Wal-Mart Does Not Have The Luxury Of Target's Customers
Monday February 13, 7:00 pm ET
Lisa Schmeiser


For Wal-Mart (NYSE:WMT - News) and Target (NYSE:TGT - News), it was
news that both discount giants beat their same-store sales forecasts
for January. What was not news: Target's 5.2% gain outpaced Wal-Mart's
4.7%.

While Wal-Mart's 2005 sales of $214.9 billion are more than four times
Target's $50.9 billion, its comps have lagged Target's in 12 of the
last 13 months. (Late Monday, Target cut its February sales view,
citing the weekend snowstorm in New York.)

Down-market and midmarket households -- those making up to $75,000 a
year -- will curb their spending. Meanwhile, those making more will
pick up the pace, Retail Forward forecasts.

Wal-Mart launched a well-publicized attempt to appeal to upscale
shoppers last year, but so far it's not clear the strategy is working.

Going after the recession-proof consumer could generate sales, but only
if they associate Wal-Mart with affordable luxury.

Target has spent the last 15 years creating an upscale image, and may
be better positioned to appeal to consumers whose spending power is
weakening, Piper Jaffrey analyst Jeffrey Klinefelter said.

"The people I know who are more likely to buy organic, who prefer name
brands ... they also seem to prefer Target," said Stefanie Haines, a
Republican Party field director in Mount Holly, N.J. "Target seems to
have more cachet -- 'It's a discount store, darling, but you'd never
know it.'"

Shopping at these stores isn't an either-or proposition: 25% of
Target's customers also shop at Wal-Mart, says Britt Beemer, president
of America's Research Group.

Wal-Mart just needs to convince more shoppers that they'll get the same
trendy items at a chain not known for being hip.

Wal-Mart has struggled to reach trendier urban markets, in part because
of high-profile opposition by unions, grassroots groups and local
governments.

Political fights are something that Target, as No. 2, avoids.

Lauren Friedman of the E-tailing Group said a key Target strength has
been its ability to translate luxury-market themes and products at
mass-market prices.

"At the end of the day, Target always was selling the items at the
right price. They were able to translate trends in a very cost-value
perspective," she said.

Target has price parity with Wal-Mart in commodity items like cleaning
products and drugs.

The margins on such items are low, but Target directs that traffic
toward higher-end discretionary products, Klinefelter said.

Those better goods may also be the ticket to Target's continuing
expansion. Klinefelter said, "The success they're having with the
apparel category points to them becoming the next-generation department
store."

Klinefelter said apparel's key to driving sales across different
categories. "It's such a brand-sensitive, emotional purchase, and it's
such a high-margin purchase. Once you feel comfortable buying apparel
at a retailer, you feel comfortable buying any other category."

Beemer said that while Wal-Mart's enjoyed some success in introducing
upscale household goods, it hasn't been able to get the formula right
with apparel.

Still, he sees Wal-Mart's upmarket pitch is a necessary move.

"(Wal-Mart's) decision to stock better goods in the store is the only
good choice they have," Beemer said. "When your stores are open 24
hours a day, the only way you're going to get more sales is get the
consumers ... to spend more money."

He added that it's not fair to judge Wal-Mart's success by its
same-store sales. Its new stores often cannibalize existing stores'
sales. Target doesn't have the same market penetration, so new stores
don't affect its comps as much.