Smith Brain Trust / June 2, 2021

The Walmart-McDonald's Split

And What It Says About the Future of the Store-in-Store Concept

The Walmart-McDonald's Split

SMITH BRAIN TRUST  Is the store-in-store format a good thing? It can be.

But the viability of a store-in-store arrangement with a smaller outlet inside a big retailer often depends on the degree to which the partnering businesses help one another.

Key factors include the tenant’s industry-type and the host retailer’s geographic location. Walmart, amid losing several of its longtime partner McDonald's stores, provides a comprehensive case study into the store-in-store concept and its future, says Maryland Smith’s P.K. Kannan.

The diminishing pandemic amplifies the stakes for these players, says Kannan, Dean’s Chair in Marketing Science at the University of Maryland’s Robert H. Smith School of Business. “Consumers are on the sidelines, not sure what exactly is going to happen, and their desire to resume normalcy feeds and couples with the dynamic of revenge shopping.”

Walmart will engage with Taco Bell and Dominos as replacements for McDonald's, which will operate in just 150 Walmart stores by summer’s end. That’s down from 800 in 2012. “During COVID, 70% of [McDonald's] sales came through drive-throughs” – a service that won’t be viable as Walmart remodels 1,000 of its supercenters by the end of 2021 to enhance its digital shopping experience, Kannan said in a recent MarketScale panel discussion. “This reaffirms why the economics don’t add up for McDonald's – really an offline brand – to continue as a Walmart partner.”

“Other restaurants have embraced the omnichannel approach and use apps in a way that better complements Walmart’s new vision,” Kannan adds. “Dominos, with its takeout and delivery model, is a better fit.”

Whereas an in-store restaurant benefits from spillover sales to Walmart-destination shoppers, service providers like salons and veterinarians conversely provide Walmart with spillover store traffic and sales from their destination clients, Kannan says. This makes this type of partner especially crucial to Walmart and other big retailers when considering partners for a store-in-store format.

Location and a decline of the shopping mall also factors in. “Walmart is an offline behemoth, with a lot of direct traffic,” Kannan says. So, the trend of shopping malls closing makes the store-in-store format appealing as “a mini-mall” experience – especially in rural areas where offline shopping options are limited.

Location aside, “people have been on the sidelines – not able to do offline shopping,” Kannan says. “So, there’s a lot of desire from customers to return to the stores and resume normal shopping behavior, and if that happens, the store in-store concept can have a renewed boom like we haven’t seen.”

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