To compete against the 'everyday low price' theme of Wal-Mart, supermarkets have to find some way of differentiating themselves -- they can't rely on the old approach of luring in customers by price promotions or loyalty cards. Stores that can't figure this out -- with Albertson's decision to seek to be acquired being a recent example -- will find they have no choice but to sell out or shut their doors.

One approach is to offer products that appeal to customers with a different sensibility than your typical Wal-Mart shopper. Costco, for instance, has deliberately targeted small business owners as its key segment - people who might be open to buying a bottle of champagne, but appreciate getting it for a good price. They've kept Wal-Mart's Sam's Club at bay for years with this strategy.

Trader Vic's is another example of a store that has differentiated on the basis of fun and interesting products. OOps - as a comment points out, I meant Trader Joe's, not trader Vic's (which I believe is a beloved bar at the old Plaza Hotel in New York).

The Dollar Store can actually offer even lower prices than Wal-Mart, by starting with low-priced selloff goods and not stocking anything that is acquired through first-run channels.

Some supermarkets have started to differentiate on the basis of the quality of what they stock, rather than a commodity item for a low price. One of the fastest growing grocery segments is that for organic foods. Whole Foods Market has taken tremendous advantage of this approach by appealing to customers who wouldn't dream of buying mass-produced beef or veggies at a gigantic Wal-Mart store.

There will always be customers who just plain don't like the Wal-Mart shopping experience - the crowds, the lines and the mess. By creating clean, nice spaces, a market can compete.

Some groceries also compete effectively by really understanding their clients. One of my contacts in the business found that his clients behaved differently according to the time of the week! Monday to Friday, they were all about in and out, convenience, and no fuss. Come Friday night, all of a sudden they turn into galloping gourmets who need 47 flavors of vinegar and fresh lemon grass for their weekend culinary creations. What he used to do was re-set two aisles of his store every Friday afternoon (dubbing it the 'gourmet experience' section) and set them back again on Sunday night. That kind of tailoring is hard for a Wal-Mart to pull off.