Wal-Mart Makes a Splash in Money Transfers -- Will It Matter?

Wal-Mart  (NYSE: WMT  ) lowered the boom on yet another industry this past week. The world's largest retailer announced it would begin offering money-transfer services under the name Walmart-2-Walmart. The service will begin April 24, and is being provided with the help of Ria, the world's third largest money-transfer company and a subsidiary of Euronet Worldwide (NASDAQ: EEFT  ) . 

Source: Wal-Mart press release

As a result of the announcement, shares of MoneyGram (NASDAQ: MGI  ) and Western Union  (NYSE: WU  ) took a dive, falling 18% and 5%, respectively. Moneygram stock took the news especially hard as it currently provides money transfer services for Wal-Mart. Western Union, meanwhile, says that 85% of its transfers involve a location outside the U.S, which will be safe from Wal-Mart's domestic-only offering. In characteristic fashion, Wal-Mart promised to undercut the industry pricing by up to 50%, promising two fee levels. For transfers of up to $50, Wal-Mart will charge $4.50; sending between $50 and $900 will cost $9.50. According to Wal-Mart's press release, competitor prices can range as follows:

Money Transfer Amount  Competitors' Prices  Walmart-2-Walmart Price 
$0-$50 $4.75-$5.00  $4.50 
$50-$200  $11-$12 $9.50 
$400-$500  $34.50-$40  $9.50 
$600-$700  $46-$58  $9.50 
$800-$900  $57-$76  $9.50 

Source: Wal-Mart press release 

With annual sales approaching $500 billion, Wal-Mart isn't expecting money transfers to move the needle on its bottom line. The all-and-sundry chain is simply looking for a way to drive more traffic to its stores, and bring those customers underneath its umbrella. The strategy seems like a savvy one at a time when same-store sales are stumbling at the retail behemoth. In the past year, comparable sales at its U.S. locations, which make up more than 70% of its sales, fell 0.4%, sliding in all four quarters, and traffic at U.S. Wal-Mart locations dropped 1.7%.  Meanwhile, rivals like Amazon.com grew its top line by more than 20%, and even Costco saw 5% organic U.S. growth in the last six months.

Taking a page out of Amazon's playbook
Amazon has turned itself into an online empire by leveraging seemingly every competitive advantage it has. From a small online bookseller, the company has grown into a retail giant and a digital media kingpin, and a primary competitor of businesses ranging from Netflix to Apple to Barnes & Noble. With its massive size, real estate footprint, and economies of scale, Wal-Mart has similar competitive advantages, and the retailer has recently made a point of stretching those capacities, as we can see from the money-transfer gambit and other recent moves.

Just a month ago, Wal-Mart stepped on video-game seller GameStop's turf, saying it would begin accepting used video-game trade-ins for credit, which sent GameStop shares down as much as 6% as a result. Similar to its entry into money transfers, Walmart's move is designed to drive traffic and other purchases rather than game trade-ins itself, a familiar strategy in the industry. Last week, Wal-Mart shook up another industry, announcing it would carry Wild Oats organic food products at a price point better than 25% lower than national organic brands. Not surprisingly, shares of Whole Foods dropped 4% on the day the news came out.

An easy win?
Of the three moves above, the money-transfer entrance seems to make the most sense. Wal-Mart is best known for its everyday low prices; customers tend to be lower-income Americans, the same consumers that are likely to use money-transfer services. According to Wal-Mart's press release, 28% of Americans or "unbanked or underbanked," with military personnel and oil-field workers among those communities that most often take advantage of the service. The money transfer initiative is not Wal-Mart's first move into financial services, as the company, in 2012, partnered with American Express to sell prepaid Bluebird cards to customers. The chain also offers check-cashing, money orders, and tax prep services.  

Still, its new rivals do not feel threatened by the announcement. In a statement, MoneyGram said it would not take any pricing actions as a result of Wal-Mart's entry, and that although Wal-Mart is its biggest customer, its share of revenue has been decreasing in the past five years. Western Union said its prices often match Wal-Mart's, and that its diverse offerings include online transfers and other services the retailer is not providing. With 500,000 locations around the world, Western Union is also much more accessible. Moneygram, meanwhile, has more than 275,000 agent locations globally. 

Foolish bottom line
While each of Wal-Mart's three recent moves has sent competitor stocks tumbling, Wal-Mart stock has barely moved. In fact, on none of the three days that the retailer made those announcements did its share price gain more than 1%. The moves are reminiscent of Amazon, which has made a habit out of beginning price wars in new industries; but Amazon, with its barely visible profits, does not need to be a model for Wal-Mart.

The retail giant may not score any big wins with the above moves; but, like other successful businesses, it knows when it needs to adapt, and it's been wisely doing so in recent years with its expansion into groceries, the introduction of the smaller-footprint neighborhood market format, and by selling more alcohol. Walmart-2-Walmart won't replace Western Union or Moneygram, but it's a smart move for the retailer. With its size and economies of scale, Wal-mart has advantages in pricing and customer traffic over nearly every other business. Millions of Americans already shop at Wal-Mart, and they count on it for low prices. Nearly 10% of non-automotive retail dollars in the U.S. are spent at the retail giant. Walmart-2-Walmart may not juice the bottom line anytime soon, but the more reasons the company can give customers to walk through its doors, the better off it will be in the long run.      

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