Target vs. Wal-Mart: A Race to the Express Lane

Good companies know that they must innovate in order to survive. Target and Wal-Mart are looking to do more than survive. They want to thrive. But does one retailer have more potential than the other in this area?

Jan 27, 2014 at 6:00PM

It's possible that you have never heard of a Walmart Express. That's because Wal-Mart Stores (NYSE:WMT) has just 20 smaller Walmart Express locations at the moment. These stores are being used as pilots and are geared to be located in more urban areas. However, Wal-Mart is very impressed with the results and its possible that we will see many more Walmart Express openings in the near future. 

Target (NYSE:TGT) too plans to open smaller more focused stores but hasn't opened its first TargetExpress store just yet. This won't take place until July 27 in Minneapolis. Target has chosen a highly strategic location, and this is a trend that Target will likely continue with if its first TargetExpress store performs well. Furthermore, Target's strategy for its TargetExpress locations will lead to Target avoiding competition from the dollar stores.

At this point, it might seem as though Target would offer more growth potential with its express-store format. This might end up being true, but it's certainly not a guarantee. And what people really want to know is: Which retailer is likely to present a better investment opportunity at this point in time?  

Walmart Express
The first Walmart Express opened in Northwest Arkansas. The average square footage ranges from 10,000 to 15,000 square feet. Most Walmart Express stores are found in rural areas, although you can find two in Chicago as well. The primary goal for Wal-Mart is to win back previously loyal customers who have switched to the dollar stores such as Family Dollar Stores (NYSE:FDO), Dollar General (NYSE:DG), and Dollar Tree Stores (NASDAQ:DLTR).

Dollar General is the largest of the three dollar stores, with 11,000 locations across 40 states. Family Dollar has 8,000 stores across 46 states. Dollar Tree only has 4,700 stores, but unlike its peers, all of its merchandise sells for $1. Therefore, where there is a Dollar Tree, there will be many customers. Consider top-line growth comparisons for these three companies over the past decade:

DLTR Revenue (TTM) Chart

Dollar Tree revenue (trailing-12 months) data by YCharts

All three companies are impressive, but Dollar Tree has been growing the fastest. Regardless of which dollar store is growing the fastest, they're all growing, and that's bad news for Wal-Mart. However, Walmart Express stores could pose a significant threat to the dollar stores. Why? Because Walmart Express stores sell fresh food and gas, and they offer pricing advantages versus the dollar stores (excluding Dollar Tree). It should also be noted that Walmart Express stores are likely to perform well versus drug stores for the same reasons, and the pricing advantages will be significant.

Clearly, Wal-Mart knows what it's doing. And while it's having a difficult time finding ways to beat Amazon.com online, it still has no problem steamrolling its competitors on the brick-and-mortar side. Though Wal-Mart isn't likely to steamroll the dollar stores, it should win back some former customers with its Walmart Express stores. Just keep in mind that this Wal-Mart store format is still in its very early stages.

TargetExpress
The first TargetExpress store will average 20,000 square feet. It will be strategically located near the University of Minnesota. If this TargetExpress performs well, then you should expect to see more stores popping up near college campuses and in urban areas.

Target has chosen this path because most young consumers are opting for cities as opposed to suburbs. As far as college campuses go, college students are always in need of goods (food, apparel, electronics) at affordable prices. By targeting urban areas and college campus vicinities, Target won't have to compete with dollar stores or Walmart Express stores. 

TargetExpress stores are designed to handle high traffic and smaller basket sizes. These stores will also offer more on-the-go food items than traditional Target stores. However, customers will still find bright lights and clean aisles.

The bottom line
Both Wal-Mart and Target have an opportunity to succeed in the express lane. Wal-Mart will have an opportunity to steal market share from the dollar stores, and Target will have less competition while setting itself up in high-traffic areas. From an investing standpoint, Wal-Mart is likely to be a better option at this point in time, simply because it doesn't have to deal with a massive data breach.

If you're considering an investment in one of the dollar stores, then you might want to dig deeper on Dollar Tree. Please do your own research prior to making any investment decisions. 

Don't miss this report if you're considering adding any retailers to your portfolio
To learn about two retailers with especially good prospects, take a look at The Motley Fool's special free report: "The Death of Wal-Mart: The Real Cash Kings Changing the Face of Retail." In it, you'll see how these two cash kings are able to consistently outperform and how they’re planning to ride the waves of retail's changing tide. You can access it by clicking here.

 

Dan Moskowitz has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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