BOSTON — Wal-Mart Stores Inc. has the capability to build 850 smaller Urban 99 superstores in the next decade, giving the world’s biggest retailer a new option as it faces challenges to its expansion in urban areas, according to a Merrill Lynch analyst’s report.

This story first appeared in the July 7, 2004 issue of WWD. Subscribe Today.

The Urban 99 outlets’ 99,000-square-foot size is significant, because it allows Wal-Mart to come in under so-called big-box ordinances in some municipalities that ban stores of more than 100,000 square feet that sell a percentage of food.

The first Urban 99 store opened in January in Tampa. Los Angeles officials plan to vote on a big-box ordinance this summer.

Wal-Mart, based in Bentonville, Ark., has faced criticism in cities such as Inglewood, Calif., and Chicago that its Superstores have an adverse impact on smaller merchants, depress wages and lead to more congestion and crime.

“Before the smaller store was developed, it would have been economically unfeasible to purchase 20 to 25 acres of land for a full-size supercenter in an urban market,”

Merrill Lynch analyst Daniel Barry stated in the report. The company is “starting to consider the applications of this model in conjunction with a change to their one-price policy for high-cost urban markets.”

Wal-Mart has both driven sales and built its brand with its much-emulated EDLP, or “everyday low price,” model that calls for chain-wide pricing standards and limits sales.

A Wal-Mart spokeswoman said the Tampa store, built on fewer than 10 acres on North Dale Mabry Highway, was a unique response to a specific land parcel. The retailer usually requires at least twice as much land to build.

Asked about the company’s plans to develop more 99,000-square-foot stores, the spokeswoman said Wal-Mart “would not rule anything out. Obviously, we are always looking for ways to better serve our customers, but I do not know of anything specifically planned.”

Barry said in his report that by 2013, 90 percent of the 200 supercenters Wal-Mart builds annually could be “some variation of Urban 99,” which would “extend the life cycle of the supercenter.”

Smith Barney analyst Deborah Weinswig said Barry’s estimate of Urban 99’s growth is reasonable, particularly as Wal-Mart turns to urban customers for growth.

“I think this is big,” she said. “I think it’s big that they’ve been able to be so innovative. My feeling is, obviously, this requires less acreage, so you’ll see this concept rolled out more quickly, to get closer to the customers.”

Because its supercenters compete with unionized grocers and generate more controversy than its smaller discount stores, Wal-Mart has opted to open its discount format in contested markets, such as Chicago. However, Wal-Mart prefers to open supercenters.

Barry estimated that Wal-Mart’s U.S. supercenters generated 71 percent, or $7.8 billion, of the company’s $11 billion operating profit over the past five years.

The Tampa store has proved to be profitable at a smaller size, flouting conventional wisdom that Wal-Mart needs an enormous box to generate its top-notch supercenter returns. It is on pace to net $70 million in sales — a staggering $700 per square foot — Barry said, citing industry sources.

In contrast, the company’s average supercenter, at about 187,000 square feet, is less efficient, producing an estimated $110 million annually, or $588 per square foot.

Barry said in his report that the Tampa store is “proportionally almost identical to a full-size supercenter” with a complete grocery and selection of general merchandise.

The company saved space by cutting the leased departments (hair salons, photo studios and optical shops) from the front; the store includes a self-serve grab-n-go bar featuring doughnuts and beverages.