Walmart is crushing Target by luring wealthier shoppers and dominating groceries

• Target reported a weak third quarter and lowered its fourth-quarter guidance.
• Meanwhile, Walmart sales were up over 8% in the quarter and the retailer raised its full-year outlook.

In the big-box battle for Americans' wallets, Walmart is winning.

The Arkansas-based retailer reported strong quarterly earnings on Tuesday, with sales rising 8.2% during the quarter. But one of its chief rivals, Target, didn't share the same fate: profit fell roughly 50% in the third quarter and Target cut its fourth-quarter outlook.

Target blamed its weak quarter on a range of factors: slowing sales as shoppers continue to contend with inflation, higher markdown rates, and an increase in "shrink" — thieves stealing inventory from its nearly 2,000 locations nationwide. And while Walmart also saw a pullback in spending in certain categories — particularly apparel, home goods, and electronics — it delivered a strong performance and raised its full-year outlook.

Walmart said its success was driven by two factors: its robust grocery business, and an influx of higher-income shoppers in its aisles.

"We've continued to gain grocery market share from households across income demographics, with nearly three-quarters of the share gain coming from those exceeding $100,000 in annual income," John David Rainey, Walmart's chief financial officer, said during the call.

That trend began earlier this year as rising inflation nudged wealthier shoppers away from their usual grocery stores and toward Walmart locations across the country. Even though there are some signs that inflation is finally starting to cool off, Walmart CEO Doug McMillon noted during the call that inflation is being "especially stubborn" in categories like dry grocery items.

And as upper middle-class shoppers trade down to Walmart's grocery aisles, they may get curious about the rest of Walmart's offerings, Wall Street analysts predict.

"Looking ahead, we think Walmart may experience some relative improvement in general merchandise trends as higher income consumers shop across its aisles," UBS analysts Michael Lasser, Mark Carden, and Atul Maheswari wrote in a note Tuesday.

"A lot of people may come to us for Tide or come to us for bananas, but they may not buy a T-shirt or a sweater," Doug McMillon, Walmart's CEO, said during the earnings call. "During a period of time when people are more sensitive to price, it makes sense that they would increase the amount of their wallet that would be coming to Walmart because of value."

Target doesn't appear to be seeing a similar trend. When asked about customer income demographics during the earnings call Wednesday, Target execs instead said growth is coming from its current guests, who are "coming more often and they are spending across more categories."

The typical Walmart customer is a middle-aged, white, suburban woman with an income of roughly $80,000 per year, according to data from analytics firm Numerator. And while the average Target shopper is slightly younger, the demographics are otherwise about the same.

Walmart is winning the grocery wars

But it's not just wealthier shoppers that are driving Walmart's dominance over Target — it's groceries, too.

Target has long tried to compete against Walmart's strong foothold in grocery, expanding its private-label offerings, adding national brands, introducing fresh fruits and vegetables, and expanding services like curbside grocery pick-up.

"We have been on a multiyear journey in food and beverage really to build credibility in the grocery space," Rick Gomez, Target's chief food and beverage officer, told the Minneapolis Star-Tribune in March. "We have a rallying cry in which we say we've gone from being just a retailer that just sells food to a retailer that celebrates food."

But Target still accounts for just 3.5% of the grocery market in the US, compared to Walmart's 22.4%, according to UBS estimates.

In fact, Walmart is the nation's largest grocer, dominating even Kroger, Albertsons, and Publix, the data shows. UBS analysts said earlier this year that Walmart is set up to continue winning the grocery wars thanks to its focus on low prices and the fact that customers can consolidate their shopping trips. Walmart is something of a one-stop-shop, a factor that's especially helpful during periods of high gas prices.

It all appears to be paying off: Walmart said during its earnings call Tuesday that it saw "mid-teens growth" in food sales in the most recent quarter.