No. 11: With Battle Scars Fading, Walmart and Target Learn How to Fight Amazon
The brick-and-mortar retailers have proved to be surprisingly nimble and innovative.
There’s little doubt that Amazon contributed to the deaths of scores of mom-and-pop shops, which were unable to compete with the digital behemoth’s low prices and convenience, and it helped push toward demise specialty retailers and department stores that were too slow to adapt to the New Order.
Walmart and Target are leveraging unique strengths and assets that the digital behemoth doesn’t have or would be hard-pressed to create or acquire, rolling out services like buy online and pickup in store and fulfilling online orders from their stores.
And while Amazon’s market cap continues to dwarf that of Walmart and Target, Wall Street has recognized that the two retailers are starting to get things right. Walmart’s market cap rose $70 billion this past year to over $340 billion, while Target’s climbed $31 billion to $65 billion. Amazon’s, of course, topped $1 trillion briefly this year before the current level of more than $885 billion.
“Both retailers are playing to their competitive strengths,” said Craig Johnson, president of Customer Growth Partners. “Both Walmart and Target were late to the online dance. The good news is that each retailer started waking up about four to five years ago, and over the last three years, both Target and Walmart are far better competitors against Amazon than they used to be.”
The two mass retailers operate far more physical stores than Amazon’s 625. Walmart counts 5,000 in the U.S., and Target 1,844. Amazon operates about 525 stores, 500 of which are Whole Foods supermarkets. Amazon founder Jeff Bezos is reportedly keen on brick-and-mortar, but building stores is never fast nor easy, and there aren’t many retail banners, aside from dollar chains, that operate hundreds of units across the country and could possibly be acquisition targets.
Walmart was once viewed as a gargantuan, immovable beast with enormous fleets of stores and trucks coiled around its Bentonville, Ark., corporate headquarters like a noose. The stores were seen as a financial liability at a time when retailers were opening fewer new units, and investing in technology, e-commerce and digital commerce.
The mass merchants “used to be way behind Amazon in terms of e-commerce,” said Johnson. “A few years ago, Target and Walmart’s online sales accounted for 2 percent to 3 percent of total sales. For the last two years, online has been growing by more than 30 percent to 40 percent, while Amazon’s retail sales are ahead 18 percent to 20 percent per year. Of course, Walmart and Target’s growth is on a smaller base,” even as Walmart’s overall sales (and profits) continue to dwarf Amazon’s.
Target’s third-quarter results showed strength across the business, from the top line to the bottom. The retailer smashed analysts’ expectations for several metrics and raised its profit outlook for the full year. The performance was attributed to the optimized brand assortment, store remodels, rollout of shipping capabilities and rapid expansion of small-format stores.
“Target continues to operate in rarified air, with third-quarter results that are outstanding across the board, especially the 80-basis-point improvement in operating margin,“ said Charlie O’Shea, retail analyst at Moody’s.
Walmart e-commerce logged its best quarter of sales growth this year with an increase of 41 percent in the most recent third quarter ended Oct. 31. Net income soared 92.3 percent to $3.28 billion, from $1.7 billion in the year-ago third quarter. Total revenue grew 2.5 percent to $127.9 billion from $124.89 billion in the prior-year third quarter, but this was below analysts’ estimates of $128.6 billion. Comp-store sales rose 3.2 percent and Walmart Inc.’s third-quarter earnings per share increased 7.4 percent to $1.16, beating Wall Street analysts’ estimates of $1.09 a share.
Doug McMillon, who in 2014 became president and chief executive officer of Walmart, and is younger than past leaders, along with chairman of the board Greg Penner, invested heavily in technology with the $3.3 billion acquisition of Jet.com. It’s become clear that Jet.com founder Marc Lore was the true asset in the deal. Jet.com in August was integrated into Walmart.com and digital native brand Modcloth, one of several assets purchased by Lore, who became president and ceo of Walmart U.S. e-commerce, was recently sold.
Lore has helped guide Walmart into the Internet age with Store No. 8, its ring-fenced technology incubator, for innovations that will be scalable five to 10 years from now. But Lore also understands the need for speed in response to Amazon’s speedy delivery capabilities. Lore helped the retailer figure out how to use its stores as fulfillment centers, a strategy it has refined and expanded in 2019. Walmart in 2017 also bought next-day delivery service Parcel.
Target in 2017 acquired for $550 million same-day delivery company Shipt, and in November, the retailer integrated it into its app. The retailer has also been modernizing its supply chain and instituted a new inventory planning and control system. It’s testing and rolling out distribution center automation.
Comparable digital channel sales grew 31 percent at Target in the recent third quarter, on top of last year’s 49 percent rise. Same-day fulfillment services, including order pickup, drive-up, now at 1,750 stores in 50 states, and Shipt, at 1,500 stores in 48 states, accounted for 80 percent of Target’s digital comparable sales growth.
“We focus first on driving traffic in our business because it indicates the continued relevance of our brands and growing engagement among our guests,” said Brian Cornell, Target’s chairman and ceo. “The real health we’re seeing in overall traffic growth will translate into a guest who’s shopping more categories.”
Grocery is a battleground. Walmart’s grocery business accounts for 57 percent of overall sales. Target has struggled with food in the past, but has created a new grocery brand, Good & Gather, with more than 2,000 items. Bezos has been quoted as saying that the company eventually wants to grow to 3,000 units, either grocery stores or AmazonGo cashier-less stores.
“Walmart and Target used to compete in terms of deep assortments, and Amazon did the same thing,” said Johnson. “Amazon has millions of sku’s. Both Walmart, and to a greater degree, Target, have ramped up and sharply improved their owned brands. When you have owned brands, the only place you can get it is their stores.”
Target excels in design and has been dubbed Tar-jay for democratizing designer apparel for the masses. Walmart has had hits and misses on the fashion front. The retailer in 2005 launched Metro 7, “designed with the highly stylish, fashion-conscious customer in mind,” according to an ad that appeared in Vogue.
“It’s basically, a build-or-buy decision,” Johnson said of apparel brands. “Walmart’s own internal brand-building skills are getting better than they used to be. [Metro 7] was a little too fashion-forward.” The retail giant will never be edgy or uber-trendy, but it’s been building fashion cred with the help of Denise Incandela, head of fashion at Walmart U.S. e-commerce who used to be at Saks Fifth Avenue.
Despite its size, Walmart also has shown a new ability to iterate faster — and, if it doesn’t work, change tack. It acquired Bonobos to expand the fashion brands sold on its platform, and followed that with the purchase of Modcloth, Bare Necessities and others. But it recently has switched strategy in an apparent indication it is instead focusing on its core, selling Modcloth, integrating Jet.com into its main web site and folding Bonobos into its headquarters operation in Bentonville (and saying goodbye to Bonobos founder Andy Dunn, who had helped oversee some of these smaller fashion properties). There also are reports it is looking to sell Jetblack, the high-service online offering aimed at urban consumers.
Not that the retailer has given up on fashion completely. Walmart.com in September relaunched Scoop, based on the popular, now-defunct chain of 16 multilabel boutiques selling contemporary designers whose outsize influence belied the number of stores it operated, and which closed in 2016. Scoop cofounder Stefani Greenfield was a consultant to the retail behemoth.
Walmart’s sartorial achievements nonetheless pale in comparison to Target’s fashion prowess. The Minneapolis-based retailer recently celebrated 20 years of designer collaborations, reissuing select pieces from the original launches by Stephen Sprouse, Rodarte, Proenza Schouler, Missoni, Jason Wu, Phillip Lim, Lilly Pulitzer, and Marimekko, among others. Target launched 12 new brands for men, women and home, including Goodfellow & Co., A New Day and Hearth & Hand With Magnolia, respectively.
“Apparel saw the most dramatic share gains in the quarter, with comp sales growth of more than 10 percent,” Cornell said on the company’s most recent third-quarter conference call. “This was driven by even stronger trends in jewelry, accessories and shoes, intimates and sleepwear, young contemporary and women’s ready-to-wear. Home, which was annualizing really strong growth a year ago, had low-single-digit comp strength. There was amazing strength in beauty and cosmetics, which delivered high-single-digit comp growth in the quarter.”
“Amazon is not exactly a style-setter,” Johnson said. “Its apparel is satisfactory, it’s fine. They’re not exactly fashion mavens.”
“We perform best when we’re pursuing our own path, not when we are chasing someone else,” Cornell said at a briefing for journalists. “We’re opening stores when others are closing stores, using stores as delivery hubs and maintaining a balanced multicategory assortment.”