Wal-Mart Goes from Mega to Micro

Edited by Vani Rao

To set up more number of small-format Walmart Express stores

Wal-Mart Stores Inc. (NYSE:WMT), the world’s largest retailer that dominated the retail world for more than five decades, is now giving a shot at new business models after Doug McMillon took over as CEO and President in February 2014. After witnessing a decline in same store sales in 14 of the last 21 quarters, the company is looking for a change of stance to focus on the less is more concept. With the price gap steadily closing in between Wal-Mart and its competitors such as Costco Wholesale Corp. (NASDAQ:COST), Target Corp. (NYSE:TGT), The Kroger Co. (NYSE:KR), and Best Buy Co. Inc. (NYSE:BBY), the retail giant is now testing new store concepts and online strategies to regain market share from online rivals like Amazon.com (NASDAQ:AMZN) and fast-expanding dollar store chains.

Wal-Mart mainly caters to low-income customers who spend 18% of their income at the chain. This class of customers has become tight-fisted and are seeking massive discounts. Coupled with the harsh retail environment, slow job growth, and higher taxes, to achieve even a 1% sales growth, Wal-Mart will have to clock nearly $5 billion in additional sales. Seems like a behemoth task in any given year!

Source: Company data
Source: Company data

In Q1 FY2015, despite an increase of 0.8% in revenue to $114.2 billion, currency fluctuations and harsh weather negatively impacted sales to the extent of $1.6 billion. On a brighter note, global e-commerce sales increased approximately 27%. The price movement of Wal-Mart’s stock is shown below.

Source: Bloomberg
Source: Bloomberg

Less is More

While Wal-Mart earlier believed that bigger stores were better, it is now focusing on adding convenience-type stores rather than large-format supercenters. Which is why Wal-Mart, for the first time in its history, is testing the waters with a new convenience store format called Walmart to Go (5,200 square feet). While this store format is still being tested, Wal-Mart has also been experimenting with a grocery-focused store called Neighborhood Market (43,000 square feet).

Most importantly, the retailer is looking to take the expansion leap with another smaller store format called Walmart Express (12,000 square feet). The first Walmart Express locations have been set up in Arkansas, Illinois, and North Carolina and in Oklahoma this fall. Walmart Express will stock groceries, household items, paper goods, cleaning supplies and health and beauty products, and general merchandise.

Site to Store

bc 3While Wal-Mart has embraced the online model in recent years, its online customers will be able to place an order online and pick it up at the Walmart Express store without any additional fee. This service, called Site to Store, allows the retailer to provide customers with bigger items that are generally not seen on store shelves. To add to the convenience factor and usher in a new trend at its stores, Walmart Express will have a full-service pharmacy as well.

As part of the company’s big push into gasoline retailing, Wal-Mart is expected to add filling stations to some 2,000 new Wal-Mart stores in the coming years.

The smaller stores will enable buyers with limited shopping lists to get in and out quickly without having to wait in long queues as seen in the Supercenters. However, prices at Walmart Express will be the same as at Supercenters. About 300 Walmart Express and Neighborhood Markets are scheduled to be built in the next year, according to the company.

Forward March

Taking a close look at competitors, Wal-Mart has said that it aims to double its alcohol sales by 2016. The chain plans to build free-standing liquor stores in states like Florida that prohibit retailers from selling liquor inside the grocery stores. Snapping at Amazon’s heels, Wal-Mart has changed its signature “everyday low prices” model in its website and instead replaced it with a “dynamic pricing” system.

Not one to be left behind and quietly creeping back to its leading position, Wal-Mart invested roughly $500 million into e-commerce venture during the year ended January 31, 2014. In February 2014, Wal-Mart announced that it plans to spend an additional $150 million on e-commerce investments this year.

Despite labor unrest and federal investigations into bribery allegations, Wal-Mart has shown that it is resilient with enormous resources to do what it takes to remain the industry leader. While the new CEO’s fresh ideas may unsettle investors, it remains to be seen whether the smaller formats and online sales will dent business at its traditional stores.

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