THE VIRGINIAN-PILOT
Copyright (c) 1994, Landmark Communications, Inc.
DATE: Sunday, December 11, 1994 TAG: 9412090852
SECTION: BUSINESS PAGE: D1 EDITION: FINAL
SOURCE: BY STEPHANIE STOUGHTON, STAFF WRITER
LENGTH: Long : 224 lines
With the specter of defense downsizing looming in Hampton Roads, you would think retailers would look elsewhere to expand or get a foothold.
Job growth in the region remains sluggish, and income levels have grown only modestly.
Despite these bellwethers, the nation's largest discount retailers are flocking to Hampton Roads. They see economic growth in the region and a growing number of young, two-income families hungry for discount pricing.
By the end of next year, retailing warriors Target and Hills will join the already robust fray battling for a slice of the region's pocketbook.
Ready and waiting are recent arrival Wal-Mart and old mainstays Kmart and Rose's.
In Hampton Roads and across the country, Kmart hopes to stave off newcomers and its nemesis, Wal-Mart, by trotting out its new superstores - a daring mix of supermarket, drugstore and discount store. Wal-Mart, which has built seven stores in the region this decade, has momentum in its favor. And bankruptcy-bitten Rose's is trying to regroup by shuttering the weakest stores in its chain.
As one Hills Stores executive recently put it, Hampton Roads is about to encounter a war of the discounters.
Each is apparently confident enough in the region's long-term economic outlook - its ability to weather defense cuts - and its base of middle-income spenders to risk reputation and big bucks here.
With 1.5 million residents, Hampton Roads is the largest metropolitan statistical area between Washington and Atlanta. Some of the region's cities, Chesapeake for example, are growing faster than the rest of the state.
The median annual household income in South Hampton Roads was $32,285 last year, according to Hampton Roads Opinion Surveys, an annual poll of The Virginian-Pilot and The Ledger-Star subscribers.
``Companies like Wal-Mart, Target and others never make a decision based on emotion,'' said Bob Smithwick, Norfolk's economic development director. ``It's always based on fact.''
The stores study the demographics of communities. In fact, they know us by ZIP code, race, gender, income and kids. They know where we shop, when we shop and how much we spend.
Smithwick puts it bluntly: Retailers aren't stupid. They don't go where they can't make money. WINNERS, LOSERS
Not everyone is as confident as Smithwick. Some, including retailers already competing in Hampton Roads, say any new discount store will siphon off their business.
The retail industry uses the term ``cannibalism'' to describe what can happen to discounters when too many of them converge in one market.
Rose's knows this firsthand.
Analysts blame Rose's bankruptcy on Wal-Mart's blitz into the regional chain's small-town markets.
Some say that when Wal-Mart moved into Hampton Roads, it cannibalized Rose's. Wal-Mart puts it more politely. It likes to say that it creates a bigger market when it opens stores.
A study by the Norfolk Division of Planning says that isn't so.
The debut of the Wal-Mart on Military Highway, for example, didn't do anything to improve retail sales in Norfolk, according to City Indicators, the division's quarterly publication.
Instead, the dollars that customers would have spent at other discount stores got shuffled to Wal-Mart, the study found.
``Any time you have additional competition coming to town, there are only so many retail dollars to go around,'' said Bob Gorham, a spokesman for Henderson, N.C.-based Rose's. CHASING WAL-MART
Despite its dominant role in this market, even Wal-Mart should be concerned by the Hampton Roads invaders, said Kenneth M. Gassman Jr., a retail analyst with the Richmond brokerage Davenport & Co.
Wal-Mart blitzed South Hampton Roads in the early '90s. With just five stores, Wal-Mart has grabbed a good share of customers. Hampton Roads Opinion Surveys found that residents here were more likely to head for Wal-Mart than any other discount store. Its success came at the expense of Kmart, Rose's and others.
Hills Stores Co. of Canton, Mass., and the Super Kmart centers are both strong competitors willing to face Wal-Mart when they open stores here over the next several years.
Only Target, an upscale chain from Minneapolis, has locked horns with Wal-Mart in the past and prevailed. But those victories were only in a few markets.
``They will compete head-to-head with Wal-Mart,'' Gassman said. ``Target runs a very good operation. They have tight controls, and the stores really look good.''
Gassman is blunt about the upcoming battle. He sees it as a war between two giants.
``Target will outgun everyone except Wal-Mart, and it will give Wal-Mart a run for its money,'' he said.
Hills, Kmart and Rose's, no doubt, see a different outcome.
In the Chicago market, where Target has opened 18 stores in the last two years, the chain has quickly gobbled up market share, according to a study in the August issue of Chain Store Age Executive.
In price, selection, sales and store design, Target has either caught up with Wal-Mart or surpassed it, the magazine study said.
Meanwhile, Kmart has been losing ground to the two competitors, and ``data suggest that Kmart has become a convenience store for life's necessities,'' the survey said.
Not everyone, however, sees it as a war between Wal-Mart and Target.
Kmart, the biggest discounter in terms of the number of stores nationwide, says it's not out of the game - though its U.S. discount stores have lagged. And Hills and Rose's say they can do well also.
By stores alone, Kmart has the most at about 2,300, though they are generally older. Comparing the balance sheets of the so-called ``Big Three'' - Kmart, Wal-Mart and Target - is another story.
Operating profits at Kmart's U.S. discount stores dropped to $966 million in the fiscal year ended January 1994 from $1.45 billion in the previous fiscal year. The $966 million excludes a one-time charge of $865 million for restructuring. During the same period, sales rose from $25.3 billion to $26.9 billion.
But sales and profits at Wal-Mart and Target continue to rise.
Wal-Mart now is the giant with $67.3 billion in sales last year. Even though the numbers include Sam's Club - a membership grocery and discount store - the Wal-Mart stores would still eclipse Kmarts in sales. The Wal-Mart division generally represents 70 percent or more of total sales.
Target, meanwhile, had $11.7 billion in sales last year.
Hills, which emerged from bankruptcy last October, has had stagnant sales over the last two fiscal years - nearly $1.8 billion each year. But its operating profits have jumped 19 percent, and the company recently has cut its losses.
As for Rose's, the chain cut its losses by closing about half of its stores - from 213 to 113 - since it went bankrupt in September 1993. As a result, sales have dropped to $1.2 billion. KMART: LOSING GROUND
Troy, Mich.-based Kmart isn't willing to cede the discount-store industry. It has a new weapon: Super Kmart Center, a combination of a big discount store, a drugstore and a supermarket. The so-called ``hypermarts'' are anywhere from 162,000 to 193,000 square feet.
Kmart has 11 regular stores in the area and one Super Kmart Center in York County. The Super Kmart at 5007 Victory Blvd. opened last year. Kmart has 67 Super K's and wants 400 by 1998.
As for other sites, the discounter recently closed a deal on a Norfolk site near the intersection of Military Highway and Norview Avenue, a real estate source said. It also is looking at another site on Holland Road in Virginia Beach.
Kmart has said it is interested in putting Super Kmart in this region, but will not confirm that it is looking at specific sites in Norfolk and Virginia Beach.
``We see families coming in, in their 20s and 30s,'' said Mary McGeachy, a Kmart spokeswoman. ``Young families. The two-income family. A working, budget-conscious family.
``These families want one-stop shopping,'' McGeachy said. ``People don't have the time they used to.'' TARGET SQUEEZES IN
Target likes that model, too.
In fact, it wants a similar design for some or all of its stores in Hampton Roads, according to a real estate source. They would be about the same size as Super Kmarts.
Target, owned by Minneapolis-based Dayton Hudson Corp., is opening a store in a shopping center to be built in Chesapeake's Greenbrier section in 1995. Other sites being considered are near Patrick Henry Mall in Newport News, next to Janaf Shopping Center in Norfolk and off First Colonial Road in Virginia Beach.
Target also is looking to squeeze into the Richmond and Roanoke markets - areas where Wal-Mart and Kmart are strong. Last week it revealed the location of its first site in the Richmond area, a 14-acre site near Southpark Mall in Colonial Heights for a 117,000-square-foot store.
The company has acknowledged its interest in Virginia but has declined to disclose exactly where it wishes to locate or how many stores it will open.
One giveaway that the chain is coming: Its advertisements recently began hitting the airwaves. That's usually what businesses do to drum up interest before their debuts. HILLS: A NEW LOOK
Hampton Roads won't be divided solely between Target and Wal-Mart.
Hills plans to open five stores in the buildings HQ-Home Quarters Warehouse Inc. has traded in for bigger stores. And Rose's, though its stores have dwindled, is still a big presence with nine operations here.
``The competition obviously is very formidable,'' said Charles L. Clement, spokesman for Hills.
Clement is open about the competition, but he argues that Hampton Roads and Richmond can support most of the newcomers.
``Hampton Roads has major growth potential,'' he said. ``Based on the projection, I'm guessing the market can support (incoming discount chains). Then again, any new retailer coming can hurt. We're obviously going to take business from somebody.''
Hills recently moved into Richmond, opening two stores. In Hampton Roads, stores will open next year in Virginia Beach's Lynnhaven section, the Chesapeake Shopping Center, Newport Crossing Shopping Center in Newport News, Wards Corner in Norfolk and another location in Hampton.
Hills' head Michael Bozic has attracted praise for changes, including renovations, at many of the chain's more than 150 stores.
Hills also has concentrated on several areas where the big chains have left off. Among those are a better, year-round selection of toys and children's apparel. It's a niche that Rose's has been known for.
Hills is largely pinning its hopes for success in Hampton Roads and elsewhere on kids' apparel and toys.
``Our kids' image is one of our biggest attributes,'' Clement said. THE UNDERDOG: ROSE'S
Any smaller chain stands to lose business when the big guys move in, analysts agree. That could be Hills, Rose's or even chains like Woolworth and Family Dollar.
But this is particularly bad timing for Rose's, which wants to emerge from bankruptcy by the spring, said Gassman of Davenport & Co.
In its heyday, Rose's ruled Hampton Roads for nearly a half-century.
``Rose's was the main discount retailer in many towns throughout the Southeast,'' spokesman Bob Gorham said.
Then Kmart and Wal-Mart began to take their toll on Rose's, and the company declared bankruptcy in 1993.
To climb back, Rose's has tried to cultivate more customer loyalty in a world of fickle shoppers.
It doesn't work - all the time. On a recent day outside the Rose's in Virginia Beach's Haygood Shopping Center, all but one shopper interviewed said they were just going inside for a bargain or a sale.
Everyone but Beverley Johnson.
``I am more prone to support the smaller than the larger,'' said Johnson, who has been shopping at the Rose's store for 25 years. ``Rose's has been here a long, long time. I'm loyal because they've never given me a reason not to be.'' ILLUSTRATION: Graphic
JOHN EARLE/Staff
SOURCE: The stores
[For complete graphic, please see microfilm]
by CNB