The future of value retailers

November 13, 2009 | By Joanna Perry

Retailers from Primark to Aldi to 99p Stores have benefited from the flight to value that the recession has created. But can they continue to capture shopper hearts and wallets once the economy begins to recover, asks Joanna Perry.

Discount grocers and value fashion retailers continue to chip away at the market share of their mid-market rivals as shoppers make their pennies last. And the latest economic indicators and consumer sentiment research suggest there are more tough times ahead in 2010.

But at some point next year the economy will begin to pick up. And although any significant upturn in consumer spending could be some way off, retailers need to begin to ready themselves for the market picking up.

Last week Retail Week wrote about the challenges the mid-market faces from the lasting effects of the recession on consumer behaviour. For discounters and value players, the question is whether they can continue to maintain and improve on the gains they have made over the past couple of years, and what they will need to do to maximise their chances of continued success when the upturn comes.

Deloitte UK head of retail Tarlok Teji believes there is too much retail capacity and demand will stay flat for the near future, so there will continue to be intense competition for retailers wherever they sit in the hierarchy of retail.

He points out: “The discounters arrived when retailers’ margins were pretty generous; even grocers were making 8% to 10% net margins. But this is now below 4%.” With this in mind, he believes it will not be easy for the hard discounters to continue their growth path.

He adds that the trend for trading down has been evident since 2006, and consumers shopping across all sectors want “genuine affordable quality”. Verdict Research lead analyst Maureen Hinton says: “If it is just price people are buying on then there is no differentiation - it is a case of convenience.”

According to Hinton, value fashion retailers will need to look at their ranges to ensure differentiation, particularly from the mid-market. She points to New Look as one value fashion player who has stretched its price architecture up. She says they need to use branding, or sub-branding, to identify ranges with a higher intrinsic value.

Mark McMenemy, senior director at consultancy Alvarez & Marsal, agrees. “The way retailers are responding is by moving the product mix,” he explains. While the high end and mid-market produce lower cost ranges, the value end of the market is reaching up in a way that will allow it to continue to appeal to shoppers as the economy improves and job security returns.

Stretching prices

Peacocks, for example, has developed a much more fashion-focused offer. For its latest product development - a range in conjunction with designer Pearl Lowe - it has raised its price points higher than ever before, to the £35 to £40 mark.

Peacocks managing director Tim Bettley says: “Even when the economy was stronger it was the value sector of retail that was outgrowing the total market, so when we come out of recession customers will continue to demand value. If anything, we hope to benefit by keeping hold of new customers who have traded into value for money during harder times.”

He adds that developments such as the Pearl Lowe range give the company confidence that customers will continue to come back. Bettley says: “We have continued to invest in the quality and fashionability of our offer.”

A Peacocks spokeswoman told Retail Week the consumer response to the range has been enthusiastic and it is selling quickly. In particular, the retailer was pleased with the hundreds of online orders that were received within the first 30 minutes of the products going live.

Similarly, Hinton says that H&M’s tie-ups with a range of celebrities and designers - the latest being Jimmy Choo - don’t just lead to higher sales on that range, but also help bring shoppers into its stores.

Last week Primark’s owner, Associated British Foods, described the value fashion giant as being in the vanguard of the movement for the value sector to gain clothing market share.
McMenemy says this has been achieved partly because Primark has been able to differentiate itself, and so it can carry on delivering more of the same. He says: “Why would they change anything? They would only do so if a significant amount of the market goes back to mid-market retailers. But quality is good at great prices now. Youngsters growing up won’t necessarily go back to the mid-market.”

Hinton believes Primark has the scale to continue making its value offer resonate, even when the economy really begins to pick up.

She says unsustainable cost bases are to blame for the smaller value fashion retailers that have gone under. Primark, she believes, is the value exception to the rule because it has a big company behind it that can invest and make its stores look great.

Primark has also sought out some higher profile sites, such as its Oxford Street store, but Hinton feels other value retailers won’t find this as easy, as it requires sales volumes and basket sizes that can only be achieved with an extensive range.

While value fashion retailers have been able to take advantage of the present rent deals on prime property, Hinton says they must consider whether moves to higher profile sites remain viable once rents begin to rise again. And while inflation next year could help value retailers in some ways, as prices will go up across the board, wage inflation could also cause those with smaller stores problems, because they won’t have the profit densities to support such rises.

According to Hinton, Primark has witnessed quite a lot of growth in the homewares area. And footwear and accessories are growing quite fast for value retailers; with the exception of footwear giant New Look, Hinton feels value retailers have not yet developed show ranges as much as they could.

Working on men

Similarly, she believes that menswear is strong in the supermarkets and there is an opportunity for high street value fashion players to extend their offer here, as long as they are careful to make it work as part of their overall brand. This will be easier, she explains, for stores targeting women with families in their 30s and older, because women make most of the menswear buying decisions so these stores will not have to make significant alterations to integrate menswear. Retailers targeting younger shoppers, however, need to be able to pull in men and women in their own right.
Meanwhile, discount food retailers Aldi and Lidl have their own challenges. They continue to chip away at the market share of their supermarket competitors with their slow and steady store opening strategies. But Teji says they are not making their existing space work harder, and to continue growing must ensure that they “connect to their customers and understand who their best customers are”.

Planet Retail global research director Bryan Roberts says: “Like-for-likes for the top end are still sinking. There is still a flight to value.” However, he adds that the challenge for Aldi and Lidl will be to hold on to market share when the economy recovers.

He points out that for younger shoppers there is little concept of what grocery products should cost, but the recession has raised awareness about food retailing and consumers have stopped and thought about prices and whether goods are value for money.

Roberts believes Aldi’s private label range is of better quality than many branded ranges, and it is not right to price match it against the major supermarkets’ economy ranges.

One snack foods supplier, who works with discount retailers but did not want to be named, told Retail Week it still considers the discounters a growing channel, and is happy to work with them.

He says: “For companies like us selling non-sophisticated goods and brands that want to be close to the consumers, it is important to be where people actually shop. There is no problem for us; it is about adapting to the shopping trips and making sure we are within arms’ reach everywhere the shoppers shop; discounters being a growing channel.”

However, he agrees that discounters’ growth is linked to the opening of new stores, and believes they will play the role of convenience stores more often in future, given the right locations.

Single-price evolution

Also trying to break into this space are the single-price retailers, which are beginning to emulate their peers in the US with more grocery. The trend for rolling out chiller cabinets that has been seen in the US is now being seen on UK high streets, including at 99p Stores.

Before the economy took a hit, Aldi opened a city centre store in Manchester in late 2006, and the UK and Ireland business revealed a target of reaching 1,500 stores, which would give it 12% market share. However, at present it continues to stick with its purpose-built edge-of-town store format, and Roberts says Aldi is not one for growth surges.

He forecasts the discounters could achieve 10% market share within the grocery sector, up from the 6.1% TNS estimates they hold at present, but he says the discounters will only ever be peripheral to the market because of the strength of the big four supermarkets.

Teji believes that one permanent consumer shift discounters should consider is the adoption of the internet as a shopping channel. While they need to think about an online offer, he concedes: “The jury is still out on whether online grocery makes money.”

Lidl is clearly already thinking about how it could extend its offer using the web. It has launched an interesting service offering DVD rentals online. For £3.32 a month, consumers will get a subscription to LidlMovies with “first class service at the lowest price”.

Next year shoppers are likely to face tax hikes, and unemployment figures will continue to rise as public sector jobs are squeezed - even though the economy should technically come out of recession.

Retailing is going to be no easier than it has been this year. Value fashion retailers and discount grocers will have to continue to work hard to make inroads in this environment, but it is a challenge they are more than ready for.

A middle-class shopper’s first Aldi trip

“Pulling into the free car park it was heartening to see that I wasn’t the only Aldi shopper to have arrived in a convertible. Once I got inside I was similarly impressed by the products that were available for ‘people like me’.

I normally split my weekly shop between one of the big four supermarkets for branded goods, and Marks & Spencer for top-quality convenience food and top-up shopping. I expected Aldi to compete with private-label versions of branded goods, but what I hadn’t bargained on was all the M&S-busting deli treats that were on display.

A great selection of cheeses, smoked salmon, cooked meats and tapas were all vastly cheaper than M&S and of great quality. However, I couldn’t bring myself to buy Aldi bananas; they didn’t seem to be Fairtrade and Sainsbury’s has trained me into accepting nothing less.

Some of the aspects of the store experience that allow Aldi to offer top quality at low prices didn’t appeal. I found it difficult to locate prices for lots of products, having to look in all directions to try to work out where price tickets were.

And the checkout experience frankly scared me. I’m not used to feeling inadequate while buying groceries, but I couldn’t keep up with the speed goods were being scanned to even get them back in the trolley, let alone pack them into bags.

I was also served by the store manager, who looked so stressed out working on the till and dealing with staff that I wanted to give him a hug and tell him everything would be alright.
I would go again, especially as a cut-price alternative for my M&S indulgence, but it wouldn’t replace my main supermarket shop - and I would take someone with me who can pack a trolley at the required speed.”