What’s Driving Wal-Mart’s Average Square Footage Per Store In The U.S.?

Wal-Mart‘s (NYSE:WMT) average square footage per store in the U.S. has come down significantly over the past four or five years. Back in 2010, it stood at 162,000 square feet per store, when the company had 708 Discount stores, 2,907 Supercenters and just 189 Neighborhood markets. Once the retailer started expanding its small-store format (Neighborhood markets) aggressively, average square footage per store declined rapidly, reaching 159,000 in 2013 with 508 Discount stores, 3,288 Supercenters and 407 Neighborhood markets. Last year, Wal-Mart opened a total of 233 Neighborhood markets, and we expect its average square footage per store to have declined in low-single digits (data not available). Going forward, we expect this declining trend to continue as Wal-Mart is persisting with its plans for aggressive expansion of small stores, thanks to their tremendous success. However, the company’s strategy of converting several of its discount stores to Supercenters is likely to mitigate the decline trend, as it has done in the past. Overall, we expect the retail giant’s average square footage per store in the U.S. to decline and reach 131,000 over the course of next five-six years.

Our price estimate for Wal-Mart stands at $81, which is roughly inline with the current market price.

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Aggressive Small Store Expansion

Wal-Mart launched its first Neighborhood outlet back in 1998, aiming to provide its customers a convenient shopping destination with easier parking and quicker check-outs. Compared to a typical Supercenter that spreads across 180,000 square foot, average area of a traditional Neighborhood store is just 40,000 square foot and it stocks products with high selling frequencies. Between 1998 and 2011, the retailer expanded this format slowly, growing the Neighborhood store network to 210 in 2011. However, in the same year Wal-Mart realized the need for aggressive small store expansion, since its big-box network was nearing saturation and dollar chains were nibbling its low-medium end customer base. It launched its pilot Express store format in June 2011 and had 11 such stores operational by July 2012. Initial response to this format exceeded all expectations, which only encouraged the company to aggressively expand its small store network.

Wal-Mart opened 76 small stores (Express and Neighborhood) in 2012, 121 in 2013 and 233 in 2014. Interestingly, in late 2014, the retail giant re-named its Express format to Neighborhood in order to have a more uniform approach towards its small store strategy. In 2015, Wal-Mart plans to open around 200 small stores and we expect it to add around 120-100 stores every year thereafter, since it is testing a couple of new concepts as well, including Wal-Mart To Go and Wal-Mart On Campus. Meanwhile, we believe that the expansion of Wal-Mart’s Supercenters will slow down considerably, which is in-line with the company’s plans for its main format. As per our forecast, Wal-Mart should have a network of over 1,500 small stores over the next five six years, with Supercenter count reaching just 3,700 and Discount store count falling to less than 350.

Conversion of Discount To Supercenters

Opening more Supercenters and large format has been difficult for Wal-Mart due its massive presence in the U.S. and real estate constraints. Therefore, the company has been focusing on increasing the efficiency of its existing stores instead and one such strategy on this front is the conversion of Discount stores. The retailer has been remodeling and extending the area of its Discount outlets to transition them into Supercenters that offer a full-line of supermarket merchandise along with a huge variety of general merchandise. Between 2009 and 2014, Wal-Mart’s discount store count went down by 430 and its Supercenter count increased by 768. A significant portion of this change can be attributed to the conversion of Discount outlets to Supercenters. Going forward, we expect the retailer to persist with this strategy, since building a new Supercenter from the scratch requires significant capital.

However, Wal-Mart is actually slowing down the roll-out of its Supercenters in the wake of falling foot traffic and shift in retailing strategy to small-stores and the online channel. Hence, with the slower expansion of Supercenters, the offsetting impact on declining average square footage per store will be less intense in the future, which agrees with our forecast.

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