Wal-Mart and Target Crank Up the Competition Online

After years of dominance, brick-and-mortar discount retailers Wal-Mart (WMT 1.32%) and Target (TGT -0.70%) are now battling for customers online more than ever before. Both Wal-Mart and Target continue to make substantial improvements to their e-commerce platforms because customers, more often than not, are increasingly flocking to online retailers like Amazon.com (AMZN -1.64%). Given the battle that is brewing investors should be asking themselves which one has the best chance to win online long term, and why?

Credit: MikeMozartJeepersMedia and Kelly Martin, via Wikimedia Commons.

Recent earnings highlights for Wal-Mart and Target
In its latest quarterly earnings release, Wal-Mart saw its total revenues inch up 0.8%, to $114.2 billion. While same-store sales were flat in the U.S. market, international same-store sales increased 3.4%. The situation was not helped by severe weather and a higher tax rate which pushed overall net income down 5.6%, to $3.73 billion.

Target's most-recent quarter saw revenues rise 2.1%, to $17.1 billion, despite same-store sales falling 0.3% in the U.S. Last year's data-breach costs, ongoing struggles in Canada, and higher discounting continued to be a burden on net income which tumbled 16%, to $418 million.

Looking towards online sales, Target appears to be just barely edging out Wal-Mart based on data from their most recent quarterly reports. However, if we dive deeper beyond short-term growth rates, does Target still hold the upper hand?

Source: Wal-Mart Corporate SEC Filings

History and price perception
Online sales for Wal-Mart and Target currently contribute about 3% and 2%, respectively, to each retailer's total sales. However, looking back at their histories, Target actually had the head start online back in 2001, when it originally outsourced its retail online operations to Amazon.com. A few years later, though, Amazon.com became a rival to Target and every other brick-and-mortar retailer, and the rest is history.

Wal-Mart's cheaper price perception over Target may have some carryover into its success over Target online. This price perception may be a reality, at least in the near term, based on a recent study that filled a shopping cart with the same products from both stores. The Wal-Mart shopping cart turned out to be 3.8% cheaper than Target's.

Wal-Mart's earlier innovations and quicker improvements
Target's current lead over Wal-Mart in online sales growth rate becomes less and less important when we look at the big picture of how both companies are evolving their e-commerce platforms. Target just started testing same-day delivery in a few select markets during the past couple of months. However, Wal-Mart started testing its same-day delivery service back in 2012.

Additionally, Target is playing catch-up to Wal-Mart when it comes to free shipping on purchases higher than $50. It's been an online perk for Wal-Mart customers for years, along with dozens of other retailers. Target made free shipping on purchases higher than $50 applicable to nearly all their products online only last month. Most recently, Wal-Mart got the upper hand on both Target and Amazon.com when it was one of the few big retailers that agreed to list unit prices on its website.

When we connect the dots, Wal-Mart may have agreed to add unit prices in a strategic move to slowly take market share away from competitors like Amazon.com that are trying to move into the online grocery segment. Earlier this year, Wal-Mart revealed a new online grocery format that's a stand-alone pick-up center where shoppers can drive up and retrieve their online grocery orders without even leaving their cars.

E-receipts may be the other piece of the puzzle for Wal-Mart. These electronic receipts are expected to be captured in a single e-receipts locker in a mobile app where customers can track all their purchases both in stores and online.

Security has been on the minds of customers after Target's 2013 data breach. However, Wal-Mart's own Sam's Club beat Target to the punch when they announced plans to add new credit card systems last month. Target had originally planned to roll out its new chip-based credit card technology early in 2015, but decided to accelerate its schedule in the face of competition. It now expects the new system to start appearing in stores in September, later this year.

Taking on Amazon.com
In recent months, Target has made some direct plays at online retailers like Amazon.com. Earlier this month, it announced that it is teaming up with e-book subscription service provider Librify to offer customers, for $8.99 a month, access to more than 500,000 titles within Librify's library.

Can Target's parternship with e-book provider Librify be a threat to Amazon.com?  Credit: Librify.

However, a couple of weeks later, Amazon.com issued its own announcement of a $9.99-a-month service to customers for access to more than 600,000 Kindle books. Due to the penetration of Amazon's Kindle reader and Amazon's overall dominance in online book sales this battle seems to be clearly tipped in Amazon's favor.

However, both Wal-Mart and Target have benefited once it was shown that households in taxed states have reduced their spending on Amazon.com by nearly 10%. Amazon.com is still making its own improvements.

Prime Pantry was launched in April enabling customers to order up to 45 pounds of products for just $5.99. Additionally, Amazon.com has expanded Sunday delivery, while brainstorming ways to make its own deliveries without using traditional delivery companies.

Bottom line
In the end, there's no doubt that Target's data breach last year will continue to be a huge blow to its progress. If perception is reality, then Target faces an uphill battle after falling in the YouGov BrandIndex from the No. 7 spot in 2013 to No. 21 today.

$13 billion, the total online sales Wal-Mart expects in 2014 for a growth of 30% more than $10 billion in 2013.

Another blow to Target's online growth prospects is its struggles in Canada, which has prevented the company from expanding globally in markets where Wal-Mart and Amazon.com are now making progress. Most recently, Wal-Mart made strategic investments in both India and Brazil, where the payoffs are expected to be worth in the billions during the next few years.

Overall, recent improvements by Target continue to be outshined by both Wal-Mart and Amazon.com. While Target is still trying to gain trust back from its customers, Wal-Mart is trying to keep pace with its goal of $13 billion in online sales this year, a 30% increase over last year.

In short, Target is busy trying to reinvent itself, while Wal-Mart is busy adding to itself.