Wal-Mart (WMT) Friendly Neighborhood Stores Have Sinister Plans for Competitor Walgreens (WAG)

Recently, Jefferies analysts put out a note on Wal-Mart’s (NYSE: WMT) plans targeting Southern California as an area of penetration for its Neighborhood Market store over the next 18 months. Jefferies’ sources now indicating that Wal-Mart is also focused on two other large metro areas in the US, the Northeast corridor and Chicago.

"While we have not confirmed Northern California as a geography that will see a step-up in openings, it clearly fits the profile,” said analyst Scott A. Mushkin. "Wal-Mart's emerging strategy of using its small boxes first to penetrate large metro areas where its presence has been limited (due to meaningful resistance to its large supercenter format), and then fill in with supercenters, while augmenting sales with its robust site-to-store offering, suggests, in our opinion, that these areas will experience a increasingly competitive landscape over the next few years.”

If Mushkin is correct, Wal-Mart’s new strategy could cause trouble for Walgreens (NYSE: WAG). Jefferies sources indicate that the latest WMT Neighborhood Market prototype over-indexes, from a merchandise perspective, to items carried at the local drugstore. Wal-Mart also seems to have placed Walgreens in its crosshairs with its price-challenge ad blitz.

Jefferies has a Neutral rating on both Wal-Mart and Walgreens.

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