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Wal-Mart to be More Like Target

by Emily KaiserReuters
June 23rd, 2004

CHICAGO - Wal-Mart Stores, which has gained a reputation for leaving opponents limping into bankruptcy court, is taking on Target Corp in a fight that it just might lose.

Wal-Mart, the No. 1 retailer, is widening its array of stylish-but-cheap goods in hopes of winning over middle-income customers, putting it head-to-head with a rival that has proved it can compete and thrive against a company six times its size.

"Can Wal-Mart make merchandise improvements that will drive incremental sales? Absolutely," said Darrell Rigby, head of the global retail practice at consultants Bain & Co. "Can Wal-Mart beat Target at Target's game? I doubt it."

Target's secret is to match Wal-Mart's prices on commodity items such as food and cleaning supplies, and then use sales of trendy-but-affordable designer merchandise to boost profits.

The strategy seems to be working. For the first quarter ended on April 30, Target turned in a strong 6.2 percent sales gain at stores open at least a year. That was more than double the same-store sales increase for Wal-Mart in the United States.

Wall Street has noticed the discrepancy, rewarding Target's shares with a higher valuation than Wal-Mart's. Target trades at nearly 21 times earnings forecasts for the next fiscal year, compared with a multiple of about 18 for Wal-Mart, according to Reuters Estimates.

The sales gap isn't lost on Wal-Mart executives. Mike Duke, head of the company's U.S. discount stores, said visits to Target stores are the No. 3 use of his time, behind meeting with Wal-Mart employees and customers.

"I'll be straight up -- they are a great competitor," Duke said in a presentation to analysts this month.


Now Wal-Mart wants to bring in its own "cheap chic" goods, using the British design team behind its George apparel line to come up with more fashionable offerings.

A Target spokeswoman said the retailer is confident of its strategy and declined to comment on Wal-Mart's plans.

Some analysts worry that Wal-Mart will stray too far from its low-price roots and alienate its core low-income shoppers.

Emme Kozloff, retail analyst with Sanford Bernstein, said fashion is fickle, and Wal-Mart could be stuck slashing prices if its "contemporary" clothing fails to win new customers.

"It's a hit-and-miss business, with no company ever able to always get it right," she said, noting Wal-Mart's scant fashion experience.

The retailer has been relying on staples like groceries to drive sales as rising energy prices cut into discretionary spending, particularly among low-income shoppers.

But food is a notoriously low-margin business, and Wal-Mart's profits have suffered. First-quarter earnings missed the company's -- and Wall Street's -- expectations.

Wal-Mart was unusually frank in taking the blame for its disappointing results.

Instead of pointing a finger at high energy prices or bad weather, the company said it put too much emphasis on its lowest-priced items, which it calls "opening price points," and lost some customers who were willing to pay more for style.

"When it comes to buying domestics or apparel, that customer isn't shopping with us," Chief Executive Lee Scott said. "They are going somewhere else where they believe the offering is more suited to their taste."


Scott said Wal-Mart prominently displayed impulse items priced at less than $1 in hopes that cash-strapped customers might be tempted to pick up one or two. The idea was that with more than 100 million shoppers visiting stores each week, sales would grow one dollar at a time.

"But what happened is that the further we went that way, the less relevant we got to be to the customer who was not really being impacted by these negative economic issues," Scott said, adding that stores began to look "junky" because of all the displays of low-priced goods.

This isn't the first time Wal-Mart has taken on a strong rival. Two years ago, its Sam's Club warehouse division was losing ground to Costco Wholesale Corp., and executives set out an aggressive plan to undercut the competitor's prices and go after coveted small-business customers.

While Costco eventually recovered and remained the No. 1 player in the U.S. warehouse club sector, Sam's Club sales grew too, suggesting that when the two giants wrestled, consumers welcomed the lower prices and both sides gained ground.

Wal-Mart is hoping that will happen again.

Scott says consumers fall into three categories -- loyal Wal-Mart customers, those who shop there for food but not general merchandise, and those who don't shop there at all.

"Quite honestly, I believe that Wal-Mart has the opportunity to have all three of those customers," he said.

Winning over fashion-conscious shoppers will be hard. Target has a 10-year head start and has built strong relationships with well-known designers, including Michael Graves and Isaac Mizrahi.

Still, Bain's Rigby said Target knows better than to bet against Wal-Mart.

"I'm sure everyone at Target is taking this new threat very seriously," he said.

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