WAL-MART GOES GOURMET WITH HARRY'S FARMER'S MARKET CHAIN STEPS INTO TEST

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ATLANTA-Rainbow color pasta ... sun-dried tomato and feta cheese pizza ... a plethora of low-fat cheeses ... 18 varieties of bagels ... scores of exotic fruits ... cheesecakes to die for ... in blue-collar oriented Wal-Mart?

Wal-Mart Stores and Harry's Farmers Market have announced a unique test program placing four Harry's in a Hurry hybrid convenience-supermarkets inside Wal-Marts in the Southeast by this summer.

The move is part of an increasing appetite for food at Wal-Mart, which recently added McDonald's Corp. outlets in some stores.

Harry's has three popular farmers market-type megastores of 90,000 to 100,000 square feet in suburban Atlanta as well as two free standing 2,500-square-foot Harry's in a Hurry outlets in the city. A fourth megastore will open this summer in south suburban Atlanta. Another megastore is planned for Nashville, and two or three more Harry's in a Hurry outlets are planned in the next 18 months.

In Atlanta, Harry's various outlets have been marketed largely by word-of-mouth since the chain was launched in 1988. Sporadic print ads and occasional outdoor advertising are produced in-house.

Harry's executives haven't yet announced the locations of the four Wal-Mart outlets, but they will be within a 350-mile radius of the company's home base of Atlanta. Industry analysts expect the outlets will be in Georgia and South Carolina.

Harry's President-CEO Harry Blazer see the Wal-Mart tie-up as a jump start for expansion. He said he is flattered that the leading U.S. retailer has the confidence in his concept to consider this venture.

After a year of operation, Wal-Mart and Harry's will review the performance of the Harry's in a Hurry tie-in with an eye toward further expansion in the Southeast.

"The idea is to see how transportable our concept is to other cities or possibly to other states," said David Patillo, VP-corporate planning and development. He said his company regards the Wal-Mart project as an "experimental program" and a "loose agreement because both of us want to see how this will work."

But Harry's executives see the Wal-Mart project as an affirmation of their concept's marketability. And it comes without a major capital outlay, since there won't be any construction costs.

Harry's will provide fixtures in the 1,400-square-foot outlets, but outside sign-age, storage space and check-outs will be provided by Wal-Mart in exchange for a percentage of receipts.

Mr. Patillo said the outlets will focus on prepared foods, salads, bakery goods, rotisserie, produce, and a limited selection of fresh meats and seafood.

"It's a chance to get our product out where we want it, get the bugs out and see what kind of customer traffic we draw," Mr. Patillo said.

Wal-Mart's top executives "realize how important food is as a driving force to increase the frequency of shopper visits," Mr. Patillo said. "We're very excited about this. Potentially it could be very, very good for us."

Besides the McDonald's outlets, some Wal-Marts offer snack bars, but not other fresh foods, only package items like snacks and drinks.

Some analysts question the demographic link between the upscale Harry's and Wal-Mart's traditionally more working-class customer base.

Lee Wilder, an analyst at Robinson Humphrey Co., Atlanta, calls the pairing "worthwhile." She says Harry's "phenomenal customer loyalty" will serve it well, but raised her own uncertainties about the demographics. "Harry's customers are not the kind who cut coupons out of the Sunday newspapers. People shop at Harry's because of the selection, the quality-and because the prices are good."

But she cautioned, "Don't expect to see a Harry's in a Hurry in every Wal-Mart in five years."

The Wal-Mart Harry's units have projected yearly sales figures of $1.5 million to $2 million apiece annually, small in comparison to Harry's posted 1993 sales of $116.7 million.

But Harry's executives think the Wal-Mart link is the road to a major expansion program and a reversal of recent losses. As part of expansion plans, an $11 million stock issue was announced in early January.

Debt restructuring has produced a $26.6 million term loan and a $9 million line of credit. Harry's is expected to post losses of about $1 million in the fourth quarter of 1994, but losses have been reduced steadily since the fourth quarter of 1993, when the supermarket chain lost $5 million.

Harry's stock rocketed 110% after the November unveiling of the Wal-Mart plans. The stock closed at 9 on March 3, up 28.6% from the pre-announcement price.

The Wal-Mart deal seems to have been an acknowledgement of the inevitable for Harry's. An industry analyst said Wal-Mart has opened a "Harry's knockoff" prototype in a Rogers, Ark., store.

"Wal-Mart said they were going to do it anyway, and Harry's saw an opportunity with very little risk," the source said.

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