Combined, discount variety store giants Wal-Mart (WMT 0.52%) and Target (TGT +1.06%) employ close to 2.4 million people around the globe. Within just the United States, this figure equates to more than 1% of the total U.S. workforce.
With their immense size, Wal-Mart and Target have the incredible ability to negotiate bulk purchases in their favor in order to underprice their smaller-sized competition, including just about any mom-and-pop store in town. By carrying a greater amount of goods – from groceries to automotive supplies and electronics – these discount variety giants are simply able to bully around their competition.
Source: Target.
However, between the two there can be only one discount variety retailer that's the better at bringing consumers back through its doors. On the surface it's not always easy to tell which retailer that may be, especially with the polar vortex knocking down comparable-store sales growth to just 0.1% for Wal-Mart and minus 0.3% for Target in their latest reports . Thankfully, that's where Brand Keys' Customer Loyalty Engagement Index comes into play.
Brand Keys, a New York-based research firm, has its own unique formula of looking at how consumers engage with a brand and form an emotional attachment to it or the products behind the brand. Brand Keys has researched this engagement and loyalty bond between customers and businesses over 64 different sectors and for more than 550 businesses. Today, we're going to take a closer look at the two-horse race between Target and Wal-Mart and decipher why one company stands atop the other when it comes to customer loyalty.
However, let's first have a gander at why customer loyalty even matter to these discount giants.
Why customer loyalty matters
As I noted above, these discount retailers are so large and have such an immense diversity of product that this alone proves worthwhile for consumers to at least give them a try. However, turning a one-off consumer into a lifetime customer isn't as easy as it sounds.
The truth of the matter is that the introduction and expansion of grocery products within Wal-Mart and Target have fueled the notion that these discount stores are becoming a one-stop shop for consumers. The downside of groceries, however, is that they carry razor-thin margins and it exposes both Wal-Mart and Target, even with their immense size, to fluctuations in global food costs. In other words, these companies might be able to haggle when it comes to getting the best deal when they're buying truckloads of apparel from overseas vendors, but when it comes to purchasing milk, eggs, and other consumer staples, Wal-Mart and Target's leverage is nearly gone.
Source: Target.
As of 2013, roughly 65% of Wal-Mart's revenue was derived from grocery sales and health and wellness products , while somewhere in the neighborhood of 28%-33% of Target's revenue, according to Milwaukee-based grocery analyst David Livingston, was based on purchases typically made at a grocery store (this included beauty and health products as well).
This means discount variety retailers need to have easily accessible stores near highly populated areas, attractive enough pricing to draw consumers away from local businesses, perks to keep customers coming back, and the ability to deliver a positive shopping experience. Without this, few customer will remain loyal to the brand which makes trying to expand very difficult since they're heavily reliant on low-margin product sales.
The kingpin of discount variety retailing is not...
Now that we have a better understanding of why consumer loyalty is still crucial, even for these behemoths, let's have a look at which of these two companies has the most loyal customers. However, before I do the big reveal, do you have your own guess which company you believe is best at keeping its customers loyal?
Got your answer?
If you thought Target then you've hit the bullseye... on the runner-up that is.
Target actually tied with Sears Holdings' (SHLD +0.00%) Kmart for the No. 2 spot on Brand Keys' rankings, however I excluded Kmart from the discussion as it appeared pretty obvious based on Sears' latest quarterly report that customers aren't loyal to the brand. Blame it on unattended check stands, the polar vortex, or the wrong mix of product. Either way you look at it Kmart is in dire straits, and despite drawing some degree of loyal consumers into its stores after all these years, it was never a true contender for the top spot.
Target, though, has some strong suits.
Source: Target.
Previously, one of the differentiable positives for Target was its ability to carry discounted name-brand apparel. Target itself appeals to a more affluent customer base than the typical Wal-Mart shopper, so the ability to offer name-brand merchandise at a discount has always resonated well with its customers.
The introduction of the REDcard was another ingenious move by Target to lasso customers back into its stores. By offering Target-branded debit and credit cards that give in-store and online consumers a 5% discount, Target is making it convenient and worthwhile for consumers to come back. Of course, the downside to loyalty reward programs is they can weigh on margins if these same consumers don't buy higher-margin discretionary items. For now Target appears willing to deal with those margin fluctuations as U.S.-based REDcard penetration rose to 20.4% from 17.1% year-over-year in the first quarter.
Finally, Target's branched out of its big-box theme and begun opening up city-themed stores in an effort to attract urban crowds that are often resistant to big corporations.
But, just as Target has made some smart moves, it's also fallen on hard times.
Perhaps nothing has stung more than the data breach during the holiday season which compromised millions of customers' debit and credit cards. A lack of adequate network oversight has certainly reduced its sales since the incident, damaged the company's public reputation, and even cost now-former Target CEO, Gregg Steinhafel, his job. The good news for Target is that consumers' memory of events such as what happened around Christmastime is generally short-lived, lending hope that a Target revival could be around the corner.
Some might also say the company's push into Canada, while smart from a strategic perspective on paper, might be shortchanging innovation within the U.S. as it focuses its efforts on building up its Canadian operations. The jury remains out on this last point, but it's something worth watching as Canadian EBITDA losses mount.
Source: Wal-Mart.
Why consumers are most loyal to Wal-Mart
As my Foolish colleague and Consumer Goods specialist Adam Levine-Weinberg pointed to last week, one of the most attractive aspects of Wal-Mart from an investors' perspective is that it grasped the "different sized stores for different communities" aspect long before target. With supercenters, neighborhood markets and Express stores Wal-Mart has the opportunity to hit bustling and highly populated cities as well as smaller urban areas, giving it the ability to better compete with standard supermarkets and local discount stores and chains. Sometimes it really is about quantity, and Wal-Mart's 4.868 stores as of April 30, which includes 3,313 supercenters, 359 neighborhood markets, and 62 small format stores, really convey convenience to the consumer.
Source: Wal-Mart.
Price is another factor that plays a crucial role in Wal-Mart's loyalty superiority over Target. As I mentioned above, Wal-Mart and Target are both discount retailers with a wide assortment of goods, but they hone in on inherently different audiences. Wal-Mart is specifically after that lower-income consumer, and it's arranged its store to be a one-stop shop for deeply discounted items, as well as a provider of services that are commonly used by lower-income individuals including check cashing and wire transfer services. With the jobs market arguably still a tough place there are more than enough cost-conscious consumers to keep Wal-Mart's aisles fairly crowded.
Lastly, as I touched on above, convenience is an important loyalty factor for consumers. While Wal-Mart handily outnumbers Target in total stores, with 1,789 in the U.S. according to Target's corporate factsheet , it also has more stores open 24 hours than Target. Personally, as a consumer that has worked a schedule outside the 9am-5pm range I can appreciate a store that's open later than your typical discount retailer.
Of course, that doesn't mean Wal-Mart isn't without its own shortcomings. As Fool Travis Hoium opined last weekend, weakening margins overseas and tougher competition domestically from online competitors and specialty retailers is going to make growth challenging for a company of Wal-Mart's size.
However, with a renewed focus on convenience, including its direct-to-consumer department, as well as a push toward Express stores, I believe consumers' loyalty to the brand will continue to deliver substantial cash flow and marked benefits for investors (and consumers) over the long haul.
