First came warehouse clubs, then factory outlets and now category killers are ready to attack UK market shares. Journalist Jerry de Muth surveys the US scene to find out what will be the next retailing format to cross the Atlantic.
The United States’ major retailers are looking to other countries as profits stall or shrink and market saturation approaches, in particular those known as category killers – 20,000-sq ft to 30,000-sq ft stores specialising in such product areas as sports, office products and books. But the size, location and product lines at any European versions of these stores are still uncertain.
Indeed, the weak economy and fully developed markets of western Europe mean that most US retailers are looking first to eastern Europe and to Mexico. K-Mart has acquired 13 stores in the Czech and Slovak republics, and Price Club, Wal-Mart, K-Mart and Smart & Final have entered into joint ventures with Mexican store chains. But none of these deals involves reproductions of the companies’ US outlets.
Wal-Mart, America’s largest retailer, has no plans to open stores in Europe. It is currently occupied with expanding into the north-east and north-west regions of the US, as well as its Mexican operations.
Still, some US retailers are moving into western Europe. Staples, a chain of about 150 office supply superstores which established an international division a year ago, has bought a 20% interest in Toronto-based Business Depot, which is looking to expand into the UK, France and Israel. It has also taken a 48% interest in Hamburg-based Maxi-Papier. Meanwhile, warehouse store chain Price Club, under a joint venture with Centros Comerciales of San Sebastian, Spain, intends to open warehouse club stores in Spain and Portugal by early 1994.
Costco Wholesale Co, another warehouse store chain, has announced plans to open three stores in the UK this year. Home Depot, which has 218 stores in 20 states, intends to open stores in Europe within six years, and, says a spokesperson, hopes to decide on which countries by the end of the year.
Last February the McArthur/Glen Group, which has developed 15 manufacturer outlet centres in the States, announced plans to develop 25 centres in Europe, five of them in the UK. Each will have some 3m people living within an hour’s drive, with some located on popular holiday routes, but most will be placed away from existing centres. But, claims Byrne Murphy, president of McArthur/Glen Europe, these will not be designed identically to American malls.
Meanwhile, Toys “R” Us has been expanding its international operations, which began with the opening of an outlet in Germany in 1987 and now also includes stores in France, Austria, Spain and the UK. It opened 29 new stores in Europe and Asia during 1991 and 41 in Europe and Asia last year. It will open 40 stores in Europe this year, with intentions of having an eventual total of 300. International sales now account for an estimated 18% of its sales.
K-Mart’s move into Czechoslovakia last summer came after scouring eastern Europe for over four years. Mary McGeachy, K-Mart’s national media director, said: “Retail is really very extended on the Continent and also the UK. We don’t see much real growth there. We’re looking at areas where there’s a real void. Certainly eastern Europe is ripe for sophisticated retailers to enter.
According to Ira Kalish, an economist in the Los Angeles office of the retail management consulting firm, Management Horizons, K-Mart’s 30,000-sq ft speciality store operations, such as Sports Authority -and not its 150,000-sq ft superstores – will lead the company’s efforts in global expansion.
“Europe is very strong in large, general merchandise formats such as hypermarkets,” he says. “Where Americans could really add value is in the speciality store industry, such as apparel stores and category killers like Sports Authority, Home Depot, Circuit City and Toys “R” Us, because the market is still very slim.
“Warehouse clubs also are still something new in Europe and could really offer the consumer a major price advantage.”
Whether American superstores could successfully compete with existing supermarkets in Europe is questioned by Trevor Kershner, a retailing consultant with Columbus, the Ohio-based Management Horizons. “Price Club is considering doing something overseas,” he says. “The question is, can they compete with the supermarket? How can they distinguish themselves? Why would Europeans shop at Price Club rather than at traditional supermarkets?”
Robert Buchanan, a retail analyst at Alex Brown & Sons in Baltimore, doubts that Sam’s Club and Wal-Mart will include food retailing in their European stores, which would make their European versions smaller.
Jeffrey Edelman, a retail analyst at the New York brokerage firm of C J Lawrence Inc, questions the attention which US retailers are suddenly giving to Europe “since US retail has proved not to be too transportable”.
Dan Martin, a senior associate at Economics Research Associates, Chicago, queries whether the superstores and warehouse stores, which depend on low-cost locations and their own direct distribution systems worked out with producers, can operate in the same way in Europe.
“It is possible that as Europe moves toward a unified market they will be able to take advantage of the flattening levels of distribution,” he says. “But there are more and better opportunities in eastern Europe because there’s not a calcified distribution system in place as there is in western Europe.”
According to Martin, superstores and warehouse stores locate in inexpensive space away from other retailers, while category killer stores – “speciality stores on steroids” – locate on the fringes of retailing areas, lowering their real estate costs. “The US has warehouse stores and category killers because of permissive zoning and sprawl. The stores may be inconveniently located, but are convenient for making a purchase because you don’t have to go to other stores,” he says. “It’s tougher to find cheap space in the UK because you can’t put anything just anywhere.” Martin predicts that it will be the category killers in such areas as electronics, sporting goods and household linens that will have the best chance of success in western Europe.
While it is hard to estimate what these stores’ European outlets will be like, the formats in the US itself are changing as a result of improving technology, changing consumer shopping patterns and the success of various innovations. For growth, they are focusing on acquisitions, a wider range of products and larger stores.
“That’s because their core products are mature markets,” says Kalish. “The only way they can grow is to be the ultimate destination store. The successful stores have expanded their merchandise mix to include a wide array of food, merchandise, apparel and services. They get people in the store to buy food and then tempt them to buy higher value products. We’re likely to see a large number of one-stop places where you can shop for everything under one roof 24 hours a day.” Sam’s Clubs, Wal-Mart’s chain of warehouse style stores, has expanded the fresh foods it carries, for example.
Since 1990, Wal-Mart has acquired the 27-store Wholesale Club, the Phillips Companies grocery chain, and the $2.6bn McLane Co, a wholesale supplier to 26,000 stores. K-Mart has acquired the 61-store Pace Membership Warehouse chain, the 17-store Price Savers Wholesale, the 124-store Pay ‘N Save drug store chain and the Office Warehouse chain, as well as individual stores. K-Mart now has six different speciality retail companies.
Meanwhile, the size of selling space is increasing so that existing product lines can expand and new lines be added without taking space away from other lines.
The number and type of category killer stores has increased, covering: sports (Sportsmart and K-Mart’s Sports Authority); books (K-Mart’s Borders); toys (Toys “R” Us); appliances and electronics (Circuit City); office supplies (Office Depot and K-Mart’s Office Max); drugs and other personal care items (K-Mart’s Payless); home improvement and repair materials (Home Depot and K-Mart’s Builders Square).
K-Mart has expanded its departments of music and video, children’s clothing and its book departments and now includes a professional photo studio for family and children’s portraits in all its new stores.
Toys “R” Us is also attempting to broaden its appeal. At last Christmas’ shopping season it tested two special sections, Books “R” Us with chairs and carpeting for a relaxed reading environment and Parties “R” Us for party-related goods, at some of its stores, sections which could become separate store chains.
K-Mart’s full-size stores measured about 84,000 sq ft, with 75% of that used as selling space. In late 1989, it broke the ground for an 86,000-sq ft store in a Detroit suburb, with about 82% of that space designed as selling space. It also began opening Super K-Mart centres, starting with a 150,000-sq ft combination store in Ohio in 1991. Nearly half this space is devoted to a full-assortment food operation.
