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.
Photo 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.
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:
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 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!