Wal-Mart’s Strategies To Drive Growth In An Otherwise Saturated U.S. Market

March 13th, 2013 by Trefis Team
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Walmart

Quick Take

  • Wal-Mart operates around 4,000 stores in the U.S. which account for 50% of the company’s value, but is an increasingly saturated market
  • The retailer is increasing its store productivity by converting discounts stores to supermarkets that offer a full range of merchandise
  • It is expanding in urban areas with smaller format Express stores, which will enable further growth
  • Wal-Mart’s focus in social media will complement its e-commerce growth
  • It faces certain risks such as self cannibalization, sluggish economic growth and rising production costs in China but appears manageable

Wal-Mart (NYSE:WMT) operates around 4,000 stores in the U.S., which account for about 50% of its estimated value. [1] Due to its sheer size, the retailer’s growth has been slow for the past few years. Wal-Mart serves more than 100 million U.S. customers every week and a significant change in this figure is highly unlikely. [2] Still, our price estimate for Wal-Mart stands at a premium of 15% to the market price. Here we take a look at how Wal-Mart U.S. can play its part in driving the retailer’s stock.

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Given its large presence in the U.S., Wal-Mart has shifted its focus from expanding stores to improving store productivity. The retailer is also looking to open smaller format stores in the urban areas, and has increased its focus on social media and technology to attract more customers. However, some potential risks such as self-cannibalization and sluggish economy can have a mitigating effect on its growth. Rising labor costs in China might also put pressure on the discounts that Wal-Mart gets from its vendors.

See our complete analysis for Wal-Mart

Focus On Increasing The Store Productivity

Opening more supercenters and large format stores may be difficult for Wal-Mart due its massive presence in the U.S. Therefore, the company is now focusing its efforts on increasing the productivity of its existing stores. To achieve this, the retailer has been remodeling its stores and converting its discount stores into supercenters. While Wal-Mart’s discount stores offer a wide assortment of general merchandise and limited variety of food products, its supercenters offer a full-line supermarket along with a wide assortment of general merchandise. Wal-Mart closed 446 discount stores between 2007-2011, and opened 773 new supercenters. [1] During this period, the annual revenue per store increased from $67.3 million to $68.3 million. We expect this figure to reach $72 million by the end of our forecast period.

Expansion In Urban Areas With Smaller Format Stores

Wal-Mart’s executives have indicated that the retailer’s future stores will occupy 8% less space, cost 16% less and will run more efficiently. Wal-Mart’s smaller stores, called Express stores, are one-tenth the size of a typical Wal-Mart supercenter and offer 15,000 items in comparison to 100,000 offered at a supercenter. ((NC is test market for smaller Walmart Express stores, News observer, July 21 2012)) Although their size is much smaller, Express stores offer day-to-day groceries and general merchandise. They are focused on attracting customers who shop regularly for their daily needs.

Wal-Mart opened its first Express store in June 2011 and had 11 stores operational at the end of July 2012. [3] In fiscal 2013, the retailer opened 76 smaller format stores, including Wal-Mart Express and Neighborhood Markets, and plans to add 100 more in the current fiscal year. [4] Wal-Mart stated that its Express stores are generating double-digit comparable store sales growth. [4] We believe that this is an encouraging sign for the company and will help it continue its growth in the U.S. Express format can be successful in big cities, which have space constraints and where busy schedules limit many customers from driving to a supercenter.

Focus On Social Media & Technology

Wal-Mart has made strong efforts to improve its IT capabilities and has leveraged social media in order to reach its prospective customers. Its digital technology unit, @WalmartLabs, creates platforms and products around social and mobile commerce. Since its inception, @WalmartLabs has been actively scouting for acquisitions. In November 2011, it acquired Grabble, the maker of ‘point of sale technology’ that ties in with mobile phones. Wal-mart is also trying to leverage social media to drive its sales. In 2011, it partnered with Facebook and also acquired Kosmix, a social media company to promote its offerings. [5] [6]

The U.S. customers are increasingly turning to online shopping and e-commerce channel provides an incredible growth opportunity. Although Wal-Mart does not report its e-commerce revenues,  Internet Retailer estimated its online sales to be around $4.9 billion in 2011. [7] In October last year, Wal-Mart projected this figure to almost double by fiscal 2014. [7] Given the increased usage of social media and launch of affordable smart phones, Wal-Mart’s investments in this arena are likely to payoff. It’ll also help the company to face competitive threat from online retailers such as Amazon (NASDAQ:AMZN).

Cannibalization, Slow Economic Growth And Rising Labor Cost In China

Like any other retailer, Wal-Mart’s long term sales and income growth depend largely on the its ability to open new stores and expand into new markets. However, due to its size, the retailer runs the risk of cannibalizing its own sales in the U.S. It will be interesting to see if expansion into urban areas with its smaller format stores has an impact on sales at its supercenters. From 2007-2011, Wal-Mart has significantly reduced the number of new store openings. [1] We expect this slowdown to continue in the near future. In addition to this, the state of the U.S. economy remains an important factor driving the retailer’s sales.

According to Statistic Brain, about 80% of Wal-Mart’s suppliers are located in China. [2] China was once the first choice for the U.S. retailers for importing low-end goods. [8] However, lately the labor cost has been rising, which is leading to an increase in the production costs. Between 2008-2012, minimum wages in the region increased by more than 12% annually. [9] This was the result of the Chinese government’s regulations to increase minimum wages once in every two years. [9] We believe that big players such as Wal-Mart will also feel the effect of increasing production cost on their margins.

Our price estimate for Wal-Mart stands at $80, implying a premium of about 15% to the market price.

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Notes:
  1. Wal-Mart’s SEC filings [↩] [↩] [↩]
  2. Wal-Mart Company Statistics, Statistics Brain, July 31 2012 [↩] [↩]
  3. NC is test market for smaller Walmart Express stores, News observer, July 21 2012 [↩]
  4. Wal-Mart’s Q4 fiscal 2013 earnings transcript, Feb 25 2013 [↩] [↩]
  5. Walmart Announces Acquisition Of Social Media Company Kosmix, Walmart, April 18 2011 [↩]
  6. Facebook, Walmart Partner Up To Create Pages For Individual Stores, Huffington Post, Oct 11 2011 [↩]
  7. Wal-Mart’s Evolution From Big Box Giant To E-Commerce Innovator, Fast Company, Nov 26 2012 [↩] [↩]
  8. China Labor Cost Rise To Boost Rivals In Asia, CNBC, Jan 17 2013 [↩]
  9. China Initiates New Rounds Of Minimum Wage Increases, China Briefing, Jan 4 2013 [↩] [↩]