Price War For Holiday Sales Heats Up As Target Raises Ante With New Price-Match Policy

Making up nearly 20% of the industry’s annual sales and 30% for a typical retailer, the two-month period of November and December is an important one for both retailers and bargain-seeking consumers. The 2014 season clocked an year-over-year growth rate  of 4.6%, beating expectations for a 3.8% rise, according to ShopperTrak, which surveys spending at brick-and-mortar stores ^[1]. Given the concerns around job growth and inflation this year, sales numbers will be under even more scrutiny, as they are often used to assess the state of the U.S. economy.

The country’s second-largest discount retailer, Target (NYSE:TGT), has caught our attention lately. It announced a renewed price-match policy to strengthen its online sales channel, as the space becomes increasingly crowded. While this decision might help the company gain a larger share of the online market, industry growth is likely to be muted compared to last year. Also, the company’s gross margin is likely to come under pressure owing to the ensuing price war. Overall, we believe this move will do more harm than good for retailers, collectively. Below, in this article, we discuss the above mentioned factors in more detail.

See our complete analysis for Target

Retail Sales Growth Remains Subdued

Retail Sales growth hovered around 2% for the most part of this year, unlike 2014 when the rate stayed above 4% ((United States Retail Sales YoY, Trading Economics)). This could be attributed to the low wage growth compared to an year ago, which in turn limits disposable income. Combined with falling consumer confidence and low inflation, middle- and low-income consumers are more likely to put off purchases to a later time. Estimates of growth for the 2015 holiday season are already indicating the slowdown. According to the consultancy firm, AlixPartners, sales are expected to grow 2.8 percent to 3.4 percent during shopping period,notably lower than 4.4 percent in 2014 ^[2].

Margins Will Likely Be Under Pressure

Price wars are nothing new in the retail industry. However, slowing industry growth means that retailers will be more aggressive for their share of incremental sales. Target recently announced a renewed price-matching policy aimed at holiday shoppers ^[3], who happen to be very price-sensitive. The company already had a limited price-match policy for its physical stores, which they extended to their website and added 24 additional retailers that they’d match on price, including online rivals. Unfortunately, they are not the first to make such an offer.

With minor variations to policies, multiple retailers now promise customers that they’d be paid back if they find a better price with a competitor. In fact, WalMart (NYSE:WMT) has a feature in its mobile application that, upon scanning a receipt, identifies the lowest price among a set of retailers and pays the difference back to the customer in the form of credits. These elevated levels of price competition are likely to drive shoppers to wait till the last minute to find the best deals available. In such a situation, the only way for retailers to capture sales is to hit the bottom in terms of prices, sacrificing gross margins.

We currently forecast Target’s gross margin to remain stable at the current level of 29.5% till the end of our forecast period. However, policies like the one Target announced have the potential to have a significant negative impact on margins. In a scenario where the company’s gross margin falls by 200 basis points (i.e. to 27.5%) by the end of our forecast period, Target’s market value could see a decline of almost 10%.

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1. Holiday retail sales growth was better than expected, LA Times [↩]
2. Reuters [↩]
3. Fortune [↩]