Have Wal-Mart Supercenters peaked?
Mega-stores lost ground to small kin in 2nd quarter
Wal-Mart’s big-box Supercenters, derived from founder Sam Walton’s original discount stores, carried the company through an era of growth and led to Wal-Mart becoming the nation’s leading grocer.
As consumers seek more convenience in shopping, smaller format stores like dollar stores and Wal-Mart’s own smaller-format stores are seeing big bumps in business. Retail analysts and observers have been speculating for years about how this will affect the behemoth supercenters, which make up the majority of WalMart’s U.S. store fleet by far.
Year-over-year traffic and sales for Wal-Mart’s U.S. business have been slack or negative for several quarters in a row. When the company released its second-quarter revenue and earnings earlier this month, supercenter sales in stores open a year or more dipped 0.3 percent, though same-store sales in the smaller, grocery-heavy Neighborhood Markets grew 5.6 percent over the same period last year.
The growing fleet of about 350 Neighborhood Markets doesn’t do much to offset the flat sales at the 3,300 supercenters.
“It does beg the question longer-term, ‘Why in the heck are they opening any more supercenters?’” said Brian Yarbrough, senior analyst for Edward Jones in St. Louis. His firm maintains a “buy” rating on Wal-Mart.
“The investment in small stores will pay off,” Yarbrough said. “We would like to see them cut back on supercenter growth.”
Wal-Mart’s website says each supercenter is about 182,000 square feet and employs about 300 workers, compared to the 38,000-square-foot Neighborhood Market with about 95 employees. Groceries and other consumables make up more than half of Wal-Mart’s business, so it’s not surprising that Wal-Mart plans to open up to 300 new Neighborhood Markets and smaller Express stores in fiscal 2015.
During a call with the media on earnings day, Wal-Mart Chief Financial Officer Charles Holley said more than 10,000 small stores of various retailers have opened in the United States in the last three years. He deemed a small store to be 30,000 square feet or less.
“I think convenience is becoming a factor,” Holley said.
The company consistently refers to the supercenter as being for customers’ weekend “stock-up” trips, and the market as a place to “fill in” any holes in the pantry midweek. In addition to new small stores, Wal-Mart also has said it will open 115 new supercenters this year.
Stephen Needel, managing partner at Advanced Simulations LLC, says shoppers want both.
“There are people who want the convenience of more [stores] like the Neighborhood Market-type place that are right around the corner, and there are people who want the big box, so they can find all the stuff they need at one place,” Needel said.
Growth in the big stores is likely to slow down, but “there’s still a lot of room for supercenters,” he said.
Howard Davidowitz, chairman of Davidowitz & Associates Inc., a national retail consulting and investment banking firm based in New York, said supercenters represent “a major problem” for Wal-Mart.
“I’m not saying the supercenter is going to disappear or anything like that. I’m saying it’s going to be less relevant than it was in the past,” he said. Davidowitz was a contemporary of Walton’s. Wal-Mart needs to refocus, Davidowitz said.
“I think they’re lost a little bit,” Davidowitz said.
Gene Hoffman, president and CEO of Corporate Strategies International consulting firm, described supercenters as the “powerhouse of the past.” He likes that Wal-Mart is turning to small stores to meet customers’ needs.
“At least they are trying hard to stay dynamic and relevant,” he said.
The first supercenter was built in 1988 in Washington, Mo. CEI Engineering of Bentonville did work on three of the first four supercenters and continued for years as WalMart converted older discount stores into supercenters. The first Neighborhood Markets, tested in Arkansas, wouldn’t come for another decade. Because supercenters are so big, they need big plots of land; the markets are easily placed in urban areas.
Michael Shupe, retired cofounder of CEI, recalled that the first supercenters were bigger and were configured differently.
He said they were “exciting times. It changed the world,” Shupe said of the dawn of supercenters. He said it gave WalMart the market on “where we really spend our money — groceries.”
Those good times can continue, depending on whether the mega store can withstand the pressure from competition, Hoffman said.
“Today’s questions regarding Wal-Mart supercenters, which have risen to the zenith of the retailing system, ‘Can it stand wave making?’” he asked. “Wave-makers can upset great ships.”