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Target (TGT) is a discount retailer, which means that it generates revenue by offering competitively priced consumer goods. Similar companies competing directly with Target include Wal-Mart Stores (WMT) and Costco Wholesale (COST). Businesses in the retail industry do not produce products directly and must obtain their goods using contracts with manufacturers.

Target is another retailer that has come under pressure due to Amazon's (AMZN) growing dominance. Here's a look into how various competitors affect Target.

A Look at the Discount Retail Sector

Department stores such as Target, Walmart and Costco provide a broad range of products and must maintain complex inventory management systems. These stores sell products to consumers at a lower price than many competitors and rely more on staple consumer goods such as basic clothing, household products and food than specialty or high-end retailers do.

Discount sector competition is strong, and these retailers must maintain their competitiveness using creative methods and strategies. Customers' disposable income and finances significantly influence sales, and general economy's overall health often correlates closely with retail sales and profitability for discount retailers like Target. Future growth for these companies depends on their ability to thrive under these competitive conditions.

The Demographics of Discount Retail Shoppers

Historically, Target and Costco customers have high incomes and interest in spending on designer products and high-quality goods. Walmart's emphasis on low prices draws shoppers who typically have lower household incomes than Target and Costco customers. Target typically appeals to more affluent customers by emphasizing high-quality merchandise and low-cost designer fashion.

Shoppers at Costco stores are often affluent and impacted less by recessions than Target and Walmart customers. Of these three discount stores, Costco courts affluent customers the most frequently. Target competes directly with Costco for these customers, but also strives to compete with Walmart's prices and position itself competitively among lower-income shoppers.

Future growth for Target and other discount retailers relies on the stores' ability to connect with customers, keep margins large enough to provide investors with a solid profit and benefit 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 stay competitive on pricing. Although margin reduction as a strategy may improve prices, it also leaves smaller profits for investors.

Managing Inventories and Fulfillment

Target got serious about its delivery operations in December of 2017 when it announced it would be buying Shipt, an online delivery company, for $550 million. With this new component, Target says it will be able to deliver products and groceries to consumers within hours after buying items online. Target hopes that this acquisition will help them stay ahead of the game in the increasingly competitive grocery delivery market. 

Good inventory management strategies help retailers achieve higher profit margins. Offering fewer brands than Target and Walmart, Costco seeks to improve supply chain efficiency. Costco, Target and Walmart all keep profit margins as high as possible and seek cost-reduction measures as a means of increasing profit. During lean economic conditions, expansion into competitor territories often helps retailers gain market share, while protecting profit margins by closing stores with poor sales performances.

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