How Wal-Mart Could Instantly Solve One of Its Biggest Problems
For years, Wal-Mart Stores was the unquestioned king of discount retailing. Its huge super-centers were located primarily in rural areas, and while it always struggled to get into urban locations, it never really had to. It kept growing and eventually became the largest retailer in the world.
Of course, therein lies Wal-Mart's problem. It's simply run out of room to keep growing in rural areas. Case in point: Wal-Mart has posted fairly unimpressive earnings results for several quarters now.
One of its biggest hurdles is its lack of presence in urban areas. Big cities simply can't offer Wal-Mart the square footage necessary to build one of its hallmark super-centers. Meanwhile, Wal-Mart is missing out on the opportunity to earn business from city-dwellers.
Enter Wal-Mart Express. Wal-Mart is working on this issue by trying to build out its own Neighborhood Markets and Wal-Mart Express stores. Wal-Mart initially tested these locations in three markets that included Chicago. Apparently, these have done well enough for Wal-Mart that it plans to add as many as 300 small stores this year.
However, that will be a costly and time-intensive effort. Instead of building its urban presence from the ground up, Wal-Mart should simply buy a dollar store like Family Dollar or Dollar General which already have high numbers of stores in urban areas.
If you can't beat 'em, buy 'em
Wal-Mart's plan to aggressively expand its own small stores in large urban areas will meet harsh public scrutiny, as well as pressure from existing competition. The latter two dollar stores both hold well-established presences with small stores in markets like Chicago, where Wal-Mart is trying to enter. Also, Wal-Mart's past efforts to build new locations in large cities like Chicago have been met with protests over its employment practices.
To get around all this, Wal-Mart should simply buy Family Dollar or Dollar General and instantly get what it wants and needs. Wal-Mart's strategy of building massive super-centers strictly in rural areas has lost momentum. Sales at its U.S. stores that have been open for at least one year actually fell 0.4% in the fourth quarter and growth was flat in the first quarter of fiscal 2014.
By contrast, Wal-Mart's Neighborhood Market grew comparable sales by 5% in both the fourth quarter of 2013 and the first quarter of 2014. Clearly, the small-store strategy is working, and Wal-Mart will focus capital expenditures there going forward. If Wal-Mart buys one of its dollar-store competitors, it can greatly expedite the process.
Speed up the strategy
Wal-Mart's small-store strategy is clearly working. April marked the 46th consecutive month of positive comps at the Neighborhood Market. But Wal-Mart can greatly expedite the process by gobbling up Family Dollar or Dollar General, since those locations already stand and could easily be rebranded under the Express or Neighborhood Market banner.
Wal-Mart could easily scoop up one of the two without having to wait years to build out its urban small stores one by one. Even with the assumption of a sizable takeover premium, Wal-Mart is such a huge company that an acquisition would amount to pocket change for it.
Plus, as is usually the case with acquisitions, synergies would likely mitigate some of the cost of a buyout. Thanks to its world-class distribution capabilities, you'd have to figure that Wal-Mart would realize significant synergies from a takeover of a smaller rival.
The bottom line is that while Wal-Mart is doing the right thing by expanding its Neighborhood Market and Wal-Mart Express stores in urban areas, it could save itself a lot of time simply by buying Family Dollar or Dollar General.
Wal-Mart has struggled for several quarters now because its super-centers simply aren't generating the growth they once did. Quickly snatching up hundreds of stores through a buyout of Family Dollar or Dollar General would instantly give Wal-Mart the inner-city square footage it's looking for.
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The article How Wal-Mart Could Instantly Solve One of Its Biggest Problems originally appeared on Fool.com.Bob Ciura has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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