The Retail Apocalypse Spreads to Walmart…or Does It?

Not even Walmart Stores Inc. (NYSE: WMT) is immune to the growing retail apocalypse. The world’s largest retailer has announced plans to close 154 stores in the U.S. and kill off one of its concept stores.

The retail giant will close all 102 of its Walmart Express small box stores, 12 Supercenters, 23 Neighborhood Markets, six Sam’s Clubs, seven locations in Puerto Rico and six discount stores, Los Angeles TV station KTLA reported. The round of closings means that Walmart will close more stores than it will open in the U.S. for the first time in decades.

The impact on Walmart’s store count will be minimal because the retailer plans to open 135 stores in the United States over the next 13 months, Reuters reported. Current plans call for Walmart to open 15 new Supercenters and 85 Neighborhood Markets by February 2017. That means Walmart’s overall store count in the U.S. will only shrink by 21 stores.

Since the discount goliath currently operates 4,177 locations in the USA, its American store count will only shrink to 4,042. That means these closings will have little or no impact on Walmart’s overall operations and will do little to make up for its recent drop in revenue.

Walmart’s revenue hit $485.62 billion in July 2015 but dropped to $484.03 billion over the third quarter of 2015 in October. That means Walmart’s revenue shrank by $1.59 billion during the third quarter, which shows some reduction in operations is needed.

Why Walmart’s Closings Are Bad News for Dollar Stores

Interestingly enough, Walmart’s closings contain some bad news for dollar stores. Walmart is effectively pulling out of the dollar store business and concentrating on big boxes and grocery stores. Walmart Express stores are about a third the size of a typical supercenter, the equivalent of a large Family Dollar.

News reports indicate that Walmart is shuttering the Express stores because it simply could not make money at them. If Walmart could not make money in the dollar store business, one has to wonder about fast-growing, low-margin discounters like Dollar General Stores (NYSE: DG) and Dollar Tree Stores (NASDQ: DLTR). Those chains might see a boost from the Express closings, but Walmart’s failure in the sector indicates that the dollar store business model is flawed.

The resources at the dollar stores are certainly limited. Dollar General reported a free cash flow of just $83.66 million on revenues of $20.02 billion on October 31, 2015. Walmart reported a free cash flow of $1.724 billion on revenues of $484.03 billion on the same day.

It looks as if dollar stores are a black hole that eats up revenue and produces little profit. Or at least that is what Walmart has concluded; it is concentrating its small box growth on Neighborhood Markets that generate several streams of revenue. Most neighborhood markets contain a grocery store and a pharmacy as well as a discount store, and many of them also have gas pumps.

Why Walmart’s Revenue Is Shrinking

Walmart is faced with shrinking revenue and store count because of a perfect storm of factors that is transforming the American retail scene. Basically, the retail environment that Walmart’s business model was designed for is disappearing because of the following changes:

• Growing income inequality is cutting the buying power of many Americans. Recent research indicates that pay has plummeted for the poorest Americans, Walmart’s most likely customers. The Brookings Institute discovered that income for the poorest 20% of Cincinnati’s households shrank by 3% between 2013 and 2015. The same households make seven percent less than they did before the current recession began in 2006. Simply put, Walmart’s customers have less money. The gains in income have come in the upper percentiles among the people that are least likely to shop at Walmart.

 

• The rise of online retailers, such as com Inc. (NASDAQ: AMZN), some of which can now match or at least undercut some of Walmart’s prices. Ecommerce sales grew by 15.1% between third quarter 2014 and third quarter 2015, according to the U.S. Census Bureau. Amazon is a major threat to Walmart because it is more convenient. To make matters worse, it is the more affluent customers with extra disposable income that are most likely to shop online. Amazon is taking middle- and upper-class customers at a time when Walmart needs them most.

• The ability of many other retailers to effectively match or at least be competitive with Walmart’s prices. This includes grocers like Kroger and Safeway, drugstores like Walgreen and CVS, dollar stores and Amazon. A big problem for Walmart here is that these retailers do not have to specifically undercut Walmart’s prices. If Kroger can sell something like laundry detergent for 50¢ more than Walmart, it just gave its customers a reason not to drive out to the Walmart Supercenter and put up with all the hassle of shopping there. Walmart’s success was based on its ability to sell items at 20% or 25% less than everybody else in town. If everybody else is selling for just 5% more than Walmart, much of that competitive advantage disappears.

 

• Changes in the American lifestyle. Americans are driving less, moving away from suburbs and doing more shopping online. Walmart was designed for a nation where most people owned cars and lived in suburbs. It was the car-oriented suburban lifestyle that drove Walmart’s growth; now fewer Americans are living that lifestyle, which means fewer customers for Walmart.

 

Can Walmart Survive the Retail Apocalypse?

The $1 billion question here is can Walmart survive the retail apocalypse? My answer is yes because Walmart is an enormously creative and flexible company with vast resources.

Most importantly, Walmart is creating the infrastructure necessary for success in ecommerce. It plans to spend $2 billion on online retail over the next two years, and it has opened four new fulfillment centers in the U.S. alone. That puts Walmart well ahead of competitors like Target, which are still playing catchup in ecommerce.

Walmart was the second largest online retailer in the United States, with ecommerce sales of $13.188 billion last year, according to Fortune, although it is still lagging far behind Amazon, which had $71.84 billion in sales. Target, in contrast, had online sales of just $2.4 billion, meaning it has far to go.

Walmart has done a great deal of research into next generation shopping options, including same-day delivery and click and pull. Click and pull means a customer orders something online but picks it up from a brick-and-mortar store. This gives the company an edge because it has already developed some of the new capabilities its competition lacks.

Walmart has the resources to survive and possibly thrive in the retail apocalypse. Unfortunately, it probably faces two or three rough years of low stock prices and falling revenues before it discovers how to adapt its business model to a changing environment.

Once the worst of the apocalypse is over, Walmart could find itself in a great position because many of its historic competitors, such as Sears and possibly Dollar Tree and Dollar General, will have collapsed.