Wednesday, May 19, 2010

My Walmart Theory

Unless you live under a rock somewhere, you have heard of Walmart, the multi-billion dollar retailer.  The largest retailer in the World and of course the World's largest corporation.  I am assuming, mostly since I have never built a billion dollar company, that before Walmart opens a new store, they do oodles of research before building a their new Superstore.  To undertake that size of store, the company must be assuming that there is a potential of profit, if not today, maybe in a few years.  To make that profit, the store must be in a center that is preferrably growing and has a future need for many products.

I do not often find myself in a Walmart, but to be honest, everytime I go there, they seem to be really busy.  The line ups are always long, but they seem to run efficiently.  The structures are massive with huge sales floor square footages.  Retailers, like Walmart, work on a sales/square foot number that illustrates a stores profitability.  For instance, the Loblaws at South Keys is one of the highest grossing stores in the Loblaws empire.  They produce more sales volume per square foot than any other Loblaws store. 

In order for these stores to be successful, you will need huge sales to keep the store open.  A store without sales is closed down and seen as a huge failure.  Lately, if you are paying attention, Walmart has been opening more and more stores in smaller centers.  By contrast, Ikea, has very strict rules on the size of a city that they will put a store in.  Ottawa tried to get a second Ikea in the East End, but were denied because the city is too small.

Walmart has recently completed large stores in smaller towns/cities just outside the city of Ottawa limits.  Carleton Place, Brockville and Rockland have recently completed huge new Walmart stores.  Kempville is now starting construction on their Walmart. 

Each one of these towns are outside the tax boundries of the city of Ottawa.  With a left leaning city council in Ottawa that seemingly has no qualms about raising city taxes by factors of 5 to 10% annually (to pay for "services".  As well as downloading many costs to utilities such as hydro and electricity, many Ottawa residents on fixed incomes will begin to find it too expensive to live in the city. 

These four towns/cities are close enough to drive into Ottawa for the day, but also represent huge savings on monthly living expenses.  Think about the numbers, the average house in Ottawa is $325,000 meaning the average household tax in Ottawa are approximately $4160 annually.  Each year, citizens of Ottawa can look forward to a $208.00 to $416.00 annual increase in taxes.  Couple this with increased water bills, hydro bills and more user fees, the average Ottawa home will likely see an increase in their living expenses of approximately $300 to $700 annually.

These may seem like a small number, but once someone retires, they are now bringing in a fraction of their pre-retirement income.  If you do not have a pension, those small amounts add up quickly.  Earning an annual income of less than $30,000, this increase can represent upto 4% of your disposable annually income.  The comparison, to make this hit home, the average home in Ottawa makes $95,000 meaning a drop of $3800 in after tax dollars to the average Ottawa household.  Yes, I know the cost will only be $300 to $700 per household, per year, but if you compare a low income home to an average home, it gives you a much better picture of the grave effects.
Now think of these smaller towns and cities.  Average house prices are lower, meaning a new retiree could move to those towns, have a nest egg of a $100,000 from the sale of their home and lower their monthly costs.   For the retiree, you could invest this money and easily earn a 5% income, so you would increase your annual income by around $5000 and lower your costs by $700 meaning an extra $475 per month to live on.  This of course does not take into account the lowered cost of living in many of these town, so the effects might be even more drastic.

Ottawa has the highest percentage of babyboomers of any city in Canada.  Second, behind Australia, Canada has the second highest percentage of babyboomer per capita in the World.  In a city that is full of the 45 to 65 demographic, it appears to me that Walmart is banking on a serious percentage of the retiring babyboomer from Ottawa retiring to these satelitte communities. 

Watching Walmarts store development patterns and location choices has peaked my interest as a real estate investor.  If yours if peaked as well, you have to ask yourself one question ... do you feel lucky?

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