5 reasons you're shopping at Wal-Mart now

With an economic crisis staring us down and the holiday season right around the corner, these are lousy times for retailers. Unless, of course, you're Wal-Mart.

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By Joseph V. Tirella, MSN Money

It seems hard to remember now, but back in October 2007 the future of Wal-Mart (WMT, news, msgs), the nation's largest retailer, wasn't looking too bright.

On Oct. 5, 2007, shares of the Bentonville, Ark., giant closed at $45.37 while its top competitor, Target (TGT, news, msgs) -- better known to hordes of aspirational shoppers as "Tar-ZHAY" -- was enjoying a share price of $67.57 and a panache that Wal-Mart couldn't seem to beat. "They were out-competed by Target last Christmas," says Craig Johnson, the president of Customer Growth Partners, a New Canaan, Conn., retail research firm.

By Jan. 11, 2008, however, Wal-Mart had closed the gap between companies' stock prices to a mere $2.23 (Target: $49.95, Wal-Mart: $47.72). And over the next several months, the company engineered a radical reversal of fortunes. In August, when Target posted an 8% loss in quarterly income -- its fourth straight quarterly loss -- Wal-Mart was bragging about its 4.5% increase in U.S. same-store sales.

Stock chart: Target vs. Wal-Mart

Then last month, with the financial crisis wreaking havoc on the economy, especially the retail industry, Wal-Mart saw its October sales increase 2.4% for stores open at least a year, while Target saw a 4.8% decline in same-store sales; Wal-Mart closed out the third quarter with a 10% increase in profits, while Target saw a nearly 24% decrease. And even as Wal-Mart's stock has slipped amid the economic downturn -- closing at $49.67 on Oct. 27, its lowest since the first quarter -- Target, with its "cheap chic" fashion, has fallen even further; its stock has mostly been stalled below $40 since early October.

Are Wal-Mart and Target shoppers cutting back?

According to retail analyst Marshal Cohen, there are two major factors that govern the fickle retail market. "It's all about results and momentum," says Cohen, of the Long Island, N.Y., marketing research firm NPD Group. "Target is only one good collection away from another good year. But Wal-Mart has gotten the results, and they've gotten the swagger in their step back."

That swagger equals momentum. And that is why, despite an unprecedented economic crisis hanging over the country, Wal-Mart could increase its market share for what is expected to be, by most accounts, a dismal holiday shopping season.

What's selling at Wal-Mart?

"One retailer's benefit is another's loss," says Carl Steidtmann, the chief economist and director of consumer business at Deloitte Research in New York.

So what exactly has Wal-Mart out in front? Industry experts say there are five factors contributing to the big-box flip-flop:

1. It's the economy, stupid

While average Americans hope that the U.S. government's bailout measures will ease the worst

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effects of the credit crisis, shoppers are still in full-fledged crisis mode.

"When we're feeling good, we trade up, (but) when we are feeling the pinch in the pocket, we go, 'Ah, the other brand will do just fine,'" Cohen says. "If the dollar is tight, you're going to find the retailer who gives you the most bang for your dollar."

So where is a strapped consumer to go? These days, many don't have a choice. "Due to the economic challenges over the last nine to 12 months, more shoppers have turned to Wal-Mart," says Johnson, who describes America's newfound frugality as "a flight to value." One of the reasons Wal-Mart is drawing customers could be best summarized by the company's slogan: "Save money. Live better."

"That says it all in four words," Johnson says.

Suddenly, traditional Wal-Mart shoppers are finding the aisles of their favorite store a tad more crowded, he notes. "Now many of the middle- and upper-middle-income shoppers are shopping down by shopping at Wal-Mart."

2. Wal-Mart's cheaper -- isn't it?

Another factor working in Wal-Mart's favor is the perception that its merchandise is less expensive than its competitors'. That might be all it needs to get customers through the doors of its nearly 4,000 U.S. stores. "The brand expectation of Target has been 'Expect more, pay less,'" says Wendy Liebmann, the president of WSL Strategic Retail, a marketing consulting firm in Manhattan. "The perception is that Target is more trendy and more expensive. But it's not really true."

Target has to work against its own well-deserved reputation of bringing chic, high-end designers -- such as Sami Hayek, who created a line of furniture and bedding for the store -- to the masses. Whether Target's designer merchandise is affordable is essentially moot; designer anything these days is viewed as a luxury.

What's hot for the holidays at Target?

Which brings up the question: Has Target done too good a job promoting the "cheap chic" lifestyle? "For this particular time, maybe they have," says Liebmann, "but in the long run I don't think you can do your job too well. They have a great brand."

Target does seem to be changing its message; an early October Sunday flier featured the phrase "Love the price" in big, bold letters. But Target has another branding problem, says Liebmann: more enticing merchandise.

While Wal-Mart is where you go to buy the "three T's" -- Tide, toothpaste and tissues -- "Target is more of an impulse purchase," she says. "There's always the temptation to buy something that you didn't plan on buying."

3. 1-stop shopping

When gasoline hit an all-time high of $4-plus last summer, consumers began recalculating the way they did pretty much everything, with particular attention to how they were racking up miles in their SUVs. Paying an extra $6 in gas for a separate trip to the supermarket? No, thank you. Suddenly, the one-stop shopping at Wal-Mart Supercenters, which combine the usual department-store offerings with supermarkets, looked more attractive.

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"Wal-Mart's core customers live from paycheck to paycheck, so they are the ones that suffer first as the economy gets tight," Liebmann says. "There's usually a Wal-Mart not far away. People ask themselves . . . 'Can I get a lot of stuff, all my groceries, all the baby stuff I need?' And they can, all with one trip and one tank of gas."

It's not as expensive to fill up the tank -- the national average was around $2.20 a gallon last week, according to the Energy Information Administration -- but as the economic crisis persists, expect those budget-minded habits to stay in place.

4. Cheaper, but also better

Over the past three years, Wal-Mart has spruced up its image, trying to compete with its flashier competitors. According to Customer Growth Partners' Johnson, Wal-Mart's turnaround began in 2005 when Eduardo Castro-Wright became CEO of Wal-Mart Stores USA, after a very successful run heading up Wal-Mex, the company's Mexican branch.

Take the "Save money. Live better." campaign, Johnson says. "They backed up that tag line with sharper prices and sharper merchandise, and better in-store experiences for the shopper."

Wal-Mart has improved its merchandise offerings in such categories as consumer electronics, where the store is a strong No. 2 to Best Buy, and even clothing, long a Target advantage. "Target has been beating them in that category for any number of years, but Wal-Mart has been catching up," Johnson says. "They've dramatically improved."

Meanwhile, Wal-Mart has been thinking boldly outside the box, offering exclusive deals with corporate partners. One prime example: Walt Disney's Hannah Montana franchise. Earlier this year, when Hannah-mania was in full swing, many Wal-Mart stores featured themed boutiques offering Hannah Montana clothing and merchandise, including compact discs and DVDs.

The company also seeks to solidify its growing influence in the music industry, cutting recent deals with classic rock groups such as Journey and the Eagles and teaming up with MTV to promote "AC/DC Live: Rock Band," a video game sold only at Wal-Mart. (The store will also have an exclusive on AC/DC's new album, "Black Ice.")

"They have been reacting to the culture around it, instead of trying to define it," NPD Group's Cohen says.

5. Good and green?

For years, Wal-Mart has operated under a cloud of suspicion, fending off what seemed like an endless stream of disputes with labor, environmental and health care activists. There's even a watchdog group, Wal-Mart Watch, that keeps an eye on the company and its practices.

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But Wal-Mart has made some real improvements to its public image. The company won kudos from environmentalists when it started pushing energy-efficient light bulbs in its stores. Recently, at the Clinton Global Initiative in New York, the retailer announced it will cut use of plastic bags by one-third in its stores around the world.

On the consumer health front, meanwhile, lower prescription-drug prices and walk-in health clinics have been winning praise. Wal-Mart also overhauled its employee health insurance coverage last year in response to widespread criticism.

"They've dramatically improved their image," Johnson says.

Some of the company's critics remain unconvinced. "They have made some small steps on the environment, but they have a long way to go," said Wal-Mart Watch's Stacie Lock Temple. "Until they reduce the amount of energy they use to generate a dollar of revenue, they're not there."

But NPD Group's Cohen says even these steps are enough to have some shoppers giving Wal-Mart another look: "It leads some people to say, 'Wal-Mart isn't such a bad place.'"

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Published Nov. 17, 2008