Target’s Temporary Promotions Don’t Give It An Edge Over Wal-Mart

Target (NYSE:TGT) and Wal-Mart (NYSE:WMT) are the two largest discount retailers in the US and compete closely on pricing in a bid to attract customers. Target’s price advantage has often been short-lived and mainly arises from temporary promotional offers, whereas Wal-Mart more often offers cheaper prices throughout the year. Moreover, the price differences have not significant enough or sustained to facilitate a noticeable shift in sales from Wal-Mart to Target. It appears that Target’s strategy is to intermittently lure customers with these promotional offers, but is not a sound strategy. Rather, Target needs to focus more on making its supply chain efficient in order to offer competitive prices consistently.

See our complete analysis for Target

Price Difference Is Not Significant

Bloomberg started comparing the prices between these companies two years ago, and there have been certain instances when Target was able to beat Wal-Mart on prices. However, these instances have been rare. In August 2012 and October 2011, Target’s products were found to be cheaper than Wal-Mart’s. ^[1] According to a recent price comparison, every $100 bill in a Wal-Mart store corresponded to a bill of $99.54 in a Target store, which only gave Target a price advantage of 46 cents. On the other hand, Wal-Mart is usually cheaper than Target. ^[1] The 46 cents advantage registered by Target was the most in the last two years. This shows that the price advantage is not sustained enough to draw customers from Wal-Mart continually. Other factors such as store location and commute also  play a role as well as selection.

Wal-Mart Provides Price Benefits Throughout The Year

Wal-Mart’s commodity prices are less dependent on seasonal sales compared to Target’s. This is because of Wal-Mart’s huge size, buying power and effective supply chain which enables it to provide cheaper products to its customers all year long. While Target is also strong in these aspects, its prices are usually higher than Wal-Mart’s.

A significant portion of revenues for these stores comes from groceries, which constitute 53% of Wal-Mart’s revenues and 37% of Target’s revenues. ^[2] Wal-Mart’s primary strength is that its grocery items are cheaper than Target’s. Even on occasions when Target has the overall price advantage (according to the study), Wal-Mart’s food products are still cheaper. ^[3] Hence, unlike Target, Wal-Mart can provide price benefits without any significant dependence on promotional sales.

Rather than focusing on short term price competition, Target should look to improve the supply chain or find other ways to cut overhead that would help to lead to lower prices. Additionally its focus on certain clothing promotions or having ways to differentiate its products has been successful in the past and should continue to be an area of focus over price competition.

Our price estimate for Target stands at $60, implying a discount of about 5% with the market price.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Target Cheaper Than Wal-Mart as Gap Widest in Two Years, Bloomberg, Aug 23 2012 [↩] [↩]
2. Wal-Mart and Target’s SEC filings [↩]
3. Target Cheaper than Walmart in August in Study of 150 Items, The Boston Globe, Aug 24 2012 [↩]