11/15/2011 3:26 PM ET|
How Target is gaining on Wal-Mart
Beaten up in the recession, Target borrowed from the giant's playbook with a strategy that adds groceries and loyalty cards to get customers into stores more often. So far, it looks like it's working.
Is Target shooting itself in the foot by trying to be more like Wal-Mart -- or is it making up ground on its much bigger rival?
Target's third-quarter earnings, out Wednesday, again showed gains, more evidence that attempts by the champion of "cheap chic" to look more like the chieftain of "just cheap" are paying off for shareholders.
To cope with tough economic times after losing out to Wal-Mart Stores (WMT, news) during the economic slump three years ago, Target (TGT, news) hatched a game plan that makes it more like the most successful retailer on the planet. That would be the one Sam Walton created.
Of course, Target would never describe the strategy that way, and the plan is a work in progress. But we're starting to see signs that it's working. Target has posted sales gains of late, for example, while Wal-Mart's sales have slumped for nine of the past 10 quarters. Wal-Mart reported Tuesday that it broke that string in the third quarter, but profits fell slightly. Target reported Wednesday that third-quarter sales rose 4.3%, with profits up 3.7%.
We'll learn more after the all-important Black Friday results come in later this month.
The game plan
Boiled down, Target's plan calls for a nationwide rollout of grocery departments along with storewide price cuts. Those are supposed to bring in more customers more often, with Target hoping they then spend enough on more-profitable cheap-chic apparel, household goods and beauty supplies to boost profits.
Some analysts worry that this won't end well. After all, there's little profit in selling groceries, compared with apparel, home furnishings and personal-care goods, the more traditional fare at Target stores. And offering a regular storewide discount, with a 5% off loyalty card, is not necessarily a recipe for boosting profits.
"We think the shares are nearly fully valued as Target transitions into more of a grocery store," says Morningstar analyst Michael Keara. "Target is using the Wal-Mart strategy, but we do not see nearly the same degree of success." Keara has a three-star rating on the stock, essentially a grade of "C."
But drill down, and there's a good case to be made that Target's strategy makes sense. In fact, there's already some evidence that it is working. If the trends continue, the plan could reward investors who buy shares now and have the patience to wait a few years for the plan to pay off.
The key: Customers who come in for low-margin groceries or sign up for the 5% discount have to buy enough extra stuff to offset the hit to margins. Here's why this strategy just might work.
A wake-up call
Target shareholders got a shock during the 2008-2009 economic slump. Consumers are supposed to "expect more, pay less" at Target. But during the slump, shoppers clearly opted for "always low prices" at Wal-Mart, the retail giant's old marketing tagline.
Target sales slumped, and Wal-Mart sales did well. (Throughout this column, I'm referring to sales results for stores open more than a year, because it is a better measure than total sales, which include the impact of store openings and closings.)
Not surprisingly, Wal-Mart investors were rewarded; Target shareholders, not so much. Wal-Mart advanced 18% from the start of 2008 to the end of 2009, but Target shares dropped and wound up going nowhere for those two years.
Emerging from that dust-up, Target has launched two major steps to try to fight back -- and become more like Wal-Mart -- in an ongoing economic environment of cautious consumers and sluggish growth.
Cheap-chic cuisine and the 5% discount
Target is in the midst of rolling out grocery sections in stores to attract more customers, as Wal-Mart has done. (Wal-Mart is now the nation's largest grocer, selling 39% of the country's groceries.)
Target hopes to have grocery sections, called PFresh, in 900 stores by the end of this year. By late 2013, it wants to have about 1,500 stores PFreshed -- nearly all of them. Target currently has about 1,770 stores.
Let's be clear. Target is not trying to match Wal-Mart in food. Target doesn't want to be a grocery supercenter. In a PFresh, there's no in-house bakery and no deli; you'll find only prepackaged bread and deli meats. It's more about convenience than offering a place where a family can do all its weekly grocery shopping, says Howard Davidowitz of Davidowitz & Associates, a retail consulting and investment banking firm in New York.
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I shop at Walmart, some are nicer and cleaner than others, especially where I live in FL.
I am guilty of shopping at Walmart, they have the lower prices and these days we have to watch every penny. I am not thrilled with Target everything is much higher in prices whether groceries or their clothes. I like a one stop shop idea. I don't like traveling from one store to another.
Target is nicer and cleaner of the two, they just need to lower their prices.
As for keeping the stores open on Thanksgiving that is ridulous, none of these stores need to be open on Thankgiving or X-Mas Day. I can remember years and years ago, all stores were closed on Sundays, and Thanksgiving & X-Mas even closed early the night before, this gave employees a day off to enjoy their families. These stores are not happy making a profit, they get Greedy and the employees suffer.
I would like to see that these 2 stores will start buying made in the USA. I go out of my way to find those items. We need to bring back the American jobs in our country.
Please explain...inquiring minds would like to know.
My wife and I have shopped both stores and on every occasion, we have always preferred Target to Wally World. Target is always cleaner, always more organized and unfortunately I have had as much as I can tolerate of Wall Mart clientele. Other issues like cashier availability, long lines and store personnel attitude are night and day, with Target always ahead of Wall Mart. That is just the surface. IMO.
All for Profit and more profit and record setting years and never being happy with a healthy return only if it is more than last and the employee gets......no more than last year..
My experience with Target is that their employees are intelligent, positive and happy to see you as a customer. This is how Walmart got their start. Now Walmart employees are sullen, angry and uninterested in serving their customers. The experience of shopping between Target and Walmart is at opposite ends of the spectrum. While price is important, I'll pay a few cents more to patronize a business that believes in customer service.
For the record!!!! Target is an American owned store that sells American made merchandise.
Wal-Mart is is largest importer of goods from China. Has several special ships charring goods from China, Malaysia, etc arriving each day to dump their goods on wal-mart shelf's. the ships return to their country EMPTY! NO AMERICAN EXPORTS!.
Most every thing you need is made in America. ABC news has a complete list, and I thinks msn- google does also. When you go to purchase any merchandise ask "Please show me only the product's made in America" not the stuff where they only sew the label on in America.
It is time to get smart, If you want better living, good wages and a better future, Buy American and get rid of all the politicians that signed the pledge to work for corporations not Americans.
Wal-Mart's sales are slipping for one simple reason. Their customer service sucks, big time. Case in point: Awhile ago I purchased tires from their website. On the receipt, it clearly said to go to the Tire and Lube Center to pick them up. So, having excellent reading comprehension skills, that's what I did. Well, the clerk there acted as if I had kicked his puppy, rudely telling me I had to report to customer service to sign for them. God forbid he pick up the phone and have them brought to him! By the way, if people are thinking this was an isolated incident, it's not. I find their employees to be either apathetic to their customers needs or so wrapped up in their assigned tasks helping customers is an annoyance.
Until Wal-Mart loses this delusion that they're the only game in town, that people should be grateful to shop there, they have nowhere to go but down.
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