Wal-Mart and the target business model: what is the difference?

Walmart’s business model and target business model: an overview

When it comes to large discount stores, Wal-Mart (NYSE: WMT) still dominates the market with its huge scale. But its main competitor, Target (NYSE: TGT), has been gaining market share through engaging advertising campaigns and stylish design partnerships. The difference between the two also extends to their business models. Wal-Mart prefers the lowest cost, while Target pays more attention to profitability and youthful image.

Key points

  • Both Wal-Mart and Target are low-cost retail stores with huge revenues. As of 2019, Wal-Mart is approximately 20 times the size of Target.
  • Wal-Mart sometimes controls over 180,000 square feet of super centers, aiming to provide the lowest possible price.
  • Target also operates large stores, but they pay more attention to profitability through the supply chain, which is why they are able to post lower revenue but higher profitability.
  • These figures prove the short payback period for typical accounts receivable in the retail industry. The inventory turnover rate of both companies is lower than that of the industry.

Walmart business model

Walmart Stores Inc (WMT) is the world’s largest retail company. As of the end of June 2019, it has 11,368 stores worldwide, of which approximately 5,000 are located in the United States (including Sam’s Club).

Wal-Mart is a retail giant that is at least five times the size of its main competitor Target. Wal-Mart also seems to be more efficient than Target in business operations-this is reflected in its higher inventory and asset turnover, as well as operating costs per dollar of assets.

Wal-Mart’s market share is nearly 20 times that of Target.

Just look at its balance sheet and market value to understand how big Wal-Mart is compared to Target. For the fiscal year ending June 30, 2018, Wal-Mart’s total assets were US$204.5 billion, roughly five times Target’s relatively modest US$39 billion. In terms of market value, as of early July 2019, Wal-Mart’s US$319.67 billion was more than 6.5 times Target’s US$44.41 billion.

Wal-Mart may be much larger than Target, but scale is not everything. On the one hand, scale does not indicate the efficiency of the company’s operations. To this end, investors should pay attention to inventory turnover, asset turnover and accounts receivable turnover. By comparing these numbers with those of competitors and the retail industry (Walmart, Target, Costco Wholesale Corp (COST) and Dollar General Corporation (DG) are large players in this industry), we can understand how efficient the business is (2017 Fiscal year):

Walmart

Target

Department

Turnover receivable

88.31

18.35

53.6

Inventory Turnover Rate (TTM)

8.53

5.91

7.43

Asset Turnover Rate (TTM)

2.41

1.72

0.82

Wal-Mart’s accounts receivable turnover rate exceeds that of the industry, but Target lags behind. Wal-Mart’s accounts receivable turnover rate and asset turnover rate are also higher than those of Target.

Wal-Mart needs about 43 days to turn its inventory, while Target needs 62 days. The department takes an average of 49 days. Comparing the asset turnover rate, we can conclude that Wal-Mart is very efficient compared to Target and the industry because its asset turnover rate is higher than the latter two. High asset turnover means high sales per dollar of total assets.

Target business model

Walmart’s main competitor Target Corp (TGT), Operating approximately 1,800 stores in the United States. Target adopted a low-price strategy similar to Wal-Mart, but focused more on e-commerce platforms. In 2018, e-commerce sales increased by more than 30%. Target’s business model is not a large store like Wal-Mart, but focuses on smaller stores, instead of focusing on direct bottom-line savings, but focusing on young business attractions.

In terms of profitability, Target seems to outperform Wal-Mart, and in some cases, even outperform the industry as a whole. Target’s gross profit margin and net profit margin both exceed Wal-Mart. This may be partly due to Wal-Mart’s low-price guarantee policy, according to which Wal-Mart promises to provide the lowest possible prices for its products. However, the net profit margins of both companies are below the industry average (quarter ended June 30, 2018):

Walmart

Target

Department

Gross Margin (TTM)

25.35%

31.15%

23.53%

Gross profit margin-10-year average

25.23

29.22

21.83

Net profit margin (TTM)

-0.67

4.49

6.65

Net profit margin-10-year average.

1.02

4.19

5.35

When comparing the two from a financial perspective, Target’s profit is slightly higher than that of Wal-Mart. Wal-Mart’s low gross profit margin and net profit margin can be explained by its daily low price strategy with a low price guarantee policy.

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