Wal-Mart’s Answer To Dollar Chain Bidding War: Rebrand Express To Neighborhood

The world’s largest retailer, Wal-Mart (NYSE:WMT), recently unveiled plans to rebrand its Express stores to Neighborhood Markets in an attempt to have a more uniform approach towards its small store strategy. ^[1] The company has been aggressively opening smaller format stores in urban markets to continue its expansion in the U.S. and better cater to buyers’ needs for convenient shopping. Wal-Mart currently has two main small store concepts – Wal-Mart Express and Neighborhood Markets, and it is testing a couple of new concepts – Wal-Mart To Go and Wal-Mart On Campus. However, the retailer stated in its earnings call that shopping trends in both its main concepts have been somewhat similar so far and thus, it makes sense to operate both these formats under a single brand name. Wal-Mart currently operates 21 Express stores in the U.S. and plans to take this count up to 90 by the year end. With the retailer’s rebranding strategy, the new Neighborhood concept will range from 15,000 – 45,000 square feet as opposed to the previous format of 45,000 square feet.

Competition in the small store space is heating up as Dollar Tree and Dollar General have entered a bidding war for Family Dollar, a company that was also a potential acquisition candidate for Wal-Mart. A few weeks back, Family Dollar agreed to sell itself to Dollar Tree for $8.5 billion, after which Dollar General pitched a better offer of $8.95 billion. After Family Dollar rejected this offer, Dollar General upped its bid to $9.1 billion. While it seems clear that Dollar chains are threatened by Wal-Mart’s aggressive small store expansion, the retail giant had been surprisingly quiet until now. Wal-Mart’s recent rebranding strategy appears to be its answer to the growing competition in the small store space. The retailer will continue its aggressive expansion in urban markets under a single banner, which should make inventory and store management easier.

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Irrespective of whether Family Dollar joins hands with Dollar Tree or Dollar General, the new company will be in a much better position to compete against Wal-Mart. A potential Dollar Tree-Family Dollar merger is expected to create cost synergies at a $300 million run rate by the end of 2018, which can help the dollar chain pass on some savings to its customers. Moreover, with the prospective merger, Family Dollar will be able to procure goods from Dollar Tree’s or Dollar General’s vendors at better prices. Also, chains participating in the merger can use the same distribution centers and delivery trucks that can help them reduce costs.

Traditionally, Wal-Mart has been serving customers who make less frequent stock-up trips, with its large stores located on the outskirts of a city. It hasn’t been as effective in catering to buyer needs for easy access, for which they usually go to a traditional convenience store. As a result, local convenience, dollar and grocery stores have been nibbling Wal-Mart’s low-end customer base. Expanding its smaller format network provides Wal-Mart with a great opportunity to win back those customers. By providing them with fresh inventory of food, consumables and other essential merchandise, the retailer can drive customers from alternative stores to its Neighborhood Markets, which will now include Express stores.

In October last year, Wal-Mart unveiled plans to open 120-150 small stores, and 115 Supercenters in fiscal 2015. Soon after, the company uplifted its expansion plans to about 270-300 small stores in the U.S in fiscal 2015. During its recent earnings call, Wal-Mart stated that it was on track to open 180-200 Neighborhood Markets and 90-100 Express stores by the year end. They will now operate under the same brand, which should help the company manage its supply chain better. With a strong supply chain to supplement its inventory needs, Wal-Mart may be able to add more weight to its already aggressive expansion plans.

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1. Goodbye Wal-Mart Express Stores, Hello Neighborhood Markets!, Bidness, Sept 13 2014 [↩]