Wal-Mart’s New Formats May Come Through Acquisition

Discussion
Aug 28, 2007

By George Anderson

Reports that Wal-Mart is looking at developing new formats in the U.S. have finally been confirmed by the company and now the question is whether it makes more sense to build them from the ground up or push ahead into the convenience store channel, for example, by acquiring an existing business.

For its part, Wal-Mart has not signaled any intention to acquire a chain(s). In fact, company spokesperson John Simley told The Associated Press, “It would be wrong to speculate about how that (new format development) might translate into future M&A activity.”

While Wal-Mart is downplaying acquisition talk, it has not stopped analysts from speculating that a purchase may be the best way forward to building a new business.

Wal-Mart’s path to growth in the U.S. has traditionally been accomplished organically, although Sam’s did purchase some rival clubs as it grew.

“Wal-Mart has been building things from the ground up for a long time,” Patricia Edwards, a portfolio manager at Wentworth, Hauser & Violich, told the wire service.

Robert Buchanan, retail analyst at A.G. Edward & Sons, said exploring new formats makes sense for Wal-Mart but he doesn’t see the retailer “going on a buying spree.”

The retailer’s track record with acquisitions in overseas markets has been spotty.

Discussion Questions: What would you see as the pros and cons of Wal-Mart following an acquisition path to enter the convenience store channel? Are there candidates that you believe would be a good fit with Wal-Mart to help it meet its competitive challenges going forward?

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21 Comments on "Wal-Mart’s New Formats May Come Through Acquisition"


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Gene Hoffman
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Gene Hoffman
14 years 8 months ago

If one is to understand the real world, one must construct it. So, too, Wal-Mart should use its knowledge base and organically-developed reasoning to develop a unique future position in the convenience store industry. Which convenience store company, if acquired by Wal-Mart, would offer greater potential to Wal-Mart than its own self-reasoning and self-determination?

Jeffery M. Joyner
Guest
Jeffery M. Joyner
14 years 8 months ago
While the thought of Wal-Mart entering the channel presents an interesting debate, there doesn’t seem to be any real evidence that Wal-Mart would grow from non-organic methods. This is Wal-Mart. It’s the biggest player in the game and obviously a very good retailer. They have resources of every kind to build what they wish. I suspect that the day that Wal-Mart decides they want to be in the Convenience Store business they will design, build and market their version of the concept expertly. During the course of my career I have been involved with a number of store acquisitions. Some were small and a couple were VERY LARGE. Any good retail operator knows that converting someone else’s format to your new desired format is hard work. Yes, it can be done – but why? If you have the funds to build your version of what the consumer will react positively to then why not do that? Of course, this is not to say that acquisition doesn’t work. It has indeed worked many times for several… Read more »
Mark Lilien
Guest
14 years 8 months ago

It’s not clear that Wal-Mart would have competitive advantages in the convenience store channel. Their cost of real estate would be the same as everyone else’s, and their labor cost might be higher, since so many convenience stores employ family members and the undocumented. If Wal-Mart wants to grow new businesses, its best alternatives probably lie outside the US.

Wal-Mart de Mexico went public in late 2004 for about $1.75 a share. There’s been a lot of fluctuation, but it’s double that price today. Wal-Mart shares (the parent company) were around $52 in late 2004 and today the shares are $44. Wal-Mart de Mexico got permission to start its own bank. Wal-Mart US had its bank rejected. Consumer interest rates in Mexico are double to triple US credit card rates. Why not invest capital in the places with the highest returns on investment?

David Livingston
Guest
14 years 8 months ago

The cons are that no matter what Wal-Mart wants to purchase, it will face some FTC road blocks. They are just too much of a lightning rod for some politician to get some free press. Unless, of course, they are below the price radar of $59.8 million or so.

The purchase of Alco or Pamida would get Wal-Mart into some small markets in the Midwest. They could also purchase one of the many distressed grocery chains to expand their Neighborhood Market format, such as Winn Dixie, Marsh, Bi-Lo, or selected divisions of A&P, Safeway or Ahold. Union issues may prevent some of those but there are ways to break unions.

It wasn’t but about 5 years ago Wal-Mart bought the Super Amigo chain of supermarkets in Puerto Rico. I’ve learned that nothing is impossible in this business. The extreme ideas of today are tomorrow’s reality.

Charlie Moro
Guest
Charlie Moro
14 years 8 months ago

There is no doubt that by putting the resources toward understanding and developing new formats, Wal Mart would eventually be successful on some level.

The issues in developing a new format (which I assume will be small store convenience based) is that the time spent to move in that direction puts them further out on the time line verses the new entries into the format, as well as the real estate issues with acquiring premium sites for location.

The greatest benefit for Wal-Mart, however, is not in just addressing these two previous negatives, but the opportunity to deal with an even greater opportunity within the organization which is to get new and different blood into the mindset that could have benefits across the entire company.

Wal-Mart has always been good at cross training key positions; what a benefit to have points of view that are not centered in Bentonville.

Mark Hunter
Guest
Mark Hunter
14 years 8 months ago

Wal-Mart needs to develop new formats, especially an ultra low price format in a 20,000 sq. foot footprint. However, if they attempt to buy their way into the market by acquiring a chain, they’ll find themselves with even more problems. The Wal-Mart culture is so unique that anybody being dumped into the culture will find themselves swimming upstream. The end result to Wal-Mart would be to wind up with nothing more than real estate and market share – both of which they can acquire themselves by creating their own format.

Don Delzell
Guest
Don Delzell
14 years 8 months ago

The “build vs buy” question is relatively easily answered. In surveying the C-store landscape, there does not appear to be an existing player with a sustainable competitive advantage. Location would be the primary motivator for acquisition, given the structure of the industry. “Buying” makes sense when there is a definable advantage which takes a significant amount of time and effort to duplicate. With all due respect to the existing field, I don’t see that anywhere.

Moreover, to dominate this business, WM has to bring something different to the game than currently exists. Mediocrity is the current standard, and buying mediocrity is seldom worth the premium.

Mark Burr
Guest
14 years 8 months ago
Analysts are certainly not barred from speculating on anything or stirring speculation. Supermarket News today quotes a Wal-Mart spokesman discussing the origination of the speculation on acquisitions coming from deep within an employment advertisement looking for a particular candidate ‘with an eye on mergers and acquisitions.’ If indeed that is the source of speculation, it’s quite a stretch – well maybe not for an analyst or for observers and speculators like us. It would seem to me that growth by acquisition from Wal-Mart would be raising anti-trust flags and difficulties they neither need nor would welcome. Developing an alternative format (that is relevant to their customers, as they discuss) is a far cry from finding an acquisition that would deliver the same. Wal-Mart is and has more consistently looked for different and unique ways to expand their dip into the consumer’s wallet by attempting to find additional relevant offerings, from used cars to banking to caskets to computers. Whether or not they have been successful at any of the attempts, they continue with intensity like… Read more »
Stephan Kouzomis
Guest
Stephan Kouzomis
14 years 8 months ago

Either way, it’s the same philosophy and business approach that curtails WM brand development image, consumer attraction, and growth.

Could you contemplate WM purchasing Sheetz?….Their corporate cultures are inconsistent. Same applies to buying a 7-Eleven Corporation.

The WM’s “tired pricing” strategy needs replacement – a new consumer marketing approach and better balance to win-win!

Jim Fisher
Guest
Jim Fisher
14 years 8 months ago

What some might have forgotten and other entrants to the retail industry in the last 15 years might not know is that Wal-Mart was in the convenience store industry in the 1980’s until its purchase of McLane. With the acquisition of that company, Wal-Mart sold its existing nine stores and exited the convenience store sector as a direct retailer.

Wal-Mart was quite aware of the positive impact to their overall development strategy having a convenience store/fuel retail facility as an outlot/pad location at each new location created. Review of development plans will attest to such belief. This only changed in the late 1990’s when Wal-Mart began developing its on-site fueling program through Gary Williams, Murphy, Tesoro, and Sunoco.

It appears the old adage does apply here, “What goes around comes around.” A successful concept remains successful, regardless of who the developer/operator might be, in terms of identifying and addressing needs that exist in a targeted market.

Ed Dennis
Guest
Ed Dennis
14 years 8 months ago

Acquisitions would be good as I don’t think there are enough high traffic corners available for a new competitor – especially with the current expansion plans of Starbucks. I think the c-store arena would be a good one for Wal-Mart. It would allow them to increase their margins and, at the same time, lower prices to consumers.

They would also move toward cleaning up the c-store industry by refusing the huge marketing programs that the tobacco companies use to buy shelf space. They would also make the beer, wine and soft drink vendors into better vendors instead of just trading shelf space for sports tickets.

Aaron Simmons
Guest
Aaron Simmons
14 years 8 months ago

In Canada, we have seen Wal-Mart make spectacular growth through acquisition without having to give up the Wal-Mart way. I believe that though this method has been mixed for them overseas, here in North America, they have proven out that growth through acquisition may work.

Edward Herrera
Guest
Edward Herrera
14 years 8 months ago

Wal-Mart would be a fierce competitor in the smaller prototype retail stores. They would have great buying power with new innovative mindsets. They also own real estate buying power and a culture of success. I do not believe they have to buy a chain but they should sway fresh minds into their organization. There is a lot to be said for a fresh perspective on the same information.

Thomas L Potts
Guest
Thomas L Potts
14 years 8 months ago
Wal-Mart would benefit by a combined acquisitions/ build from ground-up approach and could become a significant player as long as they are able to adapt their supply chain and marketing to this market space. The smaller format has more frequent/ lower shipment quantities requirements than a super-store format, so this would impact their existing supply chain costs (geared for large shipment quantities). I believe a combined approach by market area (some markets by acquisitions; others from the ground-up) would be necessary. This would provide the many needed real-estate locations with the infusion of new blood. However, I think the jury is still out as to whether they would be highly successful in this space. Currently, the Sam’s Club gasoline/ convenience store format is showing mixed results. Also, even a company the size of Wal-Mart could be less than successful when going outside their winning formula that provided the growth so far. Remember the failed forays into other countries and the so-far disappointing foray into up-scale fashions? Wal-Mart also needs to consider the impact on and… Read more »
M. Jericho Banks PhD
Guest
M. Jericho Banks PhD
14 years 8 months ago

I sincerely believe that Sam Walton viewed himself as a retailer, not as a big-box retailer. (I’ve ridden with him in his pickup, and have a minor insight into his views – which he shared continually.) He was all about selling stuff to people at the best possible price. That does not dictate a specific format. Thanks, WM, for returning to your roots. It’s about freakin’ time. I’m just glad that Sam didn’t apply himself to international military arms sales.

Paula Rosenblum
Guest
14 years 8 months ago

Acquisitions make much more sense to me. Wal-Mart is used to the “tonnage” business. Editing its assortments and learning the world of LTL deliveries won’t come easily to a company used to growing bigger and bigger footprints.

It’s no accident that growth of Wal-Mart’s “neighborhood markets” has gone slowly. This is expertise the company should buy, not grow.

Seems pretty straightforward.

W. Frank Dell II, CMC
Guest
14 years 8 months ago

Wal-Mart’s history with acquisitions is not great. The big obstacle is culture. Like Sears 20 years ago, without a new winning format, growth is difficult. Kmart was a successful re-invention itself, but consumers and markets change. Wal-Mart will likely develop and test 2 or 3 formats and run with the winner.

Dan Nelson
Guest
Dan Nelson
14 years 8 months ago

A Wal-Mart’s plan to enter the convenience channel via acquisition would not be new. I would also point out that Wal-Mart has many examples of success in acquisitions, Canada and Mexico are the two most notable. Their Neighborhood Market concept (organic) has not had the level of growth expected, so anticipating ground up may be a miscalculation in their plans.

Wal-Mart also understands gas service and has some very strong alliances with the suppliers who make up the bulk of convenience basket rings so all the elements are there for exploitation of this channel.

The thought that a larger convenience format, like a Sheetz or a WaWa, would seem to make sense. These are really hybrids between a small conventional supermarket and a convenience store. If Wal-Mart has announced their intentions, I wouldn’t be surprised to see some activity very soon.

Camille P. Schuster, Ph.D.
Guest
14 years 8 months ago

Wal-Mart needs to determine first the purpose a new, smaller store would have and identify the consumers to be served. Depending upon the purpose of the store and which consumers will be most important, desirable locations can be identified. Then, if another chain is already in those locations, buying the chain would make sense. If there is not another chain already servicing those consumers with suitable infrastructure for their purposes, purchasing another chain would make no sense.

MARK DECKARD
Guest
MARK DECKARD
14 years 8 months ago

I agree with Dr. Banks wholeheartedly.

Someone up the line said Wal-Mart’s acquisition track record was not good. Either poorly informed or a poor memory.

Example #1 – The buyout of Canadian Woolco in the early 90’s, converting 120+ stores from Woolco to Wal-Mart in less than 9 months, and establishing a Canadian Buying office. Still going strong…

Example #2 – The buyout of Pace Warehouse stores in the early 90’s and converting to Sam’s Clubs in less than a year. Still going strong.

Example #3 – The purchase of McLane in the early 90’s, learning the finer points of how to supply C-Stores, grocery stores & restaurants.

Acquisition is a GREAT way to grow. A hybrid of acquisition and building from scratch is even better – combining the Wal-Mart way & culture with existing great locations.

Charles P. Walsh
Guest
Charles P. Walsh
14 years 8 months ago
Echoing Silverstone’s comments, there were a number of panelists who indicated that Wal-Mart has a poor track record when it comes to acquisitions and to some degree their greenfield enterprises. In addition to the successfully acquisitions which Silverstone mentioned, let me add; Phillips Food For Less: A 1990’s acquisition of a small grocery chain which brought much needed grocer management and purchasing expertise into the company while it was beginning to launch its SuperCenter Group. ASDA: This acquisition has been a money maker for Wal-Mart and despite TESCO’s resurgence is continuing to compete very well. CARCHO: Wal-Mart owns a majority share in this Central American Retailers operations and results have been promising. Wal-Mart has grown successfully both through organic and greenfield approaches, and in many cases growth into a new format was done in a hybrid way. If Wal-Mart wants to compete in the “convenience” field, they will find a way. Hopefully they realize that convenience isn’t the traditional “cokes and smokes” but a newer vision which incorporates consumer needs for easy access, fresh foods,… Read more »
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