Will Wal-Mart Neighborhood Markets Devastate Local Businesses?

The retail giant is moving across the country opening smaller stores that bring the chain places it had not gone before.

Jun 28, 2014 at 7:37AM

When Wal-Mart (NYSE:WMT) began its march across the United States, it left a wave of destroyed competitors in its wake. The retail giant was not alone in causing this devastation. Other big-box chains such as Home Depot (NYSE: HD)Lowe's (NYSE: LOW), and Target (NYSE: TGT) contributed as well. But the rise of massive chains and big-box stores meant the death of many local hardware stores, butcher shops, clothing retailers, and more. 

As Wal-Mart built up its more than 3,000 U.S. superstores, many American downtowns were eliminated. Small stores closed, and in much of the country, communities' economic centers shifted from downtown to outlying shopping areas on major thoroughfares.

Now Wal-Mart is opening smaller 30,000-40,000-square-foot "express" stores and Wal-Mart Neighborhood Markets -- as compared to 180,000-square-foot supercenters. It remains to be seen what impact the chain will have on the local businesses that survived the superstore onslaught. Jason Hellmann, Daniel Kline, and Jake Mann discussed the potential effect of Wal-Mart's latest push on Business Take,  the show that gives you the Foolish perspective on the most important business stories of the week. 

Supermarkets should be afraid
Though Wal-Mart superstores sell groceries, they are not supermarkets. The Wal-Mart Neighborhood Market is a full-fledged, low-price alternative to the various regional and local grocery chains. The stores have meat counters, pharmacies, and everything else you would find in a typical supermarket.

Neighborhood Markets benefit from Wal-Mart's enormous buying power. The chain is so large that it has the ability to heavily discount as it enters a region to ensure sampling. This forces local stores to compete on price or find ways to differentiate.

With competition already intense between chains in most markets, Wal-Mart entering the fray is likely to squeeze out some struggling fringe players.

The addition of a Wal-Mart Neighborhood Market to an area should generally be good for consumers. The presence of the retail giant may cause some store closures. But with most localities served by a handful of grocery chains, there should still be plenty of choice, and Wal-Mart will operate as a check on prices.  

"The best thing about it are the prices," said Mann, who shops at a Wal-Mart Neighborhood Market in his Chicago-area neighborhood.

What's the danger?
Wal-Mart has a reputation for not caring about the damage it does to the communities it enters. That could result in pushback from some of the communities it's looking to open in.

There have been protests at a number of Wal-Mart Neighborhood Market openings so far, but none has done anything to dissuade the company from pursuing its aggressive rollout plan for the brand.

Do you believe smaller Wal-Mart stores pose a danger to local stores? Watch the video below and then share your comments.

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Daniel Kline has no position in any stocks mentioned. Jake Mann has no position in any stocks mentioned. The Motley Fool recommends Home Depot. 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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