Target, Wal-Mart set up holiday sales battle

updated 2:55 p.m. ET Nov. 15, 2006

NEW YORK - All across America, families are making their to-do lists for Thanksgiving shopping. Turkey? Check. Fixins’? Check. Sweet potato pie? Check. Flat-screen TV?

Eh?

With price cutting from Wal-Mart likely to spread among other retailers, it will be all that shoppers can do to avoid picking up toys and electronics along with their cranberry sauce and stuffing.

On Tuesday, Wal-Mart, the world’s largest retailer, announced its fourth price-slashing move since mid-October and said that it would have its most aggressive discounting ever this holiday season. Its rival, Target, vowed price cuts, too.

That’s good for consumers, but probably bad for retail profits in the fourth quarter.

By February, when retailers report fourth-quarter and full-year earning, Wal-Mart and Target may not be able to match the double-digit percent profit increases that they announced Tuesday for the third-quarter. And what’s bad for Wal-Mart and Target may be worse for smaller retailers.

“(Profits) is going to be a big issue for the big box retailers,” said Ken Perkins, president of RetailMetrics LLC, a research firm in Swampscott, Mass. He noted that Target is going to be able to make up some ground lost in digital cameras and flat-screen TVs with its trendier apparel, which carries fatter profit margins. But he said, “It’s going to put pressure on everyone.”

Perkins pointed out that Wal-Mart can’t rely on price cutting alone; it needs to have customers buy merchandise other than electronics and toys. “Customers need to leave with a handful of merchandise,” Perkins added.

Wal-Mart’s assertive discounting is expected to pressure other retailers to match the cuts, a move that would erode profit margins, though it would save customers money. The most vulnerable are toy retailers and electronic chains, but moderate-price apparel chains could be affected as well, Perkins said.

Wal-Mart started holiday discounting in mid-October by cutting prices on more than 100 toys, then followed this month with electronics and small appliances, with a promise of more to come. The company vowed generous discounts, or what the company calls rollbacks, on basic apparel like cargo pants and flannel shirts.

“We are implementing our most aggressive pricing strategy ever across core categories, such as toys and electronics,” said Lee Scott, president and CEO of Wal-Mart, in a prerecorded phone message.

Wal-Mart and other retailers normally reserve such discount blitzes for the day after Thanksgiving.

Target President Gregg Steinhafel told investors during a conference call Tuesday that the retailer would compete on long-running discounts, noting that it has often matched those before Wal-Mart advertises them in its circulars.

John Menzer, head of Wal-Mart U.S. stores, told investors there were “huge sales increases” among the discounted toys and in some electronics.

“We’re seeing a big growth in our new categories such as flat panel TV’s, MP3 players, laptops and cell phones. But this is tempered with declines in our more mature categories such as music, DVD players and telephones,” Menzer said on the recorded message

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