Walmart Inc is betting small will be big in China. The US retailer opened its fourth neighborhood store at its China headquarters, Shenzhen, Guangdong province, on Sept 13, signaling that the compact format has found traction and is expected to scale.

Each store, about 500 square meters in size, mainly carries some 2,000 stock-keeping units or products tailored to the most frequent needs of nearby residents. In the store, food dominates — fresh produce, bakery, hot meals, ready-to-eat options and snacks — covering what Walmart calls "five meals a day".

Jason Yu, general manager of CTR Market Research, said community stores are becoming a vital part of Walmart's proximity retail strategy in China. Consumers today lean toward shopping close to home or using instant retail platforms for daily, high-frequency purchases, which the traditional hypermarket's all-in-one format can no longer fully satisfy.

"Smaller formats offer advantages in cost efficiency, flexible site selection and curated assortments tailored to neighborhood needs, while instant retail extends their catchment area — making the model a strong fit with Walmart's omnichannel approach in China," Yu said.

For Walmart, community stores fill a strategic gap between its sprawling Sam's Clubs and shrinking hypermarkets. Walmart's China net sales jumped 30 percent year-on-year to $5.8 billion in the second quarter, driven by Sam's Club expansion and its double-digit growth in transactions, as well as its e-commerce growth at 39 percent.

Sam's remains the company's profit driver in China, with 57 outlets across 25 cities. At the 2025 Walmart global investment conference, Zhu Xiaojing, CEO of Walmart China, revealed that eight Sam's Club stores in China are expected to reach annual sales volume of over 3.6 billion yuan ($500 million) per store at the end of this year.

Even so, their suburban footprint leaves downtown areas underserved.

Neighborhood markets address that gap with its bigger stores that enhance one-stop experiences and 30-minute reach by e-commerce. The compact store is intensifying its coverage by reaching customers within a 10-minute walk and sharing supply chains with Sam's to break bulk packs into smaller sizes.

The expansion comes as Walmart's hypermarket model wanes. From 2020 to April 2025, the retailer's store number — including hypermarkets and Sam's Club — fell from 429 to 334. That coincided with the addition of seven new Sam's Club stores, according to data from the China Chain Store &Franchise Association.

The decline reflects long-standing issues: sites misaligned with shifting population flows, bulk pack sizes mismatched to smaller households and rising operating costs.

Despite that, Yu said hypermarkets will still serve one-stop shopping needs, though much of that demand is being diverted to e-commerce and specialized retail channels. He added "community stores face their own challenges, having to compete head-on with 24-hour convenience stores and delivery platforms".

Yet demand for them remains relatively stable, and Walmart has an opportunity to differentiate through private-label products and value-added services, he added.

"The pilot stores in Shenzhen, Guangdong province, in my view, are also a signal of Walmart's intent to scale the format into China's smaller third- and fourth-tier cities," he said.

Government policy is lending momentum to the shift. Earlier this month, the Ministry of Commerce and eight other ministries issued a notice to accelerate the rollout of"15-minute community life circles", underscoring support for small-footprint retail and commerce.

The latest report released by Worldpanel shows that small supermarkets grew 7.3 percent year-on-year in the first half of 2025, stabilizing overall modern trade (defined as hypermarkets, supermarkets, and convenience stores). Community grocery stores also performed well, with sales up 4.7 percent.

Competition is already intensifying. In the first half, leading discount retailers continued to capture market share through business model upgrades and supply chain optimization. Aldi advanced steadily through localization strategies: its store in Kunshan of East China's Jiangsu province set a new sales record in China.

Leveraging their experience in Shanghai, regional supply chains, and a "high quality groceries and lifestyle products" strategy, Aldi's penetration in the eastern region increased by 1.2 percentage points, according to Worldpanel.

Traditional e-commerce players are expanding into offline formats to break the limitation of the pure online shopping experience. JD Group's JD Mall offers immersive lifestyle solutions, while JD Fresh has accelerated its store model (central stores plus satellite community shops) in the northern region, boosting penetration by 0.4 percentage point.

In the first half, China's fast-moving consumer goods market saw moderate recovery. Price-sensitive and experience-driven consumers demand higher product quality and functionality. This pursuit drives offline and online channels to reshape the consumption landscape through both competition and complementarity, according to Worldpanel.

In offline channels, Sam's Club, Aldi, and JD Fresh precisely target consumer needs via membership formats, hard discount formats and community models. Traditional supermarkets have focused on optimizing product selection as part of their upgrades, while integrating with online-to-offline services to overcome customer traffic challenges, according to Worldpanel.