Big Retail Grows with Small Stores

by JT McGee

Smaller stores help Walmart, Target, and Best Buy compete.Big retailers are thinking outside the “big box store” concept to drive new revenue growth. Some of the biggest companies in the world, big retail loves big stores.

For the biggest giants in retail, though, same store sales growth isn’t driving profits. Walmart’s $400 billion in annual revenues means that it’s so big it’s practically a barometer for economic health. Target is finding the same trend in their income statement. And Best Buy sees that its huge stores simply don’t fit in a low-margin business.

I wanted to take a look at what each retailer is doing to weather the recession.

Walmart’s Smaller Stores

Walmart is thinking tiny. According to FastCompany magazine, the Walton’s money machine operates more than one thousand stores, each with an average size of 185,000 square feet. That’s huge.

In order to shed its big retailing image, the company plans on opening new “Neighborhood Market” outlets which will fit in a tiny 20,000 sq. ft. footprint. The company recently opened a 34,000 square foot store in Massachusetts.

Why it matters: Going small means that Walmart can achieve hyper-local targeting. In Chinatown, the company can better serve a first and second Asian demographic. In the inner cities, it can shift its supply chain to better target the emerging beginning and end of the month shopping patterns for those who receive government assistance.

Meanwhile, local grocers will be squeezed out. Walmart “tested” a Neighborhood Market in my town, only to send a local grocer into bankruptcy. Its Neighborhood Market store is literally 50 yards from the grocer, located on the same side of the street and everything.

Target’s Smaller Outlets

Smaller stores will help boost Walmart, Target, and Best Buy.Target isn’t interested in hyper-local stores as its competitor. Then again, the company doesn’t have the same anti-union, monopoly image, either. The company plans to open new stores half the size of its current stores at 80,000 square feet, thinning shelves in a bid to boost profit margins. Target will remodel as many as 380 stores to fit the new goal.

Why it matters: Shrinking a store is a great way to force customers to accept smaller selections. Higher prices, lower overhead and thinner shelves mean thicker margins. In achieving closer proximity to its core customer, it can bring home the bacon.

Best Buy Mobile Bets on Cellular Sales

Who cares about aisles of LCD TVs, printers that retail for less than the included ink cartridges, or free-if-you’re-a-pirate CDs? Best Buy thinks it can drive new growth by going small, focusing on new “Best Buy Mobile” stores which sell only mobile devices—cell phones and tablets.

What’s so great about cell phones, you ask. Residual income!

Small stores are also a great mechanism for driving a competitor, Radioshack, out of business. Circuit City may have turned to dust, and Radioshack’s clearly off it’s 1980’s nerd course, but BestBuy has bigger competitors in companies like Amazon. By the end of 2012, BestBuy hopes to have as many as 375 “Best Buy Mobile” outlets in malls and shopping centers around the US.

Why it matters: Cell phones have a short life cycle (repeat business), customers are eager to purchase new phones, and margins are thick. Plus, AT&T is known for giving better deals to in-store customers over online purchasers. And when it comes to that brand new phone, customers just have to have it NOW. The company looks to use its size as leverage; it lined up exclusive deals with cell phone manufacturers for lower prices and unique colors.

Retail Sucks

As an investor, I think retail sucks—and I’m betting it will continue to suck.

Brick and mortar retailing is dead; there are few unique competitive advantages, and the supply chain makes for a nasty headache. I don’t own a single retailer in my portfolio, and won’t for the foreseeable future. That said, these smaller stores could be a boon for each of the companies above—all of the companies profiled need something new:

  1. Aldi is kicking the snot out of Walmart in New York and elsewhere.
  2. Target has a real estate heavy balance sheet that keeps the company’s stock tethered to commercial real estate performance.
  3. Best Buy sells a product to a demographic that is frugal, lazy, and internet savvy. Amazon trumps Best Buy on price, too.

It’ll be interesting to see how each new smaller store pans out for each company.

Photo by: Epsos and Kevin Dooley

{ 12 comments… read them below or add one }

Mark August 3, 2011 at 08:29

I agree with you on the US retail market facing tough times ahead, as we’re an over-indebted economy with low future growth prospects. Not of fan of Target and Best Buy (especially as they have to face Amazon and NewEgg), but I really like Walmart’s stock. They have a solid balance sheet, have increased their dividends by a large percentage for years, and sell a lot of basic goods that consumers can’t go without. Even though their US stores have stayed flat (or dropped slightly) I think they have great growth prospects abroad and also one of the best supply chain management structures. What do you think?

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JT McGee August 3, 2011 at 08:54

I like it, but I don’t love it. The difference between the two is interest and investment interest.

I look at Walmart like this: 75% of what they sell can be purchased online. Produce and foods are typically higher margin, so I’m just going to “finance it” and say that 50% of their profits come from groceries. I have no idea if this is true.

Making this assumption, then I see complete penetration with their neighborhood markets as a replacement for the loss to online shopping. Net-net, zero gain.

So then we look overseas. Walmart’s really active overseas with acquisitions. Possible growth markets are China and India. Walmart has not done well in China. In India, shipping goods cross-country takes multiple times longer than in the developed world. Truckers routinely pay thousands of dollars in bribes to navigate their terrible infrastructure in peace.

Assuming they catch on in China, there’s a small gain plus a lot of risk. China does not interest me in the least. In India, a corrupt government threatens any growth whatsoever, and Walmart’s supply chain management skill is lost in the infrastructure inefficiency.

End of the day, I like it but don’t love it. WMT isn’t part of my portfolio, and probably won’t ever be.

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Norman August 3, 2011 at 10:20

I may be an anomoly, but the further past age 50 I am, the more I frequent smaller stores. I hate going in the huge stores. When I was younger, I loved shopping, going to all the malls and the big stores, now I just wanna go in, get what I need and get the hell out. I suspect I’m not the only boomer who is like this.

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JT McGee August 3, 2011 at 10:57

I doubt you’re an anomaly. Short lines, easy to get in and out, and no nonsense. I’m younger than you, but I like smaller stores, too. At least, if I can’t find the product online or I’m in a pinch for time.

However, this is interesting to me from a financial standpoint. As America ages, maybe these new smaller digs will be the money makers in terms of getting people in the doors? We all know that it’s your generation that has the $$$.

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Jonathan August 3, 2011 at 12:15

Norman, I’m younger but don’t much enjoy shopping. I too want to get in, get what I need, and leave. However, I also like to be able to get everything at the same place, and thus like the big stores that have lots of selection (primarily in terms of variety of product, not variety of brands). What happens when the local (massive) Target and Wal-mart shut down in favor of small-footprint stores with limited selection? I’m likely to increase the amount of shopping I do online for all kinds of specialty items.

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JT McGee August 4, 2011 at 10:54

This seemed to be a common theme in another post about online shopping for energy independence.

Most people shop online for the all-in-one benefit. And for the allure of avoiding crowds.

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youngandthrifty August 3, 2011 at 12:09

Great analysis 🙂 I own a few shares Best Buy, LOL! They were downsizing/ changing their corporate structure and at their 52 week low, but I think with the state of the economy things are gonna get uglier.

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JT McGee August 4, 2011 at 10:56

Honestly, I like BBY’s small footprint model the best because mobile phones are a serious money maker. If in some circumstance they decided to spin off the mobile unit as an individual, publicly-traded company, I’d buy in. Won’t buy the whole of BBY for that one unit, though.

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Ashley @ Money Talks August 4, 2011 at 10:43

Walmart has had neighborhood markets in my area for like 10 years. I’m surprised to hear that this is “new”. I have one about a mile from my house and have done almost all my grocery shopping there since I moved in 7 years ago.

They also have even smaller stores called “marketside” which are supposed to compete with smaller grocery stores like Fresh and Easy. Kind of a convenience store meets grocery store.

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JT McGee August 4, 2011 at 10:57

Yeah, we’ve had one for a really, really long time. I live in a popular test market, though, and you probably do too. Arizona seems like it’d be diverse yet “middle America” enough to be a good testing place for new store concepts.

Hmm, that’s interesting. I haven’t heard of the “marketside” stores yet. I’ll look into that!

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The Dividend Pig August 6, 2011 at 17:22

I’m going to pick a small, rather insignificant sentence from your article to make a point – more of a rant, since this is something that always bothers me.

“Walmart “tested” a Neighborhood Market in my town, only to send a local grocer into bankruptcy.”

Walmart did not send anyone into bankruptcy. Customers sent your local grocer into bankruptcy. I hate when people blame Walmart, or any other large corporation, for driving mom and pop shops into bankruptcy. It’s the consumer, not the company.

Walmart has a product that they sell. In the wonderful free country we live in, shoppers can choose where to spend their money. They could pay more, and support local business, or pay less and support Arkansas. Their choice.

And what do people do? No matter what they say, the don’t give a f**k about mom and pop. They only care about getting more for less. So Walmart did no bankrupt your local grocer – your friends and neighbors did.

Ok, I got it all out. Thanks for another interesting article JT.

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JT August 6, 2011 at 20:18

I didn’t really think about the perspective of that sentence, but yeah, you’re right. Customers and their decision-making preferred Walmart. Thus, small grocer goes out of business.

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