Preemptive distribution, or reaching customers first, fastest, most effectively and most often, may not be at the top of most retailers’ minds. But it should be.

Why? The world’s biggest retailer was out­maneuvered by a bunch of smaller compet­itors who were able to harness the power of preemptive distribution.

By losing the convenience battle to dollar stores—and failing to compensate on price or assortment—Walmart has made itself vulner­able to competitors who seek to steal share. Walmart’s struggle is evidenced by the retail giant’s comps, which have averaged 0.5% from Q1 2009 to Q3 2012.

Convenience

Because many of their products are often undifferentiated and prices are generally low, there is a very high level of cross-shopping across dollar stores and big-box competitors, often driven by convenience. During a recent due diligence, we found that 87% of one dollar store’s current customers had shopped at Target in the past six months, while 95% of them had shopped at Walmart. And these cross-shoppers primarily chose a competitor due to convenience.

Dollar stores are well positioned to win that convenience battle and steal more share away from the big boxes than is stolen from them, in part because dollar stores are everywhere.

The average round trip to a dollar store is six miles versus 30 miles for a typical Walmart trip. This means the cost of gas represents 11.4% of the cost of a dollar store transaction and 15.1% of a Walmart transaction. Our research shows that about 30% of customers across all dollar stores shop them at least twice a month—so the cost of gas can add up quickly.

And dollar stores are only getting closer to home. Dollar General plans to open more stores in the next 24 months than any other retailer, according to a survey by RBC Capital Markets. With over 9,600 locations already, the retailer plans to open another 1,200 in the next 24 months. Second only to Dollar General is Family Dollar, which plans to open 1,000 new stores on top of its current 7,000. Sixth on the list is Dollar Tree, which plans to add 600 stores to its 4,000-store fleet. In contrast, Walmart plans to add only 300 stores to its 3,981 existing locations in the U.S.

But it’s not only that dollar stores are physi­cally closer, they are also more convenient to get into and out of, and their smaller formats make it easier for them to penetrate an increasingly urban and suburban society.

In response, Walmart has stepped up open­ings of its smaller-format express stores, generally about 15,000 square feet, or rough­ly a tenth of the average store’s footprint. Although it initially planned for a launch of only 30 to 40 locations, President Bill Simon now says the retailer is planning to roll out hundreds in the coming years.

Price

Price could be a way for Walmart to fight back against dollar stores, except our research shows that dollar stores are generally able to beat Walmart on price.

Our research found that a basket of more than 40 food, health and beauty, cleaning, and household products in three regions was 22% more expensive at Walmart than it was at an average of four large dollar store chains— Family Dollar, Dollar General, Dollar Tree and 99¢ Only Stores. The same basket at Target was 6% more expensive than at the dollar stores.

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Assortment

Walmart’s massive assortment could also be a potential reason for consumers to choose it over dollar stores. But dollar stores are fighting hard to keep up, especially in grocery and health and beauty.

99¢ Only Stores sees 79% of its sales from consumables, while Dollar General has ex­panded its consumable mix to 72% of its total assortment and has doubled the number of its stores with frozen and refrigerated sections. Family Dollar has doubled the size of its food section over the last five years and recently reported 16% growth in consumable sales, helping to temper continued weakness in discretionary categories.  

The story is similar in health and beauty. Dollar General recently expanded its health and beauty assortment by more than 350 SKUs, and Family Dollar expanded its health and beauty assortment by 25% last year and gave it a more prominent space in stores.

In contrast, Walmart cut its grocery offerings dramatically to create sparser, tidier shelves to attract wealthier consumers during the recession. But Walmart has reintroduced these items post-recession and is fighting for its core consumer base with renewed strength as a result.

The importance of preemptive distribution holds true regardless of segment. For exam­ple, in the apparel space, this has manifested itself in the rise of fast fashion and Kohl’s success at stealing share from JC Penney by moving in closer to JC Penney’s core custom­ers. Recent same-day delivery offers from Amazon, eBay and Walmart are its latest manifestation.

Walmart’s story, and other cases of preemptive distribution, show us that it is no longer sufficient for a retailer to conquer one area—say, a great assortment or low prices— and rest on its laurels. It will only be a matter of time before its com­petitors are encroaching on its territory—literally.

8 March 2013