Wal-Mart, the largest US retailer, is launching its smaller format Neighborhood Market grocery stores in southern California, marking a new tactic in the largest US retailer’s drive to expand its presence in the state.

Wal-Mart is developing two of the 42,000 sq ft grocery stores in the Coachella Valley, a fast-growing irrigated desert valley about 100 miles east of Los Angeles that includes the city of Palm Springs.

The first store, in the small city of Coachella, is expected to open sometime next year, followed by a second location in La Quinta.

Wal-Mart has previously focused its development efforts in California on its 180,000 sq ft Supercenters, which combine groceries and general merchandise. But intense opposition from local labour and environmental activists has slowed and in some cases blocked its plans. California currently has only 31 of Wal-Mart’s national network of 2,300 Supercenters, compared with 151 in Florida.

The retailer first launched its first Neighborhood Market in1998 has used the format to fill in between existing more profitable Supercenters in major markets such as Las Vegas, Phoenix and Orlando.

“This is their convenience market near the Supercenter, serving someone who doesn’t want to go into a 200,000 sq ft building just to buy groceries,” says Hank Gordon of Laurich Properties, the developer of the first two California store sites.

Both stores are within just a few miles of two of the three Wal-Mart Supercenters in the Coachella Valley, which has a rapidly expanding population of about half-a-million year-round residents.

The plans also highlight the intensely competitive environment facing Tesco, the UK grocer, as it prepares to open its first US stores in Southern California next month. Tesco is planning to open at least seven of its new 10,000 sq ft Fresh & Easy local markets in the Coachella Valley, including two in La Quinta and one in the city of Coachella.

For Wal-Mart, the smaller Neighborhood Market format could also help sidestep the blocking tactics of its union-led opponents in California, since the stores do not require the same level of environmental and planning permissions.

Local critics of the retailer tried unsucessfully to block an initial planning procedure related to the Coachella store last November, but only delayed its approval by one month.

Wal-Mart’s top executives are expected to lay out their store development plans for 2008 at a two-day analysts meeting that begins on Tuesday, following a decision earilier this year to moderate the pace of Supercenter expansion.

Wal-Mart is also currently exploring additional new formats, reportedly including a smaller local convenience market. It has also recently registered new trademarks including “City Thyme” and “Field and Vine” to cover unspecified “retail grocery store services”.

“To continue their growth they’re going to have to target urban areas, and it will be incumbent on them to develop smaller formats,” said Curtis Barlow, of commercial real estate brokers Lyle & Associates, who is based in the Coachella Valley.

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