(July 26, 2011)





CHICAGO (Reuters) - Wal-Mart Stores Inc is opening its first small store in Chicago this week in the first true test of a store format the world's largest retailer hopes will let it penetrate urban markets that it so far has had trouble cracking.

Wal-Mart will open its first small urban store, less than one-tenth the size of a traditional Walmart, in the city's Chatham neighborhood on Wednesday.

Four more Walmart Express stores are planned for Chicago, along with three larger Walmart Market stores, which are more like traditional grocery stores, and two more Walmart supercenters. Its first Walmart supercenter opened in 2006.

The Chicago stores, and small stores in Arkansas and North Carolina, are quickly opening up as Wal-Mart tries to reverse two years of declining sales at existing U.S. discount stores.

The chain is trying to win back shoppers, especially those on limited budgets, who have started to do more of their shopping at chains such as Family Dollar Stores Inc that pack a variety of food and basic goods into small shops.

"I think it's fair to say there's a multibillion dollar growth opportunity in a lot of these cities and Wal-Mart just hasn't had the right format to penetrate," said Natalie Berg, global research director at Planet Retail.

The new Walmart Express format is being overseen by Anthony Hucker, vice president of strategy and business development, who is no stranger to opening up small discount shops. Before he joined Wal-Mart, Hucker spent a decade at German deep discount chain Aldi, including time setting up that retailer's stores in the United Kingdom.

Aldi stocks only its own store branded goods, while Walmart Express has Wal-Mart's Great Value brand as well as goods from the likes of Coca-Cola Co , Kraft Foods Inc and Procter & Gamble Co . Hucker said that people are happy to see brands that they know.

Wal-Mart just started to test the Walmart Express format last month by opening stores in rural parts of Arkansas and North Carolina.

While Wal-Mart is "very, very pleased" with early results from those stores, setting up shop in cities such as Chicago and trying to enter cities such as New York is different.

It costs more to open a store in a city than in a rural area, as rents can be two to three times more expensive, Hucker said as he walked through the new store on Tuesday.

There are also logistical issues to consider, such as dealing with some tighter spaces within the store and traffic when trucks bring in goods, he said.

"If they can't get the store economics right then the format really doesn't have a future," said Berg. "There's going to be a lot of pressure on keeping costs down."

Wal-Mart's heft, with more than 9,200 stores across the globe, is likely to give it an edge over urban competitors.

"They're the largest retailer in the world, so from a pricing perspective they can compete with anyone," said Steve Ferrara, partner in the retail and consumer practice at BDO USA in Chicago.

The day before the grand opening, workers were busy loading produce, chips, beer and other goods in the 10,000-square foot store and putting up signs touting locally grown produce.

Wal-Mart is starting to buy more from local companies, a move that highlights its environmental efforts and cuts down on distribution costs. The first items shoppers will see when they enter the store this week are cantaloupes from Illinois' Frey Farms, as well as mini watermelons.

The store already has some competition, with a new Aldi open nearby and other chains not too far away, such as Walgreen Co .

Wal-Mart has just one supercenter in Chicago so far, miles away in the Austin neighborhood. Its next supercenter will open next spring, right in the same shopping area as the new Walmart Express.