Wal-Mart Stores, Inc. Has Dollar Stores in Its Crosshairs

Following a weak performance in its recently ended 2014 fiscal year, Wal-Mart Stores  (NYSE: WMT  ) is looking to regroup this year. The company's top goal going forward must be to reinvigorate sales growth in the U.S., which is by far its largest market. Last year, sales for the Walmart U.S. division grew just 1.8%.

To boost sales in the U.S., Wal-Mart will rely increasingly on growing its fleet of small-format Walmart Neighborhood Market and Walmart Express stores. By doing so, Wal-Mart will start to challenge the three big dollar store chains: Family Dollar (NYSE: FDO  ) , Dollar General (NYSE: DG  ) , and Dollar Tree (NASDAQ: DLTR  ) .

Wal-Mart is moving away from its reliance on giant Supercenters like this one.

In 2014, Wal-Mart's small-format growth initiatives will have little impact on either Wal-Mart or its dollar store competitors. However, if these initiatives deliver good results in the next year or two, Wal-Mart has the resources to ramp up spending and rapidly add new stores. That could cause big problems for all three dollar store chains.

Going small in the U.S.
Wal-Mart has found that customers do not want to navigate giant Walmart Supercenters every time they need a few grocery items in the middle of the week. As a result, the company's small-format stores have been more successful recently.

These come in two flavors. "Walmart Neighborhood Markets" average 38,000 square feet and are meant to cater toward "basic food trips." "Walmart Express" stores are just 15,000 square feet on average and carry convenience items and fresh foods. Many of these include pharmacy counters and/or gas stations.

Source: Wal-Mart 2013 investor meeting slides.

Last year, comparable-store sales grew 4% for Wal-Mart's Neighborhood Market stores. Meanwhile, Walmart Express locations were delivering double-digit comparable-store sales growth as of the middle of last year.

Accordingly, Wal-Mart announced last week that it intends to make a big push to add small-format stores. Whereas the company had previously planned to open 120 to 150 of these stores in the new 2015 fiscal year, now it intends to open 270 to 300, which will nearly double its small-format store count.

Threatening the dollar stores
Wal-Mart's small-format stores compete with a variety of other retailers, including supermarkets and drugstores. However, their closest competitors in terms of product assortment and customer base are the dollar stores. Just last week, retail analyst Michael Exstein suggested that Wal-Mart should try to buy one of the dollar store chains -- preferably Family Dollar -- to enter that market faster.

If Wal-Mart were to follow that strategy to add more small-format stores, it would be great news for shareholders of whichever chain it decided to acquire. However, while a deal is still possible, Wal-Mart's management has indicated that it prefers to go it alone. Wal-Mart is interested in offering fresh foods, gasoline, and pharmacy services in many of its small-format stores, and the dollar stores are not set up well for these things.

Wal-Mart wants to sell gas, fresh foods, and prescription drugs at small-format stores. Image source: Wal-Mart.

All of the dollar stores are massive national chains: Dollar General has around 11,000 stores, Family Dollar has 7,900, and Dollar Tree has nearly 5,000. As such, Wal-Mart's decision to open an extra 150 small-format stores next year will not have a significant impact on their financial results.

The longer-term implications are more worrisome. Adding 150 extra small-format stores to its fiscal year 2015 capital plan increased the Walmart U.S. capital budget from a $5.8 billion-$6.3 billion range to a $6.4 billion-$6.9 billion range.

Thus, it will cost around $600 million to add the extra 150 stores -- less than 10% of the company's domestic capital budget. In other words, if Wal-Mart decides to keep emphasizing smaller stores, it has the financial resources to grow incredibly quickly.

A new risk factor
The dollar stores have carved out a profitable niche for themselves by appealing to low-income customers while offering more convenience than Wal-Mart. However, Wal-Mart's small-format stores could become a big challenger to the dollar stores if the company continues to aggressively add locations.

It's too early to count the dollar stores out, but competing with Wal-Mart won't be easy. Wal-Mart has the most efficient supply chain in retail, and this will give it a critical cost advantage. As a result, I'd be more inclined to bet on Wal-Mart than on the dollar stores in this fight.

Wal-Mart's rising challengers
Wal-Mart has dominated the last two decades of American retail, but it's facing two rising challengers. To learn about how these two companies could beat Wal-Mart at its own game, take a look at The Motley Fool's special report: "The Death of Wal-Mart: The Real Cash Kings Changing the Face of Retail."  Grab your free copy by clicking here!


Read/Post Comments (16) | Recommend This Article (18)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 24, 2014, at 1:07 PM, fallen4238 wrote:

    GREED! It's all about GREED!!!!

  • Report this Comment On February 24, 2014, at 1:31 PM, casper1850 wrote:

    My wife and I do not shop at walmart. They have gotten to big and think they should get everybody's business. They have already put a lot of small business out. Now they are reaping what they sow.

  • Report this Comment On February 24, 2014, at 2:07 PM, Scottilla wrote:

    How are Dollar General and Family Dollar "dollar stores"? Sure they have the word "dollar" in their names, but so does Dollar Rent a car. Dollar Tree is a dollar store because everything there costs $1. Dollar General and Family Dollar are discount stores that compete directly with Wal Mart, but "dollar stores"? they are not.

  • Report this Comment On February 24, 2014, at 2:54 PM, kellybaxter2552 wrote:

    I've worked at both Walmart (current job), and dollar general...so if your you are talking about prices-walmart takes the prize. However, unless Walmart DOES take the initiative to open more smaller stores, people just might continue to compromise price for convenience.

  • Report this Comment On February 24, 2014, at 5:14 PM, TMFGemHunter wrote:

    @Scottilla: You're right -- I just used the word dollar store for convenience. I believe the vast majority of products at Family Dollar are priced at $1, though not everything. But the three chains are similar in terms of what they offer consumers in price and convenience. (Is a 6 pack of paper towels for $5 more expensive than a single roll for $1?)

    Adam

  • Report this Comment On February 24, 2014, at 7:18 PM, alanonthego wrote:

    I do not shop at the "dollar" stores. The $hit at these stores makes the crap at Wal Mart look good. The two Family Dollar stores near me are dirty smelly dumps. I try to shop at a local chain grocery store for groceries, I shop at Sam's Club and BJ's Wholesale for other items and use Amazon with my free shipping for other stuff.

  • Report this Comment On February 24, 2014, at 8:12 PM, rjmodesto wrote:

    I do not shop at either stores. My family stopped shopping at wm many years ago. All you'd ever see were tweekers , thieves and weirdo's there. Walmart definitely attracts the craziest people. People here in California walmarts use the bathrooms to actually cook dope then inject it. We told the people at the front of the store and they told us" Ya, they do that here sometimes" I thought, WOW! I buy all my food at Sprouts or another Wholefood stores, all organic. I would never touch any food that was in a walmart that's for sure. For everything else we usually go to Costco. Costco has also given their employees raises during these bad times which shows a lot.

  • Report this Comment On February 24, 2014, at 9:48 PM, Rare440 wrote:

    The small town I live in has two dollar stores (Family Dollar and Dollar General) and a Super Wal-Mart. Every time I go into the dollar stores, I'm always struck by how many items are actually HIGHER there than they are at Wal-Mart. If Wal-Mart continues to build these smaller stores, it'll only be a matter of time before the dollar stores are history - and they'll only have themselves to blame for their demise.

  • Report this Comment On February 25, 2014, at 2:38 AM, oddharold wrote:

    Did it really take them this long, to figure out that some people HATE walking through the huge store, just to purchase a few items they need? Amazing!

  • Report this Comment On February 25, 2014, at 8:55 AM, TMFGemHunter wrote:

    @Rare440: It's not just the dollar stores' fault. Wal-Mart has an incredible advantage because of its scale. It makes it to cheaper to buy items and cheaper to get them from point A to point B. Last year, the 3 big dollar store chains had combined sales of around $35 billion, while Wal-Mart's sales hit $473 billion.

    Adam

  • Report this Comment On February 25, 2014, at 8:07 PM, redteam wrote:

    OMG....is there a walmart state? I wanna live there

    is there a walmart hospital too?

  • Report this Comment On February 25, 2014, at 10:38 PM, KCBuck wrote:

    So let's get this straight - Wal-Mart's new strategy is to open new stores that more closely resemble the original Wal-Mart concept they have mostly closed. I will admit that I hate going to Wal-Mart; it's like going on a major expedition, but this is a company that looks like it can't figure out what it is.

  • Report this Comment On February 26, 2014, at 12:17 AM, dixie wrote:

    I WORK AT WAL-MART AND I SEE A LOT OF THINGS GOING ON WE SEE PEOPLE STEALING THINGS ALL THE TIME BUT CAN NOT SAY ANY THING TO THEM OR WE WILL BE FIRED THE THINGS PEOPLE SAY AND THE WAY THE DRESS IS JUST ALFORD THE WAY SOME OF THE CUSTOMERS ARE ALLOWED TO TALK TO US IS UNREAL THE WAY THE MANGERS TREAT US IS UNREAL AND THEY ARE ALLOWED TO GET A WAY WITH IT ALL OF THIS FOR JUST 40 CENT RAISE EACH YEAR YA RIGHT I WOULD LOOK FOR ANOTHER JOB BUT I AM 60 YEARS OLD AND NO ONE PAYS AS MUCH AS THEY DO DIXIE

  • Report this Comment On February 26, 2014, at 11:17 AM, bills94 wrote:

    Exactly how dumb do you people have to be?? THEY (subject of the above) already OWN the "Doller Store"s. Why do you think (and I have experienced this) you see "CSM"s and "Managers" in training "running" the Doller Store down the road from the "big cahoona" store. In a small community, where (supposedly because of "them" ) shopping choices are limited anyway, There is the "big store" in the main shopping "mecca" and at least 1 Doller Store on the edge of town. In the area I live in now there is a Doller Store (just opened a new one on the opposite street) on BOTH ends of town and the "big store " is in the middle. That puts 3 of their stores in an area of some 6000 people. They only want to saturate the brand by eliminating the yellow signs because (since people don't know the above fact) theyhave lost face in light of all the litigation that has gone on the last few years. Don't be taken in by this charade.

  • Report this Comment On February 26, 2014, at 6:27 PM, TMFGemHunter wrote:

    @KCBuck: I don't think the new stores resemble early Wal-Mart stores except perhaps for their size. Wal-Mart didn't really start selling groceries until it began opening the giant Supercenters. The smaller stores sold general merchandise but not food and pharmacy items. Those latter categories seem to be the key focus of the new set of smaller stores.

    Adam

  • Report this Comment On February 28, 2014, at 11:56 AM, erics46 wrote:

    I have moved 70% of my grocery shopping to local supermarkets because my local Walmart (Greenwood, SC) is wholly incapable of keeping the shelves stocked. Walmart's "Great Value" is the worst culprit. Regardless of the day of the week, goods I am looking for (staples and general items) are simply unavailable. I have repeatedly spoken to store managers and their response is regularly repeated: " We are not allowed to hire enough people to keep the store stocked". Their other response is: "Distribution does not ship what is ordered" If the goods are there, I will shop there.

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