Walmart Devours Its Own -- Customers in This Case

Last Updated Aug 26, 2010 2:33 PM EDT

Walmart (WMT) may be able to drive profits, but its sales are languishing -- and unless it develops a new kind of store it can grow rapidly, it will find itself in the dreary situation of trailing Target (TGT) in revenue generation. Just as it did in the latest quarter and before the recession.

Today, the retailer has so many supercenters -â€" and it keeps adding more -â€" that they are cannibalizing its existing stores, hurting overall store visits and comparable store sales, those at locations open for at least a year. The retailer has been developing alternative stores, but it has never been able to find one that provides the kind of returns it's looking for.

Walmart's strategy has been to develop new stores that can serve customers in different ways while using its existing distribution system and boosting overall corporate efficiency. The retailer made its most conspicuous effort along those lines in metropolitan Phoenix. There, it combined supercenters, Neighborhood Market groceries and Marketside convenience food store formats.

But what looked like a promising experiment when it went fully operational two years ago seems to have come to naught. Marketplace languished after its initial role out, and Walmart recently converted a Phoenix Neighborhood Market into one of its experimental Latino-oriented Supermercado de Walmart stores. Not a vote of confidence for Neighborhood Market.

So, now Hispanic-themed stores have emerged as the latest potential growth vehicles for Walmart, although these have always have proven tricky for non-Latino operators. Dallas-area supermarket chain Minyard, a retailer with a lot of experience selling to Latinos in a market where they are a significant proportion of the population, tried establishing a Hispanic-themed supermarket chain a few years ago called Carnival. But, the retailer sold the chain off to a Hispanic supermarket chain when the returns it generated fell short.

Mike Duke, Walmart's CEO, already has acknowledged that Walmart needs a format that will work in settings that are more urban than it typically serves. Target, Meijer and retailers who operate stores on the supercenter scale already are experimenting with urban-oriented stores, and it seems logical for Walmart to do the same.

It's too simple to say that the folks who started shopping Walmart for bargains in the recession have simply walked away. And other factors beside its stores crowding together have impacted its results. Many customers are becoming better at being frugal in the face of ongoing high employment, turning to expanded private label selections, for example, which render bigger profits but generate fewer sales dollars.

Keep in mind, Walmart still managed to add $700 million in sales in the latest quarter. But lacking a store format it can open without taking significant sales out of the locations it already runs, the retailer may be condemned to run behind its rival Target.