Can Neighborhood Market Stores Save Walmart?

Wal-Mart's core Supercenter business is floundering, but can smaller stores really save the company?

Aug 3, 2014 at 1:18PM

Big-box retailers are having a hard time convincing fickle consumers to spend more at their stores, and their response has been to turn to smaller formats. Both Wal-Mart (NYSE:WMT) and Target are testing small stores, which could be key to their turnarounds or the cause of their future demise.

The question for Wal-Mart is whether it can turn around abysmal same-store sales and a rapidly falling return on investment, and persuade urban consumers to spend more money at its stores.

As someone who regularly walks to his local grocery store (which is about the same size as a Wal-Mart Neighborhood Market) for groceries and other everyday items, I can see the appeal. But this is a well-established industry with companies that have large footprints and strong customer bases.

Just what is Wal-Mart up against and how big is the opportunity?

Wmt Neighborhood Market Produce Image

The grocery market is a big target for Wal-Mart's Neighborhood Markets. Photo source: Wal-Mart. 

How big is the Neighborhood Market?
The concept of Wal-Mart's Neighborhood Market is to offer everyday items in convenient, local locations that require less space than a Supercenter. Think of it as an urban mini-Wal-Mart. 

The stores won't have the Supercenter selection of furniture, electronics, and clothing, but it will have everyday items like groceries, detergent, and a pharmacy along with Wal-Mart's low prices. If it sounds like that retail model is targeting dollar stores, neighborhood pharmacies, and local grocery stores, it's because it is. That's why these businesses can give us a good gauge of how big an opportunity this is for Wal-Mart long-term.

For Wal-Mart to make a significant impact on its top or bottom line with the Neighborhood Market, it needs to build out a footprint quickly in a highly competitive retail market. Right now, the plan is to open 270 to 300 small-format stores this year and to have 500 Neighborhood Market locations by early next year. This experiment fits into a company worth $244 billion, with $476.3 billion in sales last year and net income of $16 billion.

The business that's most often pointed to as Wal-Mart's target with Neighborhood Market is the dollar store, which has used low sticker prices to steal business from the megaretailer since the recession began. The three largest dollar stores had a combined total of $35.7 billion in sales and $2 billion in profit in the last fiscal year and are worth a combined total of $37 billion on the stock market. If Wal-Mart took every single dollar of their business it would add just 7.5% to its total sales and 12.7% to the bottom line.

 Company

No. of Locations

Sales (most recent fiscal year)

Net Income (most recent fiscal year)

Market Cap

Dollar General 

11,215

$17.5 billion

$1.0 billion

$16.9 billion

Dollar Tree 

4,992

$7.8 billion

$596.7 million

$11.5 billion

Family Dollar 

7,916

$10.4 billion

$443.6 million

$8.6 billion

Total

24,123

$35.7 billion

$2.04 billion

$37 billion

Source: Yahoo! Finance and company SEC filings.

In short, despite having 24,123 locations, the dollar store industry still does a fraction of the total business Wal-Mart does.

Bigger fish?
A bigger target for Wal-Mart could be the neighborhood pharmacy business because a major offering for the Neighborhood Market will be prescriptions and over the shelf medicine. But this is a business that's firmly controlled today by CVS Caremark and Walgreen. Taking a significant share of this business would have a bigger impact on Wal-Mart as a whole.

Company

Locations

Sales (most recent fiscal year)

Net Income (most recent fiscal year)

Market Cap

CVS Caremark *

7,713

$126.8 billion

$4.6 billion

$91.4 billion

Walgreen  *

8,582

$72.2 billion

$2.5 billion

$38.4 billion

Total

16,295

$199.0 billion

$7.1 billion

$129.8 billion

Note: Data for CVS Caremark and Walgreen includes pharmacy sales. Source: Yahoo! Finance and company SEC Filings.

This could be a decent gauge of the size of its market opportunity. But Wal-Mart is fighting an ingrained business. CVS Caremark and Walgreen have pharmacy contracts with major insurers and hospitals, as well as convenient locations already up and running around the country. It would take decades to replicate that same business with the Wal-Mart Neighborhood Market.

The grocery store model
Wal-Mart Neighborhood Market could also take market share from grocery stores. Wal-Mart will have its ever-growing number of stores stocked with fresh fruits and vegetables and other food items, which should be a major draw in densely populated regions.

But herein lies a problem: The biggest grocer in the country is... Wal-Mart! And it's not even close. 

Fifty-six percent of the revenue generated at U.S. Walmart and Sam's Club stores came from the grocery segment. That's a whopping $188.5 billion from selling groceries and dwarfs some of the largest grocers in the country. 

Below I've compiled the corresponding location, sales, and net income data for a few of the biggest grocers in the country.

Company 

Locations

Sales (most recent fiscal year)

Net Income (most recent fiscal year)

Market Cap

Kroger 

2,640

$98.4 billion

$1.5 billion

$24.6 billion

Safeway

1,335

$36.1 billion

$3.5 billion

$8.0 billion

SUPERVALU

1,520

(wholesale serves another 1,820)

$17.2 billion

$182 million

$2.5 billion

Total

5,495

$151.7 billion

$5.2 billion

 $35.1 billion

Note: Safeway's results include a $3.3 billion gain from discontinued operations. Source: Yahoo! Finance and SEC filings.

You can see that groceries could actually add significantly to Wal-Mart's sales and income if done right. But with hundreds of competitors in a fragmented market that it already dominates, the company may not add a lot to sales and instead cannibalize larger-format stores where someone might come for a few groceries and leave with a whole cart of goods.

Mwt Neighborhood Image

Urban centers are Wal-Mart's target with Neighborhood Market. Photo source: Wal-Mart.

How fast can Wal-Mart grow the Neighborhood Market?
For Wal-Mart Neighborhood Market to be more than a blip in this vast retail empire, the company needs to grow faster than the 270 to 300 stores it plans to open this year. It's a good start, but competitors' store counts reach into the tens of thousands. However, Wal-Mart has the scale to compete in the Neighborhood Market business and to make it a significant share of its business.  

Should investors care about the opportunity in Walmart Neighborhood Market? The concept has been around since 1998 and has been little more than a side project for the company. But with Supercenter store sales falling quarter after quarter, management is looking for a concept that can grow. Wal-Mart Neighborhood Market certainly has that opportunity, but the company would have to take significant share from dollar, drug, and grocery stores without cannibalizing its own business for the concept to be a success. That's a tall order in today's retail environment.

I wouldn't jump into Wal-Mart stock because of Neighborhood Market, simply because it's not a big enough piece of the business now to matter. That may change in three to five years, but Supercenter sales still dominate the company and they're on the decline both at home and abroad. That doesn't bode well for Wal-Mart over the long term, and that's what investors should worry about.

Travis Hoium manages an account that owns shares of Target. The Motley Fool recommends CVS Caremark. 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers