Who's afraid of the British invasion represented by retail giant Tesco? Maybe Wal-Mart (NYSE: WMT) is, judging by its plan to test out some smaller-format stores in Arizona.

Wal-Mart plans to open up four stores dubbed "Marketside," which will be about 20,000 square feet -- about half the size of the regular Wal-Mart "Neighborhood Market" model. The Financial Times originally reported the story early this week, connecting Wal-Mart's Arizona experiment to Tesco's opening of small stores called "Fresh & Easy" here in the States.

The Fresh & Easy stores' entry into the U.S. market has been high-profile; Fresh & Easy will focus on small numbers of items in a format that's more geared toward fresh foods and convenience. (OK, so Tesco's expansion into other lucrative markets hasn't escaped notice, either -- last April, we covered Tesco's expansion in Japan, and Wal-Mart's decision not to retreat from that market in October.)

Wal-Mart's not the only grocery retailer exploring smaller formats, either. In August, Whole Foods Market (Nasdaq: WFMI) said it was testing a concept called Whole Foods Market Express, which will offer value-priced, on-the-go foods.   

Is smaller actually better? Not always, but it seems clear that many companies are willing to give it a whirl. (A Whole Foods offshoot with a "value" price emphasis probably seems as odd as a Wal-Mart model trying to focus on "small.")

It should be interesting to see how big a deal Tesco's small-format entry will be. Will it hurt other big grocers like Safeway (NYSE: SWY) and Kroger (NYSE: KR), or quick-stop standbys like 7-Eleven? What about McDonald's (NYSE: MCD) quick dollar deals, or Chipotle's (NYSE: CMG) (NYSE: CMG-B) fast food with an organic, natural flair?

Most interesting of all, perhaps, we'll see whether Wal-Mart's "Marketside" experiment will end up a keeper for the retail behemoth. If so, a retailer with a giant-sized reputation for may become a more nimble competitor -- a trend its shareholders will definitely want to track.

Wal-Mart is a Motley Fool Inside Value pick. Whole Foods Market is a Motley Fool Stock Advisor selection. Chipotle has been recommended by both Motley Fool Hidden Gems and Motley Fool Rule Breakers.

Alyce Lomax owns shares of Whole Foods Market. The Fool has a disclosure policy.