Consumer trends are continuously evolving, meaning companies and brands must keep up with changing tastes if they are to stay relevant. This is no less true in the discount sector than in any other part of retailing.
Traditionally seen as for less-affluent customers only, these retailers are becoming a more regular feature in all consumers’ shopping habits, with British households spending over £4.9 billion at bargain stores over the last year, 17% more than a year ago. As consumers have gained familiarity with the sector and the low prices it offers, the frequency and average spend of purchases have been increasing, along with the number of first-time visitors.
The preferences of the millennial generation have certainly had a major part to play in this. Less brand-loyal and with an anti-establishment streak, millennials are frequently shunning the big names of food and apparel retail in favour of smaller, more niche retailers.
Added to these tailwinds, there is still significant roll-out potential for value retailers in most countries. Further, traditional retail bankruptcies and exits are allowing value retailers to open more new stores with cheaper rent.
However, being ‘cheap’ isn’t necessarily a sign of long-term success, and many discount retailers have fallen by the wayside having failed to remain relevant to consumers – take the example of Kwik Save’s demise in 2007. So what are the key traits of a successful value retailer today?
Value for money is vital
While low prices are important to shoppers, it isn’t enough to just pay as little as possible. Customers want to feel like they’ve purchased a high-quality product too. In the case of apparel, this could be a pair of jeans that aren’t just cheap, but are also on trend.
The success and growth of Primark, which posted gross revenues of more than £5bn in 2015, versus its less stylish competitor Matalan (with revenues of just over £1bn), are testament to this. Primark’s focus on providing the latest fashion fads is proving a hit with millennials especially, producing a whole social media trend whereby shoppers post photos of their multiple purchases online, a practice known as ‘hauling’.
Some value retail models are more relevant than others
The ‘every-day low price’ strategy of Walmart and Tesco is perhaps the original discount model, but it is increasingly under threat from younger upstarts offering high-quality, own-brand products like Aldi and Lidl. Almost half of UK households buying groceries are now visiting a discount food store on a monthly basis, demonstrating that shoppers are starting to trust private-label products as much as the more familiar well-known brands.
A commitment to being low-cost in every sense
A low-cost mentality and culture is vital to succeed. The different approaches to supplier price negotiation are particularly telling in relation to discount food retail. While a traditional food retailer might employ younger, less knowledgeable buyers and negotiate their prices at just one point in the year, the ultra-price-focused private-label stores like Aldi and Lidl employ more experienced buyers and negotiate throughout the year, ultimately receiving the better price.
At these German discounters, everything is focused upon a desire to save themselves and the customer money: they can operate with fewer employees as each staff member is ‘cross-trained’ to work throughout the store, a bare store design ensures prices can be kept as low as possible, and even packaging is designed to display multiple bar codes to speed up time at the checkout.
While the price transparency brought by the rise of e-commerce, as well as online retailers’ far larger number of SKUs (stock-keeping units), puts high-street discounters under some pressure, these companies do benefit from one key advantage which could help them weather the threat of online: convenience.
With online delivery costs still high (and free delivery subscription services still at a low penetration), for ultra-low cost items (around £10 and below) it can still often be cheaper to buy products in stores, with the added benefit of being able to view them in person. Nevertheless, with Alibaba having surpassed discount store giant Walmart in gross sales in March of this year, we need to watch this space.
Any reference to a specific security, country or sector should not be construed as a recommendation to buy or sell this security, country or sector. Please note that holdings and positioning are subject to change without notice.