Big Box Bust?

By Andrew Starr

America's landscape is dotted with thousands of shopping centers, most of which are populated with big-box stores. These well-known regional and national chains sell groceries, consumer electronics, discount clothing, office supplies, and almost anything and everything else.

Earlier this year, the largest big-box retailer, Walmart, made big news when it announced the closure of more than 260 stores globally. That added up to 154 locations in the U.S., which represents nearly four percent of the company's portfolio here.

The majority of U.S. closures were Walmart Express stores. This pilot program tested the retailer's ability to drastically shrink its store size. The concept took aim at more nimble discount store chains, such as Dollar General, Family Dollar, and Dollar Tree. Typically no more than 10,000 to 16,000 square feet — about the size of an average Walgreens store — the Walmart Express model focused on groceries and other key essentials.

Merchandise selection was pared down to serve communities too dense or too small to have a full-size Walmart store. Given that all 102 Express stores will be closed over the coming months, it is apparent the concept was not successful for the nation's largest retailer.

It would be unfair to suggest that Walmart's recent store closures were anything but a strategic business move by the company. But as has been widely noted, these closures disproportionally impact poorer, more rural geographies, areas that already have limited access to groceries and other daily essentials.

The question remains in the minds of many planners and policy makers: Why would the world's largest retailer need to close stores, especially when the stores impacted were more often than not one of the only games in town?

Site selection basics

The answer to this question lies in the mechanics of how Walmart initially chose Express sites. While every retailer follows its own site selection process, with help from financial analysts, real estate professionals, and GIS experts, several factors are universal.

Retailers Must Know Some Basic Demographics. Who are the customers? What do they buy? And how much do they typically spend? Armed with this information, retailers can set criteria — household income, population density, small business counts, median home value, etc.—to evaluate possible geographies.

Retailers Need to Understand the Zone, or Trade Area, from which customers will travel to a particular store location. This helps retailers plan regionally. Placing too many stores in a trade area can result in stores "cannibalizing" each other. With trade areas identified, retailers like Walmart can overlay their target demographic criteria to shortlist potential trade areas.

Finally, Retailers Will Examine Specific Sites Within the Trade Areas, weighing not only the presence of nearby competitors, but also a site's visibility, signage, and bottom-line cost. Retailers want their stores to be seen and to be easily accessible by their customers, whether they come by car or foot. Cotenancy is also an important consideration, as complementary brands can both generate traffic and incidental store visits.

A site's visibility, access, and cotenancy all influence its cost per square foot, and ultimately a store's bottom line. As discount retailers generally run on relatively thin operating margins, any upward deviation in a location's lease costs (with all other factors equal) could make a store economically unviable.

In the case of Walmart's Express concept, site selection strategy may have been the experiment's Achilles' heel. Stores were serving relatively isolated, thinly populated trade areas where household incomes were well below the national average. In its analysis, the consulting firm CDS Community Development Strategies found that more than 80 percent of closed Express stores needed a trade area of 100 square miles or more to reach 5,000 households. To put this in perspective, 100 square miles is roughly one-tenth the size of Rhode Island.

These demographic realities pitted Walmart against the rapidly growing discount store chains. Forbes recently reported that the category — dominated by Dollar General and Dollar Tree — grew its combined revenue by 50 percent from 2010 through 2015. Dollar General alone opened 730 stores in 2015 on top of 700 in 2014 and 650 in 2013, a store-opening pace that corresponded to a nearly $2.5 billion growth in revenue.

With even lower prices than Walmart, these discount stores — some of which were located less than a mile from Walmart Express stores — could thrive despite the largest and most-well known retailer coming to town. With sparsely populated trade areas, thin operating margins, and entrenched competitors, Walmart picked a battle it ultimately determined was not worth winning.

Planners play a role

Retailers look to city planners to be the "eyes and ears" on the ground. By living and working in the community, planners can provide unmatched insight into the needs and habits of a local geography. But for the nation's smallest towns and cities, what can planners and public officials learn from Walmart's actions? One lesson might be to think regionally.

In tiny towns, retailers aren't exactly knocking down planners' doors looking for help locating stores. This undeniably is a challenge, but if a handful of communities band together — especially those that share public services such as schools or utilities — they might succeed in attracting wanted and needed shopping options. Regional cooperation has its challenges (Which community takes home the tax benefits?), but city planners and public officials can help retailers understand the benefits.

That's just one way to help attract wanted retailers. But planners and other community leaders have a great deal to offer in the site selection process, from data about local traffic patterns to knowledge of future development plans to a keen understanding of the economics of a community.

Knowing how a community fits into retail trade areas and what sites might be most attractive can enhance the conversation planners have with retailers. Indeed, Walmart and many other national retailers want to listen to the input of communities, but it helps if city planners and retailers start the conversation understanding what is most important to the other.

Andrew Starr is a real estate strategist and site selection expert in Gensler's Boston office.

The Failure of Walmart Express

 

In tiny Richfield, North Carolina (pop. 611), the Dollar General store remains while the adjacent Walmart Express building sits vacant. ©Google Maps Street View March 2016.

The retail giant focused its small-format foray on the southeast corner of the U.S. The stores served relatively isolated, thinly populated trade areas where household incomes were well below the national average. Only two stores, both in Chicago, were in urban areas. Most of the others had to pull from trade areas of between 100 and more than 500 square miles in order to reach the target 5,000 households.

 

Sources: Walmart.com; Census 2016, CDS Community Development Strategies