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Walmart, the retail behemoth with a market cap of $238 billion, is mixing things up. For decades, the company's standard policy of building big-box stores aimed at price conscious working-class customers was resoundingly successful. However, it is increasingly clear simply adding large stores won't be enough to increase, or even maintain, its level of profitability.

Walmart Supercenter's store sales growth has been more or less flat since 2012. With the advent of e-commerce, the company is losing sales to Internet retailers. Perhaps more immediate, it has been hit hard by the rise of discount stores like Family Dollar and Dollar General, which target the same customer demographic but offer more convenient and numerous locations.

In response, Walmart is shifting strategy. The company is focusing more on e-commerce, with an innovative R&D facility in San Francisco and new distribution centers, though its Internet unit currently operates at a loss. More relevant to the net lease sector, it is responding to discount stores by focusing on building smaller, more convenient facilities branded as Walmart Neighborhood Market.

Over the next few years, an estimated 400 additional Neighborhood Market stores are planned. These stores appear to be outperforming their larger format brethren with consistent year over year sales growth.

From a real estate investment perspective, the cap rates on these properties are similar to what a Walmart Supercenter trades for. Fee simple deals are trading between 4.5% to 5% caps and ground leases are trading in the low 4's. This is a slight premium relative to Walmart Supercenter stores due mainly to the smaller price point.

Instant Insights /

The Strategy Behind Walmart Neighborhood Market Stores

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