Wal-Mart Is Going After Dollar Stores

Wal-Mart's plan to focus on its smaller retail locations is a serious threat to companies like Dollar General, Family Dollar, and Dollar Tree.

Mar 12, 2014 at 7:00AM

Wal-Mart (NYSE:WMT), the world's largest retailer, has over the years become the prime example of corporate power. Due to its sheer size the company holds considerable sway in terms of pricing, and due to its number of employees it has a large impact on the US job market. However, this growth can't continue indefinitely. Fiscal 2014 wasn't a particularly good year for Wal-Mart, and the company is now looking for ways to expand. Its latest plan is to enter the dollar-store space, which could prove to be bad news for companies like Family Dollar (NYSE:FDO), Dollar General (NYSE:DG), and Dollar Tree (NASDAQ:DLTR).



Uninspiring results
The company's fourth-quarter and full-year fiscal 2014 report was a bit of a letdown for investors. Underlying earnings per share for the quarter declined from $1.67 a year ago to $1.60 for a 4.3% drop, and comps were down 0.4%. For the full year, the company grew underlying EPS by 2% to $5.11. Consolidated net sales for the year increased by 1.6%, while consolidated operating income dropped by around 3%. Not particularly impressive results at all.

This sluggish growth highlights the struggle faced by low-income US consumers, who have been hit by several government measures throughout the fiscal year. Cuts in the US food stamp program have hit this demographic hard, and as one in five Wal-Mart customers is estimated to rely on this supplemental program, Wal-Mart's top line has suffered as well. Another factor that affected the lower income consumer was a hike in payroll taxes.

Taking on the small guys
As thinking big has so far failed to increase store traffic, the retail titan has undertaken a number of measures to boost sales. One avenue in which the company has been investing is the e-commerce channel, and so far this seems to have been relatively successful. However, the real push will presumably be a focus on smaller stores, a segment in which Wal-Mart's comp sales have grown quite rapidly.



A typical Wal-Mart superstore averages around 182,000 square feet. However, many shoppers don't want to traipse over such a distance just to pick up a carton of milk or a loaf of bread. As such, Wal-Mart Neighborhood Markets, which typically average around 38,000 square feet, have seen increased traffic. In the latest report, the segment that includes these markets saw its comps up a very healthy 5%. It is estimated that this growth will accelerate as Wal-Mart now intends to open 270-300 small-format stores after it previously projected 120-150 new locations.

This smaller-format retail space is one currently inhabited by dollar stores such as Dollar General, Dollar Tree, and Family Dollar. Some scary numbers for this industry from a Bloomberg research report: Wal-Mart is able to offer lower prices on household goods 100% of the time, and around 85% of the time it can offer them on auto supplies, groceries, pharmacy items, and beauty care products. If Wal-Mart does choose to enter the segment, dollar stores will be hard pressed to find a competitive edge that does not rely on pricing power. One option seen as beneficial by analysts may be a process of consolidation in the industry.

The bottom line
Wal-Mart's growth seems to be slowing, as its weak fourth-quarter and full-year report demonstrated. Faced with declining store traffic and decreasing income from budget-conscious shoppers, the company is now looking toward other means of sustaining growth. E-commerce is one option, but Wal-Mart's management is now especially turning toward smaller stores which are producing faster growth. This is a serious threat to traditional dollar store chains which currently dominate the space, as Wal-Mart is generally able to offer lower prices on most items. As such, the industry will be forced to either consolidate or innovate in order to remain competitive.

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Daniel James 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.

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