Leeching off Wal-Mart
Rather than being intimidated by the retail behemoth, some stores say they're happy to tap into its success.
By Parija Bhatnagar, CNNMoney.com staff writer

NEW YORK (CNNMoney.com) - The common wisdom is that Wal-Mart's competitors sweat bullets when the undisputed 800-pound gorilla of retailing says it's going to play in their backyard.

They fear the king of bottom-barrel prices will steal their business, eventually forcing them to drop their shutters, load up the wagon and scout out a "Wal-Mart-free" zone elsewhere.

However, not everyone is spooked. Industry watchers say some retailers instead are fighting to get a spot right next to Wal-Mart.

"Retailers that sell the exact same thing as Wal-Mart can still thrive if they focus on deepening their product selection," said James Maurin, chairman of Stirling Properties, a Louisiana-based developer of shopping centers.

He offered an example, "Sally Beauty has hundreds of beauty supplies stores. Their first preference is to not only be near Wal-Mart but right next to it."

Why? Because while Wal-Mart (Research) does sell beauty products, its assortment probably isn't as broad as that of the specialty beauty supply store.

And sometimes it pays to not be as big as a Wal-Mart store.

"Typically, Wal-Mart is not a convenient store to shop, especially if you have want to dash to the store for a handful of products," said Sandy Skrovan, vice president with research firm Retail Forward.

And the winners are...

Who wins in this scenario? Smaller format stores such as Wal-Mart's neighbor Fred's Inc., which competes with Wal-Mart on price but gets the edge on convenience by enabling time-starved shoppers to be in and out quickly.

Wal-Mart's become a preferred co-tenant to retailers such as Fred's, Aldi and Anna's Linen because when it breaks ground in a new area, these retailers view it as an opportunity to piggyback off its traffic.

"In retailing, the whole name of the game is to feed off your competitors' footsteps. Wal-Mart is the biggest traffic generator around. It gets over 150 million customers a week," said Howard Davidowitz, chairman of Davidowitz & Associates, a New-York-based retail consulting and investment banking firm.

"I'm not surprised that Wal-Mart is the co-tenant of choice for plenty of retailers," he said.

At the same time, Davidowitz said it was important to point out that this kind of symbiotic relationship won't work for everybody.

He noted,"If you're a traditional food retailer, forget it. Wal-Mart will trample your business. They are the No. 1 grocery seller and you just can't beat them on price. This will only work if your business offers something that is truly different or unique from Wal-Mart."

Memphis, Tenn.-based Fred's (Research) runs more than 650 discount stores and pharmacies, mainly in small towns in the Southeast.

Burt Flickinger, an independent retail industry expert, said Fred's is a good example of a retailer whose regional expansion strategy is determined purely by shadowing Wal-Mart.

Despite the fact that approximately 80 percent of Fred's locations are within 10 miles of a Wal-Mart, company spokesman Jerry Shore maintained that "it's not typically what we're looking for, but in this day and age you can't avoid being near a Wal-Mart."

Fred's cleans up

Wal-Mart, the world's largest retailer based in Bentonville, Ark., operates a huge fleet of more than 3,800 stores in the United States that include its namesake discount supercenter that sells groceries, neighborhood stores, and its Sam's Club warehouse clubs. Most of its stores are concentrated in the South.

Shore admits to Fred's enjoying some "spillover" from Wal-Mart's traffic.

"Our customer is typically the same as a Wal-Mart's," Shore said. "But we also say that a trip to Wal-Mart is a destination shopping trip while a trip to Fred's is about convenience. We offer a different environment from a Wal-Mart, where our shoppers can get in and out of the store quickly."

Flickinger said retailers can effectively compete against Wal-Mart by being nimble and entrepreneurial with their products and services.

"Wal-Mart's parking lots are completely full in the first week of the month when budget-conscious consumers are shopping for the month with their full paycheck. By the third week, people have less disposable income and prefer to stock up only on a few select items," Flickinger explained.

"So convenience and price together become more attractive to shoppers. They may prefer to go restock at a smaller format store such as Fred's or an Aldi which is located right next to a Wal-Mart," he said.

Privately held discounter Aldi sells everything from groceries and consumer products to housewares and electronics.

Aldi spokesman Jon Drummond said about 54 percent of the company's 800-plus stores in 26 states are in "close proximity to a Wal-Mart supermarket."

"The tendency is to select major traffic areas. Wal-Mart's usually in those areas and that's where we are," he said.

Get closer

Aldi's model is based on a low-cost, high-efficiency retail model, Drummond explained. "Our prices are up to 50 percent lower than traditional grocery stores. We're strictly cash or debit card. Our customers have to bag their own groceries. We carry a very small percentage of name-brand products and mostly sell private-label brands."

Moreover, the retailer even skimps on stocking costs by displaying products in their original pallets or cartons rather than putting them on shelves.

"I would guess that our shoppers complete 90 percent of their weekly shopping with us," said Drummond.

Stirling Properties' Maurin said he's well-acquainted with other retailers who want to happily co-exist with Wal-Mart.

"Some of them are our clients," he said. "When Home Depot or Lowe's enter a new community, they say to us 'show me where there's a Wal-Mart supercenter.' Home Depot perhaps gets the same customer as Wal-Mart but there's less overlap in terms of the product mix."

In that respect, Wal-Mart becomes an ideal neighbor for Home Depot, Lowe's and or even Anna's Linen, a privately held purveyor of low-priced home furnishings such as bedding, window coverings and bath products.

Observers say Anna's advantage over Wal-Mart is its deep assortment in the home category, where Wal-Mart is not yet a dominant player.

"Retailers only have to look at the profile of a Wal-Mart customer and their spending levels. Those retailers that fit the target should try to compete with Wal-Mart on convenience and price," Maurin said.

Anna's Linen did not return repeated calls for comment.

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.