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Research: The 4 growth drivers of discounters

Discount Retail Chains, food and/or non-food, are often bacon buyers when things are not going well economically. Yet a budget formula is no guarantee of success, for example variety discount retail chain Big Bazar shows. These are the strategic opportunities and pitfalls for bargain chains, from the P's of every marketing mix: product, price, place and promotion.

The figures for consumer confidence and willingness to buy are still well below the average of the past 10 years. Uncertainty about the economic outlook, whether or not combined with the lack of job security, leads to more price-sensitive consumers.

That many discounters are successful during economic crises will not surprise anyone. However, discount retail remains a top sport in which entrepreneurs have to sail sharply to the wind in order to be able to profit.

How low-cost fighters implement their formula largely determines success, or lack thereof. It is precisely in this segment that clear choices are needed. In a market with often low margins, a wrong choice immediately poses a potential threat to profitability. For example, even in a faltering economy in which discounters have to flourish, there are players who are struggling.

From the building blocks of the well-known marketing mix, we look at the strategic choices of non-food discounters, which lead to success or failure.

1. The 'p' of product: product is king

The range is a strategic means to distinguish yourself from the competition and to occupy a unique position in the market. Supply must meet a need and have sufficient appeal. Otherwise, the consumer does not come and buy, despite the low prices.

For discount retailers, the challenge is to ensure that low prices are not associated with lower quality. Maintaining an acceptable quality standard is essential to maintaining customer trust.

The ideal range, both narrow and wide

How discounters put together their assortment differs. For example, there are formulas that structurally offer a very narrow and specialized or very wide number of product categories. Per category, items may or may not be in stock, with the retailer usually being able to offer an alternative. This creates a predictable assortment for the consumer, even if a certain brand is not on the shelf. This approach requires a sophisticated purchasing strategy and sufficient scale. It is a strength when discounters are able to purchase (structurally) large volumes and thus enforce low prices.

You can also buy directly from producers under their own brand lines. This requires good agreements with producers or wholesalers in order to arrive at the right product and price combinations. It helps if the low-cost carrier is internationally oriented. After all, you can also buy stock in countries where prices are lower than in the Netherlands.

Leftovers on the shelf

Another method is to buy up residual lots. These are often large batches of goods that manufacturers, wholesalers or other retailers offer at greatly reduced prices because the owner can no longer sell them himself. For example, the product no longer fits in the range, does not meet the quality requirements of the brand, is seasonal or there is simply a surplus.

Discounters that respond to residual batches often do not have fixed and predictable product categories. As a result, they can vary with unique or unusual products and offer a sense of variety. The stores simply contain what was purchased at that time in batch trade. The advantage for the consumer is that the prices within this type of discounter are often at the lowest level. He can score a good deal over and over again.

Temporary outlet stores

Scoring a deal also plays an important role in temporary outlets. Retailers often use this type of store to get rid of residual stocks. Items that do not sell well enough at the normal price, fall (or threaten to) fall out of season or where stocks are too high, are offered at substantial discounts. These items are not purchased at rock-bottom prices, but from the regular business activities of the formula. The approach obviously has a strong negative impact on the margins and therefore the profitability of the outlet. It is mainly a way to get rid of excess stock and release liquidity. By selling the stock instead of writing it off completely, the damage is limited as much as possible.

'Low prices are often linked to lower quality, a major challenge for discount'

2. The 'p' of price: purchase versus sale

With a price fighter, the customer expects the best bargains. The higher the 'deal content', the sooner the consumer comes and buys. Discounters respond to this by, for example, stating the original recommended retail price in addition to their own selling price. The consumer is extra stimulated to buy, especially if the offer is too good to pass up.

Different purchasing options

The discounter must be extremely competitive in terms of purchasing conditions to keep the price in the store low. The purchasing strategy of discounters can differ and form the basis for the final price in the store. Discounters who, as party traders, focus on residual lots, basically work from the purchase price of the goods. When the conditions are good enough, a purchase is made and the right promotions for the store are devised. For example, through multibuy offers such as '3 for the price of 1' or through very substantial discounts on the recommended retail price of a few pieces. Discounters with a more fixed range have to take a different approach. The purchase price is still important, but not always the buyer's starting point. The selling price in the store becomes the starting point. From there, the maximum purchase price is calculated. The selling price must be low enough to be seen by the consumer as an opportunity, fit into the overall store concept and be high enough to provide sufficient margin for operational costs. This procurement strategy requires good relationships with suppliers, in which economies of scale and efficient logistics play a major role. The larger the volumes of the discounter, the better the purchasing conditions can be negotiated.

'The better the deal, the sooner the consumer comes and buys'

3. The 'p' of place: location, location, location

When the budget formula has determined its strategy for product and price, one still has to get those products to the customer. Physical stores are a common and traditional method. Online distribution is possible, but has its challenges due to the relatively high delivery costs versus the often low profit margins.

Low cost

For physical stores, if product and price leave little profit margin, the retailer must make the most of the available retail space. And also keep the costs of housing as low as possible. From location to inventory, all knobs are turned to the maximum to minimize costs.

For a discounter, it makes little sense to be at A-locations in important shopping streets. The rents are often at the top of the area. Fine for more traditional retailers or a more margin-rich segment, but with very low margins, an expensive location quickly becomes a threat to profitability. Discounters therefore choose properties in cheaper locations that are easily accessible (parking in front of the door) or have a good approach. Think of shops on the first floor instead of the ground floor. Or in approach streets near the main shopping area.

The right look

The shop layout plays a major role in the price perception of consumers. The store must look clean and tidy and have a cheap appearance. In addition, customers must be able to navigate easily and find products.

Anyone who has ever had to set up a store knows that the costs add up quickly. A lot of time, energy and money goes into the shop design according to a certain concept, even if it has to look cheap. The mission of a discounter is successful when you walk in and think: 'What a cheap look & feel.' Sometimes retail brands turn a less successful establishment into an outlet until the end of the lease. In that branch, excess stock from other stores is sold out. The store itself no longer requires any more investment and serves as a location to quickly reduce stock, while the other stores are neat.

4. The 'p' of promotion: mainstream and mass

Retailers are increasingly moving from 'big data' to 'smart data' and try to approach their customers as personally as possible with, for example, personalized offers. This requires a huge amount of information about the consumer and smart technology such as AI. As a result, substantial investments in marketing and IT systems are required. And to do that, solid profit margins are needed again. An interplay that is often not feasible within the discount segment due to the structurally low margins.

Leaflets as a weapon

For the providers of bargains, leaflets, physically and digitally distributed, are a powerful tool. This allows them to communicate their range, prices and offers widely and both attract customers and maintain a top of mind position.

With a focus on mainstream promotional channels and a mass approach combined with the lowest price for a sought-after range, a personal approach is irrelevant for many discounters.

Conclusion: discount retail players have a precarious balance sheet

Discounters have clear advantages over other formulas during economic uncertainty. However, low-cost carriers are also experiencing challenging circumstances such as rising purchase prices, personnel costs, housing costs and energy costs. In order to be financially successful in this segment, the operation must be tightly controlled. As a discounter, you can be a winner with a sophisticated purchasing and sales strategy, combined with a sharp focus on operational costs.

But if you miss the mark on price, product, place or promotion and have insufficient distinctiveness, profitability quickly turns into a loss-making operation. Discount retail requires a clear vision, strategy and excellence in execution, even when economic conditions are in favour.

Price fighters and sustainability: it's possible In addition to the P's of the marketing mix, we know the P's from sustainability: people, planet and profit. Discount formulas have a negative image when it comes to sustainability. Nevertheless, discounters can make a positive contribution to sustainability. Bargain chains that buy up residual lots, for example, ensure that products still get a good destination. From a dominant market position, large discounters can play a guiding and compelling role in making the entire value chain more sustainable from transport to production. For example:

  • reusable and recyclable packaging

  • optimize processes to use energy and resources more efficiently

  • launch recycling and waste management programmes

  • Of course, responsible purchasing and product selection with attention to the environmental friendliness of materials, ethical production processes and the lifespan of products.


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