Wal-mart (WMT) Should Gain More Grocery Market Share with 'Neighborhood Markets' - Moody's

Neighborhood Markets offer a compelling source of new sales growth for Wal-Mart Stores, Inc. (NYSE: WMT) (Walmart, Aa2 stable), Moody's Investors Service says in a new report. And despite strategic shifts to compete more successfully with the company, traditional supermarkets will feel the pressure as Walmart moves to increase its already dominant share of the US grocery segment.

Walmart opened 23 Neighborhood Market stores in the US during the first quarter of this year, bringing the total to 645. These stand-alone, full-line grocery stores function as the "spokes" around Walmart's Supercenters. Prices are the same in both types of stores, and in most markets are the lowest available.

"Walmart's Neighborhood Market melds convenience in terms of location with easier-to-shop stores and a Supercenter-oriented pricing strategy," says Vice President, Charles O'Shea. "While traditional supermarkets have upped their game as Supercenters and warehouse clubs such as Costco, Sam's Club and BJ's, and discounters such as Target have become more aggressive, the advantages of the Neighborhood Market concept will be difficult to beat back."

Neighborhood Markets also fit with Walmart's multichannel growth strategy, O'Shea says in "Supercenter Redux? Walmart Is Accelerating Neighborhood Market Rollout: FAQ." Moody's believes the company will be expand the number of Neighborhood Markets at about the same rate as it built its Supercenters, of which there are now over 3,400. Moody's notes that Walmart sells over $160 billion of grocery equivalents in the US annually (in addition to the $32 billion sold at its Sam's Club stores).

"We believe the stage is set for Walmart to substantially increase its share of the grocery segment via the Neighborhood Market," O'Shea says. "Walmart's current market-leading position in food has been driven by the expansion of the Supercenter format over the past decade. Our experience with the Supercenters tells us that when opened, they usually take share from every other food retailer in the market early in the game, and though the top one and two retailers eventually do largely recover, weaker operators usually do not."

Moody's expects the same phenomenon to play out as more Neighborhood Markets are added to their Supercenter hubs.

Moody's research subscribers can access this report at

https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1005713.

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