Walmart Business Model vs. Target Business Model: An Overview

When it comes to big-box discount stores, Walmart (NYSE: WMT) still dominates the market with its sheer size. But its primary competitor, Target (NYSE: TGT), has been carving out market share with catchy advertising campaigns and hip design partnerships. The differences between the two extend as well to their business models. Walmart prefers the lowest cost, while Target angles more toward profit margin and youthful image.

Key Takeaways

  • Walmart and Target are both low-cost retail stores with gigantic revenues. As of 2019, Walmart is about 20 times the size of Target.
  • Walmart controls supercenters sometimes over 180,000 square feet, aiming to offer the lowest price possible.
  • Target runs large stores as well, but they are more focused on profit margins through the supply chain, which is why they are able to post lower revenues but higher profit margins.
  • A short account receivable collection period is typical for the retail sector as proved by these figures. Both companies have lower inventory turnover ratios than the sector.

Walmart Business Model

Walmart Stores Inc (WMT) is the world’s largest retail company that operates 11,368 stores worldwide as of the end of June 2019—with around 5,000 of those in the United States (including Sam's Club locations).

Walmart is a retail giant that is at least five times larger than its primary competitor, Target. Walmart also seems more efficient in business operations than Target—this is reflected in its higher inventory and asset turnover, as well as its operational dollar generated per dollar of asset.

Walmart commands nearly 20 times the market share of Target.

It only takes a glance at its balance sheet and market cap to see how huge Walmart is compared to Target. By the financial year ending on June 30, 2018, Walmart’s total assets were $204.5 billion, about five times larger than Target’s comparatively modest $39 billion. In terms of market capitalization, Walmart's $319.67 billion is more than 6.5 times larger than Target’s $44.41 billion, as of early July 2019.

Walmart may be a lot bigger than Target, but size isn’t everything. For one, size does not tell how efficiently a company operates. For that, investors should look towards the inventory turnover, asset turnover, and receivables turnover ratios. By comparing these numbers against competitors’ numbers as well as against the retail sector (Walmart, Target, Costco Wholesale Corp (COST), and Dollar General Corporation (DG) are large players in the sector), we can figure out how efficient the business is (for FY 2017):


 



Wal-Mart



Target



Sector



Receivable Turnover



88.31



18.35



53.6



Inventory Turnover (TTM)



8.53



5.91



7.43



Asset Turnover (TTM)



2.41



1.72



0.82


Walmart beat the sector in receivable turnover, but Target lagged behind. Walmart also has a higher receivable turnover ratio and asset turnover than Target.

It takes Walmart about 43 days to turn its inventory, whereas Target needs 62 days. The sector needs 49 days on average. Comparing asset turnover, we can conclude that Walmart is highly efficient compared to both Target and the sector because it has a higher asset turnover than the latter two. High asset turnover implies a high level of sales per dollar of total assets.

Target Business Model

Walmart's main rival, Target Corp (TGT), operates approximately 1,800 stores in the United States. Target has utilized a low pricing strategy similar to Walmart, but is more focused on the e-commerce platform, experiencing over 30% of e-commerce sales growth in 2018. Instead of mega-stores like Walmart, Target's business model focuses on slightly smaller stores, focusing less on direct bottom-line savings than on a younger commercial draw.

In terms of profitability, Target seems to perform better than Walmart and, in some instances, the sector overall. Target beats Walmart in both gross profit margin and net profit margin. This may be in part due to Walmart’s low price guarantee policy under which Walmart promises the lowest possible prices for its products. However, both companies have a below-industry-average net profit margin (for the quarter ending June 30, 2018):

 

Wal-Mart



Target



Sector



Gross Margin (TTM)



25.35%



31.15%



23.53%



Gross Margin - 10 Year Average



25.23



29.22



21.83



Net Profit Margin (TTM)



-0.67



4.49



6.65



Net Profit Margin - 10 Year Average.



1.02



4.19



5.35


When comparing the two from a financial perspective, Target is slightly more profitable than Walmart. Walmart's lower gross profit margin and net profit margin can be explained by its everyday low price strategy which features a low price guarantee policy.