In a recent year Walmart reported total asset turnover of 2.44 whereas Target reported total asset turnover of 1.84. One interpretation of this is that Walmart managed its assets more efficiently than did Target. Can you think of another reason that might explain the difference in turnover ratios that does not imply that Target managers are performing poorly relative to their peers at Walmart?
What will be an ideal response?
This question points out the problem with naively asserting that a higher turnover ratio is better. Target specifically tries to appeal to a more upscale customer than Walmart. Their aisles are not as packed with merchandise (i.e., they do not have as much to sell per square foot of floor space), and they may sell goods that are priced higher and do not sell as fast as the goods that Walmart sells. They may invest more in the look and feel of their interior space. All of these lead to lower asset turnover. However, by appealing to more upscale consumers, Target may charge slightly higher prices and may be just as profitable as Walmart while pursuing a different type of strategy.
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