On CNBC's Closing Bell, the topic of Wal-Mart (WMT) rolling out smaller express stores was discussed, and how 50 express stores a quarter could impact small local businesses, dollar stores, and the economy. Some are worried that Wal-Mart's low prices will squeeze profits from smaller competitors as a result of adding Wal-Mart Express stores that only focus on groceries, pharmacy, and convenience. These new stores will be between 12,000 and 15,000 sq ft compared to over 100,000 sq ft for its normal branches. Therefore, it seems to be a fair question of how will the express stores affect smaller businesses, such as dollar and grocery stores.
One of the arguments for the Wal-Mart Express stores is that it's needed because the dollar stores and smaller grocery stores have "stolen" business from the company, and in order to grow, Wal-Mart must appeal to the consumers who prefer smaller stores. I don't know about you, but when I shop at Kroger (KR) or The Dollar Tree (DLTR) it is to avoid the long lines and ruthless consumers who turn Wal-Mart shopping isles into an Atlanta freeway. I raise the question of how effective these stores will be. Wal-Mart has already begun experimenting and the stores are already profitable, but I am not sure these stores can 'steal" business from smaller businesses who have supposedly stolen business from Wal-Mart.
In the last 12 months, Wal-Mart has reported $455.78 billion in total sales, which is a near $50 billion gain over the last two years. Therefore, I don't understand the notion that dollar stores, and even grocery stores, are stealing the business from Wal-Mart. In fact, the top three dollar stores combined have total sales of $30.5 billion for the last 12 months, which is $20 billion less than Wal-Mart's revenue growth over the last two years. As a result, I don't believe there is any retail store that is stealing sales from Wal-Mart, and that the decision to expand with smaller stores is to focus on the more profitable and most popular segments of the company, and possibly increase its sales per sq ft.
I think we sometimes forget the size and pure dominance of Wal-Mart in the retail space. Companies such as The Dollar Tree, Family Dollar (FDO), and The Dollar General (DG) are nothing more than a fraction of the retail space when combined. Over the last year I have listened as analysts have explained how these dollar stores are effecting Wal-Mart and its growth. But when you look at the numbers, these three dollar stores have grown by less than $4 billion in combined sales over the last year, which is pennies compared to the growth at Wal-Mart.
I am curious to see the impact of Wal-Mart Express to local economies over the next two years. I predict that it will have very little impact to the dollar stores and even some grocery stores such as Kroger (KR). Wal-Mart does have the best prices, but there are other companies that offer perks that have created a strong following among consumers. An example would be the Dollar Tree offering everything at just a dollar, in which WMT could in no way compete against. And Kroger, which offers a point based system to save on gas or in some states offers cash back incentives that keep its customers coming back.
Overall, the market is more than big enough for Wal-Mart's dominance and all the other midsized companies to experience growth. The true impact is felt at the mom and pop stores, like your local Ted's Pharmacy. In the end, I think dollar stores remain strong and continue to grow at a fast rate because of the services that each offers that are unique to consumers. And although Wal-Mart revenue will most likely continue to grow, I do worry about margins, and fear that express stores will only take customers who already shop at Wal-Mart and make larger stores less crowded. Therefore, it may be a win for consumers and an event to watch for investors.
Disclaimer: The material in this article is for informational purposes only and should not be used to make any investment decisions.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
