Behind the Scenes: How Walmart Makes Money in Real Estate

by JT McGee

Walmart makes a lot of money, tons of money. With revenues of roughly $419 billion in its latest fiscal year 2011, the company reported net income of right around $16.5 billion per year. Some say this economic footprint makes it a near-monopoly capable of owning the entire retail industry. I don’t think this is true at all.

Walmart realty, one of world's largest real estate companiesPhoto by: Norman Matteson.

These claims were put to the test in 2009 when the company attempted to consolidate its store shelves. You might have noticed Great Value-branded products popping up in every corner of the store, but only for a very brief moment of time…the plan backfired, and Walmart’s suppliers and even customers practically rioted.

Customers ultimately decided to go to smaller grocers for products that Walmart executives thought were basically commodities. Guess what? Many people still prefer Reynolds Wrap to Great Value aluminum foil, even if both are really just thin sheets of aluminum at different price points.

I digress, retail isn’t really all that exciting, but real estate is.

Walmart Realty

In much the same way that Walmart realized that it couldn’t store brand every product in its stores, it has also realized that there are just some goods and services that people won’t buy from Walmart. But how can the company realize the potential profitability of these goods or services if it can’t sell them itself? Hmm…they can sell their foot-traffic to companies that do sell these products!

A new Walmart location was recently built just a few miles from my home. They purchased a massive piece of real estate, and developed it fully. But they didn’t just build the store, they also built a new shopping center.

Google Earth isn’t quite up to date, so here’s my own MS Paint work. A real JT McGee original:

walmart realty

I’m of the opinion that when it comes to business, the form 10-Ks are justification for ideas, and not necessarily indicative of the economic efficiency. In many cases, they’re also full of accounting tricks that make finding the hard numbers a real challenge. What I can observe is infinitely more important.

Walmart doesn’t just throw up a new location and call it a day when it builds a new store. It finds a space where it can create a new marketplace, full of all kinds of goods and services. It sells its customers a lawnmower and their groceries, making money for itself. But then it sells these customers onto other companies, many of which are small businesses, so that they can maximize the value of each customer without putting every product under its own banner.

Again, most people wouldn’t get a “Great Value” haircut, but they’d probably go for a haircut from a company that leases space from Walmart. You might not to buy an engagement ring at Walmart (they do sell them) but you would probably buy one from a jeweler, that again leases space from Walmart.

Even in my little Midwestern city it is evident that the power the company has in attracting foot-traffic. Where commercial realty is vacant all around the city, Walmart’s never goes out of style. This newest development is already filling up.

The company says buying massive pieces of land does give it additional control; a 2004 article in RetailTraffic magazine has a quote from a WalmartRealty employee, Carole Baker, who says quite plainly that buying land around its new developments helps in protecting the brand, noting that you won’t ever find bars or pawnshops in the vicinity of a Walmart development.

Walmart draws customers within 15 miles, compared to 3 miles for smaller businesses

Walmart has what no other company has: draw. Where you might place a restaurant on a main throughfare elsewhere in the city to service a three-to-five mile radius, development companies say that Walmart pulls customers within a radius of 15 miles, a distance that ensures greater foot traffic for its Walmart Realty clients.

Walmart’s Real Estate Strategy

Walmart can’t sell everything, that much was proven by customer revolt in 2009. But what it can’t generate revenues from directly, it can derive at least some revenues from the vertical in selling its footprint. It’s a great solution; Walmart can make money from most everything by selling an input of most every business: foot-traffic, customers, and real estate.

Walmart Realty is a monopoly, not Walmart Retailing. Don’t forget that Walmart borrows at rates 30bp above US Treasuries in the debt markets. That’s the market basically saying, “hey, we trust Walmart just as much as an institution that can literally print its own money.” It’s also Walmart’s way of financing what is relatively high-risk commercial real estate developments with disgustingly inexpensive money.

P.S. if you work for Walmart Realty, I want to talk to you. Hit the contact tab on the top of this page and send me a message. Anonymity guaranteed!

See also: The Walton’s love dividends!

{ 11 comments… read them below or add one }

Her Every Cent Counts April 6, 2011 at 20:07

This is such an interesting post! I never even thought about how Walmart is actually building entire mini malls and leasing the extra space. So even if I avoid Walmart I’m supporting them from shopping in any store in Walmart complexes. Wow.

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LaTisha @FSYAonline April 6, 2011 at 20:50

When we first moved to the small town where I went to high school there was a small Walmart and one traffic light in the town. By the time I graduated they had moved the Walmart a few miles away and that location became the place to be and now the town has about 15 or more stop lights. Walmart definitely has a knack for finding the growing locations.

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JT McGee April 6, 2011 at 20:56

@ Her Every Cent Counts – Yep, if you want to avoid Walmart, you’re going to have to avoid more than just the store itself. That said, I’m sure the businesses that lease from Walmart see more benefit in you spending there than Walmart does, if that makes you feel any better. :P

@ LaTisha – They sure do! And where they can’t find the opportunities, they just make them!

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Ravi Gupta April 7, 2011 at 08:41

Great post! I never knew that Walmart also invests in real estate. You learn something new every day.

-Ravi Gupta

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Robert @ The College Investor April 7, 2011 at 10:02

Walmart is a new arrival to the real estate game. The usually lease their store space. On the other hand, Target originally set out to own as much of their land as possible, which reduces costs over the long run of a store. Target also owns a lot of the strip malls and such that surround their stores.

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JT McGee April 7, 2011 at 11:33

@ Ravi – I bet it’s probably one of their best divisions. Retailing profits were off when the economy went sour, but I’ve yet to see any vacancies near Walmart…

@ TCI – I think they finally grew to a point where exploring the real estate business became economically reasonable. Besides, with so much problems in their brand image, I’d imagine the safety and security of being able to control who locates around your company is a huge benefit.

In my opinion, owning your real estate doesn’t make sense unless you have few other avenues for consistent growth. I wonder how TGT would have done if they had gone toward leases instead of purchases. Also, funny you mention Target because a lot of their new stores are starting to internalize other businesses in their space. Starbucks, for example, is being put into a lot of newly-remodeled/built stores. It’ll be interesting to see how that works!

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John @ Curious Cat Investment Blog April 7, 2011 at 11:58

Smart move by Walmart. It does also tie them to staying with a location for the long term. I know some of the writing I have read talks about them pulling up stakes very quickly and moving on. The real estate strategy would most likely backfire in a location they did pull up stakes and move from.

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Marilyn April 8, 2011 at 07:51

No way! Another point for Walmart. There was a super walmart built about 4 miles from us. That’s where we go shopping. And they definately had some open storefront which are all hoppin now. The chick-fil-a nearby gets a ton of business.

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JT McGee April 9, 2011 at 19:58

@ John – It would be an interesting study to test how the Walmart developments change over time. I’m not sure we could find the data necessary–at least not with massive resources. Regardless, it would be a cool study.

@ Marilyn – There’s a Chick-Fil-A near the Walmart here, too, though I think it may be another development. The other restaurants/storefronts that are part of the Walmart development don’t seem to be doing poorly. Home Depot seems to be Walmart’s best bud in leading each development as an anchor store in the Midwest…is it like that where you are?

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Barb Friedberg April 10, 2011 at 07:35

JT-Love the “drawing” good job with paint :) . This article made our long term position in WMT a bit more exciting! Great angle on an old story.

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Evan April 13, 2011 at 14:54

I wonder if there is a way to analyze what stores they put up or what does well near a new walmart…and start a symbiotic business down the block lol

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