Target (TGT) is a discount retailer that generates revenue by offering competitively priced consumer goods. Similar companies competing directly with Target include Walmart (WMT) and Costco Wholesale (COST). Businesses in the retail industry do not produce products directly and must obtain their goods using contracts with manufacturers. The discount retail industry has come under increasing pressure due to the convenience and competitive price model offered by Amazon (AMZN), and Target is no exception.

Key Takeaways

  • Target's main competitors are Walmart, Costco, and increasingly Amazon as well.
  • Target is somewhat more focused on quality and slightly less competitive on price than Walmart and Costco.
  • The early acquisition of Shipt gave Target a head start in the growing delivery market, but its rivals are starting to catch up.

A Look at the Discount Retail Sector

Department stores such as Target, Walmart, and Costco provide customers with a broad range of products and maintain complex inventory management systems. These stores sell products to consumers at lower prices and rely on staple consumer goods such as clothing, household products, and food.

All three of these companies sell essential products like food, which allowed them to remain open during the coronavirus lockdowns. Furthermore, the closing of competing stores selling only less necessary goods, such as fashion accessories and consumer electronics, also contributed to continued sales. As a result, the stocks of Target, Walmart, and Costco all held up much better than the S&P 500 during the bear market in early 2020. However, Target's stock suffered a larger maximum drawdown than its competitors, perhaps because it is less focused on low prices.

Consumer disposable income significantly influences sales. The general economy's overall health often correlates closely with retail sales and profitability for discount retailers such as Target. Future growth for these companies depends on their ability to thrive under continually changing conditions. Retailers must come up with smart, creative strategies to retain market share.

The Demographics of Discount Retail Shoppers

Target typically appeals to customers who enjoy higher incomes by emphasizing high-quality merchandise and low-cost designer fashion. Walmart's emphasis on low prices typically draws shoppers with lower household incomes. Costco shoppers are often affluent, suffering less direct impact from a general market recession than Target and Walmart customers.

Target competes directly with Costco for these customers while also striving to compete with Walmart's prices, positioning itself competitively among lower-income shoppers. Future growth for discount retailers, such as Target, depends on connecting with customers. They must also keep margins healthy enough to pay investors sufficient dividends and find ways to profit from current economic conditions. These companies must provide products that drive sales by motivating customers to shop.

Many retailers open new stores to drive additional growth. They also add products, such as food, which many department stores began selling to encourage sales growth. Strong competition motivates many retailers to reduce margins to remain competitive on pricing. Although margin reduction as a strategy may improve prices, it also leaves smaller profits for investors.

Delivery Service

Target got serious about its delivery operations in December of 2017 with the announcement that it was buying Shipt, an online delivery company, for $550 million. This new offering allows Target to deliver products and groceries to consumers within hours of making an online purchase. Busy and successful people seem to have less time available for going to stores. They are willing to pay a premium for delivery. Home delivery was already growing dramatically before the panic over the coronavirus caused demand to surge.

The future of discount retailers may depend on how well they deal with the growing demand for home delivery.

Shipt has a good reputation as a premium delivery option that provides high-quality service. Shipt gives customers the ability to set a specific delivery time and pay tips to employees for timely service. That contrasts sharply with traditional package delivery services, which are increasingly focused on keeping costs down to get big contracts. Furthermore, goods from many other firms, including Target's rival Costco, were available via Shipt in early 2020.

However, Target's competitors have not been idle. Amazon realizes that letting any other firm get an edge on the delivery of anything is a threat to their business. Amazon expanded Whole Foods and launched the Amazon Fresh grocery delivery service to compete in this market. Walmart joined forces with DoorDash to provide grocery delivery to its customers. Online consumers order directly from Walmart and enjoy the same low prices as customers at their stores. The only additional charges are for delivery and tips. Costco also offers the ability to order directly from their website, and Instacart makes the delivery.