By Stephanie Thurrott

When Cathy Traietti needs housewares, electronics or kids' clothes, she treks to Target, a more-than-20-minute drive away, bypassing the Kohl's and Wal-Mart in her Walpole, Mass., hometown. "It's worth it for me to go to Target," she says. "They have everything, and they have nicer, more upscale, more fashionable things. They follow the trends better, and I never have to wait. Even at Christmas they have plenty of registers open."

Target, for her, hits on the right combination of price, style and shopping experience to build a loyal customer. A stay-at-home mom of two young children, Traietti exemplifies the shopper discount department stores want to snag. She's part of the coveted "mom" demographic-shoppers who typically make purchases for three, four or more household members.

Pinching Pennies

If price were the only consideration, ubiquitous retailer Wal-Mart would likely come out on top for Traietti. The company's purchasing power and super-efficient, low-cost distribution network mean the famous "everyday low prices" can typically beat the competition. "Wal-Mart is the low-price leader," says Marcia Layton Turner, author of Kmart's Ten Deadly Sins (Wiley, 2003). "Kmart would like to say that, but they can't. Kmart went head-to-head with Wal-Mart on price a couple of years ago but Wal-Mart just dropped their prices further."

Wal-Mart's decentralization also gives it an edge in pricing, allowing stores with nearby rivals to price their merchandise competitively, while stand-alone stores can inch prices up to what the market will bear. "Wal-Mart has just stuck with low prices-that's the niche they've carved out," Turner says.

Kmart tries to draw shoppers with its sale prices-while everyday prices might be higher than Wal-Mart, weekly sales can drop prices on specific items below Wal-Mart's. In theory, the hi/lo pricing strategy entices shoppers to visit the store more often to take advantage of the specials.

In application, it was part of the strategy that spelled financial disaster for the Kmart chain. The company emerged from Chapter 11 bankruptcy protection in May 2003, after a 15-month period during which it shuttered about 600 of its 2,100 stores, cut 60,000 jobs, dumped executives and directors, and reworked its liabilities. (The company's association with the recently indicted Martha Stewart in its housewares line wasn't "a good thing," under the circumstances.)

Essentially, Kmart stumbled into a gap created by the pricing acumen of Wal-Mart and the hip marketing pitch at Target. "Kmart still has to figure out how hi/lo beats everyday low prices," says Gus Valen, CEO of the Valen Group, a strategy consulting firm that works with consumer goods companies and retailers. "At Kmart, the prices are not as good as Wal-Mart, and the merchandise is not as good as Target."

Which is a vital point: Shoppers like Traietti are often looking for more than low prices. "Wal-Mart's kind of a last resort for me," Traietti says. "They have decent prices but both the parking lot and the checkout line are always so crowded. It's not my first choice."

Say It with Style

Having ceded the price-king mantle to Wal-Mart, retailers are looking for other ways to woo the shoppers past the bottom line. "Target doesn't focus on low price-their prices are a little more expensive," Valen says. "But Target's retail experience is a little more refreshing. Target has wider aisles and a cleaner store. Wal-Mart and Kmart are really cluttered."

Target doesn't try to go head-to-head with Wal-Mart and Kmart. "Target's paid attention to what they do well," says Wally Bock, an author and retail strategy consultant based in Wilmington, N.C. "I don't think they will ever be the biggest, but they're most secure in their niche-the upscale, price-conscious shopper. They've stayed consistent."

Another clever element of the Target revival has been the addition of the hippest names in cheap chic: Mossimo, Todd Oldham and Stephen Sprouse clothing, Sonia Kashuk lipsticks and brushes, and Michael Graves and Philippe Stark housewares. As a result, even teenagers think Target is cool.

Meanwhile, Kmart's salvos in the style battle have included its heavily promoted Martha Stewart housewares, the Joe Boxer clothing line and the Disney children's line. "But the image is different the way Target does it versus the way Kmart does it," says Bock. "Kmart is saying, 'This is an example of how we're upscale.' Target puts it into its own context. It doesn't tell you to come in for the brand, just come into Target." Worse yet, Kmart may find itself over a big-name barrel, as Martha Stewart Living Omnimedia expects at least $47.5 million in royalties coming to it from the retailer if the year's annual sales come in shy of the contract minimum-a tall order, with nearly a third of the stores closed down.

Working the Corners

Like Target, up-and-comer Kohl's isn't battling Kmart and Wal-Mart straight on. The newcomer is luring customers with a better shopping experience, starting with the chain's "That's more like it" tagline. "One good thing about Kohl's is the carts," Traietti says. "They have single and double strollers with the basket in the back, and it's really easy to go shopping with the kids with the built-in stroller. And they seem very safety conscious-for example, they've placed stop signs at the crosswalk in front of the store."

Kohl's smaller stores also attract shoppers who are put off by the big-box experience. At 86,000 square feet on average, Kohl's stores are about half the size of most discount department stores, and they are laid out in a racetrack pattern designed to loop shoppers through the departments, ideally enticing them to place items in those convenient carts as they circle the store.

Also like Target, Kohl's competes in an area Wal-Mart isn't focused on: apparel. "Kohl's offers a great selection of clothes and they're reeling in old brands that still have a life. They're not premium brands, but they still feel premium," Valen says.

Shiny and New

Once king with a capital "K" at the top of the discount game, Kmart's longtime leadership in the industry came at a price. Coming out of bankruptcy, the company is battling a decades-long reputation for dingy stores, crowded aisles and out-of-stock merchandise-so it may not surprise you to learn that Kmart has actually lost market share to Wal-Mart for 20 out of the past 40 years. "In the '60s, customers were given great savings in exchange for putting up with poor service and a run-down appearance," Turner says. Today, that sacrifice won't fly.

Other retailers, notably Target and Kohl's, came in and offered shoppers great prices without cluttered aisles and crowded shopping areas. "Target and Kohl's are building from scratch or renovating and keeping stores fresh, clean and bright," Turner says.

Duly noted. As part of its return strategy, Kmart is taking cues from the frontrunners. The retailer is combating its run-down reputation with prototype stores in Michigan and Illinois, which are testing a lime color scheme, a new logo, a new layout, wider aisles, brighter lighting and better in-store signage. In the prototype stores, greeters welcome customers and offer assistance (Wal-Mart, anyone?) and store managers have more decision-making ability. Kmart's signature brands are prominently displayed so customers don't have to hunt for them.

"From what I've heard the transformation is amazing," Turner says. "They've done all the right things-they're brighter and cleaner, and they've taken out a lot of merchandise so the stores aren't as cluttered. But I'm concerned that they are taking a wait-and-see approach.

"They don't have time to wait and see. They need to take the money saved from shutting down stores and put it into renovating existing stores-that's what will draw moms back into the stores." And where the moms go, the money will follow.

Foray into Food

Wal-Mart offers shoppers a one-stop shopping destination, even more so now that they have added groceries into their merchandise mix. "Wal-Mart has taken a significant share out of the grocery channel, and they're grabbing cross purchases with that strategy," says Gus Valen, CEO of the Valen Group, a strategy consulting firm that works with consumer goods companies and retailers. "People will frequent a grocery store more often, and the theory is the more times you come in the more purchases you will make."

"It's smart-they put in groceries not to make money, but to give shoppers another reason to come to Wal-Mart," says Marcia Layton Turner, who recently authored a book on Kmart's travails. "Kmart had the lead in grocery sales years ago, but in the '80s they got into a cash crunch and pulled back. Wal-Mart took the lead."

Wal-Mart's 100 million weekly shoppers have made the retailer the top seller of groceries in the United States, beating out Kroger, Albertson's and Safeway. "Wal-Mart has been very good at two things historically: logistics and small margins," says Wally Bock, an author and retail strategy consultant based in Wilmington, N.C. "These are two vital skills in grocery retailing, and that's part of what they have done right."

Wal-Mart's grocery experience may help them move into other as-yet-untapped markets. "Wal-Mart understands how to serve customers with assortment and convenience," Valen says. "As they go into other retail formats with their low-cost distribution they will grow globally and locally."

Blue Light, Red Ink

Now that Kmart is starting to take steps toward a turnaround, it will be interesting to see how its strategy is reflected in the numbers. While Target and Wal-Mart have enjoyed rising revenue and healthy profit margins, Kmart will need a shot of success to reverse its downward financial slide.