Chain drug stores have generally not had to cope with the specter of a Walmart pharmacy nearby — until now.

Walmart, Walmart Express, Bill Simon, Supercenters, small format, Walmart U.S., small-box retailers, Bank of America Merrill Lynch Consumer Conference, Greg Jacobson, pharmacy, Walmart on Campus, University of Arkansas, Bentonville, Walmart Neighborhood Market, Walmart Market, food/drug combination stores, general merchandise

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Analysis: Walmart Express challenges drug stores

March 28th, 2011
Walmart Neighborhood Market, Walmart's current small format, averages around 50,000 square feet.

BENTONVILLE, Ark. – Chain drug stores have generally not had to cope with the specter of a Walmart pharmacy nearby — until now.

Bill Simon, president and chief executive officer of Walmart U.S., earlier this month revealed more details about Walmart's plans for smaller-format stores at the Bank of America Merrill Lynch Consumer Conference, and the news for small-box retailers — drug stores in particular — is not good.

The discount store giant's focus on opening its huge Supercenters in suburban and small-town locations has left to drug stores the advantage of being able to find sites in all kinds of markets and to open outlets in proximity to each other. That is about to change, however.

Last autumn, Walmart announced that it was developing a small format that would range between 15,000 and 30,000 square feet for deployment in either rural or urban environments. The primary small concept, Walmart Express, will measure about 15,000 square feet and incorporate a pharmacy in some locations and not in others. According to Simon, the stores will also feature varying levels of fresh food products and other items.

“The aim here, folks, is to get the right model so that we can rapidly roll these things out,” he said. “At our peak, we built about 350 Supercenters in a year, so when we get this thing right, these are going to come real fast. And we’re real excited about this format.”

The first Walmart Express pilot stores will debut in the second quarter in both rural and urban locations. Simon said some examples will be open near Bentonville by the time of Walmart’s annual meeting on June 3.

The retailer has already developed an even smaller format, Walmart on Campus, that could give it access to tiny but heavily trafficked locations. The initial unit, at the University of Arkansas, measures 3,300 square feet and offers 2,800 SKUs, half of which are grocery and the other half general merchandise and health and beauty aids. The flagship outlet includes a pharmacy.

Simon added that two additional prototypes have been built in “super-secret locations” and declined to give further details.

“They’re really nice, and what you will see is a real effective implementation of a strategy that takes a continuum of retail from the small formats, as close to the customer as you can get, [and] has the high-velocity items the customer wants, [and] as we move through the size from Express to Supercenter we can flex inventory and assortment based on what the customer wants,” he explained.

Walmart Express — and the mystery concepts with which Simon teased investors — are part of a broader strategy to jump-start domestic sales growth by penetrating markets that cannot support a Supercenter. To achieve this, Walmart will deploy a range of small and medium-size formats, including the Walmart Neighborhood Market, which is being rebannered Walmart Market.

While current Neighborhood Markets, which essentially are food/drug combination stores with an expanded general merchandise set, average around 50,000 square feet, going forward they will vary from 25,000 to 60,000 or even 70,000 square feet, Simon noted.

Management has recently revised its capital investment plans for this year, shifting dollars from Supercenter remodels to new store openings to fund the rollout of the smaller formats.

“We are going to be adding hundreds of these in the coming years, and maybe even more, depending on how they work out,” Simon said.

Walmart is hoping that the smaller formats can provide a catalyst for its stagnant U.S. business, where its base of discount stores and supercenters have limited opportunities for growth. Though industry observers have cited small stores as one potential avenue for Walmart to reignite growth in the U.S. market, they say the jury is still out on whether the retailer can make that concept profitable under its current business model.

"We have long been an advocate of smaller-format expansion in the U.S., as we believe the Supercenters are challenged, in a classic sense, to be 'all things to all people,' " William Blair & Co. analyst Mark Miller wrote Thursday in a research note on Walmart.

"In an ideal world, Walmart might have been able to more effectively segment its U.S. customer base over time by demographic and not just geography," Miller explained. "So it is unclear whether the unit economics on smaller Walmart stores in the U.S. can be commensurate with Supercenters, given the requisite investments to maintain Walmart store standards. If not, then incremental square-footage development in the U.S. with small stores could weigh on margins and returns over time."