Wal-Mart to Seek 'Density' for Walmart Express

Published in CSP Daily News

More "convenience"-format stores coming as concept proves profitable

By  Greg Lindenberg, Online Editor

BOSTON -- Wal-Mart Stores Inc.'s Walmart Express smallest-format stores are turning profitable less than a year after the first unit opened, Bill Simon, president and CEO of Walmart U.S., said Wednesday at the Morgan Stanley Retail & Restaurants Conference in Boston. And because of that unexpected performance, many more of the convenience-store-like units are in the works.

The Bentonville, Ark.-based retail giant opened the first Walmart Express store in Gentry, Ark., in June 2011 and now operates 10 of the stores in several markets including Chicago and North Carolina.

( Click here for previous CSP Daily News coverage of Walmart Express.)

"We're pretty happy with the initial 10. ... We put these in as more of a proof of concept," said Simon. "These are 12,000 to 15,000 square feet, designed as a hybrid between food, pharmacy and convenience. Some have gas, some don't. ... What we wanted to do was prove the top line--and we're very happy with the top line."

And in what can only be described as a thinly veiled swipe at U.K. retailer Tesco's Fresh & Easy Neighborhood Market Inc., he said, "What we're also happy with--and this is a bit unique in our experience, as well as others who have been trying to deal with a small format, what we're finding is that inside of 12 months, they're turning profitable. We didn't actually project that. We didn't even try to engineer that. That was [to be] the next phase."

El-Segundo, Calif.-based Fresh & Easy, with 180 small-format stores in California, Arizona and Nevada, has yet to break even after several years of operation, and recently announced that it was pushing its estimated breakeven point into 2013 ( click here for previous coverage of Fresh & Easy).

Simon continued, "The next phase is, how big could this be? We're going to work on the construction costs and distribution costs--already profitable, but we want to get those up to the 'fleet' average or hopefully beyond that. We're also going to work on density--how many can you build in a market and to what point do you have to get to for this to matter on our large base?"

So the company is planning to roll out more Walmart Express locations. "You'll see us in the back half of this year go to market and build them out very densely so we can understand their interaction with the rest of the market, including us," he said.

He also discussed the challenge of supplying Walmart Express stores. The retailer is usually driven by scale--consumers filling shopping carts at its supercenters, rather than filling baskets or totes at a c-store or drug store.

"The good news is that top line is higher than we expected it to be; that has resulted in a bottom line that has been better than we believed it would be. So we're into the refining stages instead of the rejiggering stage, but believe now that there's the opportunity for us to do some really innovative things. ... Imagine if you could get to a density market where you actually do the trailer drops to a supercenter that's nearby, [with] a small truck to run a route of Express stores. You could almost use a supercenter as a cross-dock opportunity to deliver to a smaller store. That's the mindset were in as we move to refine [Walmart Express]."

Wal-Mart also plans to open 80 more 40,000-square-foot, midsized-format Neighborhood Markets in 2013, Simon said.

Simon's announcement of Walmart Express' profitability comes only a few days after a Wall Street Journal report said that while Walmart Express could eventually help Wal-Mart fight off competition from rapidly expanding dollar-store chains, its effort to offer supercenter pricing and assortment in small, high-cost spaces is putting pressure on the small stores' profitability.

At a March analysts' conference, CFO Charles Holley had said that the company did not have enough results to open thousands of small-format stores. The venture, he emphasized, was still "a pilot."

He described the company as moving slowly on purpose, citing a similar, 13-year effort to make its Neighborhood Markets profitable.

Wal-Mart's competitors are going smaller in a big way, said the report. The three largest dollar-store chains, Goodlettsville, Tenn.-based Dollar General Corp., Matthews, N.C.-based Family Dollar Stores Inc. and Chesapeake, Va.-based Dollar Tree Inc., opened nearly 2,000 locations in the last year. This summer, Target Corp. will open three new "City Target" stores in Chicago, Seattle and Los Angeles. Wal-Mart has had success with its small-store formats outside the U.S. in countries including the United Kingdom and Brazil.

And grocers Spartan Stores, Grand Rapids, Mich., and Price Chopper, Schenectady, N.Y., both have recently separately announced smaller-format stores. The former is piloting 25,000-square-foot Valu Land stores, and the latter is developing 19,000-square-foot Price Chopper Limited stores.

But Charles Grom, an analyst at Deutsche Bank, told the Journal of Wal-Mart's concept that "11 Express stores is a drop in the bucket."

That "drop" may be about to turn into a torrent that will overflow the bucket.