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How Small Is Too Small for Wal-Mart?

After telling analysts and investors it would be investing heavily to build out its small store footprint, Wal-Mart is apparently rethinking just how small it wants to go. An internal memo from the retailer apparently laid out that it will be abandoning its smallest store format after all.

Wal-Mart was in the express lane to growth, but has decided to take a detour. Photo: Wal-Mart

According to a report in the Arkansas Democrat-Gazette, Wal-Mart, which has been developing both Neighborhood Markets and Wal-Mart Express stores, will be abandoning the latter concept because it's ultimately too similar to the former. It will rebrand all 21 of the existing Express stores as Neighborhood Markets.

Neighborhood Markets are on average 42,000 square feet in size and give customers a local grocery store-like experience, but are really just miniature versions of its supercenters that weigh in at an average 180,000 square feet. Wal-Mart Express, on the other hand, comes in at just 15,000 square feet, and was more like walking in to your local 7-Eleven, Wawa, or Sheetz convenience store.

What it found by running the two experimental concepts was that consumers were using both for fill-in trips, picking up items at the last minute for dinner, or filling prescriptions. By going with the large format Wal-Mart can presumably offer more choices to its customers, particularly in produce and fresh foods, and potentially boost sales as well as basket size.

Cozier than Wal-Mart's supercenters, but offering more choices than a C-store. Photo: Wal-Mart

Everyone is shrinking

Getting big by going small is all the rage now. Target , has been similarly experimenting with small format stores having opened an urban-oriented CityTarget concept that's about two-thirds the size of the typical Target store, and a little over a month ago, opening a TargetExpress store that clocks in at 20,000 square feet.

And even Starbucks is getting in on the trend, just announcing it would be opening express-style stores that will feature limited menus and hopefully speedier service. At the same time, pharmacy chains like CVS Caremark and Walgreen have been expanding their selection of fresh foods.

Wal-Mart has a history of testing ideas to see what can be learned. Not too long ago it launched -- and within a year killed -- a subscription commerce service that it said it would take the lessons learned from the experiment and apply them to its traditional retail business.

And the rebranding of the Express stores apparently doesn't affect its really, really tiny concepts Walmart to Go and Walmart Campus stores, both that are about 2,500 square feet each in size.

Going back on their word?

But it is a curious development nonetheless as it was less than a month ago that president and CEO Greg Foran said the Express concept was generating solid growth in same store sales and it would continue to roll them out, expecting to open 90 such stores this year, with more due in 2015, too.

Perhaps it was the market share gains the Neighborhood Markets stores were generating, in addition to the higher comps performance it witnessed, that convinced them. It highlighted the pollsters at Nielsen found that in the key category of "food, consumables, & OTC" it gained 37 basis points of market share for the 13-week period ending in mid-July. That, of course, goes back to the supposition that rebranding the Express stores and bulking up the fresh food and produce would give it a chance to generate more sales.

The dollar store threat may be the biggest motivating factor for Wal-Mart's conversion.

Moreover, the larger stores would more effectively compete against the encroachments being made by Wal-Mart's dollar store rivals. Both Dollar General and Dollar Tree have been turning in robust numbers and have outperformed the discount retail king over just about any period.

Both are also locked in a battle to acquire Family Dollar , and though Dollar Tree discounts the assumption, Dollar General in making its case for why its bid should be accepted, argues the two companies combined would be a formidable rival to Wal-Mart.

Since neither offer fresh food and produce, Neighborhood Markets stores would be a distinctive alternative regardless of which dollar store comes out on top.

In the end, that may have been the deciding factor when it came to terminating the experiment.

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The article How Small Is Too Small for Wal-Mart? originally appeared on Fool.com.

Rich Duprey has no position in any stocks mentioned. The Motley Fool recommends Starbucks. The Motley Fool owns shares of Starbucks. Try any of our Foolish newsletter services free for 30 days . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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