Target vs. Wal-Mart: Which Is Ahead in the Digital Race and Why Does It Matter?

Target.com

Target  (NYSE: TGT  )  and Wal-Mart Stores (NYSE: WMT  ) aren't perceived as fast-growing retailers. This is an accurate assessment. However, this isn't necessarily bad, and there is a way for these two retailers to fuel their growth going forward. As the largest retailer in the world, Wal-Mart has more capital to put to use in the omni-channel space, but Target is seeing some early success.

In-store pickup
If a retailer truly wants to offer the ultimate convenience to its customers -- what omni-channel is really all about -- then it must include in-store pickup. Target recently rolled out digital ordering for in-store pickup. Despite its short time in existence, in-store pickup already represents 10% of digital transactions for Target. That's a good sign for future potential, but it's not the most impressive stat for in-store pickup.

According to Target, approximately 20% of people who pick up their items at the store after ordering digitally then spend more money in the store. Better yet, these shoppers tend to spend more money than the average shopper. The reason for this is unknown, but it's an important trend.

If in-store pickup shoppers spend more money, then the average basket size will increase. This, in turn, will help Target's margins and profitability. This would be a tremendous positive for Target and its investors, but it's still early. The only conclusion that can be made here is that in-store pickup of digital orders is heading in the right direction.

Ship from store
It's no secret that Target, Wal-Mart Stores, and dozens of other large retailers, are trying to close the gap between themselves and Amazon.com  (NASDAQ: AMZN  ) , which dominates online ordering.

One popular initiative has been ship from store. This lessens the delivery time of items to customers because the stores act as fulfillment centers. This makes customers happy. At the same time, it cuts costs for the retailer because there are fewer miles to cover when shipping the product(s). Additionally, it gives these retailers an opportunity to steal some share from Amazon.

Target recently piloted ship from store in Minneapolis, which was a success. This month, it's testing a $10 rush delivery in Minneapolis as well as Boston and Miami. Customers will be able to order as late as 1:30 p.m. for same-day delivery between 6 p.m. and 9 p.m.

What's most interesting here is that Target will be including some grocery items. As you might already know, Amazon delivers groceries in test markets with Amazon Fresh, and Wal-Mart is testing the same concept with Walmart To Go. Target's move here could be a very early indication that it might enter the fray at some point in the future.

However, it's doubtful that Target will rush into it since grocery delivery has proven to be a very low-margin operation up to now. This is just speculation, but it's possible that Target is waiting to see what does and doesn't work for Amazon Fresh and Walmart To Go prior to launching its own service in new markets. That would be stealth and savvy.

If you're wondering about standard shipping, Target will have it available at 138 stores in 38 U.S. markets later this year. Standard shipping times will be one to two days. Customers will have an opportunity to purchase items that were once store-only items (i.e., not available at Target.com).

What about Wal-Mart?
Target's first-quarter digital sales jumped more than 30% year over year, whereas Wal-Mart's e-commerce sales increased 27%. However, Wal-Mart has a much larger online and mobile presence, and it intends to keep it that way.

One of Wal-Mart's most recent initiatives is e-receipts. On the surface, this simply means that Wal-Mart will text receipts to its shoppers. But the real value is in the data. By using e-receipts, Wal-Mart will be able to capture data on customer habits, which will then allow it to send offers to customers on the items they buy most often. This could lead to repeat business and an increase in loyalty. 

Wal-Mart Senior Vice President of Mobile and Digital Media, Gibu Thomas, stated: "We view this as a platform. It will produce a fire hose of transactional data."

If you haven't heard of e-receipts yet, you likely will in the near future. Wal-Mart intends to launch a nationwide marketing campaign for its new e-receipts program.

Wal-Mart is a bit different than Target when it comes to margins. Over the past five years, Wal-Mart has been much better at keeping costs low. Therefore, any additional traffic it can generate has the potential to lead to margin expansion and continued profitable growth.

The Foolish conclusion
As crazy as it sounds, the real potential loser here is Amazon, not Target or Wal-Mart. This isn't to say Amazon is likely to suffer down the road. It's one of the most innovative companies on the planet, it's highly diversified, and it has a very talented leader in Jeff Bezos.

This is meant more in the sense that Amazon is the one with the target on its back when it comes to digital sales. It might take a long time for Target, Wal-Mart, and other retailers to catch up, but if history is any indicator, then it's only a matter of time before competitors close the gap. Therefore, omni-channel should prove to be a positive for Wal-Mart and Target over the long haul, but Wal-Mart has a good head start at the moment.

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