Thinking Small

Over the past several months, WMT officials have clearly articulated a desire to ramp up investments in ecommerce and small format stores, but critics have pointed out that these initiatives represent a different business model than that of the supercenter, as well as significant new capital expenditures, and even defenders of the strategy acknowledge it is primarily a defensive one. In response, WMT officials have sought to emphasize the ways the new investments will leverage the company’s existing big box base—initiatives such as “site to store” (allowing customers to pick up website purchases at brick and mortar stores) and “tethering” (using supercenter backrooms as secondary distribution centers to supply new small format stores nearby).

But recent downgrades by Goldman Sachs and Jefferies raised doubts about these initiatives, citing the company’s focus “on growth and investment rather than returns” (Goldman) and arguing the “lower initial ROI from [small] formats during the early years of maturity are likely to be a headwind” (Jefferies).

Goldman suggested bluntly that “the jury is still out” on the company’s tethering concept. And rightly so: as many WMT associates can attest, supercenter backrooms are sometimes so chaotic they are hardly able to supply the supercenters they are connected to, much less an “ecosystem” of nearby smaller stores. (Apologies if we have this wrong, but we thought that Sam Walton built the largest retailer in the world by eliminating intermediate distribution points, not adding them.)

WMT ROI Continues to Decline

Meanwhile the market share impacts of Neighborhood Market are unclear at best. While WMT officials continue to tout strong same store sales gains at the smaller format, last month BMO Capital released a report suggesting that the Neighborhood Market format may not be as effective as WMT officials have suggested. BMO found that WMT lost market share in roughly one-third of markets where it operates the format, including four of the top ten markets. The four markets called out by BMO were Dallas-Ft. Worth, Phoenix, Las Vegas and Houston. Our own examination of Metro Market Studies data confirms these trends. The case of Dallas-Ft. Worth should be particularly troubling for WMT. Between 2010 and 2014 WMT’s market share fell from 27.3% to 27.1%. This 0.2% market share decline might appear relatively small, until one considers that the company increased the number of Neighborhood Markets from 22 to 32, and the number of supercenters from 71 to 73, during this time period.
Note well: this market share analysis pertains to grocery sales only, a segment in which the company claims it is actually gaining market share nationally. (In contrast, WMT’s overall market share, including general merchandise, has been falling since 2010.)
The obvious concern is that the new Neighborhood Markets may be cannibalizing existing WMT supercenters. Thus, the investment in new Neighborhood Markets may appear to be sound on a store level basis however when the cannibalization effect is considered the market-level ROI reduction may offset any gains.

Instead of expanding in markets where WMT already has significant market share, a much more compelling case can be made for growth in a number of urban markets where the company has little to no presence. As one analyst recently noted, in four large population states (New York, New Jersey, Massachusetts and California) the number of WMT stores per person is about half the national average for the company. “Walmart has to go where the people are,” wrote the analyst, “and those states, especially their large metropolitan areas, have not been warm and friendly to Walmart.”

What do you think?