The big blunder Target made but Walmart avoided

Target's first quarter earnings fell short of analyst estimates as inflation continues to take a bite out of consumers' wallets.

Longtime retail executive and Storch Advisors CEO Jerry Storch says there was one mistake Target (TGT) made years ago that gave Walmart (WMT) an edge. "Target years ago... made a strategic blunder to basically pull out of the full-service grocery business. What you have in Target right now is really a large convenience grocery store, whereas Walmart is the nation's largest real grocery store with all the departments and fresh produce... That positions Target very poorly. They can't fix that overnight," Storch says.

He goes on to explain that Walmart customers are going to get groceries every week, for example, but then purchasing higher-margin general merchandise because they are there. For Target, it's "backwards" Storch argues, saying that customers may be going once a month for general items and buying low-margin groceries since they happen to be there.

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This post was written by Stephanie Mikulich.

Video transcript

So Jerry, then where does that leave this turnaround story when it comes to the fact that people simply are not going to target, they're not spending those discretionary items.

We have elevation uh inflation, excuse me, which remains elevated but has improved just a bit.

How long is it going to take them for this turnaround story to play out?

Well, they're, they're doing a lot of things well, and you saw just earlier this week that they, they knew this, obviously, that things were tough in this area.

That's why they just, this week they announced they're taking down prices on 5000 items.

And so they're, they're clearly trying to project value.

The problem is they, they aren't really set up to do it.

And so, for example, uh uh target, uh you know, years ago, about 20 years ago, made a strategic blunder to basically pull out of the full service grocery business.

What you have.

Target right now is really a large convenience grocery store, whereas Walmart is the nation's largest real grocery store with all the departments and fresh produce and everything else that you want.

And that positions target very poorly.

They can't fix that overnight.

They can't suddenly sort of snap their fingers across all these stores and have a real grocery store inside of them.

And so, so it's kind of a backwards hyper Mart at Target right now where, what you have is, uh, you know, Principal Hypermart is, uh, you go to the grocery part every week and then you pick up the general merchandise at higher margin while you're there.

Targets kind of kind of backwards.

It's, uh, you go, you go by general merchandise once a month and while you're there, you pick up some low margin grocery.

This is a fundamental strategic blunder that target made about 20 years ago and put them in very bad shape compared to Walmart.

But there's a lot they can do and they're starting to do more of that, like emphasize price more, uh, uh and so on and so forth.

But I also have to point out they've done this themselves on price integrity.

So they've, they've got a loyalty program that's very expensive.

And so they have to raise the everyday prices in order to pay for the loyalty program.

Uh, their ads are frequently full nowadays with, with Bogo as we call them the business, you know, buy one, get a sale on something else.

Buy one, get a dis, get, get a, uh, a gift card discount like on, uh, like on the laundry products, uh, detergent products, things like that.

So this undermines price integrity.

So once targets been working for some time against, uh, you know, actually hurting their price perception, they aren't gonna fix it overnight.