Wal-Mart Stores Inc is opening its first small store in Chicago on Wednesday as it tests a format it hopes will allow it to penetrate urban markets that have resisted its huge stores.

The Walmart Express in the Chatham neighborhood will be 10,000 square feet, about one-tenth the size of the company's traditional stores.

Four more Walmart Express stores are planned for Chicago, along with three Walmart Market stores, which are more like traditional grocery stores, and two Walmart Supercenters.

Wal-Mart said last year that it should create about 10,000 jobs in Chicago through 2015 through new stores.

The Chicago stores and small stores in Arkansas and North Carolina are opening as Wal-Mart tries to reverse two years of declining sales at existing U.S. discount stores.

The chain is trying to win back customers who are shopping more at chains such as Family Dollar Stores Inc that pack a variety of food and basic goods into small shops.

I think it's fair to say there's a multibillion dollar growth opportunity in a lot of these cities, and Wal-Mart just hasn't had the right format to penetrate, said Natalie Berg, global research director at Planet Retail.

The Walmart Express format is being overseen by Anthony Hucker, vice president of strategy and business development. Before joining Wal-Mart, Hucker spent a decade at German deep discount chain Aldi, including setting up its UK stores.

Aldi stocks only its own branded goods, while Walmart Express has Wal-Mart's Great Value brand and merchandise from companies like Coca-Cola Co , Kraft Foods Inc and Procter & Gamble Co
.

Wal-Mart started testing the Walmart Express format in June in rural parts of Arkansas and North Carolina, and has said it is pleased with early results.

CITIES COST MORE

Setting up shop in cities like Chicago and New York costs more than in a rural area, as rents can be two to three times higher, Hucker said while walking through the new Chicago store on Tuesday.

There are also logistical issues like tighter spaces within stores and traffic that can hamper truck deliveries, he said.

If they can't get the store economics right then the format really doesn't have a future, said Berg. There's going to be a lot of pressure on keeping costs down.

With more than 9,200 stores globally, Wal-Mart is likely to have an edge over urban competitors.

They're the largest retailer in the world, so from a pricing perspective they can compete with anyone, said Steve Ferrara, a partner in the retail and consumer practice at BDO USA in Chicago.

The day before the grand opening, workers loaded produce, chips, beer and other goods onto shelves and displayed signs touting locally grown produce.

Wal-Mart is starting to buy more locally, cutting down on distribution costs while highlighting environmental efforts. The first items shoppers will see when they enter the store are cantaloupes from Illinois' Frey Farms and mini watermelons.

The store already has some competition from a new Aldi nearby and other chains not far away, such as Walgreen Co .

Wal-Mart has one Supercenter in Chicago, miles away in the Austin neighborhood. Its next Supercenter is due to open next spring, in the same shopping area as the new Walmart Express.

(Reporting by Jessica Wohl)