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What Keeps Wal-Mart Executives Up at Night?

Feeling the sting, retail giant sizing up big "small" threat

BENTONVILLE, Ark. -- With much attention on Dollar General and Dollar Tree competing to acquire Family Dollar, the resulting consolidation of the small-format discount channel points to trouble for Wal-Mart. Sales at dollar store chains, which specialize in cheap household goods, have slowed since the U.S. economy began improving, but the chains are still outpacing bigger discount retailers such as Walmart and Target. But the retail behemoth may be more worried about convenience stores than dollar stores.

Walmart dollar stores (CSP Daily News / Convenience Stores)

In its latest quarter (fiscal second-quarter 2015), Bentonville, Ark.-based Wal-Mart Stores Inc. reported that Walmart U.S. net sales were down 2.7%, and comparable-store sales were down 0.3%.; comparable-store traffic decreased 1.1%.

Brian Yarbrough, a consumer staples analyst for Edward Jones, told Forbes that grocery items account for 55% of Wal-Mart’s business, but as grocery chains like Safeway and dollar stores like Family Dollar have gotten smarter with how to appeal to the American consumer, Wal-Mart has suffered.

"I think the lower-income consumer continues to be under pressure, and they're visiting the dollar stores for fill-in trips. I think that's why Walmart’s struggling," he told the publication. He also said that if a family wants to pick up just a carton of milk and a loaf of bread to round out the week, "it's a huge hassle" to go to Walmart, whereas the smaller scale of the Family Dollars and Dollar Trees of the world make it much easier for consumers to go there.

Part of how they have increased their appeal to consumers, however, is to become more like convenience stores. Dollar chains in recent years have added tobacco, alcohol, frozen foods and more snacks.

During the company's quarterly earing call, Wal-Mart CFO Charles Holley said, "I think convenience is where the consumers have been looking, if you look at the Baby Boomers or whatnot," referring to both convenience stores and dollar stores.

"We still do a very nice full-basket trip at our supercenters," he continued. "But if you look at what we call the 'fill-in trip,' I think there's been well over 10,000 new small stores in the U.S. in the last three years. I think convenience is becoming a factor. And if you look at what we offer at the Neighborhood Market that some of these small stores don't--you have the fresh categories, which a lot of these small stores don't; you have a pharmacy and you have fuel. Those are very important, I think, for the success of the Neighborhood Markets."

Wal-Mart's smaller-scale grocery format Neighborhood Markets posted a 5.6% increase in comparable-store sales and a 4.1% increase in traffic.

The company opened 22 Neighborhood Market stores during the quarter (it has about 380 total) and said that it remains on track to open 180 to 200 new units for the year. While this should help Wal-Mart compete against companies like Safeway and Family Dollar, Yarbrough said, "Longer term, there's value, [and] the small-store format is the right format."

When asked how a Family Dollar deal would affect Wal-Mart, Holley said, "Our focus really remains on our business and what we feel works for us, versus what other people are doing out there. We pay attention to it, but … we really like the position of our small stores, our Neighborhood Markets and even the pilot [Walmart] Express. Because we think, for us, it's a real winning combination when you add the fresh, the gasoline, when you add the Rx and even frozen. ... And it's really put us in a good position in the small-store sector."

The company does not report financial data on its approximately 20 convenience-like Walmart Express stores, several Walmart on Campus units and a single Walmart To Go pure convenience store format, all still in the pilot phase.

Holley also said that Wal-Mart has no plans to acquire small-format stores. "We very much like our format," he said. "These smaller [Walmart] formats can sell anywhere between three times to eight times what some of those [dollar store or convenience] stores do. And we think it's a much better fit for our customer."

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