With Wal-Mart’s stock under pressure and profit growth slowing dramatically, the world’s largest retailer is reportedly finalizing strategies for a new store format that would be dramatically smaller than existing stores, in part to achieve better success in urban and upscale markets. (See Where is Wal-Mart’s Secret Plan?).

The Wall Street Journal reports this week that Wal-Mart “has a team of executives hunkered down far from Bentonville in the San Francisco Bay area devising two new small-footprint stores,” one of which would be grocery store designed to battle head-on the type of store the U.K.’s Tesco plans to launch this November in the U.S.  (See Here’s a Switch: Wal-Mart Calls for Investigation of Tesco Market Dominance in U.K.)

The strategy appears to have at least two objectives: (1) to have a competitive small format grocery/convenience offering to combat the Tesco invasion and similar moves emerging from other grocers, and (2) to find a format that will have greater success in the urban and upscale markets that, for a variety of reasons, it has so far struggled to penetrate. Of special importance is California, where, mostly due to local opposition, Wal-Mart has not been able to open many stores. With much of that local opposition to be specifically focused on “big box” stores, perhaps the smaller footprint formats will have more success gaining approval.

One of the coming store formats is said to be an urban convenience store less than a tenth of the size of the company's current supercenters, carrying groceries and convenience items geared to more affluent and urban tastes. The other format will involve stand-alone stores offering a variety of health services and products. Both could be introduced as early as the first quarter of 2008.

Analysts believe Wal-Mart sees huge opportunity in providing a variety of basic health care services, from eye exams and glasses to physical exams, vaccinations and other routine care, tapping into the huge and growing market.

The strategy is also, in a sense, a continuation of Wal-Mart’s stated goal of tailoring local store execution to local market requirements. Though a plan to offer store managers more autonomy and format big box stores around local customer demographics is still very early in its roll out, the new convenience-based stores would also be an element of the strategy (See In Search of More Growth, Wal-Mart Follows Best Buy in Move to Tailor Stores to Individual Markets.)

The new stores will certainly require some supply chain and inventory changes on the part of Wal-Mart and its suppliers. Tesco is famous for its continuous replenishment program it uses in small footprint grocery stores in Europe similar to the 30 Fresh & Easy Neighborhood Markets locations it initially plans to open in the U.S.

With the small format and almost no backroom space, Tesco applied Lean principles to its replenishment strategies, making local deliveries to each store several times per day. In many areas, Wal-Mart will be able to leverage its vast DC network to achieve logistics efficiencies to these smaller stores. However, the more urban/upscale customer will probably also require some new food suppliers and an even more responsive supply chain, SCDigest believes.