As Wal-Mart rises, Target falls

Not so long ago, Target was the popular kid on the block, and Wal-Mart was working diligently to soften its image among some as an uncool bully.

What a difference a year makes.

A widening housing crisis, sporadic spikes in food and fuel prices, and a massive meltdown in the global financial markets have led to a reversal of fortunes among the nation's top two discount retailers. Now Target is the one trying to get noticed.

After losing the monthly head-to-head battle for same-store sales growth to Minneapolis-based Target for nearly four years, Wal-Mart has turned the tables. Since November 2007, as the nation's housing crisis was widening, Wal-Mart has beaten Target and nearly every other retailer in America in monthly sales data for 12 straight months.

"Wal-Mart positioned themselves perfectly for this economy," said Stan Pohmer, a Twin Cities retail consultant and former senior buyer at Target. "It's just serendipitous. Fifteen months ago, Wal-Mart was trying to emulate Target and it didn't work. So they ended up going back and repositioning on their core focus of everyday value and price."

Target's most recent blow came on Dec. 4, when it reported that sales crashed to an unprecedented 10.4 percent loss in November. Wal-Mart gained 3.4 percent, and for the first time said both its store traffic and average ticket price increased -- a sign that people aren't just going there for groceries. For Target, the dismal results marked another low -- five consecutive months of negative sales.

To be sure, few businesses and consumers remain untouched by the current economy. But the Bentonville, Ark.-based Wal-Mart and its rock-bottom prices have been a magnet for tightfisted consumers who don't want to pay even pennies more for a tube of toothpaste.

Target Corporation's stock price has fallen nearly 33 percent this year, while shares of Wal-Mart Stores have risen more than 13 percent even as the Dow Jones has seen record-setting drops.

Consumers are expected to be jittery for months to come, particularly as job losses mount nationwide. But many predict that even after the economy comes out of its current tailspin, the consumer buying binge is over. Houses will no longer be piggy banks, and banks are expected to remain stingy with giving out credit cards.

How quickly will Target be able to regain its once-sure footing?

"A lot depends on what the 'new normal' level of personal consumption is, what the competitive dynamic looks like, and whether the personal savings rate will come back up," said Jeff Klinefelter, an analyst with Piper Jaffray in Minneapolis. "It's a fair question for people to ask whether Target is positioned to deal with that as profitably as it once was."

Target's struggles this past year can't be traced to any major missteps, retail experts agree. Many say it was late getting to the gate in marketing its low prices and lost its crossover shoppers to Wal-Mart. And as Target's loyal customers see their home values, retirement accounts and college savings head south, they're just buying food and other basic commodities, and hoping they don't get laid off.

But a key factor in Target's troubles -- and, potentially in hampering a nimble turnaround -- is that Target has a higher market share than Wal-Mart in states that have been hit the hardest by unemployment and housing, according to an analysis by Minneapolis-based Piper Jaffray.

About a fourth of Target's 1,600 stores are concentrated in California, Florida, Arizona and Nevada, while only 13.5 percent of Wal-Mart's 4,100 stores are in those states. The gap is widest in California, where 14 percent of Target's stores are located compared with just 5 percent for Wal-Mart.

"It's probably why Target is experiencing the most extreme slowdown of any other retailer in discount," Klinefelter said. "It's the aspirational, trade-up customer who's got slightly above-average household income that has really been affected by housing issues. This is the population that Target has just owned, and their struggles are throwing off Target's formula."

Wal-Mart has pulled in customers from all walks of life and all income brackets, drawing significant numbers of customers who only a year ago were shopping at Sears, J.C. Penney and Best Buy, according to recent surveys by America's Research Group.

As far back as March, global retail advisory firm AlixPartners found that for the first time in its decade-old survey, consumers were unwilling to pay more for better service or a "good overall experience." Wal-Mart's service scores were at an all-time low, the researchers noted, but consumers still shunned Target's product-design and service orientation in favor of Wal-Mart's low prices.

Coming out of the previous recession in 2001 and 2002, Target was poised for the exact opposite of what's happening today.

After a decade of outspending Wal-Mart on national ads, Target had positioned itself as trendy and affordable. By the first quarter of 2003, Target's growth in discretionary items such as home furnishings, apparel and electronics was taking off. Housing values were rising, credit was readily available and consumers with pent-up demand after the Sept. 11 terror attacks and the dot-com bust were ready to spend and trade up.

In early 2004, Target kicked off a streak in which it outshined Wal-Mart in monthly same-store sales, a key indicator of a retailer's financial health, for 44 of 46 months.

At the same time, Wal-Mart had alienated its core customers by raising prices and bringing in designer clothing, à la Target. Environmentalists, community activists and union organizers accused it of exploiting the planet, squeezing mom-and-pops out of business and underpaying its workers. Now, many of those same people are shopping there.

Changing an image

The world's largest retailer has undertaken a remake of its reputation. It pledged to reduce packaging waste, become 100 percent powered by renewable energy, and sell earth-friendly products. Labor bosses remain critical, buoyed by a recent $54 million settlement to workers for unpaid work.

Wal-Mart has spiffed up its new and remodeled stores with better layouts and merchandising, changes that analyst Mark Miller of William Blair & Co. predicted eventually could help it recapture shares it lost to Target in the high-margin discretionary items.

Wal-Mart also has turned up the cool factor. It set up a temporary store in Times Square to launch an exclusive record of aging rockers AC/DC in October. And soon, Wal-Mart will begin selling a line of Apple iPhones.

Having seen Target soar, many analysts are optimistic about that retailer's long-term success, even if they're not sure what the landscape will look like when the economy eventually gets righted. A number of retailers are teetering on the edge of bankruptcy, and more are expected to become extinct if consumers remain on the sidelines

With fewer competitors, both Target and Wal-Mart benefit. But the fight to get and keep those customers could be more difficult than ever.

"Spending habits will change overall," said AlixPartners' Matthew Katz, "and loyalty will be more important to have and more difficult to maintain."

Analysts say much of Wal-Mart's gain has come from its higher concentration of grocery and commodity sales. Both retailers have benefited from inflation in food prices, but Wal-Mart even more so because more of its stores also sell groceries.

In the past year and a half, Target also has readjusted its merchandise mix so that it carries a higher percentage of mid- to low-priced items and fewer higher-priced trendy items that sold so well until a year ago. The company also has invested in technology and distribution centers that, long-term, will help control expenses and help it be more efficient.

Target told analysts recently that it plans to direct 70 percent of its advertising dollars this season to the "pay less" side of its "Expect more, pay less" slogan -- the inverse of its strategy in the boom years.

"Target has a very defensible position," Katz said. "For now, this is a maintain-market-share game. It is a control-what-you-can-control game. It is a time to look for specific opportunities to outexecute folks in achieving those opportunities."

Jackie Crosby • 612-673-7335