Don't look now, but according to some estimates Wal-Mart Stores Inc. is already the nation's top-selling food retailer.

And as Wal-Mart and other discounters get better at selling groceries, traditional grocery chains — some of which are struggling to survive in a sector notorious for its ongoing consolidation and razor-thin profit margins — will face even more competition.

So does this development pose a threat to grocery-anchored shopping centers? “Without a doubt,” says Daniel Binder, a senior analyst with Buckingham Research Group in New York. “And the threat will not just come from Wal-Mart, but from Costco, BJ's and Sam's Club. So many people are getting into the food business and they're all taking market share, except Kmart.”

To make matters worse (for grocers), Wal-Mart is arming itself with a new weapon — its 50,000-sq.-ft. Neighborhood Market format, a convenience concept designed to go head-to-head with local supermarkets.

Wal-Mart will end 2002 with 51 Neighborhood Market stores, compared with 31 at the end of last year, notes L. Wayne Hood, retail analyst with Prudential Securities in Atlanta. And the chain is working hard to make its new format even more competitive. “They've made great headway in improving store labor expense,” Hood observes. “We believe their profit margin is 8%, which is equivalent to what you get in a supercenter.”

As with most statistics, say analysts, whether Wal-Mart is the nation's top food retailer depends on how you count the numbers. “Wal-Mart supercenters include discount store items like candy, paper products, and other things you also have in supermarkets,” says Sally Wallick, retail analyst with Legg Mason in Baltimore. “I'm sure both Kroger and Wal-Mart could support the notion they're No. 1, but if Wal-Mart is not No. 1 now, it won't be long before they are.”

Regardless of who occupies the top spot, one thing is clear: discount retail chains are giving grocery giants like Kroger and Albertson's a run for their money. The question is, how much grocery business are the discount chains really doing?

Although Wal-Mart, Target and Kmart don't provide separate figures for their supercenter sales, Binder puts Wal-Mart's number for 2001 at about $76.3 billion. “That's actually higher than their traditional discount stores, which did $62.8 billion in 2001,” Binder notes.

By comparison, the Kroger Co. — which operates 2,418 stores under about two dozen different brand names, including Ralphs, Food 4 Less and City Market — reported total annual sales of $50.1 billion in fiscal 2001. The Albertson's chain, which operates 2,400 stores under various banners, reported total sales of $37.9 billion.

Wal-Mart opened its 1,000th supercenter in August 2001 and had opened 66 more by January 2002. Meanwhile, Target at the end of 2001 operated 62 supercenters. A spokesman says Target plans to open about 30 more this year. (The bankrupt Kmart chain had 105 supercenters at the end of 2001 but recently announced plans to close 12 as part of its restructuring effort.)

As the grocery battles take on the character of an all-out war, analysts say Wal-Mart clearly has the advantage. “The prospects are very good for Wal-Mart,” says Jeffrey Klinefelter, a retail analyst with U.S. Bancorp Piper Jaffray in Minneapolis. “It's been a natural transition for them and their customer base, which is built on the necessity-oriented customer trip. And they have the scale that allows them to compete effectively with any food retailer.”

And after taking it slow for a few years, Target is now opening supercenters at an accelerated pace. “Their potential is very good; they've done something similar to what they've done in the discount store business — they've tried to differentiate themselves from Wal-Mart,” Wallick says. “It's a bit more of an upscale market.”

Binder offers little comfort to nervous grocery chain executives. “Wal-Mart is not going away,” he concludes. (To see how major grocers are fighting back, turn to p. 47.)

Steve Lewis is an Atlanta-based writer

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