Target and Best Buy find themselves in an unusual spot this holiday season: fighting to retain market share during a season they usually dominate.
The last months of the year are especially critical to Target, which has lost customers to Walmart and other stores this year.
Both of the Minnesota-based national retailers already have tamped down any expectations that they will have a blockbuster holiday season — a period that produces an outsize percentage of their profits.
“I think everyone is cautious about the holiday. … Whether it’s about market share or just the consumer not spending on discretionary, I guess we’ll see,” said Diya Iyer, S&P Global Ratings retail director. “Even the ones who have gained market share aren’t guiding to a very positive holiday.”
What’s more, the season this year will test the resilience of a modern retail business model that Target and Best Buy for the most part built and that allowed them to surge during the pandemic.
The holidays come as households are feeling the full effects of two years of inflation, student loan payments have resumed and many still have credit card debt from last year’s holidays, according to national surveys.
Shoppers told NerdWallet they were cutting back on the number of people receiving gifts this year. The National Retail Federation said spending will increase, but not as much as last year.
The first indication of what retailers are facing this holiday will come over the next two weeks. Target was to announce its third-quarter earnings Wednesday. Walmart and Best Buy also were to report their financial results this week.
Executives at Target and Best Buy are expected to report sales dips from last year as spending on non-necessities has been on a downward spiral for months. Costco, on the other hand, said sales in September and October were up 5.3 percent.
“We are seeing signs of caution,” Target CEO Brian Cornell said during a CNBC virtual summit earlier this month. “I think the most prevalent term we hear from consumers is they’re looking at their budgets really carefully right now.”
Both Target and Best Buy are fighting to prove to investors that their long-term strategies — to improve in-store experience while building stronger pick-up and delivery operations — make them a good bet on the investment end.
But now they are the underdogs. In the last few days, Target’s stock has been down more than 25 percent year to date. Best Buy’s has been down about 17 percent, while Walmart’s stock is up about 14 percent and Costco’s is up about 25 percent.
And Target and Best Buy are coming into the season with weaker results. Target posted this summer its first comparable sales dip since the spring of 2017, and Best Buy had its seventh consecutive quarter of sales declines.
“Our business, discretionary consumer electronics … is very challenged right now,” Best Buy CEO Corie Barry said in September during an Economic Club of Minnesota fireside chat with Minneapolis Federal Reserve President Neel Kashkari. “By the way, we also haven’t had innovation in electronics for the better part of three and a half years, really. Everyone has just been making as much as possible or pulling back as hard as possible.”
That’s not to say that consumers aren’t spending money, Barry said. People are spending more on experiences like Taylor Swift and Beyoncé concerts — a phenomenon she called “funflation.”
But with tightened budgets, that leaves retailers in unenviable positions to compete for limited dollars.
Consumers told consulting company Accenture in a holiday shopping survey that they are cutting back on giving gifts and putting up holiday lights, and are even planning to cook less elaborate meals.
While all retailers are dealing with economic trends, both Target and Best Buy are especially vulnerable during this season.
For the past five years, on average, Best Buy made 40 percent of its profits during the fourth quarter, said Mike Baker, a senior research analyst with D.A. Davidson Cos. Target made a smaller percentage, about 27 percent of its profits. However, January is traditionally a very slow sales month, meaning a lion’s share of Target’s sales occur in November and December, Baker said.
“It’s the most important quarter with respect to their profitability for the year,” he said.
Baker and other analysts have noted Target’s recent loss of market share to competitors. The best hope, for Target as well as Best Buy, is to advertise great products and try to find ways to excite the consumer while at the same time stocking conservatively, he said.
“It’s not the right environment for (Target),” Baker said during a recent online roundtable. “Their mix is too discretionary versus Walmart. … They do seem to be losing share in some of the non-discretionary categories. It’s not a great environment there, but they seem to be doing worse than others. So they need to get the holiday right.”
Not only have other major retailers like Costco and Walmart become more formidable using their low price points as leverage and Amazon with its convenience; there is also possible competition in the near future from resurrected retailers such as RadioShack, Toys ‘R’ Us, and Bed Bath & Beyond.
As retailers compete for tightened budgets, factors such as store efficiency and shrink — retail losses attributed mostly to theft — matter more to the bottom line.
Target and Best Buy both were Wall Street and consumer favorites during the pandemic, as people stayed home, spending disposable income on electronics and home furnishing upgrades. Target said it gained nearly $9 billion in market share in 2020 as it grew its revenue by $15 billion. Best Buy’s comparable sales jumped considerably in 2020.
But both companies expect sales declines this year.
Still, they have positioned their inventories well to serve customers who still plan to spend this holiday, said Joe Feldman, senior managing director at Telsey Advisory Group.
“I think they are set up to have a pretty solid season,” he said. “I think they just need to do some good merchandising and be on trend with product.”