Here's an Idea for Walmart: Buy Surging 99 Cents Only
Walmart (WMT) might consider purchasing 99 Cents Only (NDN), given the strength the operation has lately demonstrated and a powerful performance from the dollar store sector generally, one which is challenging it for the lower-income consumer.
Suggesting such a deal is an exercise in speculation -- but not unprecedented speculation -- when you consider the retailer's just-announced Netto stores purchase in the United Kingdom. Walmart purchased Netto to solve the problem its ASDA supermarket/supercenter chain faced in the U.K.: a lack of center-city stores that left its competitors with a lucrative and uncontested market.
In the United States, dollar stores are making advances at Walmart's expense. Early in the decade, Walmart experimented with a dollar-item section, eventually giving up on the idea. Recently, CEO Mike Duke said Walmart wanted to develop a smaller store it could use to grow in under penetrated territories, particularly urban markets. ASDA, in the U.K., also experimented with its own smaller store format before finally settling on the Netto purchase. So, why shouldn't Walmart skip the headache of developing yet another small store â€"- such Neighborhood Market and Marketside -- that doesn't quite suit its ambitions? The Netto deal demonstrates it isn't acquisition averse, and 99 Cents Only might be right up its alley.
While Walmart and dollar stores added sales in the recession, they seemed headed for a reversal of fortune when shoppers felt the economy was improving. Lately, consumer confidence has been inching up, even as results have improved at Target (TGT) and other retailers hard hit by the economic downturn.
And Walmart has sagged. The reasons are complex, but certainly the sales bump that the retailer enjoyed in the recession as consumers traded down from more expensive stores has vanished.
Among dollar stores, 99 Cents Only seemed the most vulnerable to an unpleasant post-recession turn around. Two years ago, the chain was set to abandon its latest market, Texas, after a tepid consumer response. While the recession drove Lone Star state shoppers its way, the situation might have proven short-lived.
But 99 Cents Only results kept surging, even in Texas where it decided to remain. In fact, in the quarter just reported, 99 Cents Only posted solid comparable store sales gains in locations open for at least a year with strong profits, a combination that suggests consumer satisfaction with a retailer.
The gains at 99 Cents Only are just one example of dollar store sector strength. Last week, Dollar Tree (DLT) announced a six-and-a-half percent comp increase and a nice profit despite suffering a one-time charged that cut into earnings. On top of that, Dollar Tree opened 68 stores net of closings.
As that kind of activity suggests, dollar stores haven't been sitting about waiting for customers to come their way. Family Dollar (FDO), for example, expanded low-cost food and everyday necessities, and added private label offerings to make its stores even more attractive to bargain hunters. On the opposite track, Dollar General (DG) has expanded the price range on its goods to well over $10 and added an exclusive brand, Bobbie Brooks, once controlled by Walmart. It continues evolving into something like earlier-generation discount stores, providing lower-income shoppers bargains on common purchases close to home and becoming more competitive with Walmart. Both Dollar General and Family Dollar have posted strong results recently.
Which brings us back to 99 Cents Only. The company realigned its Texas division by closing about a dozen stores but saw comparable store sales at the rest rise by almost 20 percent in the latest quarter. It has focused on cost controls and purchasing higher margin goods to boost profits and plans to add 13 or 14 new stores in the current fiscal year.
If you can't beat 'em, join 'em. Or buy 'em, one might suggest to Walmart, if they might give your retail business the boost it needs.
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