Walmart vs Target: When it comes to groceries it's not really a competition

• Walmart posted surprisingly strong sales growth in the last quarter, while Target reported a decline.
• The difference comes down in large part to each company's reliance on grocery spending.
• As shoppers increasingly prioritize essentials, one in four US grocery dollars are spent at Walmart.

The past several months have had no shortage of confusing data and conflicting reports about the state of the US consumer economy, but one thing that has remained consistent throughout: Households are prioritizing essentials like groceries in their weekly budgets.

That shift in spending has been particularly challenging for retailers like Costco and Target, where the less-profitable grocery aisles serve more to attract shoppers who then splurge on higher-margin items elsewhere in the store.

Target's headwind turns out to be a tailwind for Walmart — and here's why.

Although Walmart follows a similar multi-category retail strategy, the company is in fact where one in four US grocery dollars are spent, according to data from Numerator. That's more than any other grocer, and almost as much as Kroger, Costco, and Albertsons combined. 

When Walmart's grocery sales are combined with those of its subsidiary warehouse club Sam's Club, the total approaches a third of total US grocery spending. Target meanwhile accounts for 3% of grocery dollars, or about a tenth of Walmart Inc., per Numerator.

With this context, Walmart's unexpectedly strong second-quarter sales growth — reported a day after Target posted its first quarterly decline in six years — is perhaps slightly less surprising.

"Customers are stretching their dollars further and seeking better value across more categories, more often," Walmart CFO John David Rainey said in a call with analysts. "We see grocery staples and in-home meal options being purchased more often."

Rainey also noted stronger sales of store-brand groceries, as well as items used for preparing meals at home, such as hand blenders and stand mixers.

Target sells those things too, of course, but if shoppers are already heading to Walmart for groceries, they may not want to make a second stop.

Walmart is also gaining significant ground online, where it trounced Target's e-commerce performance with a 24% increase in sales versus Target's 10.3% decline. The performance is particularly surprising given that Target has been an early leader in integrating digital and physical retail, and rolled out several drive-up features this year to make shopping more convenient.

Sara Batchelder, vice president of retail for Numerator, attributed the gains in grocery to Walmart's growing popularity among younger, deal-seeking shoppers, as well as incentives like same-day delivery and the Walmart+ membership program.

Finally, many shoppers turned to Walmart to soften the impact of inflation, with many new customers representing higher-income households, GlobalData retail analyst Neil Saunders noted.

So far these new shoppers seem to be sticking with the company as prices in some grocery categories have started coming back down. Rainey noted that shoppers were buying larger quantities of fresh meats, seafood, and eggs as those items have gotten cheaper.

Walmart was by no means the first — nor is it the last — general merchandise retailer to get into the grocery game, but the company's focus on that segment of its business is clearly giving it a big lift during a challenging time for its competitors.