Two of the biggest retail chains are sending very different signals around discretionary spending. In the third quarter, Walmart reported that general merchandise showed “positive unit growth,” while Target said there was “continued softness” in discretionary categories.
“Walmart has the upper hand over Target this holiday season, driven by its focus on low prices, everyday essentials, and the ability to attract cost-conscious shoppers—even those from higher-income households,” Angelica J. Gianchandani, professor of marketing at NYU, told Retail Brew via email. “In contrast, Target is struggling this season as dropping profits and reduced discretionary spending highlight the challenges of relying on non-essential categories in a cautious consumer market.”
In the years following the pandemic, as inflation-weary customers pulled back on making big discretionary purchases, Walmart’s relative strength in grocery and other essential goods was an asset, while Target’s relative strength in general merchandise was a liability.
Now these companies are showing how different strategies and positioning can lead to different outcomes, even as they face some of the same macroeconomic headwinds.
More of the same: From Target’s vantage point, Q3 marked a continuation of the trends it’s been experiencing for the last eight or nine quarters. “When we assess the consumer and macro environment, we’re seeing many of the same themes that have defined the environment for some time,” CEO Brian Cornell told shareholders.
What more of the same looks like for Target is softness in high-margin discretionary products such as apparel and home, which fell 4 percentage points compared to Q2. CFO Jim Lee said the company expects this trend to continue in Q4, translating to a “slightly negative comp for the full year.”
The pullback around discretionary is dampening other positive trends, such as a 2.4% bump in traffic. “This growth in traffic was mostly offset by a decline in average ticket, as consumers continue to spend cautiously, most notably in discretionary categories,” Cornell said.
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It’s also led to elevated inventory levels, which is creating unexpected higher supply chain costs.
Some notable exceptions include performance apparel, which grew double digits in Q3. Executives also stressed that the company is expecting discretionary spending to eventually bounce back, and that even in struggling categories such as home, customers are responding to “newness.”
“While current conditions are quite challenging, we’re confident that demand in discretionary categories will normalize, and our team has shown they can find efficiencies to help offset the cost pressures we’re facing,” Lee said.
Feeling the love: Walmart, meanwhile, is touting its “love” of general merchandise, which grew in the low-single digits in the US despite prices dropping more than 4%.
“We love general merchandise,” CEO Doug McMillon told shareholders. “When you go into our stores and clubs right now, the seasonal impact of GM is exciting and energizing.”
McMillon explained that in the past, Walmart had a higher share in certain discretionary categories such as toys and bicycles, but a lower share in fashion and apparel. Now it sees the latter category as an opportunity, especially with its growing omnichannel capabilities.
The embrace of general merchandise extends to Walmart’s membership club as well.
“If you think about the way that we’ve constructed all of our strategic priorities, this is not just a consumables and food game, it’s definitely a GM game,” Sam’s Club President and CEO Chris Nicholas said in the earnings call.
And yet similar to Target, Walmart anticipates that general merchandise will grow even more in the coming quarters, even as it continues to underperform essentials.
“Our plan calls for general merchandise to improve in future quarters, but to continue to underperform health and wellness and grocery until we return to a more normalized purchasing cycle across GM categories,” CFO John David Raney said.