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Will This Risky Bet Pay Off for Walmart?

Jamal Carnette, CFA, The Motley Fool

Walmart (NYSE: WMT) has big plans for its Supercenters. At the recent International Council of Shopping Centers Southeast Conference and Deal Making event, Walmart's president of U.S. realty operations, L. B. Johnson, noted the company is looking to create upscale town centers around certain Supercenters.

"We want to provide community space, areas for the community to dwell -- a farmer's market, an Easter egg hunt, trick or treating," Johnson was quoted as saying. He later noted that the company plans to break ground as soon as spring, starting at a location in Colorado.

Can Walmart, home of the everyday low price value proposition, turn itself into a town center retailer?

Person shopping in a store aisle.

Image Source: Getty Images.

3 risks for Walmart's newest plans

Walmart faces significant odds to make this venture work. The most notable are:

  • Increased exposure to brick-and-mortar sales: Over the past decade, the retail landscape has been defined by a shift away from physical locations in favor of digital channels. Walmart paid $3.3 billion for upstart e-commerce company Jet.com and continues to spend significant money to build out its digital operations.
  • Departure from Walmart's normal modus operandi: The company has abandoned other store concepts -- mainly the smaller Walmart Express stores in 2016 -- pointing to execution risk. The town center and community space buildout is another unproven gamble for the megaretailer.
  • Chasing different customers: Walmart's value proposition aims squarely at consumers in lower-income brackets while the traditional town center concept focuses on higher-end and millennial demographics that are more flexible on price and/or value the total retail experience.

Will Walmart's attempt to go upscale yield results?

That third risk can also been seen as an opportunity. While headlines touting "the death of retail" are commonplace, and the industry has produced approximately 60 retail bankruptcy filings since 2015, the truth is more nuanced. Take malls, for example. There is a crisis in lower-end, older malls, but upscale malls continue to exhibit growth.

Upscale town centers, which often focus on fine dining, consumer experience, and community, will likely continue to thrive in this challenging environment as they offer value the digital channel cannot. Walmart's town center concept is a way to tap into this market.

Is perception reality?

Walmart faces a perception problem. The brand is so defined in the minds of shoppers -- for many high-income shoppers, negatively so -- that it will be difficult to change perceptions.

Walmart has aggressively tried to buy its way into higher-income and younger demographics with differing results. The Jet.com acquisition has helped the company aggressively grow digital sales, but the site has suffered slower traffic since the acquisition.

Since the purchase Walmart has taken steps to buffer Jet.com from its eponymous website, even creating a store brand for Jet -- Uniquely J -- to further delineate from Walmart's brand. Other upscale, millennial-friendly purchases – Bonobos and ModCloth -- have experienced lower online traffic after acquisition.

Walmart likely knows this and considers its town center concept a way to better position itself with the higher-income and millennial demographics. It's a smart concept to try on a limited scale and roll out more forcefully if it succeeds.

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Jamal Carnette, CFA has no position in any of the stocks mentioned. He works as a corporate credit analyst for Sparkfund and has no private information on any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.