What Walmart and Target need to do to stay on top in a reshaped retail world
It was only a few years ago that both of those titanic big-box retailers were in peril, losing customers in droves to the e-commerce giant. But the past decade’s radical reshaping of how Americans shop, a change fueled by Amazon’s inexorable ascent, has paradoxically resulted in Walmart and Target—along with a few other big U.S. retailers—evolving to become stronger and more successful companies than ever. The massive shock of e-commerce’s encroachment, analysts agree, gave them the jolt they needed to reinvent themselves.
The result has been a stunning return to form for both Walmart and Target, each of which was founded back in 1962. Walmart is expected in February to report its 22nd straight quarter of comparable sales growth in the United States. Target, despite a disappointing 2019 holiday season, says it should post an 11th quarter of growth by that metric, which excludes the impact of newly closed or opened stores.
Most crucially: Both chains are getting more shoppers to come to their stores. Each company has poured billions into updating both the technology and the décor at their massive brick-and-mortar fleets—4,800 stores for Walmart U.S, and 1,800 for Target.
“What they did that was brilliant was to leverage their stores and sales associates in way to compete against Amazon on convenience, defining convenience in a different way,” Barbara Kahn, a professor of marketing at the Wharton School in Philadelphia, says of the two companies.
Walmart’s shares have roughly doubled since October 2015 when it announced massive investments to counter Amazon. And the top line is also at record levels, with U.S. sales likely to top $340 billion for the fiscal year that’s about to end. Target’s shares, despite a recent mini-slump, are up 60% compared to last January.
The question now is: How long can Walmart and Target extend their winning streaks? Leaders at both companies know they can ill afford to rest on their laurels. In November, Walmart chief executive Doug McMillon, ranked by peers as one of the most underrated CEOs in a recent Fortune survey, expressed dissatisfaction with the company’s U.S. e-commerce progress. And Target got a rude awakening during the recent holiday season, when comparable sales rose only 1.4%.
Each company is also coping with big changes in the c-suite. Greg Foran, the architect of the vast improvement of Walmart’s U.S. stores, has stepped down to return to his native New Zealand to lead an airline there. He’s been replaced by John Furner, until recently CEO of Walmart’s Sam’s Club. Walmart’s well-regarded chief merchant Steve Bratspies is also on his way out. Target, meanwhile, also recently lost its chief merchant, Mark Tritton, who oversaw the creation of many of its successful new brands; he left to become CEO of Bed Bath & Beyond.
Both Walmart and Target have begun to telegraph how they plan to build on their success. The two companies will update investors on their respective plans with analyst days, Walmart next month and Target in early March. Each will likely be rolling out new strategies while building on current strengths. And each is painfully aware that hot competition and fickle customers can bring a sudden change of fortune. “At any moment, things can turn,” says Forrester analyst Sucharita Kodali.
Here’s a preview of what investors—and shoppers—can expect.
Walmart: Better clothes and a better website
Walmart has been posting explosive online growth, with its e-commerce sales up 41% year-over-year last quarter. According to a Recode report, the company’s 2019 U.S. e-commerce should come in at $22 billion or so. It has spent billions to build up the infrastructure to steer customers toward curbside pickup of online orders, particularly for groceries, and in-store pickup.
It’s largely Walmart’s grocery business that has fueled that recent e–commerce growth. Overall, the online business is still losing money, with losses estimated by Recode to be $1 billion for the fiscal year winding down. All that has left McMillon frustrated about the costs and pace of expansion in Walmart’s other online sectors – its general merchandise business and its marketplace for smaller independent vendors. “We need to do more and move faster,” the CEO told investors in November, saying he wants “a stronger Walmart.com business that’s profitable over time.”
Many observers expect Walmart to tighten the purse strings on e-commerce investments to focus on those that will pay off. As Wharton’s Kahn puts it, Walmart has “to offer value but do it in a way that doesn’t make them bleed.” Indeed, Walmart is reportedly looking into shedding its Jetblack concierge service and has drastically streamlined jet.com, the e-commerce service it acquired in 2016 for $3 billion.
Amazon’s online sales are currently about six times as big as Walmart’s. And Forrester’s Kodali says Walmart still has a lot of work to do if it wants to truly challenge Amazon in that arena. That includes mastering some e-commerce fundamentals: Providing more reliable information on whether an item is in stock at a store, for example, is one such arena, Kodali says. That need for up-to-date information on availability and speed of delivery also applies to Walmart’s third-party marketplace, and Kodali says it’s crucial to keeping customers on the site in general. “If you lose a customer’s confidence, it’s that much harder to get ever get anyone to try something again,” she notes.
One key area where analysts expect Walmart to try to make bigger inroads is clothing sales, both online and in its stores. The company has struggled to turn e-commerce clothing brand acquisitions like ModCloth, which it is selling off, and Bonobos into successes. Yet it’s clear Walmart has not thrown in the towel, recently reviving defunct women’s fashion brand Scoop as its own brand, and selling some Karl Lagerfeld merchandise via a partnership with Lord & Taylor. A better women’s clothing assortment, beyond the $7 camisoles Walmart is known for, would go a long way to getting shoppers to spend more time, and therefore more money, at its stores.
Walmart is the biggest grocer in the country and gets 56% of its revenue by selling food. It built much of its recent growth by leaning in on nicer presentation of fresh food and a better assortment of offerings. This year, though, the pressure will only grow on Walmart to keep its grocery offering enticing to shoppers, particularly at the lower end. Aldi, the German deep discounter whose generic store brands are increasingly popular, continues to expand in the U.S, often opening stores catty-corner from a Walmart. And Lidl, another German low-price grocer taking root in the U.S., is also likely to pinch Walmart. (Those two chains severely dented the market share of Walmart’s Asda chain in Britain in recent years.)
How could Walmart play offense in the grocery aisle? Look for the company to continue to expand its fresh food assortment. Beyond that, Walmart could try offering services like meal delivery plans, as well as selling higher-end prepared foods, says Forrester’s Kodali.
Analysts also expect Walmart to branch out beyond its traditional business for new sources of revenue—much as Amazon has done. Walmart has already been dipping its toes in the digital advertising world, where it uses its masses of customer data to sell ads on its web site to other companies. By some estimates, that could become a $5-billion-a-year business in short order. The Wall Street Journal recently reported that Walmart was looking into selling warehouse and shipping capacity to third-party sellers doing business on its online marketplace, as well as selling some of its computing firepower to outside parties.
In a multifront retail battle, “The only retailer that can compete head-to-head with Amazon is Walmart,” says Wharton’s Kahn.
Target: More hot brands, more groceries
Target slumped in the mid-2010s in part because its store brands had lost their appeal. But it has recaptured its Tarzhay cheap-chic aura, ditching many stale brands, including some billion-dollar labels, and replacing them with new, instantly popular names.
That strategy continues to pay off, enabling Target to poach business from department stores and clothing chains. Yes, the recent holidays were disappointing for the company, but its clothing department wasn’t to blame. Apparel sales rose 5% during the holidays, while at Kohl’s, Target’s frequent strip mall neighbor, women’s clothing was weak. That was no coincidence. Last year, Target convinced Levi’s to let it start selling its better red-tab jeans in a big threat to the likes of Kohl’s and J.C. Penney.
“When you walk through a renovated Target, there’s a Lululemon, there’s a plus-size store, there’s a Victoria’s Secret,” says Stacey Widlitz, co-founder of SW Retail Advisors, of the needs filled by Target’s new brands. “There is no need to go anywhere else.” The challenge will be to keep trotting out those new brands—Target’s own, and others’—while staying in sync with shoppers’ tastes, she adds.
It will also be challenging for Target to preserve its merchandising Midas touch under its two new chief merchants, Jill Sando and Christina Hennington. Nonetheless, analysts expect the steady rollout of new brands to continue. Just last week, in fact, Target launched the “All In Motion” sports clothing label to replace the discontinued C9 athletic brand made by Champion.
Analysts expect to see a lot more progress in the grocery department, where Target derives a significantly smaller share of its revenue than Walmart does. Last year Target launched its health-focused “Good & Gather” brand, and it will add more products to the line this year to bring the brand’s assortment to 2,000 different items. The chain has won kudos for its alcoholic-beverage assortment at some 1,500 stores and its strong variety of organic food. A more appealing grocery lineup would go a long way to driving customers to visit its stores more often, a linchpin of Target’s strategy.
On the e-commerce front, Target has gingerly waded into the marketplace waters, selling other companies’ brands online. Target has so far kept its marketplace selective and invitation-only, selling only 55 brands in a few specific product categories. But after digital sales rose a scant 19% during the holidays compared to the 2018 period, barely more than half the clip they hit in the summer and early autumn, the pressure is on Target to keep pushing its e-commerce.
There’s no guarantee that Walmart and Target will continue to correctly anticipate shoppers’ desires. They’ll have to remain relentless in investing in their stores, adding to the conveniences they already offer and avoid falling into the ruts that hurt both chains over the last decade.
“Even just one off day will throw your numbers off,” says Forrester’s Kodali. And it takes perpetual hustle to keep those numbers in the black.
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