Wal-Mart Plans Further Cuts in U.S. Expansion

Bentonville, Ark. — Wal-Mart Stores here said last week it would scale back its planned U.S. supercenter development yet again, with only 170 planned for next year and 140 per year after that as the company focuses on international growth instead.

In addition, newly opened domestic supercenters are likely to become somewhat smaller, the company said, as prototypes in the 145,000- to 176,000-square-foot range generate better returns in the company's new growth strategy than the behemoth 190,000-square-feet-plus units the company had traditionally emphasized.

“What we are trying to do is reduce the impact we impose on ourselves when we open new supercenters,” said Thomas Schoewe, executive vice president and chief financial officer, in a press conference after the company's annual analyst meeting last week, where the plans were unveiled in a series of executive presentations. “So, the reason that you see the number declining to 140 when we get to fiscal 2010 is that is the number of supercenters we think we should be opening that allow us to hit the sweet spot between returns and sales growth for the corporation.”

At last year's analyst meeting, the company had projected that it would reduce supercenter expansion to 170 per year. In previous years, the company had been opening well over 200 per year as it added full supermarket offerings to its extensive network of traditional discount stores.

Now, the company said, it will run out of discount stores where it can execute conversions in the next few years, and it currently has no plans to build additional discount-store locations.

The slowdown heightened speculation that Wal-Mart is developing one or more smaller, convenience-store-sized formats as possible growth vehicles in the years ahead. Earlier this year, the Wall Street Journal reported that Wal-Mart was developing two such concepts, including one that would focus on pharmacy/health and wellness. In the analyst meeting, Wal-Mart executives declined to comment on the speculation.

The company did say that its Neighborhood Market stores, which measure about 40,000 square feet and feature an offering similar to a traditional supermarket, were in many cases generating better comparable-store sales than supercenters. The company is planning to add about 25 Neighborhood Markets per year in the next two years.

David Rogers, president of DRS Marketing Systems, Deerfield, Ill., said he thinks the Neighborhood Market format is a more viable vehicle for expansion than anything else the company could come up with.

“They've been working on that for a while, and it seems to be doing OK for them,” he said. “That's a better bet than those two small formats that they haven't even tested yet.”

Although Wal-Mart is scaling back its domestic expansion even further than it had projected it would last year, the company said its capital expenditures would decrease only slightly as it focuses on ramping up international growth. Cap-ex is planned at about $15 billion overall this year, with about $10.3 billion to $10.8 billion spent in the U.S. Next year, cap-ex is projected at $13.5 billion to $15.2 billion overall, including $8.7 billion to $9.9 billion in the U.S.

During Schoewe's financial overview presentation, analysts repeatedly questioned Wal-Mart's strategy of investing in overseas development as opposed to improving domestic performance, which represents the bulk of Wal-Mart's operations and, they argued, has more of an influence on the company's long-stagnant stock price.

Schoewe responded by saying that the company is banking on its international investments to generate returns in the long term.

“We have an obligation not just to think about the next quarter, but to think five to 10 years out, 15 years out,” he said. “We have to be making those investments for the long-term future of the business.”

He noted that the company's initial investments in Canada and Mexico were a drag on earnings before they eventually began generating strong returns.

HEALTH AND WELLNESS

Domestically, Eduardo Castro-Wright, president and chief executive officer of Wal-Mart U.S., singled out health and wellness, grocery, and electronics as three categories that have been performing well at the chain, partially offset by weaker sales in apparel and home furnishings.

“We are keeping our pace in the grocery market,” he said, noting that grocery products account for more than 40% of sales.

DeDe Priest, a senior vice president in the grocery division, said the company is becoming more aggressive in “communicating its price leadership to consumers.”

The focus is on three main areas: so-called known value items (products toward which customers have high price sensitivity); items that drive shopping occasions; and what she described as “total food solutions,” such as the July 4th Sam's Choice Great American Barbecue promotion the company staged this summer.

Also this fall, the company is ramping its food advertising tied in with football broadcasts. The “Game Time” commercials emphasize Wal-Mart as a destination for saving money when hosting football-watching parties.

Priest noted that the Neighborhood Market concept has been generating better comparable-store sales than the company as a whole. Year-to-date, comps are up 6.5% at the 112-store chain, she said.

“That's very encouraging to us, because Neighborhood Markets play in the space that conventional grocery plays in,” she said.

Last week reports said Wal-Mart was planning its first Neighborhood Markets in California.

In health and wellness, Wal-Mart said its $4 generic-drug program will continue to expand as more branded drugs come off-patent.

“Prescription unit volumes are up 30% year-to-date,” said John Agwunobi, senior vice president, and president of professional services. “It's not just our generic business, but branded business is also being positively impacted by our price-leadership approach.”

The program, launched last year as a small test and quickly expanded throughout the system, resonates with consumers because of its “simplicity and value,” he said — two qualities that consumers increasingly seek in health care.

Wal-Mart to Buy Seiyu

BENTONVILLE, Ark. — Wal-Mart Stores here said last week it would seek to buy the remaining 49.1% of Japanese retailer Seiyu that it does not already own, at a cost of about $876 million.

The third-largest Japanese retailer, Seiyu has about 400 stores. It has struggled to turn a profit since Wal-Mart first took a 6% stake in the company in 2002. That stake was increased to slightly more than 50% in 2005.

Last month, Seiyu said it would cut 450 management jobs as it seeks to turn the business around.

At Wal-Mart's analyst meeting last week, analysts questioned whether Japan would turn out like Germany and South Korea, two countries that Wal-Mart pulled out of last year.

Thomas Schoewe, executive vice president and chief financial officer, Wal-Mart, said the company was much more confident that it would eventually fare better in Japan because of the research it did in the market ahead of time.

“Japan is very, very different from Germany,” he said, noting that he expects to see improvements in the market “in the next three to five years.”

David Rogers, president of DSR Marketing Systems, Deerfield, Ill., who has followed Wal-Mart's expansion activities, said he questions Wal-Mart's decision.

“I'm puzzled by it,” he said. “The move suggests to me that they are going to be even less sensitive to the Japanese market than they were when they had a Japanese operating partner. Japan is a very, very suspect environment.”
— M.H.

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