Image Source: Wal-Mart.
There's a retail business with 700 stores nationwide that has 22 straight quarters of positive comparable sales growth and 11 straight quarters with comps up 5% or more. It's not Kroger or Costco, but a division of Wal-Mart (WMT 0.57%) that has been quietly crushing the competition -- the Neighborhood Market.
Wal-Mart launched its first Neighborhood Market in 1998, but it began aggressively expanding the concept a few years ago, more than doubling the number of stores between fiscal 2013 and fiscal 2015. The pace of expansion peaked in fiscal 2015 with 235 Neighborhood Markets opened, but the company plans to open about 90 stores this year, bringing the total to around 750 stores, about as many as Costco.
At an average of 42,000 square feet, Neighborhood Markets are about the size of a typical Whole Foods, and are dedicated grocery stores, unlike Wal-Mart's Supercenters, which carry a wide variety of general merchandise in addition to a full line of groceries.
Wal-Mart does not break out results from its Neighborhood Market chain, but the quick accleration in expanding the format and its same-store sales growth show how promising the concept has been. For the last five years, including this one, the chain has made up a majority of the company's U.S. store openings.
The chart below shows how the Neighborhood Market's comparable sales growth has outpaced Wal-Mart's overall growth.
There are a number of reasons why Neighborhood Market has found success.
1. Grocery is hard to disrupt
Grocery now makes up the majority of Wal-Mart's U.S. segment, and it's been its best performing one in recent years. The company has doubled down on the segment with the rapid expansion of Neighborhood Markets and by bringing its grocery pick-up service to 400 store in 60 markets, which allows customers to order online and then pick-up groceries from a kiosk in the parking lot.
On the most recent earnings call, management noted the impact the pick-up service was having on overall e-commerce growth as last quarter was the first time in more than two years that e-commerce growth accelerated.
Grocery is also one of the few retail categories that rivals like Amazon.com have struggled to penetrate. As department stores and other traditional retailers have fallen under pressure from the e-commerce giant's low prices and convenient service, delivering perishables to your doorstep remains difficult and expensive.
Sales per square foot at Walmart U.S. averaged $435 last year, but they appear to have been higher in Wal-Mart's grocery segment than the rest of the store. Using the $435 figure would mean Wal-Mart's Neighborhod Markets generated about $11 billion in revenue last year, though the actual number is probably higher.
2. Urban penetration
Wal-Mart began its life catering to rural customers and has long struggled to penetrate markets. The company is still without a store in New York and only recently opened its first in Washington, DC. The Neighborhood Market concept, however, has given it the ability to open up in dense cities where real estate may not be suitable for a Supercenter. Wal-Mart opened its first Neighborhood Market in Chicago in 2011, and now has five of them in that city. In Atlanta and the surrounding area, it now has 12 such stores.
Wal-Mart's Neighborhood Markets can also take advantage of food deserts in such environments, neighborhoods where residents have little access to fresh food. With its economies of scale and price advantage, Wal-Mart has the ability to create a low-priced supermarket chain that is hard for competitors to match.
While the pace of Neighborhood Market openings has slowed down over the last two years, I'd expect the concept to be a continuing source of growth for the retailer, especially as management has signaled a desire to expand in groceries. With comparable sales consistently in the mid-to-high single digits, that should be one reason for investors to believe in the company's future.
