Wal-Mart to Bring Supercenters to State

Wal-Mart Stores Inc. said Wednesday that it will open 40 supercenters across California over the next four to six years, bringing these giant discount-plus-grocery stores to the state for the first time.

The move is a direct challenge to grocery chains in California, as Wal-Mart Supercenters in other states have eroded the profits of small and large rivals.

Although the Bentonville, Ark.-based seller said it has yet to determine locations for the new stores, analysts said half are likely to be conversions of current Wal-Mart discount stores, with new construction making up the rest.

The move to take on the grocery business in California was inevitable for Wal-Mart, which most analysts say will eventually try to convert as many as possible of its discount stores to the bigger concept.

The mass merchant already has supercenters in 45 states, with the bigger stores making up about half of its 3,000 U.S. stores.

“This is the last frontier for Wal-Mart, and it just happens to be the largest state,” said Shelly Hale, a retail analyst with Banc of America in San Francisco. “It won’t be without its challenges, but 40 is a very low number. This is just the beginning.”

And with as much as 225,000-square-feet--the size of five football fields--and 500 employees per store, communities across the state will find themselves reexamining the issues of the so-called big box stores, balancing needed jobs and consumer demand against the potential that Wal-Mart will crowd out small shops and other competitors.

The supercenters typically move into a new market by offering a full array of food, from deli to bakery to produce and packaged goods, at prices about 15% to 20% lower than many area markets, Hale said.

In the near term, however, the 40 stores--which are likely to generate about $3 billion in annual revenue--will account for just 2% of California grocery sales.

Safeway Inc., which declined to comment on the expansion of Wal-Mart Supercenters, recently launched a counter-offensive against its discount competition, test marketing a greater inventory of general merchandise, such as household appliances, sheets and towels, at some of its Northern California stores.

Although the supercenters tend to leech sales from established players in the first months of operation, sales usually return to normal for most of the top supermarket operators after about a year, analysts say.

In addition, Wal-Mart tends to target low- to middle-income grocery shoppers, leaving the upper end and gourmet consumers to other stores.

“It’s like the black death,” said Mark Husson, an analyst with Merrill Lynch in New York. “Everbody gets sick, but not everybody dies.”

Supermarkets in urban areas such as Los Angeles are likely to be even less affected because of Wal-Mart’s inability to find appropriate sites for its huge stores, Husson says. About 70% of Wal-Mart’s supercenters are outside the top 100 major markets.

But Wal-mart officials say they are learning to adapt to smaller sites, opening stores such as its new location in Dallas, which has a parking structure underground, rather than the traditional Wal-Mart parking lot.

“The retail environment is very competitive, but we like that,” says Wal-Mart spokesman Bob Mc- Adam. “Our best stores have solid competition all around them.”