The rise of Walmart's small box

With sales flat, Walmart is experimenting with a convenience–store retail outlet.

(Todd Gill)

Walmart is synonymous with all things big. It is America’s biggest corporation by revenue, after all. Its workforce is sprawling, its profits huge, and its stores bewilderingly large.

But in its home market, Walmart may be growing too big. There are roughly 3,800 stores in the U.S., most of them just shy of 200,000 square feet, and some analysts are concerned the company has limited opportunity to expand without hurting sales at existing locations. The way to continue growing, therefore, might just be to shrink.

At the University of Arkansas last month, the company quietly opened a 3,500-square-foot outlet dubbed Walmart on Campus that is essentially a convenience store and pharmacy. Walmart insists it has no immediate plans to open more, but analysts say the new format could play an important role in the company’s future. “This is definitely an area where there is huge potential for expansion,” says Raphael Moreau, a retailing analyst with Euromonitor International.

The Walmart on Campus format could address some of the company’s challenges. For starters, U.S. locations have been suffering from declines in same-store sales for a number of quarters. Part of the problem is of Walmart’s own making. The chain removed many popular brands from its shelves and — in an effort to tidy up locations — axed certain in-store displays that were actually generating big sales. (Walmart is now reversing these moves.) The chain also faces threats from more sophisticated dollar stores that grew during the recession. “Walmart, in theory, should have been absolutely rocking,” says Doug Stephens, president of Retail Prophet Consulting in Toronto. “And they’re not.”

The big-box model that worked well in the past may be showing signs of strain, too. The format thrived when baby boomers flocked to the suburbs and easy credit fuelled consumption. These trends are now slowing or reversing, with people scaling back and moving closer to urban centres. After the housing crash, there are also fewer new developments in the U.S. able to support a giant Walmart.

The chain is well aware of these issues. Bill Simon, CEO of the U.S. division, said in October that up to 40 new stores built this year will be small or mid-sized, but disclosed little else. Walmart has experimented with smaller formats in the past, namely its grocery-centric Neighborhood Market and Marketside concepts, but the fact that it has not rolled either one out in a big way indicates the results have not been as successful as hoped.

Analysts say the convenience format is intriguing, however, because it could allow Walmart to enter urban centres. Unions and city councils have thwarted attempts to open metropolitan locations in the past, such as in New York City, but smaller stores could have an easier time winning approval. In this way, Walmart can target more customers with less risk of cannibalizing sales. Starting out on a university campus is also a clever strategy, Stephens says. One of the chain’s weaknesses is that its appeal to younger consumers is not as strong as with baby boomers. “What better time to build a connection to the future consumer than when they are about to graduate?” he says. (Canadians hoping to see a convenience-store-sized Walmart may not want to hold their breath; the country is not nearly as overbuilt with retail as the U.S.)

The strategy is not risk-free. Smaller stores add more complexity to the supply chain — goods need to be delivered more frequently, for example, which increases fuel costs — and the company has to find the correct mix of products to sustain healthy profit margins. Prime real estate is limited in cities, and rents are higher. “You have to drive huge traffic and huge volume in these places because of the high rent,” says Matt Arnold, a consumer analyst with Edward Jones in St. Louis.

Walmart isn’t the only big-box retailer looking at smaller formats. Target and Tesco have experimented as well, mostly unsuccessfully. “The urgency for Walmart mainly comes from whether another competitor gets it right first,” Arnold says.

That’s not to say Walmart won’t figure it out. “I wouldn’t put anything past Walmart,” Stephens says. “It’s a voracious organization.”