Big Retail Chains Market Groceries to Inner Cities

Wal-Mart Stores (WMT) is gearing up to open small outlets next year in U.S. cities, where it hopes to sell a lot of groceries. Trouble is, at least a half-dozen others are also seeking accelerated growth in urban America. CVS Caremark (CVS), Walgreen (WAG), Supervalu (SVU), and Family Dollar Stores (FDO) all are offering more fresh food at their urban outlets or opening small stores in neighborhoods with limited access to nutritious grub.

While selling food is a mature business, 23.5 million Americans live in underserved urban areas—a market potentially worth $100 billion a year, says Jim Hertel, managing partner with retail consultant Willard Bishop. "It's easy to go into a liquor or convenience store and find potato chips," he says. "But in terms of something you would feel good serving your family, not so much."

The big grocery store chains largely abandoned the cities in the 1970s and followed their customers to the suburbs. There they found abundant, cheap land and built superstores and parking lots large enough for 1,000 cars. Now they have saturated that market and are turning their attention back to urban neighborhoods that have long been served by mom-and-pop stores—or not at all.

About five years ago, Family Dollar began selling a limited selection of mostly packaged and frozen food in New York, Chicago, and Detroit. As the concept caught on, the company began carrying staples such as bread, eggs, and milk. "We have a bulkhead in many major urban areas, and we'll continue to build on [that]," Chief Operating Officer R. James Kelly said in October.

Now other retailers that traditionally haven't carried groceries are moving in. Pharmacy chain CVS Caremark is adding fruit, salads, sandwiches, and other prepared meals at a growing number of its city locations. The second-largest U.S. drugstore chain, behind Walgreen, plans this year to remodel about 300 urban stores to carry food items in Boston, New York, Washington, Detroit, and Philadelphia. Eventually one-fifth of its 7,000 stores could be reconfigured, CVS says.

While CVS is aiming at a cross-section of consumers, Save-A-Lot, a no-frills grocer owned by Supervalu, targets households with incomes below $45,000 in neighborhoods where supermarkets are scarce. The U.S. government is offering $400 million a year in loans and tax incentives to lure stores offering better quality food to these underserved areas by 2017, part of First Lady Michelle Obama's campaign to reduce childhood obesity.

Save-A-Lot, which is seeking government aid, has about half of its 1,200 stores in urban areas, and the company plans to keep the ratio the same as it doubles its store count over the next five years. To undercut rivals on price by as much 40 percent, Save-A-Lot sells mostly house brands and carries fewer items than a full supermarket. "We target the value-seeking and income-challenged consumer," says CEO Bill Shaner. "The beauty is there is a relative lack of competition in that space."

Last year, Chicago Mayor Richard M. Daley asked Walgreen to help serve neighborhoods with no food stores in parts of South and West Chicago. The retailer has since opened 10 pilot stores, which carry about 750 more food items than traditional Walgreen stores, including frozen ground meat, chicken, fresh fruits, and vegetables. Sales have surged at these locations even though the company has done almost no marketing, says John Grant, who runs its "urban oasis" project. "That has come primarily from word of mouth and signage," he says.

The rush by dollar stores, pharmacies, and grocery chains into the urban food market means Wal-Mart will face entrenched players that know the terrain as it rolls out up to 40 smaller urban stores next year. "It's clear that in large cities, customers want to shop at Wal-Mart, and we are working hard to make access to our brand easier for them," says spokesman Steven Restivo.

The retailer also will have to contend with Target (TGT), which already operates stores selling food in U.S. cities and plans to start opening smaller locations of its own. And given Wal-Mart's big-box history, getting the merchandise mix right in small, urban stores may not come naturally, says Willard Bishop's Hertel. "Name alone won't get it done," he says. "It may get the consumer in the store one time, but the second trip will be the moment of truth."

The bottom line: Supermarket and drugstore chains are boosting their food offerings in underserved urban areas. Wal-Mart plans 30 smaller stores as well.

With Chris Burritt and Matthew Boyle

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