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October 11, 2012

Comment: Wal-Mart outlines prudent expansion plans

Wal-Mart, the world's largest retailer, plans to spend an eye-watering $12-13bn on expansion in its next financial year. However, the amount equates to a cut in capex spending and the US retail giant wisely has said it plans "to do more with less".

By Dean Best

Wal-Mart Stores, the world’s largest retailer, plans to spend an eye-watering $12-13bn on expansion in its next financial year.

However, the amount equates to a cut in capex spending and the US retail giant wisely has said it plans “to do more with less”.

At a meeting with investors yesterday, Wal-Mart said it would add between 36-40m retail square feet next year, about flat on the amount it expects to expand its estate in the current financial year to January 2013.

In the US, it plans to add around 125 supercentres and continue to accelerate the rollout of its smaller Neighborhood Markets, with a goal of 95 – 115 small formats next year.

Internationally, Wal-Mart will add 20-22m sq feet, down slightly on the 21-23m set for this year. The expansion plans for the current year were revised in August and were based mainly on changes in Brazil and China (where it plans to make existing stores more profitable) and in Mexico (where it has slowed expansion in the wake of bribery allegations).

“We remain committed to capital discipline in our new store growth. Next year, we are allocating 60 percent of our funding to developing our higher growth markets and 40 percent to developed markets,” Doug McMillon, president and CEO of Wal-Mart’s international business, said. “We will point our investments toward the better performing formats, such as supercenters and discount compact hypermarkets, and we will stop or slow growth in lesser performing formats. In some cases, we have already done this, and it will be reflected in future performance.”

Wal-Mart’s prudence pleased investors and its shares jumped early in the day, although came off slightly after its forecast for sales growth in the next financial year matched its targets for this year, rather than exceeded them.

However, the company is wise to tactically use its cash. A roll-out of more smaller stores in the US will put pressure not just on the likes of Tesco’s Fresh & Easy but also traditional grocers like Safeway Inc and Supervalu Inc. That said, Wal-Mart remains cognisant of the pressure of operating in the US and other developed markets like the UK. Weak consumer confidence (and there are concerns that consumer sentiment in the US could worsen next year) means Wal-Mart will need to invest to remain competitive on price and to adapt to consumers’ changing habits and less loyal behaviour.

Moreover, the majority of its capex remains aimed at developing markets. Africa, for instance, could be a key region for the business in the wake of its investment in South Africa’s Massmart. That said, Wal-Mart’s prudence also extends to the emerging markets. It is not throwing heaps of cash at Brazil and China (two markets where there is concern over a slight slowdown in growth) and wants to make its existing stores work harder.

And, wisely, Wal-Mart has said it will invest “more heavily” in e-commerce. It believes the UK, US, Brazil and China are the markets with the “greatest growth potential” for e-commerce sales. Earlier this week in London, we heard more about Asda’s plans for investment in digital technology.

After a problematic period in the US and challenges in the UK (and notwithstanding the potential financial impact of the Mexican allegations, if proven) Wal-Mart seems to be astutely focusing its investment.

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