Wal-Mart Throws an Undercut at Target

Chain-Store Strategy Changes for the Christmas Blitz

Sales tags touting deep price cuts were flying like battle flags this week in the electronics department of Wal-Mart in Manassas. Twice each week, about a dozen employees sneak into enemy territory -- Target is just two miles away -- to scope out prices. When they return, the store starts discounting, undercutting the competition by 5 percent or more, manager Beth Melson said.

"We can stay the lowest price in the market to draw shoppers into our store," she said. "They know they can come here and get the lowest price."

Electronics make up the newest battleground in Wal-Mart's fight for customers this holiday season. And with just over a week left before Christmas, the company is in full assault mode, from Manassas to headquarters in Bentonville, Ark.

The catalyst can be summed up in one word: Target.

While it certainly isn't Wal-Mart's only competitor, Target Corp. has made a splash with its strong growth. Sales at stores open at least one year, a key performance measure in retail, were up 5.9 percent in the third quarter. Wal-Mart Stores Inc., meanwhile, plodded along at 3.8 percent growth.

Target has become known for trendy apparel and home furnishings through partnerships with high-end designers like Michael Graves and Isaac Mizrahi. This season, it rolled out a special collection by Italian design house Fiorucci and "vintage modern" holiday decor by Thomas O'Brien.

That has helped Target win an enviable customer base with an average household income of about $60,000, compared with Wal-Mart's average of $40,000 to $45,000, according to Jeffrey P. Klinefelter, an analyst with Piper Jaffray & Co., an investment company. Target shoppers are also less affected by swings in gas and heating prices, which industry analysts worry could slow holiday shopping.

Now, Wal-Mart has decided it wants a piece of that action.

"They are on a tear," said Wendy Liebmann of WSL Strategic Retail, a consulting firm. "I think they will continue to be very, very aggressive through the season."

The stakes in the holiday shopping wars are particularly high for Wal-Mart. The world's largest retailer has been eager to reestablish its dominance after stumbling last year by failing to mark down merchandise sufficiently. In addition, this Christmas is the first big test of how well the company can sell higher-priced goods -- like laptops and men's pinstripe suits -- that it hopes will upgrade its image.

That has given birth to a marketing strategy that combines the cutthroat with the chic. Wal-Mart preempted competitors when it unleashed its holiday marketing campaign in November a week earlier than last year. Advertisements for the first time featured celebrities like the bootylicious girl group Destiny's Child and tweener heartthrob Jesse McCartney.

The day after Thanksgiving, Wal-Mart offered blockbuster discounts that had customers lining up for hours to be first inside when stores opened at 5 a.m. The store has also been touting exclusives on its Web site.