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50 Years of Discounting

How Walmart, Target and Kmart came to dominate American retail
  • June 24 2012

Within a five-month span in 1962, the way America shops changed forever.

The founding of Walmart, Target and Kmart signaled the birth of the mass merchandise discounter and set the stage for the big box stores that populate the 21st century retail landscape.

Today, the Big Three together represent more than 11,000 stores around the world, accounting for worldwide annual sales of more than $500 billion. Walmart alone, with an estimated $260 billion in U.S. sales, accounts for 1.7 percent of America’s gross domestic product. The 2011 ad spending for Walmart, Target and Kmart, according to Nielsen, topped $1.33 billion.

It’s no surprise that Walmart and Target are one-two in Interbrand’s 2012 list of the Best Retail Brands.

As they celebrate their golden anniversaries, Walmart, Target and Kmart have dominated the retail landscape not because they offer low prices, but because they have continually evolved to meet the changing needs of American shoppers. They’ve gone from a place to pick a low-priced product off a pallet to high-touch retail environments with highly loyal customers.

“It’s the most dynamic of all the retail channels,” says Marshal Cohen, chief industry analyst at NPD Group and author of Buy Me!, an examination of consumer shopping habits. “They’ve gone from lowest cost to fashion conscious to value conscious to all-encompassing.”

 

The launch of a concept

On March 1, 1962, the first Kmart store opened in Garden City, Mich., a suburb of Detroit, a new concept for parent company S.S. Kresge Co., a pioneer in variety (or five-and-dime) retailing. Two months later,
the first Target store was opened in Roseville, Minn. by the Dayton Company, an old-line Minneapolis department store. And on July 2, down in Rogers, Ark., Sam Walton, who had operated a handful of Ben Franklin store franchises, opened his first Walmart Discount City.

The idea behind the discount store was simple. It would combine the selection of a department store with the price of a variety store. It would be a one-stop shop—you could buy a pair of pants, a can of motor oil and a bag of candy from the same store. The concept was built for the burgeoning suburbs—a large, freestanding, single-story structure surrounded by an ocean of parking. It might not have been posh, but it was convenient and inexpensive.

“This is when people wanted convenience, quality and price—all the buzzwords we’re still hearing about,” says retail historian Robert Spector, author of several books on retailing, including The Nordstrom Way and Category Killers: The Retail Revolution and Its Impact on Consumer Culture.

From the 1960s through the 1980s, Walmart, Target and Kmart were just three of many national and regional discount store chains. As other discounters stood pat, the Big Three began to evolve. Kmart created its own celebrity-driven brands; Target started positioned itself as more fashion forward; Walmart became a distribution and logistical powerhouse that never wavered from its commitment to low prices.

They all introduced new merchandising concepts—such as 200,000-square-foot hypermarkets and membership warehouse clubs—to build excitement and drive store traffic.

Why have these three stores come to dominate the industry where others didn’t? “What’s driven their transformation has been the quest for growth,” says NPD’s Cohen. “They all had the foresight to look at production and distribution that let them create low prices through cost efficiencies.”

At the same time, however, discounting still had a stigma for many more affluent shoppers. Walmart’s “Action Alley” and Kmart’s “Blue Light Specials” may have gotten their core customers excited about deals, but the idea of grabbing a package of socks off a pallet didn’t resonate with all consumers.

“The biggest factor that changed was the consolidation of department stores in the 1980s,” says Daniel Butler, VP of retail operations of the National Retail Federation. Discounters’ value proposition had long been lower prices, but this shift allowed Walmart, Target and Kmart to evolve from low price to high value. And the marketing programs of the Big Three began to reflect this change. The goal: to make it okay for the middle class to shop at their stores.

 

Walmart: Folksy, Friendly, Fierce and Focused

Walmart’s laser-like focus on price has long been its point of differentiation and where its brand gets its value. Sam Walton’s idea was to offer a wide variety of name-brand goods at deep discounts. Profits would come from sales volume, not markups. Nowhere was this more apparent than in its first advertising programs. In its early days, Walmart’s ad costs were generally about a third of that of competing discount chains. While its competitors published 50 to 100 circulars a year promoting their sales, Walmart ran just 12 because it always kept its prices low.

In fact, Walmart long kept as firm control of its advertising as it did its other expenses. It eschewed professional models in its circulars, using employees and their families instead. For years, its most recognizable ad image was the smiley-face “rollback” highlighting its low prices.

Rather, Walmart sought to take advantage of the folksy image of its founder Sam Walton, something that resonated with the traditions of the small towns where Walmart first made its mark. This was evident in Walton’s push to have every store have a “greeter,” someone who would welcome people and make them feel good about coming into the store.

By 1990, Walmart became the number one retailer in the U.S., ushering in a decade of growth that took it past its rural roots into the suburbs and beyond America’s borders. By the end of the decade, Walmart had become the world’s largest retailer and the world’s largest non-government employer.

Walmart today is the most valuable retail brand in the U.S., worth five times what Target, its closest competitor, is worth, according to Interbrand. While much of this value comes from the sheer scale of the company, it also is because the company, over the course of its 50 years, knows that its brand is about celebrating low prices.

“Walmart has created a clear path on what they stand for and how they deliver that at every point,” says Justin Wartell, managing director of Interbrand Design Forum. “Every person—from executives to store associates—knows what the brand is about.”

 

Target: Accessible Chic

Its department store pedigree has helped drive Target’s point of differentiation, helping the chain be about more than simply low prices. Instead, it has long sought to infuse a degree of fun and style into its shopping experience. It made it okay for more upscale shoppers­ to patronize a discounter.

“Our brand promise, ‘Expect More. Pay Less.’ aligns with how Douglas Dayton first positioned the company,” says Shawn Gensch, Target’s SVP of marketing. “Our direction is twofold; it is both differentiation and value.”

Target has delivered on that promise by mixing classic price-sensitive discounting with an eye for style. “There was a consumer appetite for something beyond pure savings,” says Wartell. “We call this accessible chic.”

In the 1990s, Target grew by positioning itself as a hip chain—the so-called Targé effect. In 1999, powered by a new campaign from Minneapolis’ Peterson Milla Hooks, it turned its bullseye logo into a “Sign of the Times.” The in-store mix changed; architect Michael Graves (who had designed a well-known “bird” tea kettle for Alessi) developed a value line of small appliances and home décor items that were exclusive to Target. Over the next 15 years, other designers—such as Missoni and Jason Wu—would follow suit and create excitement for the chain.

Target continued to reinforce this position in unique ways. It created a high-profile pop-up store on a boat in New York City. It purchased all the ad space in an issue of The New Yorker. Ultimately, this has helped turn Target into what Interbrand calls “the preferred discount mass merchant of a loyal, satisfied base of affluent shoppers under age 45.”

 

Kmart: Losing Its Way

Kmart, which by 1977 had more than 1,200 stores, pioneered many of the tactics its competitors would embrace. But it was also besieged by financial issues that kept it from maintaining its dominant position.

Foremost was Kmart’s use of “celebrity” brands. In 1985, it launched a line of women’s clothes developed by former Charlie’s Angels star Jaclyn Smith which helped turn apparel into the store’s fastest-growing department. Perhaps its biggest move was the signing of Martha Stewart as a company spokesperson in 1987. Her celebrity helped Kmart change its image and be seen as a source for “fashionable” entertaining. The Stewart-Kmart partnership would later come to include the Martha Stewart Everyday line of home products that was one of its most successful. Their high-profile split in 2009 signaled the difficulties Kmart was having.

Falling sales and losses hurt Kmart in the 1990s. In another effort to rekindle its brand, it embarked on a remodeling campaign—under the Big Kmart name—to create stores that were cleaner and brighter and had wider shopping aisles. A major ad campaign by Campbell Mithun featuring comedian Rosie O’Donnell and director Penny Marshall (and a cameo by Bob Hope), highlighted the exclusive brands available at Kmart such as Stewart’s and Sesame Street.

The comeback was short-lived. In 2003, Kmart reorganized under Chapter 11. By 2005, it merged with Sears, and it continues to close stores as it seeks to retrench. “Kmart has an aging and dwindling base of consumers,” says Keith Anderson, VP of RetailNet Group, a retail advisory company. “I don’t consider them an investment retailer any more.”

 

The Future Challenge

Retail in 2012 is certainly different from retail in 1962. As they look into the future, the Big Three discounters will need to continue to evolve to survive in this new, less predictable landscape. New competitive pressures and shifting shopping habits need to be addressed.

Still, the concept of one-stop shopping that drove discount’s growth is still a compelling proposition. Walmart, Target and Kmart continue to look for new ways to become more frequent destinations. Target’s recent remodelings included adding fresh groceries. Walmart has experimented with adding services such as health clinics and tax preparation.

“There are two decisions [discounters] have to make,” says RetailNet’s Anderson. “What is the right network of stores…and what is the appropriate mix of products and services in those buildings?”
NPD’s Cohen concurs. “Look for them to metamorphosize for organic growth. They have to get more out of their existing customers.”

As a result, both Walmart and Target have been trying out new store formats. This summer, Target will open its first CityTarget, a downtown store that’s somewhat smaller and stocks products more appropriate to an urban dweller. Walmart has tried out a variety of small format stores. Last holiday season, it opened a 1,000 square-foot pop-up store in the Los Angeles area that was essentially a showroom for online orders. A big shift from the 200,000-square-foot hypermarket, for sure, but maybe it is a signal as to where discounting is heading.