Wal-Mart Confronts a Conundrum: How Does the Biggest Get Bigger?

Wal-Mart's biggest competitor may still be itself. In areas where the chain has two stores, the opening of a third siphons off 20 percent of sales from the other two, said Robert S. Drbul, an analyst at Lehman Brothers.

In the short run, Wal-Mart is falling back on what it knows best: cutting prices. Since October, it has slashed prices on toys and electronics. Last Thursday, management said that around Christmas, Wal-Mart would promote low prices on more goods in a series of advertising circulars.

Longer-term, executives say they will stop opening so many new stores to stem cannibalizing their own business and focus on improving productivity at existing ones by finding new ways to get the occasional customer to spend more.

"Unless they abandon the idea of growth," Fishman said, "they need to attract a wider array of customers."

The company is going after what it calls "selective" customers. That would describe Springfield resident Nadine McMahon, 46, who was shopping Thursday morning at the Wal-Mart on Kingstowne Boulevard in southeast Fairfax County . McMahon heads to the discount retailer for household cleaning and school supplies, but she was not the least bit tempted by the racks of the new fashion-forward Metro 7 brand camisoles and skirts she saw.

"I thought they never held up as well as clothes from other stores," she said, adding that she buys clothes from hipper rival Target. She thought for a second, trying to explain her resistance.

"Maybe it's the way the store looks," she said.

That "look" could be seen in the Kingstowne store, where 250-thread-count organic cotton sheets on sale for $52.88 sat in open boxes next to a display featuring a martini set, clear glass cheese serving plates and curvy, white, modernist vases. The sheets and the barware would look at home inside any Target store, except that they were stranded in the middle of a narrow aisle next to shelves piled nearly to the ceiling with consumer electronics.

Retail analyst Patricia Edwards of Wentworth, Hauser & Violich in Seattle said ambience is increasingly critical to holding on to price-conscious shoppers. As gasoline prices have dropped and as "they've gotten discretionary income, the core base is shopping elsewhere," she said.

Wal-Mart has simply made its competitors smarter, she said, as they followed the company's example by making supply chains more efficient and lowering costs.

In responding to competitors, Wal-Mart has struggled through an identity crisis. Management has pulled the plug on troubled undertakings so quickly lately that it has lurched from one extreme to another.

Fishman, however, looks to history. Wal-Mart has been adept at trying new strategies, jettisoning them when they do not work, and moving on. What Wall Street and others forget, he said, is "part of Wal-Mart's DNA is to test things out."

He cited experiments such as full-service auto repair, which the company gave up on, choosing to focus on replacing tires and batteries and changing oil. "That was a passion of Sam Walton: copy, copy, copy, execute brilliantly, abandon what doesn't work," he said.

The difference now is as the nation's largest employer and second-largest company by revenue, Wal-Mart's every move is scrutinized. It has an army of critics ready to pounce, such as the union-backed Wake Up Wal-Mart and Wal-Mart Watch. They are organized and well-financed. They've advocated for anti-big-box store laws in cities and counties across the country designed to keep Wal-Mart from expanding. And as one of the largest companies in the world, its missteps reverberate through the entire economy, as on the Monday after Thanksgiving, when management's warning of poor November sales figures helped drive the Dow Jones industrial average down 158 points.

Fishman said it was important not to lose sight of the fact that while it has lately fallen short of its goals -- and Wall Street's -- for same-store sales growth, the company is enormously profitable and growing overseas. Wal-Mart rang up $28.6 billion in sales in November, up 11.9 percent. Sales have been strong in Mexico, Brazil, Argentina and China, and the company is expanding into India.

But Fishman said, a larger question remains: "How much can one company own of the U.S. retail market?"

Staff writer Ylan Q. Mui contributed to this report.