Wal-Mart's Push Into City Spaces Will Work And Reward

| About: Wal-Mart Stores, (WMT)

Wal-Mart (NYSE:WMT) hit another impasse trying to put a retail store in Brooklyn recently. That headline has been read before, and it will be read again when Wal-Mart starts another campaign for a location in the country's largest city. But that's not a real reason to worry about Wal-Mart or lose any faith in the retail giant's growth strategy. Why? Because even if it isn't able to get into New York, it's thriving in other large American cities and taking market share away from competitors there. With progress in LA, Chicago, Miami-Dade and other cities, Wal-Mart is showing that its domestic growth prospects are alive and well.

The company is up over 24% this year and analysts have Wal-Mart price targets at a mean of $77, with some as high as $86. If its city potential remains solid, that growth combined with some very open opportunities in the Indian market should create a new and consistent revenue source for quarters to come.

It wasn't so long ago that American cities were seeing stagnation in both population growth and retail market growth. Stores weren't coming in and instead focusing on ever expanding suburbs, inevitably because suburban sprawl brought wealthier homeowners with more day-to-day needs than casual city renters. Soon, though, the suburbs over-saturated themselves with chain stores, big box retailers and restaurant listings the same as three towns over. Combined with the housing market crisis, the suburbs weren't necessarily a dreamland for businesses to open up in. And then cities starting booming again, and not just the southwest cities where rapid expansion had continued on unchecked. Cities like Atlanta, Washington DC and even New York are growing again, and stores have begun realizing the potential in going back in to where they may have exited last decade. And so they're willing to work with the size, zoning and parking pains that cities bring, as the expansion of population and wealth represents some of the best potential left in America.

Wal-Mart has been serious about its urban growth prospects. The company, for so long, had a reputation for coming into small communities and becoming the one-stop shop for consumers there. That's no longer the case, though I remain optimistic about Wal-Mart as it is already seeing positive signs from its metropolitan locations. Though it hasn't broken into New York, it has started swooping grocery shopping market share in Chicago (where it ranks 4th and has serious potential to move up there - something Wal-Mart may not be used to since it instantly became that one-stop megastore for so many years). Wal-Mart is now chasing other names, and it plans on "burying" the top 2 Chicago grocery retailers.

Chicago isn't the only metropolitan powerhouse where Wal-Mart has ground it can make up and new revenue to earn. In the Miami-Dade area, Wal-Mart ranks 3rd in grocery numbers. Two of its stores in that area rank in the top five Wal-Marts in sales numbers, and yet because of a serious expansion push, Wal-Mart is still behind in this area as compared to other urban targets. Now, it's making big moves in Miami and South Florida and will work up to 12 new locations in the area. South Florida is going to be a serious spot for Wal-Mart and strategies that help in other urban areas will help the world's largest grocer compete enough to steal market share from other giants in the area.

What are some of these strategies that will help? For one, Wal-Mart is pushing new web technologies to help it compete in new areas. A new comparison tool lets web users upload a receipt from another retailer and compare savings from Wal-Mart. The technology tells the shopper how much it could have saved at Wal-Mart and the company's ability to consistently offer low prices should impress a lot of users. It'll turn those new tech-savvy city dwellers into more permanent Wal-Mart patrons, a transition the company will want to keep replicating for success in the urban arena. Another is Wal-Mart's success in mobile shopping and optimizing its web presence for new technologies. It ranks highly on critics lists of iPad-optimized stores. Tablet shoppers spend 50% more on each purchase than conventional shoppers according to research. If Wal-Mart can find a way to tie these mobile shoppers into physical shoppers, it will help again to garner city crowds into new storefronts.

Another sign of urban success is in the pure size potential of Wal-Marts. As this site points out, Wal-Mart has the muscle to put in stores much larger than average California grocery centers, allowing for more products, more diversity and a larger range of offerings for potential customers. The site shows the possibility for Walmartization in Los Angeles, and while the writer speaks of how terrible this may be, it truly would be a powerful stream of revenue if Wal-Mart can open the proposed 64 super centers in LA and climb the ranks among grocers in America's second city. The site points out that Wal-Mart taking over LA would be simpler than New York, for the layout of Los Angeles neighborhoods mimics suburban American far more - a place where Wal-Mart holds a 20% share of the overall market. A leap toward this number amongst Los Angeles' more than 4 million people is tremendous potential for Wal-Mart.

Cities certainly hold challenges for Wal-Mart, and many are problems other big box stores have found and failed to answer. As this Slate blogger points out, the reason that big box stores have so often found comfort in suburbs is the opportunity for standardization. Wal-Marts being the same set-up from town to town. In cities, this is less feasible and less attractive as an option - as zoning rules, size restrictions and neighborhood culture will dictate changes amongst stores. That's fine, as Wal-Mart is fully able to take on the heightened costs that the lack of standardization brings on. If this was Wal-Marts first time targeting urban neighborhoods, one could be skeptical about decreasing margins - but Wal-Mart has already taken the time to improve its margins and now returns 5.5% net margins on average. This number is up from the 1% Wal-Mart saw when it first started opening city centers. The point is, cities still have enough revenue potential to keep margins healthy and the time to invest in urban growth is now, especially as some big name grocers, like Safeway (NYSE:SWY), are struggling currently.

The company has some other walls to climb in urban development - including research that paints Wal-Mart as poisonous for local and small businesses. But cities are recognizing the potential that Wal-Mart can bring and city-dwellers are going to increasingly call for lower priced options, especially if Wal-Mart can advertise its savings on an Internet-wide scale. The market for food eaten at home (a market dominated by grocery retailers) is pegged at $800 billion right now and the steps Wal-Mart can and will take to strip percentages away from some already big names will provide the basis for its next round of domestic growth.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: This article was prepared for Freedonia Freelance by one of our analysts.