Convenience Will Be Key to Wal-Mart's Growth

Fortunately for Wal-Mart (NYSE: WMT  ) , the severe cold and snow we had this past winter seems to have caught up with deep-discount rival Dollar General (NYSE: DG  ) , as it reported weaker-than-expected fourth-quarter profits and sales that fell well short of analyst expectations. But because it's still siphoning away more than $17 billion a year in annual sales, along with all the other dollar stores, the retail giant can't afford to ease up on its plans to roll out new-format stores that make themselves more accessible for on-the-go customers.

Source: Wal-Mart.

Tomorrow, Wal-Mart will be celebrating the grand opening of its Walmart to Go convenience store, a test project for which there are no plans yet to open more, but also one of several ideas it's been testing to stem the tide of sales it's losing to rivals (and not to be confused with its delivery service of the same name). The retailer also operates 20 Walmart Express shops, a 15,000-square-foot convenience store, and 346 Neighborhood Markets, which, at 42,000 square feet, are smaller versions of its supercenters. The new hybrid C-store will be just 2,500 square feet.

With convenience store operators like 7-Eleven and Wawa adding more fresh foods and groceries, supermarkets following the lead of Whole Food Markets and Tim Hortons by adding dining options, and restaurants adding packaged goods and groceries like Cracker Barrel does, what we're seeing is the return of the old general store idea.

Source: Cracker Barrel investor presentation, September 2013.

For the longest time, the supermarket was a resilient investment, because regardless of economic conditions, people still have to eat. Wal-Mart and Kroger were two of the premier practitioners of the art, but increased costs and expenses have winnowed away the profits, such that Safeway, the second-largest supermarket operator, is now close to being sold to private equity firm Cerberus Capital, the same company that bought the Albertson's chain.

Although that sale will create a massive network of grocery stores, bigger is no longer necessarily better, as consumers are increasingly concerned about the quality of the food they're buying, and smaller neighborhood markets that sell locally sourced organic produce and even meat are gaining popularity. It's not just the "snow in winter" excuse retailers of all stripes have been using, but rather a change in how we shop that's impacting sales.

Wal-Mart saw the change coming and began the process of adapting to the trend. It now plans on adding 270 to 300 small-format stores during the coming fiscal year -- up from an originally planned 120 to 150 stores -- adding as much as 21 million to 23 million square feet of space across all formats.

Dollar General has been part of the wave of smaller, more convenient store locations that have drained sales from the lumbering retail giant, but this last quarter's results show that it might not just be Wal-Mart that needs to worry about this trend in hyper-local shopping. There's a $415 billion quick-trip opportunity out there, and the retail king has proven adept at adapting to the new landscape, though it has yet to pay dividends.

What's not clear is how many others also see that going small to get big is the new trend and are willing to make the changes necessary to prosper. Although Wal-Mart's sales have slowed considerably, investors may still profit from the big things coming from small packages.

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  • Report this Comment On March 19, 2014, at 11:13 AM, bardmike wrote:

    The above analysis is flawed. As is the case with other sources, The New York Times being conspicuous among them, typical exurban and rural shoppers have different priorities than urban journalists and analysts, and it is the former who are Walmart's primary shoppers. The priority of those consumers, who generally survive on relatively low salaries, is everyday costs. Walmart wants to get closer to all its potential shoppers, reducing the amount, and cost of, fuel they burn to shop its stores, while creating profitable sales by leveraging its distribution system to produce revenues at satisfactory margins. Whether or not it will succeed in doing so is another matter, but Walmart has been adept in its approach to testing, amending and then either dropping or expanding store concepts as warranted by experience. Hyperlocal and locally grown food are much more the concern of affluent urban and suburban consumers, not the price-driven folks who shop at Walmart. It's interesting to note that Walmart has been experimenting with organic and local foods for years, commodities that generally have higher rings than their standard competitors and often better margins, but the retailer has chose to continue doing so on a limited basis. In that, Walmart clearly is responding to the actually purchasing patterns of its customers, which is as it should be, as opposed to how observers think it should be.

    Mike

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