supermarket chains are playing the same game, it cannot be assumed that the quality-and-service niche is big enough to ensure survival. It all depends on local market demographics and on a realistic appraisal of an operator's strengths and weaknesses as local shoppers see them.
•Fourth, one strategy for success against Wal-Mart—besides reduced pricing—is to invest in facilities that equal or exceed the strong selection offer of the supercenters, and on top of that, offer something that Wal-Mart is not good at.
•Finally, site research is not one of Wal-Mart's strong suits. Retailers who pick their shots with professional market strategies and site selection will continue to survive and prosper in the expanding Wal-Mart world.
David Rogers is president of DSR Marketing Systems, Inc. in Deerfield, Ill., which specializes in retail location and consumer research. This article was excerpted from After the Blitz...Living With Wal-Mart. Further information may be obtained by contacting Rogers at [email protected].