Thoughts About Big Box Stores

Wal-Mart is introducing a smaller store concept called Wal-Mart Express, which is part of their response to declining same store sales. The Express stores will have less than 10% the square footage of a "supercenter" store. [Something else most people don't realize: Wal-Mart is basically a grocer, as food accounts for a slight majority of their U.S. sales.] This is all part of a longstanding pattern whereby retailers reinvent their stores every so often.

The U.S. has approximately 20 square feet of shopping center space per capita and 50 square feet of total retail space per capita. The figures for western European countries are in the single digits of total retail space per capita, so not quite an order of magnitude less space than the U.S. for countries with a comparable standard of living. [In the USSR in 1985, there was approximately one square foot of retail space per capita!]

The internet is making many of the uses of retail space obsolete. One twist that I thought of combines this trend with cheap electric vehicles: what if instead of driving to Walgreens or Radio Shack, they sent an automated vending truck that parked on your street and could dispense the few hundred most common SKUs? Or maybe these types of purchases will increasingly be fulfilled by UPS? Amazon already has a service called Local Express Delivery for many items.

The very premier shopping centers that cater to tourists probably won't be hurt as much. But the marginal centers and especially the strip malls may have trouble finding tenants at any price. There is probably an opportunity to dig through the REITs and put together a long/short strategy based on this. Right now, the valuations reflect the lower average creditworthiness of strip tenants as opposed to the better credit quality of tenants in premier centers. But, I don't think the valuations reflect the potential for more dramatic changes.

There may be opportunities if the credit markets have not figured out that good retail collateral is actually much, much better than bad retail collateral. For example, you could be long/short CMBS based on this thesis.

Also, there are the retail chains that will make transition to internet sales versus the ones that won't. You can order office supplies and office furniture online from Office Depot, which makes free deliveries. I would only count a retailer out if it was unwilling or able to transition to online sales.

Maybe what is important is whether a retail chain owns or leases stores. Investors get excited about retailers that own lots of real estate. But, it might be better to be in the position to quietly let leases expire as the physical locations become less profitable. Make it the landlord's problem!