Wal-Mart Express’ Real Target: Drugstores

Wal-Mart developed its small-box entry, Wal-Mart Express, to grab a large share of the drugstore business, not to kill off dollar stores.

Mar 19, 2014 at 3:58PM

A lot of investment analysts seem to have gotten Wal-Mart Express, the expanding small-box concept from Wal-Mart Stores (NYSE:WMT), wrong. Wal-Mart did not come up with Wal-Mart Express in an attempt to kill dollar stores like Family Dollar or Dollar General; instead, Wal-Mart created the concept to enter into the neighborhood drugstore business.

Wal-Mart Express really targets drugstore operators like Walgreen (NASDAQ:WBA) and CVS Caremark (NYSE:CVS). Any harm done to Family Dollar or Dollar Tree will purely be collateral damage.

Wal-Mart doesn't want or need a piece of the dollar-store operators' business. It wants a piece of the drugstore operators' business, and it is easy to see why. Stores like CVS Caremark and Walgreen, which combine a pharmacy with a small-box discount store, make a lot of money these days.

Fast-growing revenue shows why Wal-Mart wants into the drugstore business
The revenue figures show us why Wal-Mart is so interested in neighborhood drug stores. They're money-making machines with fast-growing revenue figures.

Walgreen reported a TTM, or twelve trailing months, revenue figure of $73.23 billion on Nov. 30, 2013, and CVS Caremark reported a TTM revenue figure of $126.76 billion on Dec. 30, 2013. Drugstore revenue has also been rising fast. Since Dec. 2011, CVS Caremark's revenue has grown by an astonishing $19.66 billion from $107.10 billion.

Walgreen's revenue has stayed about the same since November 2011 because of its dust-up with Express Scripts, but it has started to grow again. In November 2011, Walgreen reported a revenue figure of $73 billion. Walgreen has recovered from the Express Scripts debacle and returned to growth.

In contrast to this Family Dollar reported $10.47 billion in revenue on Nov. 30, 2013 and Dollar General reported $17.22 billion in revenue on Oct. 31, 2013. Wal-Mart knows where to find the money, and it is not in the dollar-store business.

Why Wal-Mart wants and needs drugstores
There's a big reason why Wal-Mart is moving into the neighborhood drug-store business: it needs more middle-class customers. Historically, Wal-Mart has done a great job of attracting lower-income customers but a lousy job of luring in the middle class.

Much of the 21% drop in Wal-Mart's profit during the fourth quarter of 2013 resulted from cuts to the Federal food stamps program. Wal-Mart Express, or the small-box stores, provided one of the few bright spots in Wal-Mart's Feb. 20 earnings report. Sales at those outlets increased by around 5% in 2013 according to Wal-Mart's chief of US operations William S. Simon.

Wal-Mart designed its Express stores to attract the middle class and compete directly with drug stores. Each one contains a pharmacy, a discount store, and a small grocery operation. In other words, they sound just like Walgreen or CVS Caremark stores. It sounds as if Wal-Mart is after Walgreen and CVS Caremark's customers, not Dollar Tree's.

Wal-Mart's secret weapon: gas pumps
Many Wal-Mart Express locations will have a secret weapon for their war against the drugstores; it's called a gas station. A Wal-Mart Express planned for Benson, N.C., will have one. The idea is to give a customer a place where she can fill up her gas tank, pick up her prescription, buy a box of Tide, and pick up a gallon of milk in one stop.

Simon has even bragged that Wal-Mart Express will provide customers with "fresh food, pharmacy and gas." Wal-Mart plans to go after the drug store operators in a big way by opening between 270 and 300 such stores this year, Motley Fool blogger John Maxfield noted.

Dollar stores will get hurt
Even though they are not the primary target of Wal-Mart Express, dollar stores could be badly hurt by the concept's expansion. Customers will have no real reason to go to Dollar Tree or the 99 Cent store if they can pick up everything they need while they are getting their prescriptions filled at Wal-Mart Express.

As I noted above, dollar stores' TTM revenues are tiny, which means they may not have the resources to meet the challenge from Wal-Mart Express. CVS Caremark and Walgreen do seem to have enough revenue to add gas pumps or delis to their stores to match Wal-Mart, though.

No matter how you look at it, Wal-Mart Express will change the retail landscape, and some retailers will get hurt badly in the process. The question investors need to ask is which company will suffer the most damage from Wal-Mart's small-box offensive? 

Which two retailers look like they can more than handle Wal-Mart?
To learn about two retailers with especially good prospects, take a look at The Motley Fool's special free report: "The Death of Wal-Mart: The Real Cash Kings Changing the Face of Retail." In it, you'll see how these two cash kings are able to consistently outperform and how they're planning to ride the waves of retail's changing tide. You can access it by clicking here.

Daniel Jennings has no position in any stocks mentioned. The Motley Fool recommends CVS Caremark and Express Scripts. The Motley Fool owns shares of Express Scripts. 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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