Discounting reality

Some pundits have asserted that ‘structural challenges’ and ‘digital disruption’ terminology is used a little too frequently. There is an element of truth in this, but our analysis suggests nowhere is the impact of these themes more prevalent than in retail. In what remains a tough environment for bricks and mortar stores, consumers continue to prioritise value and convenience. 

Given the well documented plight of Poundworld and Toys R Us, alongside recent woes for specialists Homebase and Dunelm, you could be forgiven for turning a blind eye to the sector. After all, online distribution is only likely to lead to further difficulties as growth emerges in indirect channels. 

We still believe the discount operated model should continue to resonate strongly

However, our sector work shows that these are company-specific issues, rather than a wider negative trend. Increased competition may have driven their downfall, but the various business models also warrant scrutiny. Companies that are purely wedded to seasonal category (i.e. garden or toy focused) have suffered from either weather or shifts in consumer patterns. Businesses that adopt a scattergun approach to SKUs (stock keeping units) also lack focus, as too much product inventory and choice has proved a significant hindrance. 

Yet, for all the doom, we still believe the discount-operated model should continue to resonate strongly outside of ecommerce. In this context, the influence of Aldi and Lidl should not be understated. They are responsible for breaking the stigma around the discount offering in the UK, opening up this category to the middle classes. An early market scepticism gave way to an influx of value propositions, which after initial success, has now started to wane for some companies. 

Looking ahead, we see more capacity exiting the market. This should actually strengthen the hand of those with a more focused and effective business model. On this, we draw inspiration from a recent meeting with industry leader, B&M European Value Retail. The company has the positive dynamics of category diversification, seasonal mix and product initiatives, building a winning proposition. Even Lego now wants a piece of the action!

Consumers have become increasingly last minute and impulse-driven

Offering a narrow range of leading product lines, B&M's direct sourcing model in Asia provides a unique and cost-effective route to market. This sees them buy large volumes at low prices, which becomes even more cost effective as they scale further, and they share this purchasing advantage with its customers. It also allows for a much more active approach to managing stock. Those items that don’t perform well are quickly replaced by something new. 

This is hugely significant, as consumers have become increasingly last minute and impulse-driven. Data shows that half of the customer basket is influenced by in-store promotional activities. This highlights the importance of store manager autonomy, allowing for greater freedom when it comes to product push and newness. Importantly, over 50% of items found inside the store retail for less than £5. Smaller transactions are less likely to be profitable via the ecommerce channel, so the risk of online disintermediation is low, providing protection from the perceived 'Amazon threat'. By investing in a new distribution centre, the company is self-funding growth and futureproofing for the long term. As they move from being a regional to a national player, a measured approach to store roll-out forms a core part of their strategy. The investment into distribution and logistics is far from a negative factor!

With the concept of market disruption likely to impact more sectors in the years ahead, we believe the likely winners will be companies who are able to monetise the strength of their proposition, whilst offering multiple growth angles. This should demonstrate the merits of a business prioritising long-term value creation.