You might not think of your Sunday newspaper's advertising circulars as a battleground, but they are. Flip through them looking for prices on various popular items, and you'll see Best Buy (NYSE:BBY) duking it out with Circuit City (NYSE:CC), and Home Depot (NYSE:HD) and Lowe's (NYSE:LOW) mixing it up with hammers and drills.
A recent Reuter's article explains how Wal-Mart (NYSE:WMT) and Target (NYSE:TGT) are also engaging in this kind of competition -- to the point of creating "loss leaders." A loss leader is something sold at a major discount in order to attract customers who are expected to also buy other, more profitable items. In this case, one battleground is toys.
The article describes the price history of the popular Bratz Formal Funk Runway Disco, noting that while K-Mart (NASDAQ:KMRT) recently offered the item for $80, at a decent discount off other major retailers' prices, Target was practically giving it away for $64.88. Not to be undone, Wal-Mart, which had been selling it for $100, quickly dropped its price to match that of Target's.
The thinking here is classic loss-leader rationale, as Target aims to beef up its market share in various categories such as toys and electronics. You might rush to Target to snap up a Runway Disco for your young one, but while there, you're likely to buy some soda, towels, and maybe even a book or CD. And if you would have normally gone to Wal-Mart to do this shopping, then Target has just raked in a bunch of dollars it previously wasn't going to get. Not a bad deal, as long as shoppers check out with more than just loss leaders.
For many retailers, these are do-or-die days, as the holiday season can supply up to 40% of a store's annual sales. Doing poorly during the holidays can easily translate to net losses for the year. And when there's a price war afoot, it can be hard to not join in, though it will likely hurt profits. Beleaguered K-Mart, for example, is not well positioned to slash prices.
Investors should keep an eye on the degree to which various retailers are able to command higher prices, thereby retaining higher profits, or compensate with higher volume.
Drop in on our Wal-Mart and Target discussion boards to see what investors are saying about them.
