The trial store in Northampton will be a completely new format for the retailer. It will sell 95 per cent own brand products and only 2500 lines - barely a tenth of those sold in its superstores.
This set-up will allow the retailer to undercut established discount retailers such as Aldi and Netto. And it has been reported that store managers will have the power to fix prices locally to ensure the company is charging the lowest prices in the area.
This move will finally allow Asda to expand into Tesco stronghold areas such as London and Southeast England where it has previously struggled to enter due to strict planning regulations.
Planning permission for the new smaller stores, which are likely to average between 7,000-10,000 square feet, should be easier to acquire.
The news follows revelations that the retailer may fall from its position as Britain's second largest retailer as soon as next month because of stagnant sales over the last 12 months.
The retailer's recently appointed CEO, Andy Bond, has admitted that the company has failed to meet internal sales and profits targets for the last two quarters.
In an interview with the Financial Times, Bond said: "The general leadership of the business has got to take accountability for that and I was one of those people."
Asda has yet to name the new discount format that will be in direct competition with its rival's smaller High Street stores - Tesco Express and Sainsbury's Local.
The reatiler will be hoping to replicate its competitors' success in the convenience sector. Tesco more than doubled its number of Express and Metro stores in 2004 while Marks and Spencer's Simply Food chain grew from 49 to 122 stores.
Recent figures from the retail research group IGD show the current estimated value of the British convenience market is £23.9 billion - an increase of 4.9 per cent since 2004. This constitutes the largest growth-area for food retailers and signals an upward trend in consumers' preference for local convenience stores.