Market watchers not surprised Wal-Mart exited small format business

Analysts, insiders and other retail watchers said a change in top bosses in Bentonville is one reason why Wal-Mart Stores got out of the small-ball retail game, even with Target, H-E-B and other competitors still investing in small format retail.

The supercenter has always been the cash cow for retail giant Wal-Mart Stores, so the recent shuttering of the small-store format it launched in 2011 was not a surprise to several retail experts. Part of the consensus suggests that organizational inefficiencies and management churn as two possible reasons why Walmart U.S. gave up on its 102 small format stores that are slated to close this week.

Peggy Knight, a supplier consultant and retired Wal-Mart manager, said the new management regime of CEO Doug McMillon is watching sales and expense ratios, with more focus placed on e-commerce. The retailer is in the process of a $2 billion investment in e-commerce. Knight said with the complete management turnover in the U.S. segment since the Express format was introduced in 2011, the new mindset is focusing on proven models of success such as the supercenters and Neighborhood Markets.

Alan Ellstrand, a corporate management expert at the University of Arkansas, said since the small formats were tied to leaders that moved on – such as former Wal-Mart Stores CEO Mike Duke and U.S. Divisional CEO Bill Simon – it’s not a surprise to see some of their projects abandoned.

“Projects often fail to be picked up when their champions are no longer present. From the political viewpoint, most leaders have their own ideas they want to introduce and that will most often be the focus and direction they take the company,” Ellstrand said.

EXPRESS EXPERIMENT
When Walmart U.S. introduced the Express Format in 2011, the biggest competitor nipping at their heels were the dollar store chains. Walmart reacted by setting up the small 15,000-square-foot Express Store primarily in rural areas near a Dollar General and Family Dollar store.

In October 2013, then-Walmart U.S. CEO Bill Simon told investors that the retailer planned to build out retail ecosystems adding smaller format stores, the Express Store and traditional Neighborhood Markets around supercenters. The plan was to tether these small stores in rural areas to nearby supercenters so the small stores could be stocked on-demand and equipped for two-day shipments from Walmart.com.

Between 2011 and 2013 Dollar General added nearly 1,200 stores equipped to offer fresh foods and dairy products as well as tobacco products. In late 2013 Walmart U.S. had just 20 Express Stores and 306 Neighborhood Markets, not nearly enough to complete Simon’s ecosystem model.

The first tethering test markets were in North Carolina and Northwest Arkansas. Under Simon’s vision the small, inexpensive formats would have low operational costs, and, if tethered to supercenters and endless aisle opportunities with Walmart.com and instore pickup, then consumers could have the best of both worlds in terms of local access and the broadest assortment possible.

“Think of it this way, a Walmart Express with site-to-store, ship-to-store, full grocery, gas and pharmacy can drive the same sales as three to five Dollar Stores,” Simon said.

He said the hybrid Neighborhood Market could drive the sales of 10 Dollar Stores, and both models would make better use of capital given their reduced building costs.

Walmart reported Express Formats were returning double-digit comp sales in the first half of 2013 while supercenter comp sales were flat. The smallest Walmart stores were shopped regularly, which led to an expansion of 80 more Express formats which were built over the past year. Simon said building out the ecosystems across the U.S. was the key to unlocking future growth potential at Walmart. He said the retailer would continue to be disciplined in its use of capital to fill in markets where the brand is already strong.

In the spring of 2014 Simon said the ecosystems would also include pickup depots for Walmart.com. The pickup option was expanded to include grocery orders placed online, an initiative championed by Simon and one that has survived and expanded since his departure.

OPERATIONAL CHALLENGES
By July 2014, Simon had resigned his post as Walmart U.S. CEO, to be replaced by Greg Foran, a retail operations veteran in overseas markets. A retired Wal-Mart executive who spoke with Talk Business & Politics said the smallest of the Walmart formats were operationally inefficient because they didn’t conform to the retailer’s traditional supply chain model, deemed by many to be the most efficient in the industry. He said it didn’t take Foran long to figure that out.

The tethering concept indeed was abandoned as Foran saw this as a cumbersome chore for supercenters, which continue to be the retailers proven model of success. Foran told investors in the fall of 2014 that his focus would be on supercenter improvements and Neighborhood Market expansions because they offered the company the most growth potential in terms of sales revenue.

Insiders said it was Foran who called for ending the Express experiment, given that it was a distraction to what the retailer is trying to accomplish in terms of improving service at its supercenters, returning to a focus on low prices, doing better with fresh foods, and blending the physical assets with Walmart.com

Carol Spieckerman, of Spieckerman Retail, said Wal-Mart execs, who understood the benefits of supply chain efficiencies, realized how unique small formats are from an operational standpoint.

“Walmart openly acknowledged its struggles to manage everything from pack sizes to back room processes and transportation to urban locations. It was faced with operating a model that was more unique than synergistic with its core business,” Spieckerman said. “The small format landscape is also quite crowded with seasoned competitors such as dollar stores, drug retailers and hard discounters like Aldi, and soon, Lidl.”

At the same time, she said Walmart’s Neighborhood Market stores can easily fulfill its clicks-to-bricks aspirations by leveraging locations as pickup points for online orders.

“Taking a ‘medium/large’ approach to its format strategy rather than attempting to build a ‘small/medium/large’ fleet will drive more differentiation, and focus, for Walmart at the end of the day,” Spieckerman said.

Ellstrand said the small formats were a major departure from what has traditionally been a sweet spot for Walmart in terms of revenue generation. He said given many of these Express stores were in rural areas, they no doubt provided a time and logistical distraction for the supercenters that were tasked with suppling on-demand inventory.

Amy Koo, an analyst with Kantar Retail consulting group in New York, said the Express format stores “were just not worth it.”

OTHERS GOING SMALL
While the small format game was not the right fit for retailer Walmart, Target and H-E-B Grocery are experimenting in the small format arena in larger urban areas such as Minneapolis and San Antonio, Texas.

Jerry Bowman, a contributor for Motley Fool, said unlike Walmart, Target has found success in urban areas and it is better poised for success with the smaller City Target stores and the new Target Express. He said Target is not a grocery retailer that Walmart is and much more of the Target revenue is derived from non-perishable goods.

Ellstrand said a smaller Express format is more likely to be successful in large urban areas. He said Target and H-E-B have found success in large metro areas and are capturing major market share. He said while the cost to build in urban areas is much greater, the population density is typically enough to support those added costs.

H-E-B recently announced plans to expand with convenience stores in its home base of San Antonio. Walmart also experimented with convenience stores, a project began under Simon’s leadership. After opening the Walmart Express Convenience Store in Bentonville, the retailer determined it could downsize the format and put them outside of fueling stations linked to supercenters and Neighborhood Markets, which is the model Walmart is now using. The Walmart convenience stores promote 32-ounce foundation drinks for 88-cents and a full beverage bar offering a variety of coffees hot and cold and other traditional c-store snacks.