Bud's profitability recycles old stores - Wal-Mart Stores Inc. Bud's Warehouse Outlet - Wal-Mart

Discount Store News, June 7, 1993

For Wal-Mart, Bud's Warehouse Outlets primarily is a real estate play, a way to use leases on the smaller stores it is closing by the scores.

In addition, Bud's provides an avenue for tapping a new class of customers: those who find Wal-Mart too expensive and instead shop at chains such as Family Dollar and Dollar General.

Bud's offers a mix of distressed Wal-Mart goods and opportunistically purchased closeouts. Since Bud's can't depend on Wal-Mart buyers to make enough mistakes to keep its stores stocked with the discounter's surplus, Bud's buys closeout goods from vendors who ship directly to the stores, rather than sending goods through Wal-Mart distribution centers.

The ratio of fresh closeout goods to Wal-Mart distressed merchandise varies week to week. Last month, for example, it stood at about 75:25 at the former Sam's Club in Dallas that was converted to a Bud's.

The typical Bud's is an old Wal-Mart store of 60,000 sq. ft. that the chain replaced with either a larger store or supercenter. Bud's uses 40,000 to 50,000 sq. ft. for selling space and the rest for storage.

But two of the 72 Bud's were former Sam's Clubs. In Shreveport, La., Sam's closed one of two clubs, and in Dallas, Sam's relocated a 120,000-sq.-ft. club and turned it over to Bud's, which uses 70,000 sq. ft. for selling floor and the balance for storage.

Bud's are located in the South and Midwest, because the older, smaller stores being closed were built there. Bud's started the year with 60 units, now operates 72 and expects to end 1993 with 120, scattered all around the South and even into Illinois, a Wal-Mart spokeswoman said.

In the test of another retail concept, Wal-Mart has converted its old store in Kirksville, Mo., to a Country Farms, Farm, Home and Garden store.

Before it converts a unit to Bud's - named for Bud Walton, Sam Walton's brother - Wal-Mart first tries to sell the lease, said William Snow, chief financial officer of Consolidated Stores, Columbus, Ohio.

Consolidated, the largest operator of closeout stores, called Odd Lots and Big Lots, in the country, has taken over leases on about 25 closed Wal-Mart stores, including five this year, Snow said.

"Bud's is primarily a real estate play," Snow said. "Wal-Mart would rather be a landlord than operate a Bud's."

Wal-Mart isn't acquiring new real estate for Bud's, Snow said.

In visits to Bud's in Tennessee and West Virginia, Snow said he particularly noticed a great deal of gallon cans of paint that customers had opened and returned, price at $2 a gallon.

Operating within a bare bones environment, Bud's represents another opportunity for Wal-Mart to generate additional sales at extremely low cost, said Peter Monash, a retailing consultant based in Columbus, Ohio.

Rents on the old stores are extremely low, Monash said, and Bud's is buying "very opportunistically."

Bud's is profitable for Wal-Mart, said Maggie Gilliam, retail analyst for First Boston. Just how profitable is immaterial, she said. Any return on investment is better than being stuck with an empty store lease, Gilliam added.

With Bud's, Wal-Mart can tap another level of customer who funds Wal-Mart too expensive and who shops now at chains such as Dollar General, Family Dollar and Bill's.

"Every chain worth its salt needs an outlet store," said George Rosenbaum, chief executive officer of Leo J. Shapiro & Associates, a Chicago-based retail research firm.

From a cost effectiveness standpoint, it makes better sense to dispose of shopworn or opened and returned merchandise and end-of-season odds and ends at final clearance prices in low-cost outlets, Rosenbaum said. That way, Wal-Mart can generate higher gross dollars per square foot sales by reserving floor space for goods at normal prices, or at worst at first markdown, he said.

All Bud's units are individual and "managers do their own thing," said Craig Luther, manager of the former Sam's Club in Dallas. The warehouse ambience of the Dallas Bud's speaks of cheap prices and cheap goods, with a lot of merchandise stacked right on the floor.

Bud's makes no attempt to associate itself with Wal-Mart, and goods that could be identified as having come from Wal-Mart are conspicuous by their absence. It does honor, though, the Wal-Mart check cashing card.

Overwhelmingly, the goods appeared to be manufacturers closeouts, including major appliances and upholstered furniture that Wal-Mart doesn't carry.

Even though Bud's has a special section of "as is" goods, customers can return purchases within 30 days, with receipts. Major appliances, even if refurbished, carry the manufacturer's new warranty.

The store was offering two models of Kelvinator dishwashers at $249 and $349 and one model of a Kelvinator washing machine at $269. Bud's doesn't post comparison prices.

It also was offering "refurbished" Zenith TVs it promised "big savings" but without listing a price.

A large stock of recliners, no brand name apparent, was priced at $149.

The offerings were mostly hard lines, such as Hoover vacuum cleaners stacked right on the floor and priced at $99. Health & beauty care products, such as Rexall private label baby powder, are another major category.