Skip to comments.Target vs. Wal-Mart: The battle for consumers' dollars continues
Posted on 08/30/2009 6:15:48 PM PDT by 2ndDivisionVet
The economic downturn has made an already competitive retail landscape especially brutal and unforgiving. Exhibit A is the rivalry between discount retailers Wal-Mart (WMT) and Target (TGT).
The clear winner in the current downturn was Wal-Mart. Amid millions of job losses and plunging stock and housing markets, new customers flocked to Wal-Mart, at the expense of almost every other U.S. retailer except ultralow-price dollar stores.
It appears that "cheap chic" -- Target's famous selling point -- is not the primary concern of recession-battered consumers. Last quarter, the average U.S. Wal-Mart store actually saw traffic increase 1.3% from the year before. By contrast, last quarter Target's traffic was down 2.6% from a year ago.
"Even with lower sales than we'd expected," Wal-Mart Chief Executive Officer Mike Duke told analysts Aug. 13, "we believe that our comparable store sales outperformed the retail sector almost every place where we do business."
Wal-Mart's advantage during a recession is its low prices. "Everybody is becoming more price-conscious rather than fashion-conscious," says Thomas Nyheim, a portfolio manager at Christiana Bank & Trust Co., which owns Wal-Mart shares. "Nobody can match Wal-Mart on pricing."
One of Target's problems is its reliance on discretionary purchases, which make up about three-fifths of sales. Target customers "now focus their shopping more on need than entertainment," Target Merchandising Executive Vice-President Kathy Tesija told analysts Aug. 18. That skews purchases toward food and other necessities, and away from clothing and items for the home.
Wal-Mart did feel the impact from slower consumer spending. U.S. same-store sales dropped 1.2% last quarter, according to results released Aug. 13.
And, Target, like Wal-Mart, benefits from consumers trading down from the pricey to the less expensive. "We continue to gain affluent guests from department stores," Tesija said.
However, Target -- despite its status as a discounter -- did far worse than Wal-Mart in its sales. It saw same-store sales tumble 6.2% in a year.
Both firms win kudos from analysts and investors for managing inventories and costs at a tough time. Earnings figures for both beat Wall Street expectations.
But if the main fight between Wal-Mart and Target is over customers and sales figures, Wal-Mart clearly won out in the past year.
In all, total sales at Wal-Mart rose 2.7% last quarter from a year ago, to $104.3 billion, when one ignores the impact of currency fluctuations, which hurt Wal-Mart's large overseas operations. At Target, sales fell 2.7%, to $14.6 billion in the second quarter.
Target Will Lead in a Recovery
Those numbers, however, reflect the trends of the past year, a particularly tough time. For investors and even executives, the crucial question is what happens next.
Those who are expecting an improvement in the economy and a recovery in consumer spending tend to favor Target.
"People were shopping at Wal-Mart because it was the cheap place to shop," says Bernie McGinn, chief investment officer at McGinn, McKean & O'Neill. An owner of Target shares, he believes consumers will gradually return to "a sense of normalcy."
"If you're feeling less pinched, you go out to Target," McGinn says. "You know you're going to get a good value, and you're going to walk out with something a little classier than [at] Wal-Mart."
Target is trying two strategies to win back customer traffic. First, it is reminding customers the chain offers good prices. Through its "Low Price Promise," Target now promises to match the advertised price on any product offered by a competitor in the same market.
At the same time, however, Target executives "really don't want to stray too far into deep discount territory," says Morningstar (MORN) analyst Kimberly Picciola. Thus, the chain must make customers aware of the value it offers, while also boasting of better merchandise and a more pleasant store.
Even as it touts low prices, Target is planning to offer clothes designed by Anna Sui, jewelry by Anna Sheffield, and handbags by Carlos Falchi.
As always, Wal-Mart emphasizes its low prices. "There's a 'new normal' now where people are saving more, consuming less, and being more frugal and thoughtful in their purchases," Wal-Mart's Duke said. He added: "Wal-Mart can continue to attract new customers, because we're helping [the typical consumer] to do more with what she has."
Christiana's Nyheim owns Wal-Mart shares because he believes consumers will remain very careful about their spending. "We think everybody's going to be competing on price for the next year, because we're going to be in a much slower economy," Nyheim says.
At the same time, however, Wal-Mart is trying to compete in ways other than price. Consumers may have traded down to Wal-Mart for its low prices, but the chain hopes to hold onto those customers through improvements in their stores, including renovations and improved layouts.
"Wal-Mart has done a good job of reinventing themselves and cleaning up their stores," says Steven Roge, a portfolio manager at R.W. Rogé & Co.
In 2008, while the recession was at its worst point and economists were gloomy, Wal-Mart was one of the most popular stocks on Wall Street. Since March, however, investors have become more optimistic. That has helped shares of other retailers, including Target.
While Wal-Mart shares have drifted lower this year, investor expectations for Target have improved dramatically. In the past 12 months, Wal-Mart shares are down 12.7%, while Target shares are down 11.4%. Since the start of 2009, Target shares are up 28%, while Wal-Mart's stock is down 8.4%.
Much of Target's recent gains occurred on Aug. 18, in reaction to second-quarter earnings, when shares jumped 7.55%, to 44.32.
Though the two chains are fiercely competitive, it's possible that both retailers could do well. As discounters, both have a natural advantage in hard times. In better times, both could see sales rebound.
Harvey Robinson, president of Robinson Capital Group, believes the economy is recovering but the consumer will remain "exceptionally cautious."
"As the economy picks up, I believe Wal-Mart and Target will continue to benefit," says Robinson, who owns neither stock. The move of customers toward cheaper options could be permanent, he says. "Consumers are more interested in buying from discounters."
In other words, a slight recovery in the economy could be enough to get shoppers buying again. But it may not be enough to send customers back to pricier specialty and department stores.
In any environment, the competition between Target and Wal-Mart will remain cutthroat. The onus is on Target to prove it can stop the slide in sales and customer traffic. And, Wal-Mart, with its global reach and deep pockets, is not known for taking competition lying down.
If conservatives were really determined, they could end Obamanism in 3-6 months. Stop spending on anything other than necessities. Make the economy tank, and voters will turn on it like a pack of wolves. Forget the tea parties, that’s eyewash.
I prefer Meijer to both.
Wal-Mart is the no-brainer choice for me.
the palin administration.
Target - yuppie white trash... Wal Mart - poor white trash...
Shop local “Mom & Pop” stores when possible first.
To each his own - I don’t buy groceries in either store. For general merchandise, I prefer Target over Wal-Mart hands-down.
One thing that stood out to me when I went to a WM a couple of weeks ago is the low inventory.
I remember the same store used to have stuff overflowing into the aisles so that two carts could barely pass each other. Now, it’s like a six lane freeway. The shelves are much emptier too and very little selection.
I did come away with a box of ammo though (one of three boxes on the shelf).
I try not to shop at Target but I haven’t shopped at Walmart since they decided that Fox news was too controversial to run their ads.
Wonder when the business “experts” will admit that conservatives are not participating in BO’s phony economic recovery? Taxpayers are forced to pay their taxes or go to jail, but the federal government cannot force them to go to the mall.
Let's not forget Wal-Mart pulling their ads from Glenn Beck. Wal-Mart is on my “unshop” list. I've been paying a little more at my local grocer, Target or other retailer.
FY Wal-Mart. Interesting how they went from the liberals’ “most-hated” to “loved”.
WMT peaked a year ago at approx $62, it's now at $51.13.
Prior to that peak WMT was mid 40s to low 50s for a long, long time. It now stands at $51.13.
They are making comparisions to Aug. 25th 2008, when it had jumped in a matter of a few weeks from $52 to $62. It's natural place for the past 3-5 years has been in the $45-$50 range.
I like them both but I do more shopping at Walmart. However, Target has some excellent frozen pizzas that I get sometimes. They’re hand made in Italy with an ingredients list that’s about five items long. They are top notch. The brand is Archer Farms, which is one of Target’s generics. I learned about them on one of the foodie forums.
Exactly what I have been doing since November 8, 2008.
I have the money to buy things, big ticket things. I have money to invest too. I've just decided I won't until the 0 and his merry band of thieves are gone.
Their powdered sugar donut holes are the best, especially if you refrigerate them.
Shop at Target! My younger daughter works for Target, and I want her to keep her job! My elder daughter spent a year studying in England. When she finally got home, the first place she wanted to go was Target.
Giving money to Wal Mart is like handing money to the red Chinese. I’d rather spend an extra 12 cents on toilet paper and shop at a local or employee owned store.
in our area, the target store was asked to donate money or items for care packages to the soldiers in iraq and afganistan. they refused. they did however donate generously to a gay/lesbian organization. walmart supported the troops. contest over.
Yeah, they say they love Walmart but they’ll still be at Whole Foods buying their arugula.
Actually it would be interesting to see some stats on who shops where broken down by ideology.
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