Wal-Mart wants to ramp up expansion of small-store network

Wal-Mart wants to ramp up expansion of small-store network

Given Wal-Mart pre-announced its fourth-quarter earnings last month, the drop inthe retailer's profits was no real surprise.

However, one announcement from the world's largest retailer did catch the eye. We already knew one of the retailer's most synoymous with big-box stores was looking to expand its fledgling estate of smaller stores in the US. But yesterday (20 February) Wal-Mart doubled the number of small stores it said it would build this year - and in a few paragraphs demonstrated new CEO Doug Millon, just three weeks in the hot seat, was making his mark.

In October, Wal-Mart, during its annual update of where it plans to put its capital expenditure, said it would open 120 to 150 small outlets in the US this year. Yesterday, alongside results that showed a fall in both quarterly and annual comparable sales in the US, it put a pen through that plan and announced something bolder.

Wal-Mart now plans to add around 270 to 300 stores to its network of Neighborhood Markets and Walmart Express outlets in the US.

McMillon said Wal-Mart wanted to "get closer to our customers and provide them with additional shopping options". Small stores, McMillon insisted, was central to this aim.

"In the US, we see a great opportunity to accelerate our small-format store rollout to complement Walmart's core supercenter fleet. Customers want this convenience, and they are responding by driving strong comps at existing small formats."

In a quarter when Wal-Mart's total US sales were down, not helped by the end of the SNAP benefits in the US and, of course, the foul weather in parts of the country, its smaller stores generated notable growth in underlying sales.

Bill Simon, the head of Wal-Mart's US business, said the retailer "continues to be pleased with the strength of our small formats".

"These stores continue to deliver positive comp sales and traffic increases each quarter. In fact, comp sales, without fuel, for Neighborhood Markets grew approximately 5 percent for the 14-week period [to the end of January]," he said.

Wal-Mart operates 346 Neighborhood Markets and 20 Walmart Express stores. It opened 105 Neighborhood Markets and seven Express stores last year. Simon was upbeat about the prospects for both formats.

"[Neighborhood Markets] delivered an approximately 4% sales comp for the year, driven by fresh and pharmacy. In fact, our Neighborhood Market fleet is performing comparable or favourable to leading grocers around the country," Simon claimed. "We also opened seven Walmart Express units this year, bringing the total to 20. We continue to learn from these stores and are excited by the options this format offers." Wal-Mart said it is expanding Express' presence beyond what was an initial pilot in three markets.

Wal-Mart's previous attempts to build a network of smaller stores did not go smoothly. In 2008, Wal-Mart tested a much smaller outlet of around 16,000 sq ft called Marketside. The move was seen to have been sparked by Tesco's launch of its US business Fresh & Easy. That said, during the Noughties, Safeway, in California, and Supervalu Inc, with its Urban Fresh outlet in Chicago, opened smaller formats, while Giant Eagle opened its first Giant Eagle Express store in Pittsburgh in 2007. In 2009, Wal-Mart announced it would not build on the Marketside trial and the four outlets under the chain closed in 2011.

McMillon and his management team clearly seem optimistic about the prospects for its current small-store business. US shoppers are looking for more convenient options and, while far larger than the traditional 'Cokes and smokes' c-stores seen in the country, they are tapping into a consumer need.

Wal-Mart also believes a larger estate of smaller stores can help it build what Simon called "digitally connected, multi-format portfolio". He said: "Our full fleet will serve as the physical access points for our digital business, combining these two worlds in a unique way."

Analysts have welcomed Wal-Mart's renewed - and bolder - ambitions for its smaller stores, although there are some reservations.

"We view the acceleration of its small store formats in 2014 favourably, although it is still unclear if this strategy will cannibalise existing Supercenters," William Blair & Co. analyst Mark Miller said yesterday.

He added: "We continue to see less appeal from larger stores with wide assortment when almost everything is available online with greater convenience."

Wal-Mart is continuing to build its estate of Supercenters, with plans to open 115 this year. "Supercenters will also continue to play a role in our overall growth and are essential to the grocery stock-up and broader shopping trips," Simon insisted.

However, it is Wal-Mart's new plans for smaller stores that are most notable. "The small store format has been around a long time in some variation. They have not, to date, really signalled a commitment. Perhaps this is a sign," Neil Stern, senior partner at retail consultants McMillanDoolittle, said. "It is the obvious direction for the company to head in, assuming that they can produce an adequate ROI, which has been the bigger issue from day one."

Such considerations will no doubt exercising Wal-Mart's management and new CEO, who, just 19 days into the job, has signalled some change at the retailer.

"Walmart has a long history of embracing change," he said. "And this year, we'll certainly make some changes to improve our business. These changes will be made with a filter on increasing customer relevance. Customers' shopping habits are changing more rapidly than ever before. We must be more nimble and flexible as we operate our businesses to adapt to these changes."