Walmart’s pharmacy footprint is poised for its most meaningful expansion in decades, thanks to shifting capital expenditure priorities that have begun to favor more aggressive expansion of smaller stores.
The move is significant because ever since the advent of the Walmart Supercenter, net increases in pharmacy count have been minimal, as Walmart swapped discount stores with pharmacies for supercenters with pharmacies. That kept a lid on the type of gains in pharmacy count chains like Walgreens and CVS experienced, due to the combination of organic growth and acquisitions. Now it appears Walmart could be looking to narrow the pharmacy gap by opening its smaller Neighborhood Market stores at a faster pace, while continuing to experiment with an even smaller Walmart Express concept as the supercenter conversion cycle decelerates over time.
“Supercenters remain our primary driver of growth and returns,” Walmart U.S. president and CEO Bill Simon said recently during Walmart’s annual investor conference. “Because we see increased momentum in comp and total sales and traffic performance, we will continue to accelerate the rollout of Neighborhood Markets.”
Walmart expects to add between 15 million and 17 million sq. ft. of U.S. selling space next year, compared to a projected 14 million to 15 million by the end of the current fiscal year. Virtually all of the increase in planned square footage growth is attributable to an acceleration of smaller format stores like the approximately 45,000-sq.-ft. Neighborhood Market, and to a lesser extent, the approximately 15,000-sq.-ft. Walmart Express. Walmart plans to open 125 supercenters next year, roughly the same as last year, with most coming from conversions or expansion. However, the company is planning to add between 95 and 115 smaller format stores, primarily Neighborhood Markets, compared to about 80 that will be opened during the current year. While that is a relatively modest acceleration from the current year total, Walmart went on to say it expects to have 500 of the Neighborhood Market food-and-drug combination stores operational by 2015, and these stores are expected to generate annual sales of approximately $10 billion.
From a productivity standpoint, that equates to average annual sales of $20 million per unit and sales per square foot in the vicinity of $450, assuming an average store size of 45,000 sq. ft.
Productivity of the smaller stores has long been the impediment to expansion, but company executives more recently have indicated that the smaller stores now generate returns on par with larger stores. They are also a lot easier to open, since suitable locations are more abundant. The same is true of the small Express concept, but Walmart has indicated the returns are not yet high enough to warrant a more aggressive rollout.