Wal-Mart to build out retail ecosystems with small stores

Wal-Mart Stores Inc., plans to build retail ecosystems that will capture a larger percentage of marketshare from Dollar Stores and others catering to consumer convenience desires in rural America.

Bill Simon, CEO of Walmart U.S., told investors Tuesday (Oct 15) that tests in rural North Carolina have proven fruitful enough for the retailer to build out three ecosystems, and “the first will be up and running by March.” Simon and other executives addressed Wall Street analysts at the company’s annual investor conference in Bentonville.

He said the ecosystems involve building more Express Stores in rural areas that can be stocked directly from nearby supercenters that are tethered to the small stores. Also in the mix, are rural Neighborhood Markets that may be stocked with general merchandise on-demand from nearby supercenters and two-day shipments from Walmart.com.

Simon said while Wal-Mart was building out supercenters in recent years, Dollar General and other convenience stores saturated rural America with some 11,000 stores.

It’s been three years since the first Walmart Express stores opened in Northwest Arkansas. The plain vanilla stores resemble a small box, with the convenience of a gas station and pharmacy. But, getting the merchandise assortment right in a 10,000-item store took some time, as Wal-Mart is widely known for its massive 100,000 or more item assortments.

Locally in the Wal-Mart Express in Gravette, consumers can get their grocery staples, books, beer and wine, party supplies, birthday cards, gift cards and even live fishing bait. The rod and reel could be delivered same-day to the store from the supercenter in Bentonville that it’s tethered to for merchandise stocking.

Simon said the company can ramp up these plans to build out the ecosystems as needed, but it will stay focused on disciplined spending overall. Wal-Mart now has just 20 Express Stores and 306 Neighborhood Markets with ramp-up plans throughout the next two to three years.

In the past two years, Dollar General has added nearly 1,200 stores along with fresh and dairy products which has helped them steal away marketshare from Wal-Mart. The loss of marketshare in part comes as in many rural areas dollar stores are competing head-to-head with Wal-Mart’s older discount centers.

Simon said the logistics and density tests in rural North Carolina and Northwest Arkansas have shown that stocking Express stores from nearby supercenters is efficient. He said the small box stores tethered to supercenters and board product offering opportunity from Walmart.com give consumers the best of both worlds – convenience in terms of local access, as well as the broadest assortment possible.

Wal-Mart also said it’s actively looking to update or relocate some 650 discount stores because the model has the weakest comps with no fresh grocery items to drive traffic.

“Think of it this way, a Wal-Mart Express with site-to-store, ship-to-store, full grocery, gas and pharmacy can drive the same sales as three to five Dollar Stores. He said the hybrid Neighborhood Market can drive the sales of 10 Dollar Stores, and both models make better use of capital given their reduced building costs," Simon said.

He said Wal-Mart also has a smaller supercenter prototype that is 70,000 square feet which can be built for less than $10 million including land costs on average.

Jason Long, CEO of Shift Marketing Group in St. Louis, recently told The City Wire that Wal-Mart took its eye off the ball in rural America, where founder Sam Walton made his mark.

“It’s a fact that Dollar General and Dollar stores in general are taking a bite out of Wal-Mart’s business,” Long said.

For instance, Dollar General reported strong comparable sales of 5.1% in its recent quarter ended Aug. 2. At the same time Wal-Mart saw slightly negative comps and expects flat to slightly negative comps for the quarter ending Oct. 31. Wal-Mart said Tuesday (Oct. 15) that the Express Stores registered double-digit comp sales in the first half of this year and the Neighborhood Market also performed well.

Simon shared a slide with investors that showed a typical market where various dollar stores vastly outnumbered Wal-Mart’s one or two Supercenters and a Neighborhood Market. He said that is something the retail giant will combat by blending brick and mortar with e-commerce capabilities.

Retail Insight analyst Mike Paglia recently told The City Wire that Wal-Mart is keenly aware it is losing share to Dollar Stores because of a change in shopper habits. He said consumers are making fewer stock-up trips that supercenters facilitate, while making more convenience and frequent shopping trips better suited to smaller stores that have fresh products. Paglia said Dollar General is comparing very well on price with Wal-Mart in a number of categories including edible grocery and non-edible grocery.

Kantar did a price comparison study last year that found Dollar General shoppers saved 18% when they went head-to-head with Wal-Mart on the total basket. That study will be updated next month.

Simon said building out the ecosystems across the U.S. is the key to unlocking future growth potential at Wal-Mart. He said the retailer will continue to be disciplined in its use of capital to fill in markets where the brand is already strong.

He deferred any comments on cannibalization to the end of the year reporting.