3 ways Walmart can go small and urban in 2010

As the recovery sends consumers elsewhere, WMT knows it needs metro locations to prop up profits

By InvestorPlace Apr 28, 2010 10:27PM

walmart wmt stock logoIn last week's release of its 2009 annual report, Walmart (WMT) indicated that it might change direction and "develop new, innovative formats" to capitalize on opportunities in major metropolitan markets. Walmart has long been the go-to retailer in rural communities and the suburbs, but its sprawling Supercenter format has never really appealed to urban dwellers.

Well rather than try to find a way to shoehorn a 36-aisle retail monstrosity into midtown Manhattan, Walmart may be taking a very un-big-box approach to its retail locations: Go smaller. And there are three logical ways how.

Walmart has slowed its once aggressive Supercenter expansion plans in the U.S., with just 49 new locations opening last year compared with 132 sites in 2007. Some analysts believe it is running out of ideal places to build the gigantic outlets since the company's strategy has historically been to serve a regional customer base that lives within 30 miles or so from the store. The best commuter-shopper locations have been filled -- meaning Walmart’s only choices are to go even more rural in pursuit of fewer customers traveling farther to shop, or to break into the cityscape than it should figure out how to go urban in a hurry.

It’s a no brainer then for WMT execs to go for urban. And here’s the best ways to do it:

Cut out groceries: Walmart can price most other retail stores out of competition, but the store faces stiff competition with other grocery retailers. And with grocery margins as thin as they are, Walmart would have to execute this almost perfectly right out of the chute. Focusing on sales other than food would be a leaner approach.

Go warehouse: A synergy of digital sales and urban storefronts would work, where customers could pick up items that they had ordered on the company's web site. The store would not have to be very large, and it could offer a limited amount of merchandise for sale directly. The most likely suspect would be electronics – where Walmart is one of the lowest priced retailers in the space. Deliveries of items ordered over the web could also be handled by a contract service or other carrier. And given Walmart’s well-known habit of wringing every last dime out of its vendors, the cost of this could also be kept manageable.

Buy out an existing urban retailer: Perhaps the most interesting possibility is that Walmart could buy an existing retail chain. A prime candidate would be Radio Shack (RSH), which operates nearly 4,500 retail stores in the U.S. Radio Shack has a market cap of about $2.8 billion which Wal-Mart could easily manage a buyout with its $8 billion hoard of cash. Radio Shack earnings recently showed a 4% increase in sales, but the company is creating growth by actually moving away from gadgets like smartphones. That means the electronics department of Walmart is pretty closely aligned with RSH.

Whatever happens, the consensus on Wall Street is that something has to give. Bulls have 5 top reasons to buy Walmart WMT stock and bears have an equal number of  reasons Walmart is washed up.

Of course, it’s worth noting that all this discussion of urban expansion overlooks the fact that Walmart has run into opposition from community groups, small businesses and a host of other detractors in previous efforts to go metropolitan. It has failed twice to get a super-center into either Queens or Staten Island in New York City, though WMT is reported to be looking at a shopping center in Brooklyn.

A smaller size may be more palatable to urban residents. And practically speaking, the only way to expand into these areas is to do so without the massive Walmart complexes customers typically associate with the brand. Even if the 20 acres or so that a super-center needs were available, the cost of the land alone might be prohibitive. That’s to say nothing of increased traffic and the ability of surface streets to handle the thousands of cars that a new store would attract. So if Walmart wants to get a toe-hold in New York City or Chicago, it is very likely going to have to think smaller.

Wall Street knows that Walmart's returns have flattened out, and it is having trouble keeping customers in its stores as the economy improves and rock-bottom prices become a lower priority. Walmart recently dropped prices on some 10,000 items in an effort to retain new-found shoppers won in the depths of the recession. But squeezing margins could backfire if there store can’t keep volume up.

The best way for WMT to grow its profits -- and share price -- is to break into the urban marketplace. And the only real option to do that is to go smaller.

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