Wal-Mart's Micro-Mini Opportunity

Watch out, 7-Eleven! There just might be a Wal-Mart (NYSE: WMT  ) convenience store opening up next door.

According to an Arkansas news site, the retail giant is testing out a convenience store format next to its corporate headquarters in Bentonville. The Northwest Arkansas Business Journal says the new C-store "will offer customers a quick and easy solution for gas, snacks and beverages, and other staples like milk, bread and eggs."

Walmart NeighborhoodMarket. Source: Wal-Mart.

As Wal-Mart experiments with smaller-format concepts that step away from the previous superstore expansion model it championed, it's drilling down to the most basic level. While this will be something it uses to learn from, it's easy to see the convenience-store format being the next natural progression in store development. It's already accelerating the rollout of small-footprint stores, such as its 42,000-square-foot Neighborhood Market stores and its 14,000-square-foot Walmart Express shops.

The vast majority of the retailer's stores are Supercenters that average 180,000 square feet, but Wal-Mart says it will be opening more smaller stores than Supercenters. Between 2013 and 2014, the discount chain anticipates opening 240 Supercenters, yet will open about 300 of these more compact stores over the same time period.

The average C-store is around 2,750 square feet, according to the Association for Convenience & Retailing, with newer stores going as large as nearly 3,600 square feet, with almost 2,800 square feet dedicated to sales space.

Even if Wal-Mart doesn't shrink to that size, it still represents a remarkable transformation in its direction. Because convenience stores are typically, well, conveniently located, offer extended hours, and stock the basics most people are looking for when they don't want to spend hours doing a week's or month's worth of grocery shopping, they continue to expand at a steady pace.

The industry trade group says the number of C-stores in existence expanded to a record 149,220 at the end of 2012, a 0.7% growth rate over the year before. More than 82% of the stores sell gas and nearly a like amount sell beer, and C-stores account for more than 30% of all the beer sold in the U.S.

As popular as they are, they are also very reliant upon gasoline sales and quarterly results can end up being lumpy. The Pantry (NASDAQ: PTRY  ) , one of the largest C-store chains, with more than 1,500 locations in 13 states, saw store merchandise sales rise 1.3% (up 3.3% excluding cigarettes) despite declines in store traffic, but retail fuel gallons sold comps dropped 4.4% in the quarter.  

Conversely, a convenience store chain like TravelCenters of America (NYSE: TA  ) , which operates fewer than 250 facilities, saw a near 4% rise in retail fuel sale volumes, yet revenues were essentially flat year over year, although its margins jumped 7.5% despite being negatively affected by aggressive sales tactics from rivals who tried to gain market share.

As Wal-Mart continues to deal with a sluggish economy, a bleak employment picture, and record numbers of people on food stamps, becoming an even more convenient destination for shoppers could help bolster flagging sales. It generated profits in the second quarter ahead of 2012's numbers, but still came in below analyst expectations and ended up lowering full-year guidance.

Of course, simply because it's opening up one test store doesn't mean it will become a full-fledged C-store operator. The company has a history of testing ideas to see what can be learned, such as its recently ended test of a subscription commerce service that began less than a year ago. It's taking the lessons learned from the experience and applying it to its traditional retail business.

I imagine the convenience store is being launched with the same mind-set, though I believe there's a lot more traction for this format then in a grocery-basket-a-month club.

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