Where Will Wal-Mart Be in 5 Years?

By Motley Fool Staff | More Articles | Save For Later 
November 9, 2014 | Comments (8)

Sales growth has been harder and harder to come by for Wal-Mart Stores  (NYSE: WMT  ) since the Great Recession. Whether due to high gas prices, stagnant wages, or cutbacks in the SNAP food stamp program, comparable-store sales have stayed stubbornly near the flat line for the past couple of years.

Can Wal-Mart revitalize its business over the next five years? Or is it doomed to long-term stagnation and decline? Two Motley Fool contributors weigh in below.

Rich Duprey: Wal-Mart hasn't delivered the goods lately for investors, but its entry into grocery delivery just may be what turns it around for the king of retail.

Wal-Mart has been plagued by falling store traffic. Source: The Motley Fool.

After seven consecutive quarters of falling traffic in U.S. stores, Wal-Mart cut its earnings guidance for the full year and said growth in online sales would slow. The introduction ofonline grocery shopping though, with both in-store and home delivery options available, could change that outlook as consumers become aware of its availability and the service is rolled out nationally.

Groceries are a low-margin business, and though rivals like Amazon.com (NASDAQ: AMZN  ) also are making a push to deliver groceries to your door, Wal-Mart has an advantage in that it essentially has distribution centers all over the country: its brick-and-mortar stores. Amazon sees the necessity of this and is now building its first retail location.

And Wal-Mart has extensive experience in the field, having honed the home delivery craft in foreign countries, where the service is much more common. It also builds on other recent successes, such as its ship-to-store model that has been emulated by numerous other retailers. With free grocery pickup at the store, or home delivery for $5 to $7, Wal-Mart should be able to offer the service to more markets eventually.

Further, Wal-Mart's expertise in technology will serve it well, as well. It was an early adopter of RFID tag technology; popularized vendor-managed inventory; advocated universal barcode usage as a labeling system; used POS real-time sales data to forecast supplier demand; and recently began using smart tags to keep shelves stocked. In short, the retailer is a logistics genius and a technology whiz.

It's playing to those strengths by bringing onto its board of directors the wunderkind founder of Instagram, Kevin Systrom, to help it better engage a young, more tech-savvy consumer. Building on the string of tech acquisitions it's made over the past few years, Wal-Mart has all the tools, experience, and ideas needed to reverse the course it's been on and launch it toward its next phase of growth.

Adam Levine-Weinberg: If Wal-Mart wants to return to growth, it needs to become more accessible for consumers. Wal-Mart Supercenters are useful for big shopping trips, but they aren't very convenient for customers who just need to buy a few things. The rapid growth of dollar stores in the last 10 years shows the value of combining low prices with convenience.

Wal-Mart has finally admitted that this is a problem. While Wal-Mart opened 130 Supercenters in the U.S. last year and expects to open another 120 this year, it plans to add just 60-70 Supercenters next year. Furthermore, many of these will be converted from the older "discount store" format, rather than being brand-new stores.

Wal-Mart is opening hundreds of smaller "Neighborhood Market" stores. Source: Wal-Mart.

On the other hand, Wal-Mart will open about 240 small-format "Neighborhood Market" stores this year and plans to open another 200-220 next year. This encompasses a sizable group of 40,000 square foot stores that compete with grocery stores, as well as a newer set of 10,000-15,000 square foot locations that compete more directly with dollar stores.

Wal-Mart appears to be very happy with the Wal-Mart Neighborhood Markets, which have posted significantly better comparable-store sales performance than the Supercenters in the past two years.

In five years, small-format Neighborhood Market stores are likely to be much more prominent relative to Wal-Mart Supercenters than they are today. The best way for Wal-Mart to fend off dollar stores is to become more like them. By finding top-notch real estate for smaller, easy-to-navigate stores focusing on groceries and fresh foods, Wal-Mart can solidify its dominant position in food retailing.

E-commerce is another area where Wal-Mart has a long-term opportunity to grow by becoming more accessible to consumers. By leveraging its massive store footprint to offer fast delivery of a wide range of products at low prices, Wal-Mart can become the most credible Amazon.com competitor there is.

Wal-Mart announced some big e-commerce investments last month. It hopes to grow e-commerce sales at a 30%-40% average annual rate for the next three years. That would boost e-commerce sales from $12.5 billion this year to around $30 billion by 2017 (Wal-Mart's FY18). In five years, Wal-Mart will still be primarily a bricks-and-mortar retailer, but e-commerce will be a more meaningful (and growing) proportion of its sales.

The key to the next five years at Wal-Mart will be getting closer to customers through more convenient store formats and a bigger e-commerce operation. This could drive a revival in sales growth, leading to stronger long-term growth in earnings and dividend payouts.