Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

Wal-Mart's Neighborhood Markets Pose Threat to Dollar Stores

By

Although they are safe for the next one to three years, a consumer stock analyst runs the numbers and shows what will happen to dollar stores if Wal-Mart accelerates the roll-out of its Neighborhood Markets concept.

PrintPRINT
At Wal-Mart's (NYSE:WMT) latest analyst meeting, the company said that it would accelerate the rollout of its Neighborhood Markets stores that, at 40,000-square-feet, are about a quarter to a third of the size of a typical supercenter. The Neighborhood Markets grocery stores are designed to penetrate urban settings that do not allow for supercenters. The current roll-out rate is approximately 100/year.

Analysts took this news to mean the company would not be growing its Wal-Mart Express concept, which is basically a dollar store. With this, the sell side, at least, breathed a collective sigh of relief for the long-term growth rate of dollar stores.

Still, longer-term, I believe that the Neighborhood Markets will be a negative for the dollar stores. The sell side analysts who don't acknowledge this threat, in my opinion, are compartmentalizing shoppers to different stores or types of stores, rather than looking at the competition among the differing stores. Chipotle (NYSE:CMG) customers would never eat at Taco Bell (NYSE:YUM), which common sense, or if you are really dense, and actually had to have David Einhorn's market research study prove it, would have told you was rediculous.

The growth of dollar stores is spearheaded by their increased consumables offering, though somewhat less for Dollar Tree (NASDAQ:DLTR) than for Dollar General (NYSE:DG) and Family Dollar (NYSE:FDO). Having better food and household products pricing than their competitors is key.

As a retailing analyst, I know that consumers have historically reacted to pricing differentials above 5% when choosing among the same sorts of stores. As the differential approaches around 8% however, it can cause some really important market share shifts. Indeed, we have seen Kroger (NYSE:KR) gain significant market share from other chains such as Safeway (NYSE:SWY) and Supervalu (NYSE:SVU), with prices that I believe have averaged about 6-8% below traditional chains. As an aside, it seems very possible that Supervalu may see bankruptcy based on its years of being priced about 8% above most of its competition.

Pricing has gotten to be even more of an issue since the recession. Moving forward, it is likely that increased taxes and slow or no economic growth over the next four years will intensify the market share shifts tied to relative prices. For those at the bottom half of household income in the US, the historical and future effect of relative prices is even greater.

In late 2010, one good sell-sider pointed out that dollar stores were taking some market share from Wal-Mart because of the higher cost per trip for small items (due to the increased gasoline cost for these trips), even though Wal-Mart and Target (NYSE:TGT) had lower prices than the dollar stores. It seems very reasonable that any gains made by dollar stores for those reasons are ripe for reversal in the next few years. Significantly, some of the biggest sales gains at the dollar stores have come from higher income consumers ($60,000/year and up) who would have more access to cars than other dollar store customers and can, even in urban settings, travel further for cheaper prices.

I have not seen a pricing differential study for Wal-Mart vs. the dollar stores in the last year or two, but I am fairly sure that Dollar General's consumable prices are 3-5% above Wal-Mart's, and that Family Dollar's prices are at 5-7% above Wal-Mart's. I judge these differentials to be big enough to make these stores somewhat vulnerable to Wal-Mart in terms of relative prices. Additionally, I can point to Target's history of fairly scrupulously keeping its relative prices on like consumables at only about 3% over Wal-Mart's.
< Previous
No positions in stocks mentioned.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
PrintPRINT

Busy? Subscribe to our free newsletter!

Submit
 

WHAT'S POPULAR IN THE VILLE