By
msnbc.com
updated 11/26/2003 10:07:40 AM ET 2003-11-26T15:07:40

The retail industry is making hopeful noises about the upcoming holiday season, after three years of a slumping economy kept a lid on sales. But while the outlook is looking brighter overall, the competition promises to be fiercest among the Big Three discounters Wal-Mart, Target and Kmart.

Major Market Indices

Total spending on holiday shopping is expected to hit $217 billion — up 5.7 percent from a year ago and the best season since 1999, according to the National Retail Federation. Over the past decade, discount chains have been ringing up a bigger share of those dollars, as specialty stores and traditional department stores have been losing ground.

That trend is expected to continue this year, according to the trade group’s CEO Tracy Mullin.

“Consumers, not surprisingly, are still looking for a great deal, they’re still looking for value,” she said. “They’re going to shop at all sectors, all segments of the industry, but they’ll probably shop mostly at the discounters.”

But those discounters are each taking different approaches to appeal to tight-fisted shoppers.

Wal-Mart
Though generally regarded as the king of discount chains, Wal-Mart is really in a class by itself. Last year, Wal-Mart’s $246 billion in sales amounted to for roughly 8 cents of every retail dollar spend in the U.S., not counting than car sales. With over 560 billion square feet of floor space, Wal-Mart’s 4,700 stores worldwide last year rang up nearly five times as much as the next biggest U.S. retailer, Home Depot.

That size gives Wal-Mart’s legendary leverage over vendors — allowing the massive merchandiser to cut prices to the bone.

But even low prices won’t guarantee the company will ring up big profits this holiday season. The company has said it expect to do better than last year, when it posted the smallest holiday sales growth in 30 years. But Wal-Mart’s top executives have repeatedly warned investors not to get their hopes set too high for the rest of the year.

“I don’t think consumer spending is slowing, but I also don’t see the strength that many of you in the investment community appear to see,” Wal-Mart CEO Lee Scott told analysts when the company missed Wall Street profit expectations earlier this month.

With its gigantic outlets virtually blanketing the U.S., Wal-Mart is seeing its biggest growth in overseas volume, which now accounts for about 17 percent of total sales.

Profits were crimped a bit this summer when the company tightened inventories with markdowns. Despite those sales, warm weather this fall has left the company with more winter clothing than it had planned on — although Wal-Mart executives have told Wall St. analysts the overstock is “manageable.”

A lot will depend on how aggressively other discounters cut prices to try to boost traffic. And there are already signs that Target, the second-largest discounter, apparently plans to give its bigger rival a run for the money.

Target
With its popular ads pitching a distinctive “cheap chic” style of merchandising, profits have been strong at the company’s flagship Target stores and at its credit card operations. But the company recently warned Wall Street that it may miss profit forecasts for the current quarter — which includes the holiday season — because of slow traffic at its Marshall Field’s and Mervyn’s department stores.

For now, Target is working to fix those store chains with a different mix of merchandise, according to CIBC World Markets analyst Peter Benedict.

But “with each quarter of underperformance by the department stores, we could be moving closer to the situation where management decides to dispose of those assets,” he said.

In the meantime, Target has also opened up a price war in the toy aisles of its flagship stores - taking a swing at Wal-Mart’s recent success in becoming the nation’s biggest toy retailer.

“In consumer electronics and toys, you’re going to see the most ferocious, competitive bidding that we have seen in years,” said Kurt Barnard, head of consulting firm Retail Forecasting Group. “Everyone carries the same items so it’s just a matter of price.”

Kmart
For Kmart, the stakes this holiday shopping season are a lot higher.

One measure of the dominance of Wal-Mart and Target and the fierce competition in the discount retail sector is the number of smaller players that have fallen by the wayside. In just the past few years, Caldor, Ames, Bradlees and Ward’s have gone out of business, closing more than 800 stores altogether.

For a time, it looked like 90-year-old Kmart, formerly S.S. Kresge dime store chain, was destined to be the next retail roadkill.

After losing nearly $6 billion from 2001-2003, and restating earnings in an accounting scandal that left two executives facing criminal charges, Kmart filed for bankruptcy protection in January 2002 and emerged in March of this year. In the process, the number three discounter closed more than 600 stores, laid off more than 60,000 employees and left shareholders with worthless paper. Though still the third-largest discounter, the company has been trying to shrink its way back to profitability - and survival.

Now, Kmart is going urban. With stores in 85 percent of U.S. metropolitan areas, the company says it is positioning itself to attract a multicultural clientele of Hispanic, African-American and Asian shoppers — a group the company says represents $1.2 trillion in purchasing power. To signal the makeover, the retailer launched an ad campaign in October built around the slogan: “Kmart. Right here. Right now.”

“Because of our proximity to these customers, their respective growing buying power, and a limited retail offering near their homes, Kmart is well-positioned to become the ‘store of the neighborhood’ for these consumers,” according to the company's Web site.

A $2 billion financing package will give the company’s new management a shot at reviving the company. But analysts say it’s too soon to tell whether the plan will work. Many of them stopped covering the company when it entered bankruptcy court; stock in the new company, known as Kmart Holding Corp., began Nasdaq trading in June.

Reuters contributed to this story.

© 2013 msnbc.com Reprints

Discuss:

Discussion comments

,

Most active discussions

  1. votes comments
  2. votes comments
  3. votes comments
  4. votes comments

Data: Latest rates in the US

Home equity rates View rates in your area
Home equity type Today +/- Chart
$30K HELOC FICO 4.71%
$30K home equity loan FICO 5.26%
$75K home equity loan FICO 4.70%
Credit card rates View more rates
Card type Today +/- Last Week
Low Interest Cards 13.42%
13.42%
Cash Back Cards 17.94%
17.94%
Rewards Cards 17.14%
17.14%
Source: Bankrate.com