The Incredible Shrinking Discount Retailer

Growth by shrinking sounds counterintuitive, but Wal-Mart (NYSE: WMT  ) has been showing more and more signs of aggressively pursuing the strategy of using smaller stores to infiltrate congested urban markets.

The Associated Press reports that real estate executives have noticed Wal-Mart's aggressive interest in this initiative, eyeing small locations in urban markets like New York and San Francisco. These desirable retail locales are about 20,000 square feet, bigger than your usual drugstore but smaller than a supermarket.

Big-box retailers' newfound interest for somewhat smaller boxes isn't new. Rumblings about Wal-Mart's dabbling in Lilliputian store plans circulated in the springtime, and Target (NYSE: TGT  ) has experimented with small, temporary pop-up stores, recently opening its first store in Manhattan.

Whole Foods Market (Nasdaq: WFMI  ) has also tried smaller store formats on for size, with much financial success. And Chipotle (NYSE: CMG  ) is headed the same way, too. The burrito wrapper expects that smaller-format stores will allow it profitably enter smaller markets.

Meanwhile, there are already small-format deep discounters floating around out there on the retail landscape, like Dollar Tree (Nasdaq: DLTR  ) , Dollar General (NYSE: DG  ) , and Family Dollar (NYSE: FDO  ) . Recent results from this grouping have been pretty solid.

Wal-Mart is an interesting contender to go small, since most of us think of it as nothing less than a behemoth in every conceivable way. Wal-Mart has a mind-boggling footprint: It operates more than 8,000 stores, domestically and abroad.

Urban environs may be one way to boost up sluggish sales here in the U.S., but since this is Wal-Mart, that could be fraught with peril, considering it's the retailer that folks love to hate, judging by protests that crop up when it attempts to enter some neighborhoods. Some urban markets could be tough ones for Wal-Mart to crack, but the urban opportunity is one reason my Foolish colleague Jim Royal picked the stock to outperform in our "50 Stocks in 50 Days" event.

Wal-Mart is expected to offer more detail on "think small" initiatives at an upcoming meeting with analysts in October. Shareholders should be glad it's going to try to move into relatively untapped markets, but remain aware of the risks involved in a strategy that's fairly alien to the retailer. Do you think it can succeed? Let loose with your thoughts in the comment box below.

Wal-Mart is a Motley Fool Inside Value recommendation. Chipotle is a Motley Fool Rule Breakers selection. Whole Foods Market is a Motley Fool Stock Advisor pick. Chipotle is a Motley Fool Hidden Gems selection. The Fool owns shares of Chipotle and Wal-Mart. Try any of our Foolish newsletter services free for 30 days.

Alyce Lomax owns shares of Whole Foods Market. The Fool has a disclosure policy. True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community.


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