Walmart's Neighborhood Markets are thriving, but at what price?

Walmart reported its second quarter earnings, and despite the company's seventh straight quarter without sales growth at stores open at least one year, as well as a downgraded full-year profit outlook, Walmart reported that its small-scale Neighborhood Market locations are thriving.

Neighborhood Market same-store sales grew by 5.6% compared to the previous quarter, and traffic grew by 4.1%.

Walmart opened 22 Neighborhood Market stores in the last quarter and is scheduled to open 180-200 more this year. (There are no stores in the Greater Philadelphia Market so far.) Still, the small-format grocery concept represents only a small fraction of the company's total business.

The earnings report comes a few weeks after a report by BMO Capital, which claims that Walmart is losing aggregate share in roughly one-third of the markets in which it operates Neighborhood Market stores. The report suggests that "Neighborhood Markets may be less of a threat than expected" to conventional grocers like Kroger, and that the concept in some cases may be cannibalizing sales from larger Supercenters in the same market.

Walmart's U.S. CEO Bill Simon acknowledged a "slight" cannibalization effect in some markets, but said it was not significant.

Small format plans get bigger for Walmart

Walmart announced last week that it plans to open 270-300 new Neighborhood Market and Walmart Express stores in the next year. Late last year it had announced that they would open only 120-150 of the small format stores (Walmart to accelerate small format growth). The forecast for 115 new supercenters remains unchanged.

The existing 346 Neighborhood Market stores and 20 Walmart Express stores continue to generate positive results, according to the company. Last year, comparable-store sales for the Neighborhood Market rose 4%, driven largely by fresh food and pharmacy.

As a result of the revised store forecast, Walmart increased its capital expenditure budget for the U.S. division by $600 million to a range of $6.4 - $6.9 billion.

Walmart CEO Bill Simon said that small store expansion "will strengthen our market share and create greater efficiencies in our supply chain through a tethered approach that uses supercenters as a supply chain base, links our resources and provides a unique and connected customer experience."

Along with the announcement about the small store growth plan, Walmart announced that total company sales in the fourth quarter increased 1.4% to $128.8 billion, while net income and earnings per share fell 21% and 19.8%, respectively.

For the full year (2013), sales increased to $473.1 billion, while net income and earnings per share fell 5.7% and 3.2%, respectively.

The company blames a portion of its results on bad winter weather and a reduction in the federal government's Supplemental Nutrition Assistance Program. Walmart expects challenging market conditions to continue in 2014.

Walmart to accelerate small format growth

Last week Walmart reported that it plans to accelerate the growth of its small-format stores - mostly Neighborhood Markets - and projected that they will open between 120 and 150 of them in fiscal 2015, compared to 120 in the current fiscal year. The company also said they plan to open 115 supercenters in the next fiscal year.

According to President and CEO Bill Simon, "We will accelerate growth of our Neighborhood Markets because of their strong returns, consistent comp-sales performance and double-digit net sales increases; and we will continue to build and leverage the supercenter format, which remains our primary format for growth."

In addition, Walmart expects to open between 17 and 22 new Sam's Clubs stores in fiscal 2015 at a cost of $1 billion.

Walmart Neighborhood Market may accelerate its rollout

Earlier this month Walmart CEO Bill Simon said the company could accelerate the rollout of its Neighborhood Market grocery stores. According to Simon, Walmart had plans to open 80-100 Neighborhood Market stores this year and next, but that number could increase as returns on newly built stores approach those of its supercenter format.

"Neighborhood Market is a really cool format," said Simon. "It's a grocery store combined with a drug store put in a place where a dollar store would be."

And just to scare grocery stores, drug stores and dollar stores a little more, Simon kept talking.

"Imagine a drug store that has Walmart's prices that has fresh food, fresh produce and fresh meat. Imagine a convenience store that has pharmacy and fresh food. Imagine a grocery store that also has a pharmacy and, in many cases, gas, and the prices Walmart has. It just really works well against any competitive set it operates against."

Simon and the company he runs have a lot in common. They both lack eloquence, but make alot of money!

Walmart ramping up its smaller-format stores

Wal-Mart said earlier this month that its smaller-format stores are making inroads against dollar stores, supermarkets and pharmacies, and that the company will increasingly move toward stores below 60,000 square feet.

During the current fiscal year, Wal-Mart's Bill Simon said they expect to open about 115 smaller-format stores, with The Neighborhood Market and Express locations accounting for about 40% of stores the retailer opens. Simon calls it a "rapid ramp-up."

"We can deliver price, and assortment and fresh food and Rx," said Simon, who believes the smaller-format stores provide a full package of products and services that competitors lack.

Even with the growth of these smaller-format stores, about 90% of Wal-Mart's existing stores are supercenters or large stores. The company plans an additional 125 supercenters this year.

Walmart to have 300 Neighborhood Market stores by 2013

According to an article in Shopping Centers Today, Walmart said last week it plans to nearly double the number of its Neighborhood Market supermarkets over the next three years. Currently the company operates 185 of these stores, including 30 in Puerto Rico.

Walmart President and CEO Bill Simon is counting on the 42,000 square foot stores to help revitalize same-store growth after several sluggish years, while also easing entry into urban markets that don't have the room for a Supercenter.

Simon added that Neighborhood Market stores are easier to develop than Supercenters, which can take up to seven years to open.

The article also points to Walmart's Pick Up Today program, which allows customers to place orders online for pickup at a local store, as an additional benefit of the Neighborhood Market stores. The program launched last year and Simon said results have been encouraging.