Once the 'big box' format or hypermarket was a winning concept in the food retail industry - it capitalized on the ability to leverage existing customer traffic by selling non-food items adjacent to food offerings. The model has been similar in style to the department store model, which sells a range of items under one roof. In recent years, however, structural and cyclical factors have undermined this model. And weak developments at the "Big Four" food retailers and the major operators of hypermarkets give us an indication that this trend has worsened, with Wal-Mart Stores, Carrefour, Tesco, and Metro all struggling to boost sales.
We take a look at the case of Wal-Mart:
Wal-Mart Stores (WMT) has seen like-for-like sales decline for the most part of the last three years and is looking for the right concept to recover sales. Not only in developed markets, but also in emerging markets, the 'big box' format clearly lags behind smaller stores. For example in China, Walmart continues to lose market share to specialty shops, because its motto of everyday low prices does not appeal to their main buyers, who tend to be upwardly mobile middle class and wealthy consumers seeking quality and good value rather than a better price. There are always lower prices than Walmart's at roadside stalls and mom-and-pop stores, so positioning itself this way is not a sustainable, long-term strategy. Walmart's market share plummeted to 5.5% in 2011 from 8% three years earlier, as organic fruit shops and other specialty stores took market share.
The problem of declining sales can be attributed to the non-food categories. Unlike specialist retailers, hypermarkets barely invested in building brand equity during the last decade. In addition, (perceived) service quality attached to the non-food offering lags significantly behind that of specialists. As a consequence, hypermarkets' non-food items are less competitive and less appealing to customers. On top of that, non-food is a 'cash consumer' from the perspective of working capital, as it has much longer inventory days than food. Instead of non-food delivering higher margins, it has become a big margin destroyer for many 'big box' operators.
Understanding the 'big box' problems:
Lower consumer budgets and confidence. A downturn in the macroeconomic climate has translated in lower non-food spending in hypermarkets. Cut-throat competition, mostly on the pricing front has kept margins well under pressure.
Changing demographics. The aging society and smaller households are unfavorable for 'big box' operators.
High fuel costs. Rising gasoline prices keep cost-conscious customers away from driving a long distance to out-of-town hypermarkets, increasing environmental consciousness in terms of CO2 emission also play a role.
Specialist retailers and deep-discounters. Organic food stores, specialist retailers and shopping malls have been luring customers away from hypermarkets. Deep discounters such as at Aldi, Dollar Tree (DLTR) and Dollar General (DG) have aggressively expanded and gained market share.
eCommerce. Amazon, as also others, have transformed the general retail landscape, with growth in particularly non-food sales over the internet.
Final Note
Big box retailers with significant exposure to non-food need to adapt to a changing environment. Smaller stores, a narrower range, and a multi-channel approach could be the right answer to the structural and cyclical issues 'big box' retailers are facing.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
