Same old tune at Target is not music to Walmart’s ears

The increases in average transaction size and customer traffic that Target credited with driving its 4.1% same-store sales increase during August is unwelcome news for Walmart. This is especially true since the biggest gains continue to come in categories where Walmart is traditionally strongest and is intent on demonstrating price leadership.

For example, as has been the case for most of this year and last year, Target said its comparable-store sales in grocery increased in the mid to upper teens, while healthcare, beauty and household essentials increased in the mid single-digit range. Growth in those categories is attributable to Target’s major store remodeling program begun several years ago called “PFresh.” Two of the most significant elements of a PFresh remodel are the addition of fresh food and expansion of consumable categories. Now in approximately 900 stores, Target is focused on completing the rollout of PFresh in 2012 and 2013, ensuring there will be an even greater degree of overlap in the companies’ product assortments than there is already.

This shift is arguably one of the most significant developments unfolding in the retail industry at this time because it is occurring precisely as Walmart is looking to revive sales at its U.S. stores by rededicating itself to an everyday low price philosophy. Meanwhile, Targets remains committed to its longstanding pricing philosophy of being within a few percentage points of Walmart thereby diminishing, if not completely negating, Walmart’s efforts to establish the type of pricing separation necessary to establish itself as the clear cut leader and regain customer traffic lost during the past several years.

Target has always been willing to cede the mantle of “low price leader” to Walmart while recognizing that as a discount retailer it needed to be more competitive with Walmart than conventional supermarkets or drug chains. Pricing surveys repeatedly show Walmart enjoys a double-digit pricing gap with companies regarded as leaders in those channels. As for Target, its pricing strategy of shadowing Walmart is clear and it’s worked quite well for a long time. However, the potential game-changer unfolding as you read this is the increasing percentage of shoppers at Target who participate in the company’s REDcard Rewards program and see their bill reduced by 5% at checkout. Under this scenario Target’s prices on comparable items tend to be slightly less than Walmart’s. The program negatively affects gross margins, but Target doesn’t seem to mind since it is making up for it in volume and capturing a larger share of wallet from its best customers.

As for August, Target said every region of the country experienced a healthy increase in comparable-store sales and it got a half a percentage point boost from Hurricane Irene which pulled some demand forward from September.

“August comparable-store sales were in line with our expectations, reflecting solid results in our back-to-school and back-to-college categories,” said Target chairman, president and CEO Gregg Steinhafel. “While the pace of the economic recovery is uneven and uncertain, we are confident in our ability to execute on our strategy, to offer the right balance of extraordinary value, convenience, newness and differentiation and to remain our guests’ preferred shopping destination.”