Please ensure Javascript is enabled for purposes of website accessibility

Will Target's and Walmart's Success Spell Disaster for Other Retailers?

By Jennifer Saibil - Jan 22, 2020 at 5:34AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

It's not only the Amazon effect that's hitting retailers hard. Target and Walmart are thriving while other stores are suffering.

While Amazon (AMZN 3.66%) has zoomed to the forefront of the retail industry, some of its largest competitors, such as Target (TGT 2.41%) and Walmart (WMT 1.97%), have hit back hard and seen tremendous success. While their own income statements don't show any signs of a retail apocalypse, they may be contributing to the fall of the rest of retail. Is this the new trend?

Low-income spending is increasing

There may a variety of reasons that spending by low-income consumers is rising. One is simply that income gaps are widening, with the rich getting richer and the poor getting poorer. Another is that consumer nondiscretionary expenses have increased, leaving the less well-to-do with less money to spend.

A sale rack in a clothing store

Image source: Getty Images.

In this situation, luxury companies do well, and so do the ones aimed at careful spenders, but those in the middle -- the smaller, mid-price stores -- get squeezed. This describes many of the retailers who did well over the past few decades and are now stuck trying to find their way.

Large companies have the cash to give customers what they want

Walmart and Target are both large companies, with annual revenue of $330 billion and $75 billion, respectively. That kind of money gives them great flexibility and opportunities for growth. The largest discount retailers can offer the full omnichannel experience, with the most relevant online features and strong storefront presences. They can also offer free and fast shipping.

Research by McKinsey found that what holiday shoppers valued most was a good deal, with the next most important features being easy online shopping and gift ideas. They also valued free and fast shipping and secure delivery. These are ingredients that the average smaller company can't provide, at least not at the capacity of a megaretailer with cash in the bank.

Larger companies can also spend more on data analytics, providing them with the knowledge they need to make better decisions based on who their customers are and what they want.

Of course, all of these abilities create a cycle where these companies grow even larger, while the little guys can't keep up and get left behind.

Pulling out all the stops

Walmart, a blue chip company, fits this profile of a behemoth that has the cash to give any competition a run for its money. But Target was a beleaguered company just three years ago: Its 2016 fiscal sales were below those from 2011, so executives rolled out a plan to completely overhaul the company, from store design to merchandise to online shopping.

This plan achieved astounding results and has propelled Target to where it is today. If suffering retailers have a chance, they may want to follow in Target's footsteps, and pull out all of the stops to turn themselves around.

Target was always a discounter, which has helped it in this new shopping era of penny-pinching by many consumers. Other retailers may have to shift away from mid-pricing themselves, choosing a new price point either up or down.

Can anything be done to stop it?

When Amazon landed on the retail stage, Walmart and Target found themselves in a pickle, but they found creative ways to push back and grow.

This is where struggling retailers currently find themselves: They're sweating, but the challenge will make them or break them. The current environment will no doubt continue to harm some companies, but others will find creative solutions and bounce back. Stay tuned.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Wal-Mart Stores, Inc. Stock Quote
Wal-Mart Stores, Inc.
$128.48 (1.97%) $2.48
Target Corporation Stock Quote
Target Corporation
$167.14 (2.41%) $3.94, Inc. Stock Quote, Inc.
$2,302.93 (3.66%) $81.38

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/28/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.