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Wal-Mart's expansion could hurt supermarkets

With a 55 million-square-foot expansion announced this week, Wal-Mart is set to squeeze supermarkets further. Stores in strip malls have plenty to worry about with the world's largest retailer's plans renovation and expansion of existing stores and the addition of about 125 to 185 stores nationwide, according to industry watchers.

Gwen MacKenzie, vice president of retail investment for Sperry Van Ness, says supermarkets mustdifferentiate themselves from Wal-Mart by providing more convenience, prepared foods, banking services and dry cleaning, for example. "Stores that can't provide that differentiation will suffer," she says. "In the grocery business, losing even 1 percent of sales to a Wal-Mart is a substantial loss."

During its annual analysts meeting this week, Wal-Mart also confirmed rumors that it is looking to enter Russia, according to Merrill Lynch analyst Daniel D. Barry.

How much should supermarket owners worry? Just ask Albertson's Inc., which saw a 51 percent reduction in profits for the third-quarter of 2003 following a bitter union strike in Southern California. The strike was caused by a reduction in employee's benefits and pay, Albertson's said, so it could compete with Wal-Mart.

Stores in strip malls where plenty of land remains, such as the Inland Empire of California, are more likely to suffer competition than in urban areas where there are few infill properties available, notes MacKenzie. The shopping titan's expansion includes 240 to 250 new Supercenters, which have the highest return of investment of any of Wal-Mart's store types, 40 to 50 new discount stores, 30 Neighborhood Markets and 30 to 40 Sam's Clubs. About 160 of the new Supercenters will be relocations or expansions of existing stores, the company says. About 20 of the new Sam's Clubs will be expansion or relocation of existing stores.

Wal-Mart also is broadening its reach in the global market, where it accounts for less than 3 percent of global retail sales. The international division plans to open 155 to 165 new units next year; about 20 percent of which involves relocating or expanding existing stores.

"It looks like they're trying to keep Wall Street happy with the expansion," says Britt Beemer, chairman of America's Research Co. "They probably will not build all of them, but definitely most of them."

Wal-Mart may find it difficult to get permission to build the new stores and relocate others in the current climate. "It may be the biggest retailer in the world with unlimited pockets, but its muscle doesn't always work," says MacKenzie, referring to the recent community rejection of plans for a Wal-Mart in Engelwood, Calif.

In addition to unfriendly zoning boards, the company also faces a barrage of criticisms by labor unions, local businesses--and charges of racial discrimination. It also has to contend with a sluggish consumer economy.

The company announced this week that September same-store sales rose 2.3 percent, in the low end of its 2 to 4 percent range. High fuel costs and hurricanes in the Southeast hurt many of its core customers, resulting in a disappointing back-to-school season.

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