Until recently, the Neighborhood Markets concept had been developing slowly. As of April 2002, Wal-Mart had only 31 of these so-called "Small-Marts," all located fairly close to Bentonville in states such as Arkansas, Texas and Oklahoma. However, Wal-Mart recently announced plans to build 25 more in Florida alone, starting next year, and has begun building them in Utah as well.

Making Neighborhood Markets as profitable as Wal-Mart Supercenters has been a challenge. The modus operandi for Wal-Mart and other supercenter owners has been to attract shoppers with low food prices and make the bulk of their profits on hardlines, clothes and other non-food items. But with less room for non-food items, Neighborhood Markets have been less profitable.

Perfecting a prototype

In its latest Neighborhood Market prototype, located in Rogers, Ark., Wal-Mart apparently found a solution. Situated in a lower-income and heavily Hispanic neighborhood, the store has an upscale look, with more space devoted to produce and meat, including vertical displays to make the best use of space. Prices are still largely the same as those of a supercenter, but the pharmacy and beauty aids section is oversized compared to those of other Neighborhood Markets and most competing supermarkets. In a tactic reminiscent of old five-and-dimes or even Kmart's original "Blue Light Specials," store managers get on the store intercom to highlight deals , primarily in the higher-margin pharmacy, HBA or fresh-foods sections.

While growth of Neighborhood Markets will allow Wal-Mart to plant its food-store flag in places too small for supercenters, expansion into wholesale retailing could allow it a presence in stores it doesn't even operate. Wal-Mart has quietly begun approaching independent and small-chain retailers -- which typically buy from such wholesalers as Supervalu, Fleming and Nash Finch -- with plans to begin full-scale operations by late 2003 or 2004, according to retail and wholesale executives. Wal-Mart declined to comment.

Wal-Mart already owns the nation's largest convenience-store distributor , McLane Co. , and a wholesale grocery division would give it a presence in the one area of food retailing from which it is absent. A wholesale division could give Wal-Mart a stronger presence in the Northeast, where high real estate prices, lack of available land and a strong union presence have made it harder for Wal-Mart to operate its own stores. By providing independents and small chains with lower prices than they currently get from wholesalers, Wal-Mart could also further squeeze its primary competitors in the supermarket industry, including Kroger Co., Safeway, Albertson's and Publix.

"At some point, you have to wonder if anti-trust becomes an issue," says Ken Harris, partner with Wilton, Conn.-based consulting firm Cannondale Associates.

But David Balto, a former Federal Trade Commission (FTC) official who spearheaded the group's investigation of slotting fees and is currently a Washington, D.C., antitrust attorney, doubts that a successful anti-trust case could be launched against Wal-Mart. The ultimate legal standard is whether consumers are getting hurt, he says, and clearly they haven't been hurt yet by Wal-Mart's low prices.

The Robinson-Patman Act, which requires manufacturers to provide equivalent terms to all trade customers, might be more of an issue as food companies keep beefing up their Bentonville contingents. But the law allows manufacturers to offer better terms based on volume, and no supermarket chain can compete with Wal-Mart's volume anymore. With its reputation for efficiency, Wal-Mart also offers better execution of manufacturer promotion programs than most of its competitors.

"A dollar spent on marketing with Wal-Mart goes farther than a dollar spent almost anywhere else," Harris said. 

He believes the growing strength of Wal-Mart is emboldening big food processors to take a tougher line with their other customers. He points to Kraft Foods' recently adopted policy to withhold some of its slotting fees until the new products actually arrive on supermarket shelves.