Target vs Walmart | Wardrobe Malfunction | 3

0:07Walmart head office, Bentonville, Arkansas, spring 2005. In the auditorium, Walmart's buyers and executives are attending their regular Friday meeting. These meetings are a ritual that goes back to the days of Sam Walton. They're a big reason why Walmart remains nimble, despite its heft. And every week, Walmart CEO Lee Scott leads the meeting. Okay, make sure that supplier gets us enough product to keep pace with demand. Scott doesn't give a deadline. He doesn't need to. Everyone here knows the deadline. It's the same as it's always been, sundown. At Walmart, problems aren't allowed to linger.

0:47Scott adjusts his thin-rimmed spectacles and looks around the room for the small appliances buyer. Ah, there you are. I got a question. The buyer stands. Why is Target selling a coffee maker for$19.95 that's better than ours? The buyer knows better than to make excuses. I don't know, but I'll find out. The buyer sits and grabs his BlackBerry. As he pings messages and emails to his team and suppliers, the meeting moves on. But in every discussion, Target looms large. Ever since Target embraced designer collaborations, it's been on fire. Affluent shoppers now rush to buy the company's latest gear.

1:30And so far, Walmart's attempts to get a piece of that action have fallen flatter than its static stock price. The revenue gulf between the two remains huge. Walmart's U.S. stores ring up$192 billion of sales a year. Target trails far behind on$51 billion. But Target's growing faster, and that means Walmart's conceding market share. And if that continues, one day, maybe many years from now, Target will catch up. And when that happens, it'll be too late to stop it. So Scott wants Target neutralized now. As the meeting wraps up, the small appliances buyer puts away his BlackBerry and stands again.

2:18Scott stops the conversation. Go ahead. There'll be a better coffee maker in our stores next week. The room breaks into applause. Even by Walmart standards, that's fast. Scott nods approvingly. But then the meeting marches on. There's no time for back-slapping. Target's hit on a winning formula, and Walmart needs to respond. But new coffee makers aren't enough. What Walmart needs is apparel that can beat Target in the style stakes. But to succeed, it's going to have to overcome a major problem. Its own brand.

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4:35From Wondery, I'm David Brown, and this is Business Wars.

5:01On the last episode, Walmart's down-home image got shredded as it came under fire for hollowing out downtowns. Target refashioned itself as a style destination with help from trendy designers. And Kmart got crushed. Now, Walmart's out to puncture Target's new momentum by following it into fashion. This is Episode 3, Wardrobe Malfunction.

5:35Spring, 2005, Midtown Manhattan. Two blocks from the Empire State Building in a low-key office block off Fifth Avenue, Walmart's latest master plan is taking shape. Inside, dozens of designers spread over two floors are at work. They used to create clothes for upscale brands like Nautica. Now, they're bringing style to the aisles of America's top retailer. In a glass-walled meeting room, Executive Vice President Claire Watts checks the final prototypes for Walmart's soon-to-launch Metro 7 clothing range. The table is loaded with silk camis, leopard print tops, velvet blazers, and skinny jeans.

6:18The red-haired 45-year-old executive picks out a pair of jeans embellished with flower patterns and holds them up. These look great. Fabric feels nice, too. The team feels relief. Watts oversees apparel and home furnishings at Walmart. It's a$37 billion a year operation, but it's famous for basics. Watts wants Walmart's new Manhattan design studio to change that and make its apparel trendier. Watts turns to Metro 7's lead designer. How much will these jeans cost customers? Should be less than$23. Watts smiles. She might want chic, but this is Walmart, and it's still got to be cheap. Metro 7 is designed to challenge target supremacy in budget fashion.

7:08It's noticeably more urban and stylish than Walmart's trusty but rusty Faded Glory label. Metro 7 will launch in urban Walmarts in the fall, then go nationwide next year. But it's only the first step. Walmart's also copying Target's strategy of working with top designers. It's recruited Mark Eisen to create a sportswear line called George M.E. Eisen's clothes are usually found in stores like Neiman Marcus, and Watts hopes he can do for Walmart what Masabo did for Target. But fashion isn't just about clothes and price tags. It's about the image those threads project. And that's why Walmart's also tending to its brand.

7:59Walmart head office, Bentonville, September 2005. In a windowless meeting room, several former presidential advisors stare at their laptops and Blackberries while munching trail mix. This is Walmart's new war room. These men and women are the generals leading the new fight back against the retailers' enemies. On the TV in the corner of the room, CNN's on with the volume down low. A former advisor to Bill Clinton looks up from her Blackberry. Another union's just quit the AFL-CIO. Everyone sits up. This might be something they can use. Walmart's been under fire for years. Critics say it stifles small business, mistreats employees, busts unions, and squeezes suppliers to breaking point.

8:50Walmart used to shrug off these criticisms, figuring its low prices would trump those concerns. But the negativity around its brand is now hurting its attempts to woo the image-conscious middle earners who've fallen for target. But the attacks are getting more sophisticated, too. Unions are founding campaign groups like Wake Up Walmart and staffing them with former presidential advisors. So Walmart's hired some D.C. image makers of its own. The former Clinton advisor checks her BlackBerry again. The rebel unions have a convention in St. Louis in two weeks. Ronald Reagan's former spin doctor, Michael Deaver, leans forward.

9:32You can bet your bottom dollar that they'll attack Walmart at that convention. It's an easy way to fire up their members. We should counter their arguments before they even open their mouths. How about a news conference in St. Louis the day before their convention? To say what? To highlight Walmart's positive effect on the community. You know, give the media our side of the story. We could have local suppliers talk about Walmart creating jobs. Deaver nods. Also a cashier from a local store. People relate to cashiers. Walmart's news conference delivers the goods. The media still covers the union's criticisms of Walmart, but the retailers' counterarguments also get aired.

10:17And in this PR war, that's a victory. Walmart's not looking to change the minds of those who already shun its stores. They want to sway the undecided, the masses of people in the middle, who haven't yet picked a side. But while the spin doctors in the war room waged their PR war, store managers are digging in for another holiday season. Last year, Walmart played nice, then watched as Target and others cleaned up on Black Friday. But this year, it plans to clobber the competition. And as the holidays approach, Walmart stores clear space for more upscale products. They take deliveries of Metro 7 clothes and brand name electronics.

11:02And they stock the shelves with 600 thread sheets and organic food. Walmart begins its holiday season assault on November 1st with festive TV ads starring pop group Destiny's Child.

11:28During Thanksgiving week, Walmart ups the ante. It posts its Black Friday deals online early, so everyone knows there'll be half-priced laptops and deeply discounted big-screen TVs up for grabs. It also tells shoppers those deals will end at 11 a.m. The message is clear. If you don't visit Walmart first, you could miss the best Black Friday deals. Then, Walmart drops another bombshell on the competition. If another retailer advertises a lower Black Friday price, Walmart will match it. Walmart is forcefully reasserting its low-price strategy. And when Black Friday comes, Walmart opens at 5 a.m.

12:14So it can ring up sales while Target's still keeping people waiting in the cold for another hour. By 11 a.m., Walmart sold more than 75 ,000 laptops nationwide. And its November sales haul is up more than 4 % over the year before. Target bounces just 2.6%. But in December, the tide turns. Metro 7 sells well, but it's only in a few urban stores. Elsewhere, Walmart finds that lower prices alone can't peel people away from Target's exclusive designer collections. When the holiday shopping frenzy's over, Target's sales are up 5.8%, comfortably outpacing Walmart's gain of 3.6%. And as 2006 begins, Walmart's attempt to muscle in on cheap chic comes undone.

13:17February 2006, Rogers, Arkansas. In the local Walmart, a middle-aged shopper pushes her cart through the clothes department, looking for a new outfit. She stops to admire a faux velvet Jordache blazer. She's tempted for a moment, but then decides it's way too 80s and puts it back on the rail. Then she spots a sign for a new arrival in store, Walmart's Metro 7 collection. On the sign is a photo of Metro 7's raven-haired spokesmodel, former Miss Universe Dayanara Torres. She's wearing jeans embellished with flowery patterns and a matching cami. The shopper searches the Metro 7 rails. The clothes look great and the prices are right, but the tighter urban fits are another matter.

14:05Like her, the average Walmart shopper is size 14 and 5 '2", close to the national average. But Metro 7's fits are more form-fitting, part of Walmart's efforts to appeal to trendier shoppers that expect runway-ready clothes that hug the body. As a result, these Metro 7 clothes simply don't fit. So she shrugs and moves on, over to the display for Faded Glory, the Walmart brand that's been clothing customers for more than 30 years. And in small-town and suburban Walmarts across the nation, millions of other women are doing the same. Metro 7 hangs around in stores selling slowly week after week, occupying valuable real estate that could have gone to less fashionable but way more popular apparel.

14:57Walmart's designer sportswear collection, George M.E., doesn't do much better. By fall 2006,$2 billion worth of unsold clothes and home goods are dragging down Walmart's profits. And its plan to out-style Target is in tatters. It's becoming clear to Walmart that the design of its clothes isn't the root problem. It's the brand. Walmart made its name as the place that piles high and sells low. That reputation took it to the top. But now, it's become a trap, and it can't find a way to break loose. But world events are about to change the retail landscape in Walmart's favor.

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16:38May 2009, Waukesha, Minnesota. Beneath overcast skies, Target's annual shareholder meeting is underway in a soon-to-open store. and the company's 55-year-old CEO Greg Steinhoffels braced for a showdown with the man who's been menacing him for months. That man is Bill Ackman, the white-haired founder of the hedge fund Pershing Square. Wall Street sees Ackman as a rock star. Time after time, this slick 43-year-old squeezed huge returns out of major corporations by buying into them and then pushing their management into moves designed to boost their stock price. And now, he's taking aim at Target.

17:23Ackman's struggle with Target began in 2007, when he persuaded his pals on Wall Street to give him$2 billion so he could buy a big chunk of Target stock. Ackman wasn't just interested in the retailer's revenues. He saw value in the land those retail stores were built on. His plan is to put the land under Target's stores into a separate real estate business. That new business would then earn money by charging Target rent. Ackman believes this steady rental income would be so attractive to investors that the new real estate business would raise more than$5 billion in an IPO. But Steinhoffel shot that idea down point blank on the grounds that those returns might not materialize.

18:10He also worried that losing control of its properties would restrict Target's ability to open, close, and improve its stores. So Ackman's switching tactics. He now wants to get himself and four of his acolytes elected onto Target's board so he can press Target's management into accepting his plan by taking his plan directly to the shareholders. From the stage, Steinhoffel checks the agenda and then looks at Ackman. It's time. Bill, the floor's yours. Everyone in the room watches as Ackman heads to the stage, looking confident. But beneath the veneer, Ackman's feeling the pressure, because Target's become a bad investment.

18:54In the past year, the world sunk into a deep recession, and Target's hurting bad. Before the downturn, Target's stylish apparel and home decor sold fast. Now, with money tight and property prices slumping, People are cutting back on the clothes and household fixtures that once powered Target's growth. Shoppers are defecting to Walmart, too. Target is price competitive, but its upscale image in smarter stores make many think Target is the pricier place to shop. So Target's stock is now in freefall, and the$2 billion Ackman invested in the company is now worth just$200 million. He needs a victory today.

19:39Otherwise, his backers will be hundreds of millions of dollars down, and his hard-won reputation will take a big hit. Ackman reaches the podium. He pauses to look out over the audience of target stockholders and starts to make his case by invoking the spirit of President John F. Kennedy. I will pay any price, oppose any foe, to do what I believe is right. The entire room looks bewildered as the hedge fund owner wipes a tear from the corner of his eye. Ackman pulls himself together and presses on, this time invoking Martin Luther King Jr. I don't want Target to end up a once-great company. It needs independent directors on the board.

20:30You see, I have a dream. A dream that one day directors will be elected on character and competence. I have a dream that our efforts here will be fruitful. Ackman turns his head away as he leaves the podium. No one's sure what to make of his tearful address. But his tears are in vain. Target's been campaigning hard to convince investors to reject him and his candidates. A few minutes later, the stockholders vote overwhelmingly to reject Ackman and his nominees. Ackman's attempt to push Target around have failed and cost him dearly. But the wider problems that inspired his intervention still need fixing.

21:20And that won't be so easy. Target's magic formula of cheap chic and affordable designer decor doesn't work so well in hard times. And while Steinhoffel and his team seek a way forward, Walmart's celebrating.

21:42June 2009, Fayetteville, Arkansas. It's 7 in the morning, and the Bud Walton Arena is already rocking a capacity crowd. On the stage, a team of cheerleaders are starting the party with a company chant that Walmart employees have yelled since the 1970s. Give me a squiggly! The cheerleaders squat and twist their hips. The crowd follows their lead. Give me an M. Give me an A. Give me an R. Give me a T. What does that spell? This is Walmart's annual shareholder meeting, and no one does stockholder summits like Walmart. Here, the numbers take a backseat to celebrations that this year include appearances from Miley Cyrus, Smokey Robinson, and Michael Jordan.

22:41But this morning, it's down to comedian Ben Stiller to get the party started. Good morning. I'm Ben Stiller. How you doing? I am very, very excited to be your host for the 2009 Walmart Shareholders Meeting. Yeah, man, you guys like to get up early. I hear they're still sleeping over at Target. All right, all right. So I thought I'd see how awake everybody is with a little pop quiz, all right? Who is the world's largest retailer? Who did over$401 billion in sales last year? Who helps the planet by being a leader in environmental sustainability? Who knows what sustainability means?

23:40Good, because I don't. Who helps people save money so they can live better?

23:52The stockholders are buzzing with good reason. The credit crunch is Walmart's time to shine. While household finances get hammered and Target's advance screeches to a halt, Walmart's got its swagger back. With discretionary spending tight, millions of hard-pressed Americans are flooding back to Walmart. But Walmart's success doesn't stop at home. Its global operations now account for nearly half its sales. From Britain to Japan, China to Mexico, Walmart's a retail juggernaut. And with its room for growth in the USA getting ever more maxed out, Walmart's seeking fresh opportunities abroad. And it's just spotted one to the north.

24:45Late 2010, Toronto, Canada, the head office of Hudson's Bay Company. In his corner office, the company's governor, Richard Baker, leans back in his leather chair with his landline phone pressed to his ear. Baker is a 45-year-old real estate mogul and the latest boss of North America's oldest company. Hudson's Bay started in the 17th century fur trade. Now it owns hundreds of retail stores in Canada, including the discount chain Zeller's. And the Walmart executive on the line from Bentonville wants to take Zeller's off his hands. Bottom line is we want to buy most of Zeller's stores. Baker smiles.

25:27His big gamble is about to pay off. Baker bought Hudson's Bay two years ago for$1.1 billion. On the surface, it seemed risky. Zeller's was in trouble. Ever since Walmart swaggered into Canada in 1994, Zeller's has spiraled down. But Baker didn't see a 330-store discount retailer in trouble. He saw 330 plots of land he could sell at a premium to an American retailer with designs on Canada. And Walmart's ready to be that buyer. The Walmart executive on the line gets worried by the silence. Richard? You still there? Yes, I'm just considering your offer. Baker fiddles with the phone cord. He's pleased his plan is coming to fruition.

26:20But he's also wondering if there's a rival bidder he can use to jack up the price. Baker sits up and replies to the Walmart executive. I need to talk to other people here, but this sounds as attractive. Great. I look forward to hearing from you. Baker hangs up and buzzes his secretary. Get me Greg Steinhoffel, the CEO of Target. I need to speak to him today. He's going to want to talk to me. Baker sinks back into his chair. Target's been eyeing sellers for years. Target's long talked about expanding abroad, and Canada's the obvious first step. But Target doesn't want to build a chain store by store.

27:04It wants to storm in. Trouble is, that's expensive. So, time after time, Targets led Zellers down the aisle, only to bail at the last moment. But now, with Walmart after the same prize, Targets going to have to pony up if they want Zellers. All Baker has to do now is step back and let these two behemoths duke it out. And it doesn't matter who wins, because either way, Hudson's Bay will walk away with a major payday.

27:43Hudson's Bay Company head office, Toronto, January 2011. In a meeting room, Zeller's CEO Mark Foote nearly spits his mouthful of coffee across the room. Target chief executive Greg Steinhoffel smiles. So, that offer works? Foote tries to regain his poker face. Targets just offered$1.8 billion for most of the Zeller's chain. It's more than enough, but it's not for Foote to say yes. He turns to Hudson's Bay Company Governor, Baker. Richard? Baker nods. He also can't believe Targets just offered that much. He bought Hudson's Bay for$1.1 billion less than three years ago. Now he's selling about half of it for$1.8 billion, even though Walmart's already walked away from the bidding war.

28:39Steinhoff leans forward. He wants confirmation. It's getting hard to wring more growth out of the USA. The discount store market there is saturated. Target's best hopes for stellar growth lies abroad. and Canada seems like the easiest place to start. Is that a yes? Baker stands, smiles, and offers his hand. Yes. Steinhoffel grins and shakes Baker's hand. They've got a deal. For the first time in its 50-year history, Target is taking its fight with Walmart global. Now that it's written the check, Target's got to move quick. It has up to 220 Zeller stores to remodel and a distribution network to build.