NEW YORK — It's looking like all-out war between the nation's big discount stores.
With overall sales sluggish and showing no signs of improvement, the three largest discounters — Wal-Mart Stores Inc., Kmart Corp. and Target Stores Inc. — are turning to guerrilla tactics to win more customers.
They're increasing discounts, grabbing exclusive brands and stealing employees from their rivals.
The hostilities couldn't come at a better time for consumers, who have their own ammunition: money from tax rebate checks.
In a move to defend its turf, Target charged Kmart in a lawsuit filed Tuesday of lying to consumers in a nationwide advertising campaign that compares Kmart prices with those of its competitors.
Kmart, which is on a campaign to cut prices, has denied any wrongdoing, and in a conference call with investors Thursday, Chuck Conaway, chairman and chief executive officer, fired back.
"If our talking about our pricing was an issue now, it is going to be a lot more of an issue" by the end of next month, Conaway said, when Kmart plans to lower prices on nearly 50,000 items — nearly 45 percent of all its merchandise.
The three companies, which account for 88 percent of the $206 billion U.S. discount market, have their own distinct identities: Wal-Mart, the world's largest discounter, has ruled with its "everyday pricing" formula. Target appeals to a slightly more upscale customer, offering exclusive products like Michael Graves housewares and Mossimo clothing.
Embattled Kmart wants to focus on being a destination for the shopping mother, and has expanded its licensing partnership with such brands as Martha Stewart, its most lucrative label. It also has signed exclusive children's apparel arrangements with Sesame Street and Disney.
In trying to build more business, the identities are overlapping more.
"They are all looking to gain market share at the expense of the other fellow," said Kurt Barnard, president of the Barnard Retail Trend Report, based in Montclair, N.J. "This is the most intensely competitive climate I have seen in decades, and it is not likely to abate anytime soon."
"Each is trying to add a new dimension to its offerings and to its way of operating, which they hope will attract new customers from their competitors, as well as department stores," Barnard said.
Eyeing Wal-Mart's successful expansion into food and pharmacy, Target and Kmart are now out to expand these categories by expanding their super centers. Food, in particular, carries a lower profit margin, but the category is a traffic driver. Kmart has converted its entire chain of stores to a single food distribution company, which Conaway said will allow it to cut the company's costs, as well as the consumer's.
In a bid to capture the youth market, Wal-Mart and Kmart are now trying to copy cheap chic purveyor Target, stocking up on tiny T-shirts and low-rise jeans.
Kmart hired away Mariana Keros, formerly a director of trend merchandising at Target, to lead the company's first trend apparel department.
Wal-Mart has scored big with its exclusive licensing clothing deal with preteen TV twins Mary Kate and Ashley Olsen. The retailer, which started carrying the line in January, is doubling its orders for fall.
The competitive climate has forced Wal-Mart to step up its discounting, even if it creates margin pressure in the short term.
"This is the right thing to do for our customer and is driving strong market share gains," Tom Schoewe, chief financial officer, told investors during a recent conference call.
Bert Flickinger III, a consultant based in Westport, Conn., noted that Kmart has made some strides in closing the pricing gap. Two years ago, Kmart's prices were 6 percent to 8 percent higher than its discount competitors on 1,000 top sellers across a variety of categories. Now, the difference is only about 1 percent, he said.
Some wonder how long Kmart, still struggling to cut operating costs that are higher than its competitors, can afford to keep discounting.
"Kmart has a lot less room to maneuver," Bob Buchanan, an analyst at A.G. Edwards, said.
Flickinger said Kmart also is facing a real challenge in Target's lawsuit over the "Dare to Compare" campaign, in which Kmart uses in-store signs to promote its prices on different products and to compare Kmart's prices to those at other retailers, including Target.
Target said the signs are "deceptive, rife with errors and provide no meaningful information to consumers." Kmart called the suit "needless, costly litigation" by a competitor who is "falling behind in pricing in the retail arena."