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Tickers in this Article: TGT, WMT, TIF, M, DDS
Overall, I am not a big fan of the retail industry from an investment standpoint. Retail is a very tough business, and is often characterized by low margins and lots of competition, even though the barriers to entry are relatively easy to overcome. There are no trade secrets in retailing - you can walk into a store see what the competition is doing. The age-life of the inventory is very short-lived which leads to constant inventory write downs. All of these factors leave the retailing industry with no competitive advantages. Or as Buffett says, retailers have no economic moats. IN PICTURES: Eight Ways To Survive A Market Downturn

Focus on the Target
The problems I've noted above exist in any economic environment. But when they exist along with economic slowdowns or recessions, the retailing business is an absolute nightmare. We all know the advantage of Wal-Mart (NYSE:WMT) is low prices, and when that's mixed with Wal-Mart's size, it has an edge that will dominate all other retailers.

However, Target (NYSE:TGT) also finds itself in a neat little spot. It's what I call the millionaire trade-down effect and it's really powerful. Target can become to the upper middle class what Wal-Mart is to the middle class. (For more, see Analyzing Retail Stocks)

Frugal is Cool
Today, no matter what your economic status may be, the words "thrifty" and "frugal" are becoming fashionable, as this economic recession has spared no one. Target's trendy offerings without the trendy prices put the company in a sweet spot for long-term success. Look around your local Target stores and you will see a lot folks trading down from designer to more budget-brand purchases. Americans aren't spending as much anymore and when they are, saving money is the top priority.

As a bonus, activist investor Bill Ackman has a big stake in Target and is working on ways to create shareholder value.

Dividing Lines
The retail industry is facing a major paradigm shift. On one side you will have Target and Wal-Mart. On the other side you will have luxury outfits like Tiffany (NYSE:TIF) which serve a niche market that will always require a diamond or necklace that only Tiffany can provide. Tiffany and other luxury retailers aren't in the business of selling volume, they sell products that are viewed as rare and valuable. If that growth peters in the U.S. it will be made up by the expanding middle class in China.

In the middle is where you have a problem. Stores like Dillard's (NYSE:DDS) and Macy's (NYSE:M) are all selling the same things, and the only way to survive is by slashing prices. I'd avoid these businesses - too many of them are competing for the same dollar. That's not a good long-term business advantage.

Bottom Line
Retail is a very tough business, one that, for the most part, competes solely on prices. Add that to the fact that their products have a very short shelf life and many things can go wrong. With Americans visibly curtailing spending, stores like Target are where you want to be when the dust settles. (For related reading, see Using Consumer Spending As A Market Indicator.)

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