Why Wal-Mart Isn't Too Big to Keep Growing

One of the world's largest companies is still finding new ways to grow.

May 5, 2014 at 6:00PM

Shares of Wal-Mart Stores (NYSE:WMT) recently fell thanks in part to a downgrade by William Blair. The company was cut from market perform to underperform because of concerns about growth. The analysts believe that the size of the company is a dampener on growth, and the aggressiveness and intensifying competition from online retailers is also a threat. There is also concern that investors may well move away from the retail segment altogether.

It is true that Wal-Mart's size gives it some key advantages, including economies of scale, but the size also comes with its disadvantages. For one thing, it invites the detailed scrutiny that its competitors do not have to endure. It also means that the customer experience is affected, and the company trails behind its competitors when it comes to customer satisfaction.

The company has been partly protected from online competition because of its low pricing and the tendency of its lower-income customers to avoid shopping online. However, customers are increasingly beginning to buy single items online, thus reducing the attraction of shopping under the one roof that Wal-Mart provides.

New money transfer service
To bring more customers into its stores, Wal-Mart is launching a new money transfer service that is cheaper than the existing money transfer companies such as Western Union and Money Gram, and it uses a simplified fee structure. The new service, to be called Walmart-2-Walmart, will allow customers to send or receive up to $900 at one time at more than 4,000 stores; the new service can be used only for transactions within the United States.

The market for person-to-person payments is estimated at $900 billion, much of which takes the form of checks or cash. This initiative is to counter the declining store traffic, and the company has also announced increased spending on its online presence as well as its more convenient smaller stores.

The company has been expanding in the financial services business even though it is not a bank. In fact, it withdrew its application in 2007 for a special category of the bank charter after banks and some legislators opposed the application. In addition to the new money transfer service, it also offers services such as cashing checks, paying bills, and prepaid cards to the core group of lower-income customers who are excluded from the banking system. However, it does not yet provide loans or accept deposits.

Reviving the organic foods business
Wal-Mart is going to reenter the organic marketplace by reviving its line of Wild Oats products. Because the company is the largest grocery store in the United States, this move could put pressure on companies like Whole Foods Market (NASDAQ:WFM) to reduce prices. Worth noting is that Whole Foods actually bought Wild Oats for $565 million in 2007, but the FTC made it divest the company in 2009. Wild Oats stores were closed, but its partnership with Wal-Mart could be a renaissance for the brand.

Whole Foods has just over 370 stores, whereas Wal-Mart has over 4,200 stores spread across the globe. And last quarter, Whole Foods generated $4.2 billion in revenue, compared to Wal-Marts $130 billion. However, the big difference is that Whole Foods continues to grow quite nicely. That $4.2 billion in revenue generated last quarter for Whole Foods was a 10% increase from the same quarter last year. However, Wal-Mart's $130 billion was just a 1.5% increase. But what Wal-Mart is hoping to do is to give shoppers a reason to come back again-and-again. Groceries are items that most shoppers buy on a weekly basis, hence the reason that Whole Foods' same-store sales growth was 5.4% last quarter. Meanwhile, Wal-Mart's was flat.

The impact of this entry on the market has yet to be felt, but Wal-Mart believes that it can sell these products cheaper than its premium pricing competitors. Almost 100 organic products will be introduced this year as part of this line, and prices are expected to be 25% lower than the national brands. The company already offers a wide assortment of dairy, meat, and package products. Some of these products will include items like yogurt and baked goods, as well as ready-to-prepare skillet meals.

Obviously, the company intends to use its size to reduce prices and make organic foods more affordable, especially for its lower-income customers. It intends to make long-term commitments with the organic food producers so that they will be induced to produce more. As consumers at all income levels become more conscious of their health, there should be a corresponding increase in demand. The US market for packaged organic products grew by 108% to $12 billion last year compared to growth of around 25% in packaged foods as a whole.

Can Amazon compete?
Amazon.com (NASDAQ:AMZN) is preparing to compete in the online groceries market, which currently accounts for less than 1% of a market that is worth $568 billion. Wal-Mart has started deliveries in the UK and San Francisco using its large stores as warehouses to deliver grocery orders in the surrounding areas which can be placed online. It probably won't be long before the delivery service is ramped up on a much larger scale. Amazon has expanded its AmazonFresh grocery delivery outside of Seattle but requires customers to be subscribers of Amazon Prime Fresh. However, it remains to be seen how effective it is and how low it can keep prices stable.

Bottom line
It is clear that, as the latest initiatives show, Wal-Mart is not going to give up on growth without a real fight. It looks cheap at its current price based on valuation metrics, on top of which is the fact that the company remains the largest retailer in the world. And for investors looking for a stock to play the global economy, Wal-Mart is worth a closer look.

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John Mackey, co-CEO of Whole Foods Market, is a member of The Motley Fool's board of directors. Marshall Hargrave has no position in any stocks mentioned. The Motley Fool recommends Amazon.com and Whole Foods Market. The Motley Fool owns shares of Amazon.com and Whole Foods Market. 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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