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Wal-Mart Announces Plan to Kill Dollar Stores. Will It Succeed?

By John Maxfield – Feb 23, 2014 at 3:12PM

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Wal-Mart has trained its competitive gaze on dollar stores. Will they be able to survive the coming onslaught?

If Wal-Mart (WMT 0.82%) has its way, the days of the dollar store are numbered.

In a press release issued on Thursday, the retail giant signaled its intent to aggressively go after the smaller store format that's the bread and butter of dollar stores, including Family Dollar (FDO.DL), Dollar General (DG 1.46%), and Dollar Tree (DLTR 1.43%).

According to the announcement, Wal-Mart is accelerating its plan to blanket the country with miniature versions of its now ubiquitous Supercenters. It expects to open between 270 and 300 small stores throughout 2014. That's more than double its initial forecast of 120 to 150 stores which it publicized last October.

Of particular concern to dollar stores is Wal-Mart's most recent concept, the Walmart Express. "They are really kind of a hybrid little store, with about 10,000 to 12,000 square feet," explained a Wal-Mart executive last year. Most recently, the company opened a Walmart Express in Benson, N.C.

"The new Walmart Express store will be a place for Benson residents to fulfill their everyday grocery and pharmacy needs in a clean, friendly, convenient location," said Benson store manager Dale Ennis. "It also means residents can get fuel without having to drive out of town."

The advantage of the format was highlighted by William Simon, chief executive officer of Wal-Mart U.S., who noted that the stores "deliver really, really well against three competitive sets." Most notably, "against a dollar store, they have fresh food, pharmacy, and gas," not to mention a "pricing advantage" over companies like Family Dollar, Dollar General, and Dollar Tree.

Wal-Mart's strategy is to essentially use the Express format to plug the gaps between its Supercenters and Neighborhood Markets -- which is where the dollar stores have carved out a niche for themselves. You can see this in the following image, which I pulled from a recent Wal-Mart presentation.

This is a map of an actual, though undisclosed, metropolitan area showing the current locations of (1) its existing Supercenters, (2) its dollar and grocery store competitors, and (3) where Wal-Mart plans to fill in the gaps with its Neighborhood and Express formats.

"Customers appreciate the broad assortment of our Supercenters for their stock-up trips as well as our small store formats for fill-in trips," said Simon. "By unlocking this growth opportunity and further combining our supercenters and small store formats with an unlimited selection available through e-commerce, we provide our customers with anytime, anywhere access to our brand."

Suffice it to say, if you're a dollar store operator -- or, for that matter, a shareholder in Family Dollar, Dollar General, or Dollar Tree -- this doesn't look promising.

John Maxfield and The Motley Fool have no position in any of the stocks mentioned. We Fools don't 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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