Copying Dollar Stores Is Not The Answer To Wal-Mart's Woes

The dollar store market may not provide Wal-Mart with the opportunities that some analysts are looking for.

Feb 28, 2014 at 6:00PM

There was good news and bad news for Wal-Mart Stores (NYSE:WMT) investors in the retail giant's Feb. 20 conference call. The good news is that Wal-Mart isn't planning to follow analyst Michael Exstein's advice and buy Family Dollar Stores. The bad news is that Wal-Mart is going to launch about 700 new dollar stores in an effort to boost revenue.

Expanding its dollar store business is the wrong strategy for Wal-Mart at this time. Opening small box stores will be a waste of money and resources that will distract Wal-Mart from far greater opportunities in the online retail market. Here are a few reasons why expanding its dollar store operations is a bad idea for Wal-Mart:

The dollar store market is already saturated, as I've argued elsewhere. A SWOT analysis last year indicated that the U.S. retail market could support around 15,000 additional dollar stores. Two major dollar store players, Family Dollar Stores and Dollar General, plan to open 18,600 new stores in the next few years. Add the 700 stores that Wal-Mart plans to add, and that's 4,000 more stores than the market can support. That sounds like a bubble that could quickly collapse.

Dollar stores are heavily dependent on food stamps and other government benefits for a portion of their revenues. Wal-Mart is already heavily dependent on food stamps -- one out of five of its customers rely on them, according to Reuters. With Congress cutting $14 billion from food stamps over the next few years, it would be a good idea for Wal-Mart to move away from them. Yet Wal-Mart is moving into an arena that's heavily dependent on food stamps; around 70% of Family Dollar's sales come from grocery store items.

Dollar store additions distract Wal-Mart from its online business, which generated around $10 billion last year. Wal-Mart needs to go online and compete with Amazon.com because that's where the middle- and upper-class customers with the money are. Dollar stores are where the cash-strapped poor shop. The company's Wal-Mart to Go delivery service is a good start and a potential cash cow.

How dollar stores could help Wal-Mart

The flip side of this argument is that dollar stores wouldn't cost Wal-Mart that much to build -- around $600 million. That's a drop in the bucket for a company that reported a trailing annual revenue figure of $475.11 billion on Oct. 31, 2013. The dollar store experiment won't cost that much for Wal-Mart, and there are some potential benefits:

Small box stores would be easier to open in urban areas, older suburbs, and other regions that Wal-Mart has had a hard time penetrating. There would be far less resistance to a Wal-Mart small box location in a strip mall than there would be for a supercenter.The massive number of stores owned by other companies which will close, which includes 500 Radio Shacks, will provide lots of locations that Wal-Mart can pick up cheap.

Wal-Mart's dollar stores would be very competitive because they would offer a wide variety of merchandise Family Dollar, Dollar Tree, and Dollar General do not carry, such as fresh vegetables, meats, and better selections of clothing, electronics, and tools. The small box stores would be excellent outlets for Wal-Mart's financial-services products, such as the Bluebird card it offers with American Express, check cashing, and money orders. None of the other major dollar store operators offer these products.

The small boxes would be excellent locations for pharmacies. Other dollar store operators don't offer pharmacies. With Obamacare expanding the number of Americans who have health insurance, this could be an opportunity.

Wal-Mart's logistics capabilities could allow it to tailor dollar stores to each market, for example by offering specific products that sell better in specific areas, such as tacos in heavily Latino neighborhoods.

 The small boxes would fit in nicely with the Wal-Mart to Go online operation. They could serve as pickup points for Wal-Mart to Go merchandise.Middle class customers and urban dwellers who refuse to go to a Wal-Mart supercenter might shop at the small box Wal-Mart locations.

 One thing is clear from both sides of this argument: Wal-Mart is still a very good company with a very bright future. It knows how to react quickly to a changing market and take advantage of opportunities. Even if the dollar store experiment doesn't work out, Wal-Mart is still in a position to dominate American retail for decades to come.

Daniel Jennings has no position in any stocks mentioned. The Motley Fool recommends Amazon.com and American Express. The Motley Fool owns shares of Amazon.com. 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers