By Shelley DuBois, writer-reporter
FORTUNE — Those of us familiar with discount shopping know the Target/Walmart duality well.
Target stocks its shelves with low-cost bedspreads, shower curtains, and clothes with bright colors and funky designs. Walmart is for the necessities: cheap Cheerios, laundry detergent, bulk meat, paper plates.
Truth is, Target comes across as more fun, and Walmart as more frugal. And typically, Walmart’s all-value, no-nonsense message strikes a chord with consumers during tough economic times. But that hasn’t been enough to boost sales growth during this downturn. In fact, Walmart’s U.S. same-store sales have been on a decline for the past nine quarters.
To cope with tighter budgets and increased food prices, Walmart (WMT) customers are buying cheaper brands and smaller packages of products, Walmart CEO Bill Simon said in an earnings call on Tuesday. Unlike Walmart, Target’s (TGT) main appeal is a combination of low prices and designer brands. But can a fun brand strategy survive such a gloomy retail outlook?
It goes a long way, apparently. “Target has this aura. It’s a wonderful place to go into and shop and everybody loves Target,” says Bernard Sosnick, a retail industry analyst with Gilford Securities.
Target can also boast an improvement in its same-store sales in the U.S., while Walmart cannot. Walmart’s profits have mostly come from overseas expansion and cost-cutting, not the kind of sales growth on home turf that retail investors like to see.
Not to discount Walmart’s profits. On Tuesday, the biggest company in America announced that profits for the second quarter of 2011 increased by 5.7% from last year to $3.8 billion. By comparison, Target’s profits increased 3.7% to $704 million during the same time period.
Still, Walmart will probably struggle with same-store sales growth as long as the recession continues to hurt low-income shoppers, the company’s bread and butter consumer group.
Low-income customers shop at Target too, but the company has taken steps to differentiate itself. In fact, one of its best branding strategies has been to keep from confronting Walmart head-on and, instead, carve out its territory in a whimsical, design-intensive, low-cost retail space, says Denis Riney, a senior partner at brand consultancy firm Brandlogic.
Take the two companies’ cost-savings efforts. Walmart learned that gas was one of the biggest concerns for customers. So the company tried to help them out by offering a 10-cent-per-gallon discount on gas bought with Walmart credit cards between June and September. It helped bring customers to Walmart stores, but couldn’t significantly affect slow U.S. sales.
Target, on the other hand, wants to appeal to consumers with more cash. For example, it started offering customers with its REDcard credit card a 5% discount on all purchases. Only those with solid credit are approved for the card, which often screens out the lowest-income consumers. The REDcard helped boost sales, but because people were using it to buy more products at discounted prices, the profit margin for those sales took a hit.
Still, it’s a sensible strategy. “It’s better to take a slight hit on [profit] margins and keep on moving and inventing,” says Ritesh Doshi, an analyst with First Global securities. And at least for now, Target is inventing in a way that appeals to consumers with money to spend.
Walmart, on the other hand, can’t stray from its conservative values even when it tries to. In 2006, the company hired a flashy new chief marketing officer Julie Roehm on staff to spruce up its image. Cultures clashed immediately, and Roehm only lasted 10 months at the job. “The first thing she did when she went down there was she painted a wall chartreuse, and everybody freaked out,” Riney says.
But numbers are grim across the retail sector, and for now, it seems like consumers with money to spend are drawn to a little color.
