Image: Coupon © Tom Grill,Corbis

Let us begin with the obvious: Wal-Mart Stores (WMT -0.13%, newsis stupendously large. Its revenue for fiscal 2013, which ends Jan. 31, will come in at around $468 billion, a touch under Norway's gross domestic product in 2011. Wal-Mart is also the world's largest private employer.

Wal-Mart is not just the world's largest retailer -- it is larger than the next four combined. Wal-Mart's international business alone would be the world's second-largest retailer. It is also the largest gun retailer in the United States.

So, any company with the moxie to say it will take on Wal-Mart directly has its work cut out for it.

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Still, there are a few companies that look like they could mount a challenge to Wal-Mart, including Costco Wholesale (COST), Target (TGT) and Amazon.com (AMZN). But all face serious logistical and marketing head winds. And, with the possible exception of Amazon, they may be content to stick with their existing strategies and continue to dominate their pieces of the retail world. In the cases of Target and Costco, such strategies are working.

That's why, as investments, they look like good alternatives to a stalled Wal-Mart.

At the same time, I have found a few smaller retailers that are growing rapidly despite Wal-Mart and could produce returns that will make investors happy. Here's a look at the current state of Wal-Mart -- and then why these alternatives look attractive.

The wizardry of Wal-Mart

There are a lot of things that make Wal-Mart unusual. It's not just its size or the fantastic wealth it created, astounding for a company based in Bentonville, Ark., in the northwest corner of the state. If you bought 100 shares at $16.50 when Wal-Mart went public in October 1970 and never sold -- through thick and thin and 11 two-for-one splits -- you'd have 204,800 shares today worth $14.2 million. And you'd be receiving about $326,000 a year in dividends.

Wal-Mart is also unusual because, despite its huge presence in the market, the Walton family effectively controls the company. The three surviving children of founder Sam Walton and the estate of Walton's fourth child, the late John Walton, who was killed in a 2005 airplane crash, own about half the stock. That makes them collectively worth at least $104 billion, more than Microsoft's (MSFT) Bill Gates and Berkshire Hathaway's (BRK.A) Warren Buffett combined. (Microsoft is the publisher of MSN Money.)

What gave them this extraordinary wealth was an amazing strategy that worked beautifully for more than 40 years in the United States: big stores located in rural or semirural communities with few competitors; low, low prices; lots of choice; and, most of all, plenty of inventory, sent to Wal-Mart stores from huge distribution centers no more than a day's drive away.

A key innovation was to add groceries to the five-and-dime tradition that Sam Walton came out of. His first stores were Ben Franklin stores. He opened his first Wal-Mart in 1962.

To the basic formula, Wal-Mart has added the Sam's Club chain of warehouse stores, which look like Costco stores. And its international business has become an increasingly important source of growth. The company has operations in 26 countries, including Canada, the United Kingdom, Mexico, Brazil, China, South Africa, Japan and India.

Hitting a wall

But like many giants, Wal-Mart has run into a wall in recent years in the United States. This is in part because of controversy: Critics charge that it doesn't pay workers enough or offer a good health plan -- and that it fights off unionization ruthlessly. Its aggressive expansion into Mexico succeeded because, The New York Times has written, company executives bribed their way to choice locations.

Plus, as retail consultant Burt Flickinger noted, Wal-Mart in the United States has lacked an edge. There have been problems keeping stores adequately stocked. There have been embarrassing problems like tramplings and other violence at after-Thanksgiving sales.

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The opening of a Wal-Mart near a small town can often damage local retailers. Whether that invariably happens and how much blame Wal-Mart deserves for it are still a matter of a raging debate.

But Neil Stern, a senior partner at McMillanDoolittle, a Chicago retail consulting firm, sees three more, relatively prosaic, reasons why U.S. sales growth has shrunk in recent years:

  • Competition has intensified -- from Costco, Target and Amazon.com for somewhat higher-end customers, and all the dollar discount stores at the lower end.
  • It's harder to find enough land to build classic big-box stores, especially near big cities. The nation is "site saturated," Flickinger adds.
  • The 2008-2009 recession and the slower-than-usual recovery have squeezed Wal-Mart's primary U.S. audience.