The problems Woolworths Limited and Wesfarmers Ltd face in one picture

Much has been written about Woolworths Limited (ASX: WOW) and Wesfarmers Ltd (ASX: WES) and the issues they face in their general merchandise divisions – aka Big W, Target and Kmart.

But the following chart displaying same-store-sales (SSS) growth for all three brands clearly shows where the two retailers face their major issues. It also clearly shows that Kmart has completed a remarkable turnaround.

General Merchanise same store sales 2014 to 2016

Source: Company reports

As hard as Target’s management has been working, the brand has been struggling – perhaps because of the success of Kmart – with both brands owned by Wesfarmers.

Big W faces the bigger problem and it has been struggling for years to generate any growth at all.

The problems the discount department or discount variety stores face is that the products they sell can be obtained from a multitude of sources – much like traditional department store retailers David Jones and Myer Holdings Ltd (ASX: MYR).

Why would shoppers venture into a Big W or Target for clothes when they can obtain similar items at specialist fashion retailers, or buy toys from other specialist stores?

Kmart has succeeded by a relentless focus on finding a niche for itself. It’s almost the Aldi of the general merchandise sector, focusing almost exclusively on home brand products and offering the lowest price.

Target and Big W need to find their own niche to be successful, and that could mean either moving up market or further down market. Target faces the additional problem of how it avoids cannibalising the turnaround at Kmart. However, now that it has been combined under the same management as Kmart, there’s perhaps a fairly good chance that Target will see a turnaround.

Foolish takeaway

There’s certainly plenty of hard work ahead for the management teams of the respective retailers, but it’s unlikely to get any easier if the likes of Amazon decide they want a piece of the action in Australia.

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Motley Fool writer/analyst Mike King owns shares in Wesfarmers and Woolworths. You can follow Mike on Twitter @TMFKinga

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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