Wal-Mart Can't Just Duct Tape This Massive Problem

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The world's largest retailer, Wal-Mart (NYSE: WMT  ) , saw its revenue rise in the latest quarter, but U.S. same-store sales figures fell for the eighth consecutive quarter. U.S. operations have been struggling since the recession, and now, rising crude oil prices and budget-conscious shoppers are chipping in to spoil the party.  

The Arkansas-based retailer has made some big moves recently, hoping to regain lost strength. From social media to online shopping, Wal-Mart is exploring different realms to help generate positive numbers from U.S. operations. Now it is looking to test out a small-store format in the U.S., a change from its usual football-field-sized stores. Is this the crazed act of a desperate management team, or a brilliant next-gen strategy?

Small steps
This week, Wal-Mart opened its first test store in Gentry, not too far from its headquarters in Arkansas. The store, called Wal-Mart Express, is designed to cater to those underinvested areas and populations that don't have easy access to grocery stores. The company will open two more test stores in Chicago, and eventually 15 across the country, to build out its initial test.

In theory, these smaller stores will have lower start-up costs and overhead requirements, recoup their investment faster, and give Wal-Mart access to a much larger market of consumers who are unwilling or unable to make their way to the company's regular outlets.

Wal-Mart hopes to replicate the success such small stores have had in Mexico, Argentina, and Brazil. Wal-Mart's international operations have shown irrefutable signs of growth, especially from its Mexican, Chilean, and Chinese operations. These test stores may just be what Wal-Mart has been looking for to help turn around its U.S. business.

What's in store?
The smaller store will be about one-tenth the size of its supercenters and is expected to house one-tenth the number of the products. The 12-aisled stores will stock groceries and general merchandise, along with a pharmacy. The stores will cost about $1.2 million each to build.

Depending on the success of the test stores, Wal-Mart plans to open 350 stores a year across the United States. Rival Target (NYSE: TGT  ) is also planning to open small stores targeted at urban markets next year. It seems small may be the new big for these retailers as they try to combat the pressures of high gas prices and slowing sales growth.

U.S. same-store sales
All of this is meant to correct a number of problems that have popped up recently in quarterly figures. Although the retailer is generating growth on the top and bottom line year over year, its U.S. same-store sales have slipped for the eighth straight quarter.

A shifting customer base is partially to blame here. Lately, even its loyal customers have moved down-market to shop at its low-price rival stores such as Family Dollar (NYSE: FDO  ) and Big Lots (NYSE: BIG  ) . Meanwhile, high-end shoppers have turned to upscale discount stores such as Costco (Nasdaq: COST  ) and Target in search of value deals.

Web and social media help
Wal-Mart has also sought the help of the Web to get back consumers. A few months ago it launched the Pick Up Today program, which would allow consumers to preorder items online and have them picked up at a more convenient time later.

The company also recently began testing an online grocery delivery system, emulating the steps of fellow grocers such Safeway (NYSE: SWY  ) and SUPERVALU (NYSE: SVU  ) . None of this has seemingly helped the retailer thus far.

The Foolish bottom line
Rising oil prices are bound to pose a serious threat in the short run as budget-conscious shoppers shy away from discretionary spending. Wal-Mart's efforts to boost sales, along with its new test store, may pay dividends in the long run and provide an express solution to its currently sagging same-store sales. But only time will tell what fortunes await the world's largest retailer.

Shubh Datta doesn't own any shares in the companies mentioned above. The Motley Fool owns shares of SUPERVALU, Wal-Mart, and Costco. Motley Fool newsletter services have recommended buying shares of Costco and Wal-Mart, buying calls in SUPERVALU, and creating a diagonal call position in Wal-Mart. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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  • Report this Comment On June 10, 2011, at 5:28 PM, djlresearch wrote:

    US same store sales declines are not the issue. There is really no way they will increase when they are building so many new stores near existing ones. The stores they have now are already performing 30% higher per sq ft than their peers. They are just taking the pressure off of their high volume units.

    You need to look deeper into same store sales declines. I know it sounds bad but its a result of overall growth of adding more stores. Most competitors would love to be doing just 70% of Walmart's sales per square foot.

    I predict around 2013 we will see another round of store closings which Walmart will benefit from. Then we will see an increase in same store sales once again.

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