Wal-Mart Stores (NYSE:WMT) is changing before our eyes. The big-box giant, which came to power by disrupting smaller retail stores, is now aggressively slimming down to fight off its own disruptive competitors with concepts such as its Neighborhood Market and Walmart Express. With its latest effort -- a convenience store dubbed Walmart to Go that includes gas pumps -- Wal-Mart is continuing to bet that a slimmed-down strategy will boost its bottom line.
Let's take a look at what this could mean for investors.
What is Walmart to Go?
Walmart to Go is a pilot program for now, with one location in Wal-Mart's hometown of Bentonville, Ark. The store concept for Walmart to Go is closer to a super convenience store than the traditional, sprawling storefront Wal-Mart's known for. With gas pumps out front, and a slew of quick and cheap items inside, the store seems aimed at competing with 7-11s and dollar stores.
While the "to go" store is just a concept (for now), Walmart is already seeing success with its two other small brands. Walmart Express, a 12,00-square-foot concept that targets dollar stores, is expecting a large rollout this year, and Neighborhood Market grocery stores saw year-over-year comparable-sales growth of 5.6% in Wal-Mart's second quarter. There are 381 Neighborhood Markets in the U.S. and 21 Walmart Express Stores, making up a small part of Wal-Mart's 4,281 U.S. stores.
While the Walmart Express concept is much more similar to Walmart to Go, it remains to be seen if expansion of either will stick. All we know is that Wal-Mart is hoping these "small" expansions will boost its otherwise flat same-store sales numbers.
Why Wal-Mart will continue to go "small"
Consumers aren't just looking for the best prices; they want convenience, too. As Wal-Mart's Supercenters (each about 182,000 square feet) attempt to lure customer in by selling a wide range of products at low prices, Dollar General (NYSE:DG) and Dollar Tree (NASDAQ:DLTR) are able to steal market share by winning over customers who want to get "in and out" of a store quickly. Walmart to Go meets consumer needs to get quick items like deli-counter snacks, or batteries, without venturing through a giant store.
Moreover, the slimmed down stores could help Wal-Mart enter new markets and grow its store count. With more than 3,000 Supercenters in the U.S., Wal-Mart is running out of space. These stores, which range in square footage from 98,000 to 261,000, can only be built in so many places. Smaller stores open a new market for Wal-Mart -- large cities. If Walmart to Go can help Wal-Mart break into urban markets, which have resisted it so far, it could boost top-line sales significantly.
Wal-Mart is adapting well
Investors should have confidence in Walmart to Go because Wal-Mart has adapted to changing trends better than most brick-and-mortar retailers. Take online shopping, for instance; Wal-Mart has handled it admirably. Last year, Wal-Mart Stores online sales grew a whopping 30%, and, according to data from trade publication Internet Retailer, Wal-Mart ranks fourth among all retailers in global e-commerce sales (Amazon.com is No. 1). Wal-Mart trails Amazon in online sales by a wide margin, but its online sales grew faster than Amazon's for the first time last year. This is thanks to Wal-Mart's proactive approach. It hit online shopping early and offered value (like in-store pickup), even though the threat was relatively small. As the chart below shows, online sales still only account for a small percentage of overall retail sales (but it's growing).
Will Walmart to Go boost the bottom line?
Wal-Mart's brand is synonymous with large Supercenters. It remains to be seen if it can stand for something else, say Walmart to Go. The fact that Neighborhood Market grew same-store sales 5.6% in Q2 is encouraging, however, because Wal-Mart isn't "known" for fresh produce or Neighborhood's smaller format, either.
Could Walmart to Go boost the company's bottom line? Potentially. Despite the fact that these stores sell lower-margin products, they could be the most profitable brands for Walmart. Walmart to Go, like Walmart Express, would sell non-perishable items and it would have much lower capital expenditures and overhead than the Supercenters. When we look at the net profit margins at Dollar General and Dollar Tree, these stores both come out ahead of Wal-Mart as a whole. It's reasonable to think that Walmart to Go could do the same.
There are risks with Walmart to Go, and all of Wal-Mart's smaller stores. Keep in mind that sales at the existing, large stores are still slowing and there is a risk that Walmart to Go would cannibalize some of the "convenience sales" that do take place in Supercenters.
At the end of the day, Investors should be encourage by Walmart go Go, even though it's too small to impact the bottom line in the near-term. These slimmed down initiatives represent an eagerness to change by Wal-Mart. We don't know if customers will fully embrace these changes but, compared to most brick-and-mortar retailers, Wal-Mart's proactive approach is refreshing.
Adem Tahiri has no position in any stocks mentioned. The Motley Fool recommends Amazon.com. The Motley Fool owns shares of Amazon.com. 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.