A strategic look at the big 3 in discounting - Target, Wal-Mart, Kmart

Discount Store News, August 2, 1993

A Comprehensive Consumer Research Survey Conducted By Babson College

The Big Three discounters -- Wal-Mart, Kmart and Target -- are luring flocks of consumers to their doors based on convenient locations, low prices and wide assortments.

Wal-Mart succeeds with the best price position in the market, while Kmart and Target need to improve their business strategies, according to a study by Babson College.

The strategic positioning of the Big Three, especially in price and product assortment, and their consumer strengths is key to their continued expansion amidst growing competition.

It is especially important now as newer retail formats -- specialty stores, warehouse clubs and supercenters -- enter the fray.

The Babson College report on low-priced department stores analyzed here is an exclusive three-market study conducted by Babson College, Babson Park, Mass., and written by Douglas Tigert, professor of Retail Marketing.

Wal-Mart dominates the report.

"Our primary objective [was] a strategic gap analysis of the key success factors which differentiate these three chains in the mind of the consumer," explained Tigert.

Tigert authored the research with Dr. Stephen J. Arnold, associate professor of marketing at Babson College. Terry Cotter, president of C/J Research Inc., was responsible for field work done for the study.

Sponsors for the 1993 Babson College Retailing Research Report included Chain Store Age Executive, New York; Dayton-Hudson, Minneapolis; EDS Retail Services, Plano, Texas; Hudson's Bay Co./Kmart, Troy, Mich.; and Montgomery Ward, Chicago.

According to the research, consumers consider Wal-Mart the price leader among discounters. The report noted that a low-price position is the number one consumer choice determinant. Quality and value are the other intangibles that also trigger consumer response. Wal-Mart is the undisputed leader in this area.

"Because the mass merchandisers carry primarily national brands in hard goods, H&BC and other areas, the value equation is driven by price," said Tigert. "What consumers are telling us is that the quality differentials are not very high, at least for the three mass merchandisers. The chains carry a lot of the same things. Value leadership therefore requires EDLP leadership. Wal-Mart appears to have the right formula."

The study also found that Target received consistently high marks in the category of fast checkout and friendly service in consumers' minds. This consumer perception, added to about a dozen others, paints an interesting picture of the state of discounting today.

The entire report covers three markets: Atlanta, Dallas/Fort Worth and Indianapolis. According to Tigert, these markets were chosen because of the market presence Wal-Mart, Kmart and Target have in each area. In addition, various historical factors helped lay a foundation for some strategic analysis in these markets.

Babson College has tracked the Atlanta market as far back as 1984 when Wal-Mart first entered the area. The findings from the Atlanta market are really a barometer of Wal-Mart's growth and expansion throughout the country and can be projected to other markets.

Indianapolis was one market where store count among the three was almost equal (14 Kmart stores, 12 Wal-Mart stores and 10 Target stores) and the retailers had competition from a number of other value retailers such as Montgomery Ward.

Finally, Dallas/Fort Worth was chosen because Target had a stronger position there, having built stores from scratch rather than taking over existing stores as it had done in the other markets. (It acquired 14 Richway stores in Atlanta and 10 Airway stores in Indianapolis.)

Though results for each market vary, a number of consist observations do emerge:

* Wal-Mart has a compelling competitive advantage, especially in its pricing strategy, that pulls shoppers from greater distances, past other chains, to its stores.

* Kmart has perhaps the least favorable showing in these reports. In all three cities, Kmart's share of primary shoppers is barely above half what it should be just based on market coverage (number of stores in the area) alone, according to Babson College.

* Target's performance varies by city, garnering strong market image on some store choice dimensions but not doing as well as Wal-Mart overall.

The important conclusions of the study include:

* Cross shopping activity is very high in all markets. Consumers do not live in a vacuum. Virtually all of those surveyed were familiar with all three formats. Department stores, category killers and warehouse clubs are shopping destinations for items such as apparel, consumer electronics and food, respectively. There tends to be more cross shopping between Wal-Mart and Kmart. But, regular Wal-Mart and Kmart shoppers are less likely to visit Target stores overall.

* Store choice is driven by location/convenience, low price and assortment overall. There are other store characteristics that make an impression on consumers, but these three drive store choice.