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Convenience Will Be Key to Wal-Mart's Growth

By Rich Duprey – Mar 19, 2014 at 8:30AM

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The retail giant isn't the only one impacted by changes under way in the grocery business.

Fortunately for Wal-Mart (WMT 1.22%), the severe cold and snow we had this past winter seems to have caught up with deep-discount rival Dollar General (DG 1.33%), as it reported weaker-than-expected fourth-quarter profits and sales that fell well short of analyst expectations. But because it's still siphoning away more than $17 billion a year in annual sales, along with all the other dollar stores, the retail giant can't afford to ease up on its plans to roll out new-format stores that make themselves more accessible for on-the-go customers.

Source: Wal-Mart.

Tomorrow, Wal-Mart will be celebrating the grand opening of its Walmart to Go convenience store, a test project for which there are no plans yet to open more, but also one of several ideas it's been testing to stem the tide of sales it's losing to rivals (and not to be confused with its delivery service of the same name). The retailer also operates 20 Walmart Express shops, a 15,000-square-foot convenience store, and 346 Neighborhood Markets, which, at 42,000 square feet, are smaller versions of its supercenters. The new hybrid C-store will be just 2,500 square feet.

With convenience store operators like 7-Eleven and Wawa adding more fresh foods and groceries, supermarkets following the lead of Whole Food Markets and Tim Hortons by adding dining options, and restaurants adding packaged goods and groceries like Cracker Barrel does, what we're seeing is the return of the old general store idea.

Source: Cracker Barrel investor presentation, September 2013.

For the longest time, the supermarket was a resilient investment, because regardless of economic conditions, people still have to eat. Wal-Mart and Kroger were two of the premier practitioners of the art, but increased costs and expenses have winnowed away the profits, such that Safeway, the second-largest supermarket operator, is now close to being sold to private equity firm Cerberus Capital, the same company that bought the Albertson's chain.

Although that sale will create a massive network of grocery stores, bigger is no longer necessarily better, as consumers are increasingly concerned about the quality of the food they're buying, and smaller neighborhood markets that sell locally sourced organic produce and even meat are gaining popularity. It's not just the "snow in winter" excuse retailers of all stripes have been using, but rather a change in how we shop that's impacting sales.

Wal-Mart saw the change coming and began the process of adapting to the trend. It now plans on adding 270 to 300 small-format stores during the coming fiscal year -- up from an originally planned 120 to 150 stores -- adding as much as 21 million to 23 million square feet of space across all formats.

Dollar General has been part of the wave of smaller, more convenient store locations that have drained sales from the lumbering retail giant, but this last quarter's results show that it might not just be Wal-Mart that needs to worry about this trend in hyper-local shopping. There's a $415 billion quick-trip opportunity out there, and the retail king has proven adept at adapting to the new landscape, though it has yet to pay dividends.

What's not clear is how many others also see that going small to get big is the new trend and are willing to make the changes necessary to prosper. Although Wal-Mart's sales have slowed considerably, investors may still profit from the big things coming from small packages.

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