WMT v TGT II Environmental Analysis

The environment shared by Wal-Mart and Target can be analyzed by answering a number of questions about the nature of the industry and its key success drivers. Both firms compete in the discount retail industry, which is a large segment of the broader retail industry. Firms in discounting typically offer a wide range of goods but compete primarily on price (Investopedia, 2011). Within the broader retailer category, Wal-Mart is ranked #1 with sales of $405 billion and Target is ranked #5 with sales of $65 billion. Kroger, Costco and Home Depot are in between, meaning that in discounters Wal-Mart and Target are #1 and #2 respectively (Planet Retail, 2009).

The discount industry is populated by firms pursuing a cost leadership strategy. The industry is in a state of monopolistic competition, so firms within the industry attempt to differentiate from one another. They do this with their brands, and they also use product selection to do this. Both Target and Wal-Mart are brand-focused in their marketing. Target has attempted to offer a slightly more upscale selection of goods in order to differentiate itself somewhat from its closest competitors. Wal-Mart is also diversified into groceries, warehouse stores and international outlets; Target offers groceries but no warehouse stores and is strictly a domestic competitor.

In order to succeed in the discount industry, firms must be able to drive prices to customers lower. The business is low margin and high volume in nature, and firms competing as discount retailers must drive value throughout their supply chains. Purchasing is essential in that goods must be sourced at the lowest possible prices. There are also considerable cost savings to be found in the supply chain. Wal-Mart in particular has made heavy investments in reducing supply chain costs as a means of keeping its prices low. From cross-docking at its warehouses to the use of electronic data interchange (EDI), Wal-Mart is exceptionally successful at managing costs throughout its supply chain (Lummus & Vokurka, 1999).

Target's mission is "to make Target the preferred shopping destination for our guests by delivering outstanding value, continuous innovation and an exceptional guest experience" (Target.com, 2011). Wal-Mart's mission is to "save people money to help them live better" (Wal-Mart Stores.com, 2011). There is a slight differentiation between the missions of the companies, and thus the strategic objectives. For Wal-Mart, saving money is the end goal, while Target frames its goal using the word "value." Value implies an equation including both price and quality, which is different than Wal-Mart's message. Value also speaks to Target's slight differentiation -- it understands that because it lacks Wal-Mart's economies of scale it will be unlikely to match Wal-Mart's prices. Therefore, Target focuses on delivering higher quality products. The cost leadership strategy still applies, but to a higher quality range of goods.

Both companies are effectively seeking to stay the course over the next year or two. Both are committed to their current strategies, focusing on internal improvements, branding efforts and for Wal-Mart a continuation of expansion in international markets. Both firms have weathered the recent economic downturn fairly well and are just beginning to set out growth strategies after a period of relatively slow growth.

II. Products and Services

Wal-Mart and Target both have very broad product ranges, with Wal-Mart being perhaps the broader of the two. Both companies are focused on a wide range of household items, clothing and groceries. Wal-Mart also has pharmacies and other services in its range. Wal-Mart carries over 100,000 SKUs, highlighting the broad range of products that it carries. By contrast, its Sam's Club warehouse brand only carries 4900 SKUs (Retailing Works, 2010). Target stores of equivalent size would have a roughly equivalent number of SKUs to a Wal-Mart. It should be noted that both companies have worked to reduce their SKU counts in recent years in order...

Both companies do focus on SKU circulation -- bringing in new products that meet the needs of their target audiences better. Both companies remove slow-moving goods and replace them with different products. The inventory for either store is a constant work in progress.
Both companies will target products for different situations. The stores offer seasonal products and products built around holidays. Wal-Mart will be even more specific with its targeting -- for example moving umbrellas to the front of the store when rain is in the forecast. There will always be some degree of seasonal, temporary or promotional goods for sale at a Wal-Mart or Target. Wal-Mart is planning to reintroduce a number of items that it had removed in recent years trying to appeal to a more upscale shopper. These items are important to Wal-Mart not because they sell well, but because they are items that bring people into the store -- the merchandising tactics then convince the shoppers to buy other goods once they have become a captive audience (Bustillo, 2011).

Both firms have similar supply chain management practices. They were carefully with suppliers to drive down prices on the items that they sell. Items are warehoused in a network of warehouses and are delivered to stores roughly using a just-in-time strategy. This lowers the costs associated with holding inventory. Products are then shelved -- merchandising (the positioning of products throughout the store) is a key element in the sales of each company. Wal-Mart is noted as an especially proficient merchandiser.

III Markets and Market Share

Wal-Mart is the #1 retailer and Target the #5 (#2 in discounting). Each company has a very broad target market -- as Wal-Mart management puts it "everybody shops at Wal-Mart." Wal-Mart is seeking new geographic markets, while Target is focused on internal growth in the U.S. In general, Target seeks a shopped that is slightly more affluent and educated than a Wal-Mart shopper, although this generalization may not play out as well in reality as the stereotype holds. Wal-Mart uses price and the choice of merchandise to attract shoppers, and Target also focuses on the selection of merchandise as a means to reach its target market. Both firms advertise extensively to get their message to the market. Wal-Mart's share of the U.S. retail market is around 11.3%. Target's share is around 2.3% in comparison (Kapner, 2009).

IV Financial Plan and Management Team

Wal-Mart's capital structure consists of 62% debt and 38% equity. Target's capital structure consists of 64.5% debt and 35.5% equity. Over the past five years, Wal-Mart has seen its EPS has increased steadily, as its net income has done the same. The EPS in fiscal 2007 (calendar 2006) was 2.71 and by 2011 this has increased to 4.47. For Target, the EPS dipped in fiscal 2009 as the result of the recession. However, it is on a long-term upward trend, moving from 3.21 in 2007 to 4.00 in 2011.

As sales have increased, the selling/general/administrative expense has increased at Wal-Mart, from $63.9 billion in 2007 to $81 billion in 2011. At Target, this expense has increased from $11.8 billion in 2007 to $13.5 billion in 2011. Expressed as a percentage of sales, Wal-Mart now spends 19.3% of sales as SGA while Target spends 20%. In general, this figure supports Wal-Mart's cost leadership strategy. The company is able to sell at lower prices than is Target in part because its overhead is lower. It spends less on promotion as a percentage of sales, indicating that its marketing ROI is superior to that of Target.

Wal-Mart generally hires internal leaders. Its current CEO is Mike Duke, who joined the company is 1995 and became CEO in 2009. Mr. Duke is a career retailer, having worked previously at a number of other department stores. The current CEO of Target is Gregg Steinhafel, who has been with the company since 1979.

Taking this information into account, Wal-Mart remains the superior investment. The firm has a clear strategy that…