Source: Wal-Mart

Wal-Mart (WMT 1.49%) is the undisputed king of retail, having generated 2013 revenues of $476 billion from more than 10,000 stores in 10 countries across the world. Given its size, it isn't surprising that the company hasn't grown at an exciting pace. In the past five years, Wal-Mart has increased its sales and earnings by modest CAGRs of 3.3% and 3.6%, respectively.

Going forward, Wal-Mart's ability to compete with companies like dollar-store operator Dollar General (DG -2.45%) and home improvement specialty retailer Home Depot (HD 0.75%) will be a key factor in determining its future growth prospects.

Small store format
In February 2014, Wal-Mart announced that it will be adding about 270 to 300 small stores in fiscal 2015. This represents a departure from its traditional focus on Supercenters. Although a "every day low price" strategy and the large number of SKUs have historically been crowd pullers for Wal-Mart's Supercenters, there has been a significant change in consumer behavior in recent years.

Instead of concentrating all of their purchases periodically with one single retailer, consumers are now used to separating their buying into complete stock-ups and quick fill-ins. One such beneficiary is Dollar General.

Over the last five years, Dollar General's growth has significantly outpaced that of Wal-Mart and the retail industry. It has seen its revenues and net income grow by five-year CAGRs of 10.9% and 56.8%, respectively. Dollar General has drawn foot traffic from retail giants like Wal-Mart by positioning itself on both convenience and price.

With a retail footprint exceeding 11,000 stores, there's always a Dollar General store nearby for consumers to do quick fill-ins. In contrast, Wal-Mart runs about 300 Neighborhood Markets and 20 Wal-Mart Express stores as of February 2014.

Also, although Dollar General's product prices are potentially higher than Wal-Mart on an equivalent basis, it sells most of its items below $10by including smaller package options. This allows Dollar General's consumers to spend less on a per-basket, per-trip basis.

Wal-Mart faces an uphill battle against dollar-store operators like Family Dollar. One factor is that Wal-Mart's retail footprint is still small, and it will take time for the company to have a sufficiently large network of stores to compete on convenience.

Furthermore, while there is no disputing Wal-Mart's cost efficiency, running smaller stores requires a different mentality from operating Supercenters. This is especially evident with respect to SKU management. While Wal-Mart's Neighborhood Market stores grew their fiscal 2014 comparable sales by a respectable 4%, it remains to be seen if this set of good results can be duplicated with its small stores expansion.

Source: Wal-Mart

Increase penetration rates of certain product categories
Although Wal-Mart has had success in gaining market share from grocers by using food offerings as loss leaders, not every product category is fair game for Wal-Mart. Wal-Mart conducted a spring season sale in March 2014, offering huge discounts on outdoor and garden items.

Although this seems like a good move to increase its customer penetration rate of the home improvement product category, Wal-Mart is unlikely to threaten the dominance of home improvement specialists like Home Depot.

Home improvement is one product category where a specialist like Home Depot has considerable advantages over Wal-Mart. There are complementary advisory services that come with every purchase at Home Depot. The company has experienced and knowledge sales staff to provide homeowners with relevant ideas and suggestions for their projects.

This is supplemented by a 2.5 million strong database of user-generated products reviews specific to home improvement products. In comparison, Wal-Mart sells such a wide range of products in diverse categories that it makes it difficult to offer any specialized assistance to homeowners.

The results speak for themselves. Home Depot has been relatively unaffected by competition from Wal-Mart and online retailers. The company grew its comparable store sales and diluted EPS by 7% and 25%, respectively, in 2013.

Similarly, Wal-Mart will also find it challenging if it were to significantly expand its penetration of other product categories like consumer electronics and high-end jewelry. In the case of consumer electronics, there will always be a group of buyers (like homeowners) who prefer some hands-on advice from specialized retailers. With respect to high-end jewelry, it will be an issue of image and perception.

Foolish final thoughts
It's never easy for large companies to deliver superior growth every year, and Wal-Mart is no exception. Wal-Mart's revenue and earnings growth rates have slowed considerably in recent years. While it's encouraging that Wal-Mart is exploring new growth opportunities in the area of new store formats and product categories, I think that the company will face difficulties given the strengths of the incumbents in these respective areas.