The New Wal-Mart CEO Wants Dollar General's Success

Wal-Mart plans on building 270 to 300 small stores by year-end. Small-store formats allow for growth in the U.S. without cannibalizing supercenter market share.

Mar 5, 2014 at 3:26PM

For years Wal-Mart Stores (NYSE:WMT) has moved large supercenters into small towns, replacing local commerce by providing lower prices. The company calls it "investing in price" and it's been an extremely profitable business model based on economies of scale; but it's time for an update.

The truth is most large-box retailers are suffering from declines in same-store sales. My theory is that large-box stores are a drag on return on assets; they don't provide the same advantages in scale as they have in the past and require high traffic to break even. Small-box retailers, on the other hand, have a lower breakeven. They have the same access to low-price supply chains, can move inventory faster, and respond to changes in demand faster.

New CEO, new ways
C. Douglas McMillon grew up only four hours from Bentonville, Ark., the location of Wal-Mart headquarters. In 1984, McMillon began his career with Wal-Mart as a summer associate in a distribution center, and on Nov. 25 he was promoted to succeed Mike Duke as CEO; he assumed that role on Feb. 1.

I listened to the Feb. 20 conference call expecting to hear more talk of promotions and better customer service.

"Comp sales improvement is a key priority," McMillon said, "and we'll use a combination of price investment and enhanced service to accomplish this." 

I'm glad comp sales is a key focus area, but it's the same strategy other large-box retailers are employing to combat lower traffic. It leads to pricing wars -- Canada's a good example of how this scenario plays out.

Thankfully, McMillon and his team have another idea that will take Wal-Mart into a period of growth: leveraging the current base of supercenters.

The case for smaller stores
Dollar General (NYSE:DG) is one of the only discount-retail operations that thrived in 2013, as sales increased 10.5% in the third quarter to approximately $4.4 billion. With more than 11,061 stores, the company is actually larger by store count than Wal-Mart, which has only 4,203 stores in the US. Same-store sales increased 4.4%, slightly below the 5% comp growth rate Wal-Mart announced for its smaller store formats in the fourth quarter but much higher than the overall comp-store sales rate of -0.4%.

The primary difference between Dollar General and Wal-Mart is not scale; it's store size, and Wal-Mart has figured out a subtle way to grow same-store sales again without cannibalizing its own revenue.

The following chart was published by Wal-Mart and shows the breakdown of store formats as of Jan. 31.

Uploads

Source: Wal-Mart 

By year-end, Wal-Mart plans to have 270 to 300 more small-store formats, double its original commitment made in October.

We've been working to improve our speed to market and lower capital costs to allow us to move more aggressively.

It's not just a move to small stores that will transform the business model, it's the use of supercenters as distribution/supply centers. Wal-Mart is leveraging its current base of supercenters to enhance fulfillment. Bill Simon, Wal-Mart U.S. president and CEO, had this to say:

Our small store expansion will also strengthen our market share and create greater efficiencies in our supply chain through a tethered approach that uses supercenters as a supply chain base, links our resources and provides a unique and connected customer experience.

The primary risk associated with small-store expansion is cannibalization. In its 2013 10-K filing, Wal-Mart estimated that new stores had a negative 0.7% impact on existing units; but supercenters are generally located in large lots, and smaller-store formats give the company more flexibility in big cities with space constraints. These stores are one-tenth the size of supercenters and less likely to cannibalize traffic.

So what?
Making the decision to open more smaller-store formats has several benefits:

  • it increases same-store sales
  • it increases store growth without cannibalizing current market share
  • it may help to transform the perception of Wal-Mart from corporate supercenter to community corner store.

It takes good leadership to identify problem areas, align resources into focus, and pull the trigger, especially under such intense scrutiny. Yes, plans to build more small stores were already announced in October, but the new CEO had the nerve to push for more. Indeed, McMillon's legacy may be these smaller stores. My only criticism is that he didn't request more.

Other initiatives, such as investments in Canada, e-commerce, and compliance/quality control will also help the company, but an investment in smaller-store formats could be the beginning of a new growth channel in the U.S.

Does this make Wal-Mart the Fool's top stock for 2014?
There's a huge difference between a good stock and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it's one of those stocks that could make you rich. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.

C Bryant has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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