Amid weak earnings, Wal-Mart finds a bright spot in its small-scale grocery stores, U.S. e-commerce business


This Tuesday, June 4, 2014 photo shows the produce department at Wal-Mart Neighborhood Market in Bentonville, Ark. (AP Photo/Sarah Bentham)

Wal-Mart ascended to its place atop U.S. retail by focusing on big supercenters in rural and suburban markets. But today, it is counting on something entirely different — growth in its small but surging small-scale grocery store and e-commerce businesses.

It is starting to pay off, according to the company’s second quarter earnings released Thursday.

The company has hoped these efforts would help revive its U.S. business, which has taken a hit along with the rest of the retail industry as consumers keep their wallets close. On Thursday, the Bentonville, Ark.,-based retailer reported that its U.S. division, its most important market, had seen its seventh straight quarter of declining traffic and its sixth straight quarter without sales growth at stores open at least a year. The company also downgraded its full-year profit outlook, pointing to increased health-care costs and investments in its e-commerce business.

But there was a silver lining: As Wal-Mart’s U.S. division struggles overall, its small-scale Neighborhood Market locations and e-commerce sales are thriving. Same-store sales grew by 5.6 percent, and traffic grew by 4.1 percent, at the retailer’s Neighborhood Markets. These grocery stores cater to urban areas in storefronts with less than one-third the square footage of Wal-Mart’s traditional supercenters. Wal-Mart’s U.S. division also posted double-digit sales growth in its e-commerce business, complementing a robust 24 percent growth in Wal-Mart’s e-commerce sales globally.

“We’re encouraged by the performance of our small-format stores and e-commerce, areas where we’re investing significantly this year. But we wanted to see stronger comps overall in Walmart U.S.,” Wal-Mart chief executive Doug McMillon said in a statement Thursday.

Wal-Mart’s Neighborhood Market and e-commerce businesses are rapidly expanding, but they still represent only a small fraction of the company’s total business. Wal-Mart opened 22 Neighborhood Market stores in the last quarter and says it’s on schedule to open from 180 to 200 Neighborhood Market stores this year. But as of June, the stores still represented less than 8 percent of its U.S. retail units. The retailer’s e-commerce sales are also up, but still account for a fraction of their overall revenue.

Paul Trussell, a retail analyst with Deutsche Bank, said Wal-Mart’s rollout of Neighborhood Markets and other smaller-scale stores will benefit the company’s bottom line over time. But he added that while Wal-Mart’s e-commerce sales growth is “already important,” it is likely to have only a limited impact on the company’s near-term financial performance.

“Given the size and scale of Wal-Mart and all the various regions and markets that it operates in, I think it will be a long time before it is material,” Trussell said.

Thursday’s earnings release was the first under the tenure of the U.S. division’s new chief, Greg Foran, who replaced Bill Simon last month. Foran said in the company’s pre-recorded earnings call that sales at Neighborhood Market stores “were particularly strong in pharmacy, produce, meat and adult beverages.”

Wal-Mart is hoping its grocery-focused Neighborhood Market stores can help it compete against online retailers like Amazon, who have captured some of its market share in merchandise but have made fewer inroads into groceries.

“Not too many people are buying tomatoes from Amazon anytime soon,” Faye Landes, a managing director at the financial services firm Cowen and Company, said in an interview last month.

“Food in general is very important to [Wal-Mart] because it drives frequency of purchase,” Landes said Thursday. “You don’t buy TVs very many times a year.”

Wal-Mart’s recent emphasis on consumables has included the launch of Wild Oats, a new organic food line. That was seen in part as an effort to gain market share from grocery competitors such as the struggling retailer Whole Foods, which posted disappointing sales numbers in its third-quarter earnings report last month.

Wal-Mart’s stock was flat at closing time Thursday, up 0.5 percent at $74.39 per share.

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