• by Sarah Mahoney  @mahoney_sarah, June 17, 2008

Wal-Mart is going upscale. In the latest development of the ongoing saga of the small-format supermarket, reports are surfacing that Wal-Mart plans to go high-end with its Marketside store, set to open in Phoenix later this year. The Financial Times reports that the new Wal-Mart banner will focus on premium offerings, a departure from the chain's usual everyday-low-pricing strategy. At 15,000 square feet, the new prototype will reportedly offer plenty of prepared food, served by "meal specialists," who will also double as cashiers. And Marketside is also said to be cooking up its own private-label line.

That's a slightly different spin than Tesco, which is trying to build its U.S. Fresh & Easy Markets chain on a "great food, unbelievable prices" positioning. "This isn't Wal-Mart's first foray into upscale territory," says Jon Hauptman, a partner at Willard Bishop, a retail consulting company in Barrington, Ill. "It already runs more upscale Super Centers, where it sells very high-end electronics." And while the company is clearly benefiting from its low-price position in the current soft economy, downturns don't last forever. "Wal-Mart is thinking more long-term. This isn't an indication of Wal-Mart going after the most affluent shoppers. It's an indication of them going after the middle and upper middle-class."

Meanwhile, grocery chains--pressured on the one hand by the ever-growing success of super centers, on the lower-cost, more selection end, and on the other by stores like Fresh & Easy, offering higher quality and more convenience--are rolling out their own versions of small-format stores. Safeway Stores Inc. is the latest, reportedly testing its own 15,000-square-foot format in Long Beach, Calif., called the Market by Vons.

Of course, it was easier for retailers to believe that small might be the next big thing when the economy was more or less humming along. But the recent downturn, with its fast-rising gas and grocery prices, has caused many consumers to radically rethink their shopping behavior. For example, IRI reports that while trips to super centers are up, convenience-store traffic is down. And no matter how tempting the Shepard's Pie, Ratatouille, or Homemade Clam Chowder is in the prepared foods case, at the moment, most U.S. shoppers are saying no to prepared meals, and stocking up on food bargains: Hormel recently reported that its quarterly results were buoyed by especially strong sales of Spam.

In fact, there's already evidence building of a different kind of format backlash: Minneapolis-based Nash Finch Co. just unveiled a new Family Fresh Market store in Hudson, Wisc., converting the former Econofoods location to "lower, everyday prices." And Pathmark, now owned by A&P, has begun opening Pathmark stores that have been converted to what the company calls "a price impact strategy," focusing on the ultra-low prices the chain was known for 30 years ago.

And while there's been plenty of speculation that Tesco's Fresh & Easy Markets have underperformed, the company tells the Financial Times that business is thriving and even hints that plans are already in the works for a Midwestern expansion, once it's achieved "critical mass in California, Nevada and Arizona." So far, the company has opened 61 stores, with the 62nd scheduled to open early next month.

"There's room on both ends of the spectrum," Hauptman says. "While consumers are putting off bigger-ticket purchases, food continues to be an affordable indulgence, especially for people who are eating out less, and see themselves trading down from restaurant meals. But these very low-priced stores are not only the right fit for today, but they also have long-term potential. Even in strong economic times, shoppers are looking for bargains."