Sam Walton believed in strict control — of store operations, of product quality and most certainly of expenses. Walton's dedication to keeping his hands on the wheel played a big part in parlaying his first enterprise, a franchised Ben Franklin in Newport, Ark., into the world's largest retailer, Wal-Mart.
Walton would no doubt be pleased that 12 years after his death his company is exercising the same kind of control over its real estate dealings. The Wal-Mart Realty Co. division has quietly become a major player in retail real estate, both by selling off excess retail pads next to its newly developed stores and by disposing of older stores vacated when Supercenters are built.
In late June, for example, Sears, Roebuck & Co. bought seven Wal-Mart stores made obsolete by nearby Supercenters.
By vertically integrating a big part of its real estate operations, Wal-Mart is able to control both its environment and costs and to squeeze added profit from its deals. “It's a great strategy,” says Reza Etedali, president of Reza Investment Group, a California brokerage. “They're in control of the land, and there's a lot of potential profit to be made.”
Like everything associated with Wal-Mart, the real estate operation is ambitious. It currently offers 380 buildings for lease or sale and about 350 parcels of land. Last year the division sold 240 outparcels and 70 buildings.
“This is a big enterprise,” says Jo Kaye Bandy, special project manager for Wal-Mart Realty. “We have a lot of property, and Wal-Mart devotes a huge piece of the corporation to managing these properties.”
At the bottom of its real estate operation is the success of the Supercenter concept, which has created a steady supply of what Wal-Mart Realty calls “once-occupied” buildings. Although many dispositions are handled in-house, about 70 percent are listed with brokers, says Scott Greear, the director of development who handles building sales for the division.
Of course, Wal-Mart has to acquire plenty of land to build Supercenters, and that's where another big part of the real estate division's work comes in. The company often buys more than it needs, then sells off surplus pads to retailers. A big reason is control. It wants to pick high-traffic retailers and restaurants as neighbors.
“It helps us protect the development around the store, so we don't have bars or pawnshops or things like that,” says Carole Baker, the division's director of land development. It also allows Wal-Mart to increase the attraction of its new stores by siting restaurants and additional retail nearby, she says.
It isn't unusual for big-box retailers to wind up with more land than needed for a new site. “Almost all the big boxes work the same way,” notes David Cassman, senior director of real estate in Home Depot's central division. “They self-develop but work closely with developers and brokers. A lot of times you'll find a seller that wants to sell a property whole, and if that's the case you'll have excess property you have to dispose of.”
Available properties seldom match up perfectly with building plans. “Almost everyone is working with a prototype building that will result in having some excess property,” Cassman says. “It's not like you're going to the butcher shop and asking for a pound of ground beef. Most of the time, though, we don't like to take more than we need. We would prefer not to have that ownership. Most big boxes would rather not tie up their money in excess real estate.”
But Wal-Mart isn't like other big boxes. “Wal-Mart by far has the greatest amount of internal resources devoted to this,” says one brokerage executive who asked not to be identified. “Their primary goal seems to be to control who competes with them in the marketplace.”
“They see this as a major component of their business,” says Brad Umansky, vice president of Sperry Van Ness in Irvine, Calif. “Wal-Mart has made it exceptionally clear that not only is it the world's largest retailer, but one of the largest owners of real estate.”
Fueling its ability to acquire and develop land is the fact that it has a lower cost of capital than developers, Umansky says. “They have the capital to do this,” he says. “Clearly part of the development strategy has been to take down the property themselves and flip off parcels. If they need 20 acres and it's a 30-acre site, they're not going to let that stop them.”
When it comes to its dealings with brokers, says one who has worked with the retailer, Wal-Mart has “a unique way of handling things that's consistent with the way Wal-Mart handles everything. They want to do as much as possible in-house, and pay as little as possible.” Wal-Mart's sheer volume gives it the ability to cap brokerage fees, he says, adding that “they control their costs second to none.”
In most cases, the excess property winds up in the hands of fast-food franchises. Among the biggest buyers of Wal-Mart outparcels are fast-food restaurants like Wendy's, Chik-fil-A, and Yum! Brands, whose properties include Taco Bell, Pizza Hut, KFC, A&W and Long John Silver's.
For those who locate nearby, the proximity to a Supercenter can mean big benefits. Florida-based Valenti Management owns 113 Wendy's franchises in Arkansas, Mississippi, Missouri, Pennsylvania and Tennessee. Four of them are on Supercenter outparcels.
“One of the principal benefits of the super Wal-Mart, specifically in smaller communities, is that it increases the radius of draw that any user would have, from the three to five miles that's traditional in the fast-food industry to 15 miles,” says Steven Underwood, senior vice president of real estate and development for Valenti. “People make a commitment to drive to Wal-Mart and that allows us to intercept that customer.”
As might be expected, it isn't cheap to be a neighbor. “They usually meet the market for outparcels,” Underwood says. “They are very professional and responsible. As long as the deals are their way, they go very smoothly.”
Whether it's land or an outgrown building, Wal-Mart Realty uses an aggressive approach to selling. “It's a full-court press,” says Bandy. “We have signs on empty lots, we have information on our Web site, and we attend conventions — lots of fast-food conventions — and whatever else we've got to do. If property is just sitting there, it's not helping us or anybody else.”
Baker says special emphasis is placed on the division's Web site, which she says “has really helped us to be proactive and move quickly with our marketing efforts.” Every available parcel and building is listed on its site, she says, and outparcels “go onto the page just as soon as we close the deal, so people can get an opportunity to see what might work for them.”
The realty division keeps an in-house staff to speed deals along: a transaction management group, an appraisal group and an asset management team, among other personnel. There's also an internal construction department to help with what executives call the “demising” of old Wal-Mart stores.
It's all part of Sam Walton's original concept: to grow the business through close management. “Once Wal-Mart comes to a site, the value of the nearby land immediately goes up,” notes Etedali. “Who better to take advantage of the opportunity than Wal-Mart?”
URBAN 99
How Wal-Mart's smaller prototype could impact its real estate business.
Wal-Mart may have less peripheral space to market in the future as its new, scaled-down Supercenter prototype called “Urban 99” kicks into gear. The 99,000-square-foot concept can be opened on 10 acres or less, allowing the retailer to penetrate dense and expensive urban markets.
That ought to cut down on the excess periphery property quite a bit. By 2013, 180 of Wal-Mart's 200 new U.S. Supercenters will be a variation of the Urban 99 prototype.
CASE STUDY
Wal-Mart's unique take on excess space :
Challenge:
As the Wal-Marting of America continues, the company finds itself with plenty of excess properties. Why? First, the retailer's move to the Supercenter format has left it with smaller stores that need to be sold or leased. Second, the retailer often acquires more land than it needs for those big new stores.
Solution:
Taking matters into its own large hands, the Arkansas retailer has developed an aggressive real estate division to handle much of its property disposition. By vertically integrating, it keeps greater control of the process and its expenses — and the resulting profits don't hurt.
Buzz:
Wal-Mart's a smart player that drives a hard bargain. When it deals with brokers, it sets the terms in the same way that the retail side deals with its vendors: by insisting on the best deal.
Data:
Wal-Mart Realty currently lists 380 buildings in its portfolio, with almost as many outparcels. Turnover is usually fast, with some buildings sold before they become vacant. Since its inception 15 years ago, the division has disposed of nearly 1 billion square feet of excess land and buildings.
