Comparing Walmart and Target No Longer Makes Sense (But I’m Doing It Anyway)

The one-two punch of Q2 earnings reports from Walmart and Target is always a harbinger of retail’s health as Halloween, Thanksgiving, and the make-or-break holiday season loom. Yet the daylight between these power players keeps getting brighter. Direct comparisons between Walmart and Target do a disservice to both as their priorities, capabilities, and business models diverge. Carol Spieckerman teases out uncommon takeaways from this second-quarter double feature, highlighting the growing differences that now set Walmart and Target apart.

Episode highlights:

·      How Walmart’s diversification slays retail setbacks.

·      Why product sales will take a back seat.

·      How “mix shifts” and “frequency categories” bring on the pain.

·      Why retail crime isn’t an equal opportunity crisis. 

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Transcript

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Hey everyone, and welcome to Spieckerman Speaks Retail with me, Carol Spieckerman. I help companies get credit for the great stuff they already do and land bigger deals in their retail B2B businesses. I created an integrated thought leadership, market positioning, and sales process that helps my clients do just that so they can feel more confident in their B2B sales situations, get more of the right clients, and be seen as true thought leaders, not just vendors.

And that's what this podcast is all about, bringing retail thought leadership across categories, borders, business models and touchpoints through my hottest retail trajectories and interviews with industry experts who help us chart the course. And if you like what you're hearing, please do like, share, and subscribe on your favorite podcast platforms.

Last week, we got an important retail barometer reading that  retail watchers everywhere eagerly anticipate, including me. I'm talking about the one-two punch of earnings announcements from Walmart and Target for the second quarter. And as usual, they came out one day apart with Walmart going first. I've been dedicating episodes to this retail double feature for the last couple of years because this isn't just about two mega retailers duking it out for dominance, it's a bellwether for the entire industry. 

And with back to school wrapping up and as we careen into Halloween Thanksgiving and the all-important holiday shopping season, it's a great time to compare what these big guys have in common, where they're veering in different directions, and what it all signals for everyone else going into the end of the year.

But here's the thing. The daylight between these two guys just keeps getting brighter, so bright that it's actually getting harder to even see them as direct competitors. And the Q2  reports from Walmart and Target only make this clearer. 

In fact, continuing to compare them does a disservice to both. That doesn't mean I won't keep doing it, but more in the spirit of what we just talked about: their Influence in the industry and the signals that they're sending to everyone else. So let's dig into some of the details.

And by the way, Walmart provided a lot more of those details overall than Target did, and you can find all the specific numbers and drill downs all over the media. So I won't get too far in the weeds with that. We are here to talk about the big picture and what it means to everyone else.  Walmart's comp store sales were up 6.4%. Target's were down 5.4%, and the Walmart wins just kept coming. Sam's was up 5.5%. International was up 11%. E-commerce was up a whopping 24%. International e-commerce was up 26%. So let's take a beat here. Walmart booked double digit E-commerce increases in a very mature US business and internationally where massive online marketplaces dominate.

That's really impressive, but it's not just about shoppers buying more of Walmart's products online, as we'll talk about in just a minute. But here's the chaser. Walmart's advertising business was up 35%. It doubled over a two year period. Sam's advertising business was up 33%, and Walmart's international advertising business was up 40%.

Those are some crazy numbers, and Walmart's crowing about it for good reason. Advertising can bring upwards of 70% margins, and some in the industry would say that's conservative, but it's not a standalone, siloed business for Walmart. All the money that Walmart's pouring into advanced data gathering and analytics supports its ad business, as does the integration of digital assets into the store environment and their store remodels.

Walmart's, CEO, Doug McMillon, when he talked about Walmart store remodels, said, "The way we design them, along with our marketplace fulfillment services and advertising business, is key.” So it couldn't be plainer. They all work together to fuel Walmart's highly profitable solutions and services ecosystem.

 Doug referred to an "increased demand for in-store activation” on the part of its brand partners so it's a self-perpetuating profit-building system.  Walmart is the embodiment of two of my top retail trajectories, “diversify or die,” and “the power of platform positioning.”

Walmart's diversification, particularly its diversification into new business models like advertising, fulfillment, and its online marketplace will drive its next-level platform monetization mojo.

Walmart is not just a place that sells merchandise anymore, and increasingly, product sales will become a smaller and smaller piece of its profitability pie. Walmart repeatedly talked about growing profit faster than sales. A concept that started popping up in its first quarter report this year.  But let me translate it. The goal is to sell more advertising and onboard more marketplace sellers. That's how you grow profit faster than sales, not by selling more cereal or sweaters. Doug McMillon said, "We like who we are and we like who we're becoming," and Walmart is becoming a massive platform that includes not just products, but data, content, acquisitions, partnerships, new formats and solutions and services that it markets to others, including its competitors.

 It's a healthcare, financial services, fulfillment, and entertainment provider on a global scale. As Doug said in the report, "Some of our newer businesses will shape the overall model in a positive way." Yes, they will. Walmart's platform is built for it. And Walmart's CFO, John Rainey put some sprinkles on it by saying, "Just like you view a portfolio of stocks, you diversify because it reduces risk."

In other words, even as Walmart's ongoing gains in its low-margin grocery business continue to be a double-edged sword, and even as grocery isn't driving the conversions to discretionary categories like it used to, there are still lots of other places that Walmart can go now to make up for it.

In the shared struggle department, Walmart used the term "mix shifts" again to address the fact that shoppers are buying more groceries and backing off of discretionary categories and general merchandise.

Target reprised its favorite term for this dynamic when it once again talked about how increased purchases of what it calls "frequency categories" were still a stubborn situation.  But here's the thing. Both Target and Walmart count on grocery to drive traffic and more frequent visits so they can woo shoppers over to higher margin categories like beauty, apparel, and home. Walmart's the undisputed grocery leader. Target's newer to the game, and now you could say they might even be too late, and here's why: both Walmart and Target are cheering the gains that they're making on the convenience front, more in-store fulfillment for online orders, quicker deliveries, drive-through returns, and so on. But the more convenient that Walmart and Target make it to grab groceries and get out or drive on, the harder it will be to convert shoppers to more profitable categories.

 Walmart's arsenal of convenience options is arguably making it worse for everyone else because the train's already left the station. Convenience and choice are now table stakes. No retailer can afford to opt out at this point. 

 But even with all of that in mind, Target is still operating more like a place that sells stuff. It mentioned a 1.3% increase in what it called "other" revenue. That's it. 1.3% filed under "other." That's shocking really. Target, a retailer known for its marketing chops, its brand alliances, and general customer loyalty is being downright sheepish about its biggest potential profit centers. There was no mention, not one, of its online marketplace.

 Walmart, on the other hand, called out a 50% increase in marketplace sellers that leverage its fulfillment services, and marketplace expansion is one of its top strategic priorities. So Walmart's e-commerce gains probably haven't even peaked. Yes. Target has CVS shops in its stores. It also has an in-house advertising and media arm, like Walmart. It's made some acquisitions, but all of it pales in comparison to Walmart's diversification.

 Most of the highlights and low lights that Target shared were centered on the product side of the business. There were some operational wins like 97% of online orders now being fulfilled by stores. 

 By comparison, only 50% of Walmart's online orders are fulfilled by stores right now. So this was one area where Target took the lead 

 Target's rightfully proud of the combination of its increasingly automated sortation centers and how well they play with Target's last-mile deliveries facilitated by its acquisition of Shipt. Target's also pleased with updates it's made to its drive-up service, which enjoys tremendous customer satisfaction.

 The addition of Starbucks coffee pickups being integrated into DriveUp has grabbed a lot of headlines recently. Pundits have gone so far as to call it "ingenious." But in the scheme of things, is it really? What does it mean in light of all of Target's other opportunities and challenges? Anyway, getting back to product and on the plus side Target touted its brand exclusives and brand showcase partnerships with Disney, Barbie, and Apple and its agility in jumping on partnerships while they're trending, like their partnership with Taylor Swift for some exclusive products.

 Target was quick to remind everyone that it has a $50 billion private brand portfolio and mentioned upcoming upgrades to its flagship home brand Threshold, along with the introduction of a new kitchenware brand that should land just in time for the holiday shopping season.

 But here's the thing, the more Target's business is weighted toward private brands, the smaller the base it has for building its ad business and other platform monetization plays. Advertising and media networks are built with national brand bucks and online marketplaces are brand showcases, so Target's product-based brand strategies are arguably compromising its ability to diversify into more profitable solutions and services.

 Target's thrilled with its partnership with Ulta Beauty and its beauty business in general. It's bullish on expanding Ulta shops after doubling the business year over year. 

But as I just told MarketWatch in an interview, even though beauty brings in the margins, it's also one of the most tempting categories for retail crime. There's another double-edged sword. Retail has become a crime scene and it's doing serious damage to retailers', bottom lines. Dick's Sporting Goods released its own shocking results recently showing a vertiginous 23% dip in profits after a nice long stretch of success. Shrink was cited as a significant factor. But shrink wasn't even mentioned in Dick's first quarter report, so this either speaks to an acceleration out of nowhere or some kind of denial on the part of Dick's. 

 But since then, Footlocker and even Dollar Tree have cited shrink as a profit-killing pain Earlier this year, Target said the rise in retail theft could cost it $500 million in profits this year and in its second quarter update it cited a 120% increase in theft over the first five months of the year, calling it "unsustainable." I'll say, but here again, Target's core categories and premium brand partnerships are disproportionately susceptible to shrink. That's not Target's fault, but it is an unfortunate fact. And these are the very categories that global online disruptors like Shein are attacking right and left. Not to mention TJ Maxx, Marshalls, and HomeGoods, collectively known as TJX, which are showing some really nice numbers these days.

 Target's focus on apparel, home beauty, and private brands gives it very little wiggle room when headwinds hit while increasing its exposure to a growing list of competitors and retail crime. Target's cited changes in student loan relief, childcare tax credits, and stimulus payments as being some of those headwinds.

 But all disproportionately impact the categories that are Target's bread and butter. Walmart's also acknowledged retail crime as a problem in the past, but in its Q2 report, it was practically parenthetical and didn't even come up until Q&A.

 Walmart said it lost one percentage point of profitability to crime and when asked about the impact shrink is having on its business, Doug McMillon said "It's not necessarily the same answer as maybe some of the others" because of, wait for it, Walmart's diversification. Walmart's diversification even puts it in another league when it comes to the impact that shrink has on its overall business.

 And here again, it's a mixed-blessing situation. Shoppers are returning to stores, but so are criminals. And in the unforced errors department, there's the kerfuffle over Target's Pride merchandise, and their ultimate decision to curtail it. This was just a chocolate mess all around. Target tried to keep its progressive cred going by carrying Pride merchandise, which by the way, Walmart also carries and even dedicates sections on its website to.

 Target was in the hot seat this time. 

 First came the backlash from just enough noisemakers to draw negative attention and keep the confrontational videos playing on rotation. Then came the performative lawsuits from political actors and then a shareholder lawsuit piled on top. So even though consumers' attention spans are short and news cycles move fast, Target just couldn't catch a break here. The story got bigger and bigger and the spotlight just wouldn't shut off. But in its report, Target positioned Pride as but one of many, what it called "Heritage Moments." Target's EVP and chief growth officer said that the reaction was, "a signal for us to pause, adapt, and learn so that our future approach to these moments, balances, celebration, inclusivity, and broad-based appeal." I have to say that felt kind of cringe to me. It was kind of a word salad that actually contradicts Target's usual authoritative trend leadership approach. 

 Target managed to look meek, wishy-washy, and lacking conviction all at once. Anyhoo, this too in time shall pass. But here's the bottom line: the tone of Walmart's report was confident, future-seeking, anticipatory, and specific. Target's report came off as a defensive reactionary rehash by comparison.

 I'm really not trying to bash Target here, but the difference was undeniable. But of course, Target has its own strengths, like a loyal shopper base, a groovy upbeat marketing vibe that is still largely intact, and one that still attracts really great brand partnerships. 

 Target may be just diversified enough to keep those Target fans playing on its platform, but comparing Target and Walmart is becoming an apples-and-oranges situation that will increasingly do a disservice to both. Walmart's diversification is its greatest strength and it's not static. It'll continue to grow and sprout new tentacles, and as it does, Walmart will be shielded even more from so many of those variables that can collectively sink its more narrow-focused competitors. Diversification will also increasingly set Walmart apart from many of its traditional competitors, including Target. Walmart is in a league of its own. 

 I'm heading to Denver in a couple of weeks to lead a panel on the future of retail technology at the Total Retail Tech Conference. It's an invitation-only event, but if you want to apply, ping us at team@spieckermanretail.com and we'll get a link to you. Either way, if you're in the Denver area the week of September 10th, please reach out. I'd love to meet you, 

 In the meantime, I'd love to hear from you. If you have any questions, ideas, or stories to share, you can ping me at carol@speakmanretail.com or hit my site at spieckermanretail.com to check out more insights, subscribe to my updates, and get the latest on events and other happenings.

 See you next time and happy selling.