The last few months have been a crucial period for Wal-Mart. The world's largest — and most feared — retailer seems to be at a crossroads.

And that should rivet the attention of the retailing and retail real estate industries: If there's anything scarier than an industry-dominating behemoth, it's an industry-dominating behemoth that has lost its footing and is thrashing around, looking for a new formula.

The old formula produced amazing results. As Wal-Mart filled the rural and suburban landscape with discount stores — upgrading the most promising ones to the supercenter format — it became the top grocer, the largest music seller, the largest jeweler, the largest furniture dealer, and the largest toy seller in the U.S. Today it operates 1,209 domestic Wal-Mart stores and 1,980 supercenters.

But, having saturated its traditional locations, Wal-Mart has found it rough going to penetrate urban America. Its efforts to export the Wal-Mart formula have produced mixed results. The chain has given up on two major markets, Germany and Korea and while 25 percent of Wal-Mart's global footprint is outside the U.S., only 20 percent of revenue is international.

This is a game of diminishing returns: Even as Wal-Mart's sales keep increasing, overall profitability is eroding, because the new stores are less productive than older ones. Merrill Lynch currently pegs the chain's sales productivity (a measure that compares the company's overall sales growth to comparable-store growth) at 70.5 percent. That's the company's worst figure since 1998 and down from an all-time high of 95.6 percent in 2001.

Now, the behemoth is responding — in ways that every retailer and developer should note. In the past month, Wal-Mart has begun to alter its merchandising approach drastically. Instead of focusing on big discount product categories, it now has six strategies for product selection, each targeting specific groups of shoppers: African-Americans, wealthy shoppers, empty nesters, Hispanics, suburbanites and rural residents.

If Wal-Mart is able to win over these demographics, it could restore the air of invulnerability that had been punctured with its recent missteps.

Significantly, Wal-Mart's move to corner the Hispanic market — whose buying power is $750 billion and growing — is an astute play as other national chains have been slow to try and woo this market, which is today largely served by mom-and-pop operations (see story p. 55).

The move to grab upscale shoppers is perhaps the most intriguing. Wal-Mart is pushing hard to grab market share in electronics (it has launched a major ad campaign highlighting its HDTV selection) and organic foods. This moves it into competition with retailers that were considered outside its purview, chains like like Best Buy, Circuit City and Whole Foods.

Moreover, Wal-Mart has redoubled its assault on the drug store. In late September, with much fanfare, it announced an initiative to sell 300 generic drugs for just $4 per prescription (a move that Target Inc. quickly aped.) And that should be cause for worry.

Drug store pads — especially those housing Walgreens and CVS outlets — have long been viewed as the safest investments in retail real estate. Deals for Walgreens pads trade at 6.3 percent cap rates and average $392.04 per square foot. That pricing is largely based on Walgreens' pristine credit rating and healthy operations. But should Wal-Mart come to dominate the pharmacy sector like it has supermarkets, toy stores and everywhere else it's aimed, that could threaten the single-tenant net lease.

Investors who count on drug-store pads as bond-like investments could suddenly see both their returns and principle under attack. A Wal-Mart category coup in drugs would also spell trouble for operators of smaller shopping centers with drug-store anchors.

It remains to be seen if any of these new strategies will work for Wal-Mart. But if they do, the shakeout in supermarkets and department stores that has so greatly changed the way retail real estate functions will be repeated again.