Wal-Mart Express Shows Size Does Matter
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It is no secret that specialty big box retailers have needed to become increasingly creative asset utilizers in their never-ending scramble to remain profitable. Key players including Best Buy (NYSE: BBY) and Staples, for instance, have toyed with smaller store layouts that not only tuck nicely into busy urban centers, but also specialized in faster moving inventory and contribute more efficient square footage to each retailer’s total physical footprint.
Even general merchandise retailers, which have historically enjoyed the customer loyalty-inducing sale of grocery items, have not been immune to the recent slowing foot traffic and the lost business to even cheaper retailing alternatives. Target (NYSE: TGT) has enjoyed a slight improvement in top line and comparable store sales performance over the past three years through its continued devotion of sellable square footage to displays of revolving and seasonably fashionable merchandise. Its latest in-store venture with The Shops is a natural extension of such a “cheap chic” retail concept, and currently highlights a collection of handpicked luxury retailers across five product lines.
Wal-Mart’s (NYSE: WMT) experience since reaching mid-recessionary trough levels has shown that even the largest and most influential retailers in the big box space are hardly immune to smaller competition by simply being “too big to fail.” The retailer, despite its impressive growth in the international market, has experienced significant troubles in its core domestic stores.
One of the primary issues Wal-Mart faces going forward is the sluggish growth in the United States market. The retailer gave up a sizeable chunk of the domestic sector through the customer alienation change it made to its merchandizing strategy several years ago – selective sales and cleaner/less cluttered isles versus traditional focus on every day low prices and controllable clutter to drive impulse sales. Many general merchandise shoppers, which traded down to even cheaper alternatives including dollar store players, have left Wal-Mart’s domestic growth in its worst shape by far over the past decade.
The certain players that have historically garnered significantly less attention than the industry heavyweights are now very legitimate components to the United States general merchandise retail setting. Dollar Tree (NASDAQ: DLTR) and Family Dollar (NYSE: FDO), for example, have grown organically at rather robust rates over the past five years, and the rates are speeding as time progresses:
- Dollar Tree
- Five Year Sales Growth Average: 10.8%
- Three Year Sales Growth Average: 12.6%
- Five Year Comparable Store Sales Growth Average: 5.3%
- Three Year Comparable Store Sales Growth Average: 6.5%
- Family Dollar
- Five Year Sales Growth Average: 6.0%
- Three Year Sales Growth Average: 7.0%
- Five Year Comparable Store Sales Growth Average: 3.3%
- Three Year Comparable Store Sales Growth Average: 4.8%
Despite its relative age in the domestic retail environment and the inability to enact extremely swift change due to its sheer size, Wal-Mart does appear to have a very important ace up its sleeve. The corporation, which announced the launch of smaller Wal-Mart Express outlets in mid-2011, has compiled enough performance data to label the undertaking as a raging success. The up-and-coming smaller players and the larger existing competition alike will undoubtedly feel a large impact from the continued growth of the latest Wal-Mart retail concept.
Following the latest industry trend of scaling down store size and focusing on the merchandise of the highest turnover, Wal-Mart Express represents a meaningful shift away from the corporation’s expansive legacy outlets. Shooting for a 12,000 – 15,000 total sellable square footage, the smaller Express stores are a mere one-tenth the size of Wal-Mart’s traditional Supercenters. There are two key takeaways with the success of the Express stores:
- Let the Growth Continue
The Supercenter store concept has recently been Wal-Mart’s primary key to growth in the domestic market. Over the past five years, the corporation has opened more than 450 Supercenters (through a combination of new store construction and legacy store conversion), and Supercenters have gone to comprise 77% of Wal-Mart’s domestic square footage to more than 88% over the same time period.
By focusing on growth through such large outlets, the corporation has greatly diminished its year-over-year growth rate performance.
- Domestic store count growth, 5 years ending:
- 1992 – USA store growth (non Sam’s Club stores): 55.5%
- 1997 – 22.4%
- 2002 – 16.2%
- 2012 – 7.6%
Year-over-year sales growth has also slowed to a disturbing halt.
The focus on growth through smaller Wal-Mart Express outlets will not only allow the retailer to resume historic levels of square footage growth, but it will also give Wal-Mart access to previously-untapped geographic markets. The tuck-in ability of the Express outlets and their focus on necessary and high-turnover goods makes the retail concept very suitable for high traffic urban and lower population rural environments alike. Wal-Mart has announced the intention of opening several hundred Express stores over the next five years (up from ten today) and despite the stores’ smaller size, it should contribute very efficient square footage to the mature retailer’s domestic operations.
- Attacking a New Niche
Wal-Mart’s heavy focus on grocery items (more than 50% of its domestic sales) shows that consumers view the stores as attractive destination sites for weekly shopping trips. Despite the ample food selection, however, the Supercenter concept is not always ideal for quick, last minute item shopping trips. The robust growth of dollar and drug stores alike over the past several years, at the expense of Wal-Mart’s top line, does show that the larger retailer is missing a large opportunity in the “fill-in trips” general merchandise market. This large subset of shoppers, which tend to run into stores and grab a few items on the way home from work, is a swiftly growing niche that will act as a great supplement to the bulk shoppers that Wal-Mart’s Superstores already target.
Already profitable within a year of their launch, the smaller Wal-Mart Express stores have proven their ability to be a great growth driver for the retailer’s mature domestic market going forward. Combined with the corporation’s significantly more efficient command of its hub-and-spoke logistics system, the attacking of this new niche should pose a very meaningful threat to all of the smaller players that have taken a bite out of Wal-Mart’s top line over the past several years.
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