Wal-Mart Builds, Waits for Communities to Catch Up
It started out in mostly rural areas where other large retailers chose not to build. More recently, Wal-Mart has begun a well-publicized urban push. Now, the retailer is looking to add stores in communities “in the making.”
A report by The News & Observer points out that Wal-Mart is now building stores in markets that appear headed for major spikes in population, even if they are not there yet.
A case in point is Holly Springs, N.C. Recently, the pharmaceutical manufacturer Novartis announced plans to build a $267 million manufacturing plant in the community. The facility is expected to create 350 jobs over five years, bringing new people to the community and the need for more retail options.
Marshal Cohen, chief analyst for research firm The NPD Group, said, “Wal-Mart can certainly afford to have a store sit in an up-and-coming community for 10 years. That’s why they can afford to enter some of these communities that other retailers cannot.”
One benefit of Wal-Mart getting into a market early is that the chain can build its supercenters while the cost of land remains reasonable.
Some have suggested that Wal-Mart has saturated markets with stores and is simply cannibalizing its own business. By building in still developing areas, however, the retailer is comfortable there is room for additional stores.
“We follow the rooftops, of course,” said Tara Stewart, a spokesperson for Wal-Mart. “We are looking to serve a population right now that we feel is underserved.”
Being first to a market doesn’t guarantee success, even for Wal-Mart. In Holly Springs, Harris Teeter has announced plans to build a second store.
Still, observers agree that it is better to get in early rather than late, especially if you’re Wal-Mart.
Connell Radcliff, president of Cary’s 1st Carolina Properties, said, “It’s going to be more difficult later than it is today to get into that market. Land costs will go up, No. 1. But then the people come out of the woodwork who are anti-Wal-Mart. So if you wait, along with paying more for the property, you’re also having to fight the anti-Wal-Mart movement.”
Discussion Questions: Concern has been expressed about Wal-Mart taking business from itself as a result of store growth. Do you believe there are enough
underdeveloped markets (urban, suburban, rural) left where it can build and add to its business? Where do you see the greatest opportunity, in terms of communities, for Wal-Mart
to grow its business?
Pre-empting opposition and saving money by buying the land cheap makes a lot of sense. It would be interesting if someone could do a study, once these communities actually develop, into the difference between who has moved in and who might have moved in.
Wal-Mart has almost an infinite number of new growth opportunities. The “Rural 99” format is perfect for any small market which currently has one small discount store and two grocery stores.
In many Rust-Belt cities, there are still little to no Wal-Mart Supercenters – Madison, Milwaukee, Chicago, Grand Rapids, Detroit and Cleveland. We can keep going on all day like this.
Chasing the population is not a new concept. SuperTarget has done this in Texas and is still waiting for the population to come. Eventually it will. Only a few retailers can afford to take this gamble. Smaller retailers usually go bankrupt waiting for the population to grow.
A good point is made with the low land costs and fewer anti-Wal-Mart activist extremists. Communities are also more likely to hand out corporate welfare packages because having a Wal-Mart Supercenter is a big attraction in helping lure new residents. There are many citizens today who would not consider living somewhere where they did not have access to a Wal-Mart Supercenter.
Specifically, I see the greatest opportunity in those MSAs where the population is forecasted to grow the most over the next several years. I took a look at Global Insight’s MSA forecast and included variables like population, income, and employment growth. Not knowing WM’s methodology and forecast timeline, and knowing that they will have their own weights for cannibalization and competition, I came up with my own list of MSAs that rise to the top from an economic/demographic growth POV. I only looked at those MSAs with current populations over 300K. The 25 top-growing MSAs are all in the South and West. This suggests either that WM (at least in the South) is already where the growth is or that they may still have room to grow in select counties in Florida, Nevada, the Carolinas, and Arizona.
Wal-Mart can afford to buy locations in areas of great future potential, but investors might not be happy to go along with the decision. Wal-Mart’s return on assets for the past year was 9% after taxes. That’s nice for mature retailer (Target’s ROA was 8.4% and Barnes & Noble’s was only 5.7%), but it’s not impressive. Lowes’ ROA is 12.7%. Wal-Mart stock is around $45 today, versus $49 a year ago, $52 two years ago, and $53 five years ago. Investors pay more for businesses with higher rates of return and higher potential.
Much has been written regarding Wal-Mart’s issues, not the least of which discusses their store development challenges. However, in this instance I believe Wal-Mart is following Wayne Gretsky’s approach to development. When asked what made him such a great hockey player, his response was “I try to go to where I think the puck is going to be, rather than where it currently is.”
This proactive strategy may enable them to preempt competition in these emerging markets as well as minimize the anti Wal-Mart effects. A preemptive strategy like this focuses on markets that are currently under or poorly served. The bonus of this approach is to signal to competitors that Wal-Mart is not about to become simply defensive or complacent.
Wal-Mart is very good at store expansion analysis, and I’m sure they have factored store cannibalization into new store openings. Obviously, 1st in market offers some advantages, not only in terms of land prices but also building a solid shopper connection before competing National chains enter that marketplace. Wal-Mart competes with other Discount chains, as well as Grocery, Drug, and Dollar retailers so winning shopper loyalty is important.
Will a new Wal-Mart take sales from an existing one? Sure it will. Then again, it is better to move sales from a Wal-Mart to a new one then to have sales move to a competitor who builds in closer proximity to a rapid growth community. The expansion of Wal-Mart in the US will mirror population change, and there are clear projections of growth predicted for markets like the SW, and lower Mid Atlantic; especially with baby boomer retirees.
Theories on the eventual impact of energy on demography abound of course. But one that seems to make a lot of sense is that an energy-starved, technology-laden U.S. will “re-pod” around exurban population centers. These mini-pods would support a pedestrian/pedalling lifestyle for what is anticipated to be a telecommuting workforce. But they would breakout from major urban/suburban centers to avoid high land and housing costs and to escape the already established “suburban sprawl” landscape environmentalists and energy engineers hate. So — why wouldn’t we anchor those around a Wal-Mart? Unless and until the U.S. population a) stops growing, and b)stops moving, Wal-mart’s growth opportunity is there.
Mired by stiff resistance in major metropolitan areas such as Southern California and New York City, Wal-Mart cannot sprout stores across the landscape at will like they did at one time. The law of large numbers also dictates a slowing in same-store sales and annual revenue and profit. Building in areas that may take five or ten years to develop (post housing bubble), will not give Wal-mart the growth that they need. Many saturated markets are experiencing cannibalization from new store growth.
With retailers like Bed Bath & Beyond, Target, Kohl’s, Best Buy, Home Depot, Lowe’s, and JCPenney expanding aggressively and profitably, Wal-Mart is bound to lose some market share in former Wal-Mart strongholds.
In closing, their recent failures in Germany and South Korea show that the Wal-Mart formula cannot be arbitrarily replicated across the planet. To grow revenue at 10% a year, Wal-Mart would have to tack on over $30 billion in sales. Wal-Mart cannot have a tepid approach for their expansion plans. Americans will vote with their dollars in mass, but only when the situation gets bad enough and apparently we haven’t reached that pinnacle yet.