Why the discount retailers are here to stay

 —  Article by Laura Agadoni
BERLIN, GERMANY - AUGUST 25, 2014: People visit T.K. Maxx store in Berlin. As of 2014 the clothing outlet and home goods company has some 1000 stores worldwide.; , discount retailers
Image credit: Shutterstock

Mid-market retailers may be struggling, but discount chains are thriving as more financially strained – and financially savvy – customers change where they’re shopping.

Value-for-money prices are the main draw. Aldi U.S. CEO Jason Hart estimates that the discount grocer’s prices come in as much as 40 percent lower than traditional grocery stores and 25 percent lower than big-box discounters.

For many shoppers, the prospect of cutting their weekly shopping bill during the global financial crisis was enough to get them in through the door. But once they discovered—and then became used to—shopping at discount retailers for their clothing and grocery needs, their perceptions changed and many never went back to the traditional stores.

The numbers are proof of this phenomenon. Almost 6,000 discount stores popped up across the U.S. between the end of 2010 and 2015 with sales soaring from $30.4 billion to $45.3 billion during the same period, according to retail research firm Conlumino.

And sales for discount retailers in the U.S. beat out traditional retailers by far: T.J. Maxx along with its sister store Marshalls rack up $304 in sales per square foot. Ross brings in about $288 per square foot. Traditional retailer Macy’s, in comparison, averages only about $158 per square foot. Dollar Tree has been doing so well that it reported better-than-expected profits in the first quarter of 2016.

It’s not just lower-income groups are the only segment interested in discount stores. The coveted affluent millennial market – people born between 1980 and 2000 who make over $100,000 a year – is responsible for about 25 percent of sales at Dollar Tree and Dollar General.

Gaining market share

While the discount retail market is booming, growth isn’t a given and a comprehensive plan need to be in place. “A whole plethora of value retailers have been quite aggressive in the marketplace,” says Scott Burns, JLL’s Retail Brokerage Lead in Los Angeles. “And they’re not just growing organically on an individual basis; they’re acquiring other stores, taking those stores out of the equation.” In July 2015, Dollar Tree completed the acquisition of Family Dollar to create a discount retail behemoth with 13,600 stores across 48 states and five Canadian provinces.

Increasing their store presence is another favourite move. “Dollar Tree grew its market share by expanding its locations and upgrading the quality of its real estate,” Burns explains. “As their market share and brand recognition has increased they have been able to locate stores within closer proximity than in the past utilizing the density of many of the major metro areas to their advantage.”

It’s not just where the discount retailers locate their stores: what happens inside is equally important: their rapidly changing inventory holds huge appeal for fashion conscious shoppers. “Discounters are really good at changing up their inventory,” says Burns. Customers go in and have a “seek and find” experience. “When they are rewarded, they can’t wait to come back to see what else they can discover.” Discount grocer chain Aldi for example, has recently added lines in organic quinoa and coconut oil, as more shoppers pay more attention to the quality of the food they’re eating.

Besides a changing inventory, discount retailers know that American consumers place importance on brand names, says Burns. “You go into discount stores, and they’ll have good-quality brands at discount prices. While there’s nothing new about that model, it’s what helps discount stores gain market share from traditional retailers,” he says.

Plus the way the merchandise is presented has also changed. “A typical dollar store today looks very different to one 10 years ago,” Neil Saunders, managing director at Conlumino, tells CNBC. “It’s lighter, it’s brighter, it’s more shoppable.”

A changing landscape

With discount retail chains now firmly established – and nurturing their own growth plans – the pressure is on to fight for their place in a rapidly changing retail landscape.

German discount grocer Lidl, which offers high quality food at very low prices, is gearing up to enter the U.S. market in 2018 having built a sizeable – and disruptive – presence in Europe. Aldi is also expanding in the U.S. market with 45 stores planned for the fiercely contested Southern Californian market in 2016. Kantar forecasts that it could generate $20 billion in U.S. sales within five years as its total number of stores rises to around 2,000.

“The discount trend in the U.S. isn’t going away,” says Burns. “But it won’t grow at the rate we saw between 2009 and 2014. The massive growth we’ve seen will level out.”

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