Note Market Report examines the UK discount retailing market, which, for the purposes of this report, has been divided into the following two sectors — discount grocery retailers and discount non-grocery retailers. The grocery sector is comprised of retailers, such as Aldi, Lidl and Iceland, while non-grocery retailers are dominated by outlets such as Primark and Matalan, as well non-clothing specialists such as Pound land. Although these types ofretailers differ in the range of products that they sell, maintaining low costs is the most essential priority for all such companies operating within the discount market.
The UK discount retailing market experienced continual growth between 2006 and 2010, reaching £28.22bn in 2010. Grocery retailers contributed £8.15bn in sales in 2010, while non-grocery retailers accounted for £20.07bn. Despite the latter remaining the largest sector of the market throughout the review period, the grocery sector observed the greatest growth between 2006 and 2010, which has led to the sector significantly increasing its share of the total market.
The discount retailing market has expanded significantly since the recession in 2008, which saw many consumers trade down in terms of product choice in order to curb their expenditure. This was especially apparent in the grocery sector, although non-grocery retailers also saw sales increase over the same period. Growth was maintained in both sectors despite the UK’s exit from recession in late-2009. Consumer caution towards spending is believed to have helped drive sales in the aftermath of the recession, with many households in
the UK still struggling financially due to high levels of unemployment. In 2010, the industry witnessed another surge in sales. A small increase in new consumers is believed to have been behind this recent growth, as well as an increase in expenditure on discount products by regular consumers. This loyalty between the retailer and consumer will ultimately determine whether the industry will maintain its status in the future; and when the economy fully recovers and consumers once again become less cautious in their spending habits, discounters could see a drop in sales. k Note has forecast further growth for the market in the future, which will reach £42.24bn in 2015. Despite the UK’s exit from recession in 2009, the economic outlook has remained somewhat bleak due to the Government’s spending cuts and increases in taxes, while unemployment is expected to rise again, before gradually declining. However, the economic climate will remain resilient, which will continue to impact consumers’ shopping habits and reduce spending. Competition from non-discount retailers will also remain a big threat to the industry, notably from the dominant supermarkets in the UK.
Discount Retailing Executive Summary
- Market Definition
This . Note Market Report examines the UK discount retailing market. The report covers the total discount market, which comprises discount grocery retailers and discount non-grocery retailers. Discount retailers are described as retailers that offer a ‘no-frills’ approach, with their main operation being the distribution of low-price goods over all other elements of the retail mix, such as location, customer services, range and merchandising.
For the purpose of this report, the discount retailing market is divided into the following two main sectors:
- discount grocery retailers
- discount non-grocery retailers.
Although the sectors are divided, there is sometimes a mix between the two types of retailers, as some grocery stores may sell non-grocery items, while outlets, such as Makro, distribute a variety of goods including food, homeware, garden products, electrical items and clothing.
Discount Grocery Retailers
The discount grocery retail sector includes outlets, such as Aldi, Lidl and Iceland, which aim to distribute groceries at the lowest possible price, keeping other business expenses to a minimum. The majority of groceries sold by these types of outlets are own-brand goods, thus allowing retailers to distribute products at their own lower prices. In terms of store presentation, the majority are very basic in design and use inexpensive fittings, decorations and displays. A number of discount grocery retailers also occupy self-service check outs, thus reducing the need for employees, while in other stores, notably Aldi and Lidl, only a small number of checkouts are usually in place. Most stores are continually seeking to improve
on efficiency by operating highly automated depots, which again serve to reduce the number of staff required.
Discount Retailing Market Definition
These stores are often designed similarly, with basic merchandised items often stocked high in cartons or pallets. This enables the retailers to make the most of the space provided, while leaving little room for product display. The majority of such stores concepts are based on functional design, rather than aesthetics. Other money-saving schemes are also found in these types of stores, for instance, trolleys often require a token or coin and carrier bags are sometimes not provided. The stores themselves are often much smaller than traditional grocery outlets, usually between 6,000 square feet (sq ft) and 15,000 sq ft. The smaller sizes of such retailers mean that they can often be situated in towns, instead of out-of-town locations, which are more commonly favoured by the larger supermarkets.
As previously mentioned, discount retailers’ product ranges are often own-branded, while the amount of stock is often limited in comparison to traditional supermarkets. In major supermarket outlets, such as Tesco and ASDA, around 20,000 to 30,000 different items are stocked, while, in discount grocers, this figure is usually around 1,200 lines, showing the limitation of such outlets in terms of product range. However, by restricting these product lines, discount retailers can benefit from buying in bulk, allowing costs to be kept to a minimum, while forming relationships with fewer suppliers and keeping a tight control on business deals. Such outlets commonly stock only a few branded items, and most goods are generally dry grocery items, with limited ranges of fresh, frozen or chilled products, although this excludes Iceland, which specialises in frozen goods.
Many discount retailing formats have been introduced to the UK from overseas companies, such as the Germany-based Aldi and Lidl stores, which were launched in the UK in the late-1980s and early-1990s. These formats have been developed in the UK and have served to inspire other retailers. However, retailers, such as Iceland, have been distributing in the UK and Republic of Ireland since the 1970s.
Discount Non-Grocery Retailers
Non-grocery discount retailers mainly specialise in clothing and footwear, although other items, such as homeware, accessories and jewellery, are also usually offered. Discount non-grocery retailers’ distribution methods are similar to those employed by discount grocery retailers, with the main focus being on maintaining low prices, as this is regarded as the most important aspect of such stores. This concept means that the format of such shops is often similar to that found in grocery retailers, where there is less focus on aesthetics and presentation, and more on keeping tight operational logistics.
Discount Retailing Market Definition
Regarding the items distributed, there is greater variation among the different stores, as some retailers, such as TK Maxx, focus on distributing branded items cheaper than the sellers’ prices, while other retailers, such as Primark, only distribute own-brand goods. Such stores often sell the latest fashion trends, as well as more essential and basic clothing ranges. Non-grocery discount ranges have also been launched in traditional supermarkets in recent years; for example, Tesco’s Florence & Fred (F&F) range and ASDA’s George brand. However, it should be noted that these companies are not included in Chapter 4 — Competitor Analysis or in Chapter 10 — Company Profiles, as the majority of sales from such retailers do not fit in with the discount retailing model.
Discount Retailers Positively Impacted by the Recession
The UK economy has been turbulent in recent years, with the recession having a significant effect on the economy in 2008 and consumer expenditure falling drastically. Although the UK officially exited recession in late 2009, consumers have remained cautious in their spending habits, with many people trading down to value products instead of standard or premium ranges. This has been greatly influenced by the current high levels of unemployment in the UK, and many households are still struggling financially, while those unaffected by job losses have continued to remain cautious.
Although this has ultimately had a negative effect on a number of retailers in the UK, discount retailers have experienced a boom in sales since the recession, with many consumers using the cheaper outlets for both grocery and non-grocery products in order to save money. The recent rise in value-added tax (VAT) in the UK, which came into force in January 2011, has also pushed up costs, while inflation on items such as food and drink has remained high.
All of these factors are also believed to have driven the discount market in recent years, which initially saw a surge of consumers in 2008 following the start of the recession.
Expansion in the Discount Retailing Industry
Since the surge in the number of consumers turning to the discount retailing industry in 2008, many value retailers have taken the opportunity to expand their presence in the market, thus maximising sales. According to the Financial
Times, in July 2011, several discount retailers have continued to expand, notably on the high street. These retailers include B&M Bargains, Poundland, 99p Stores, Poundstretcher, the
Original Factory Shop and Store Twenty-One, all of which have continued to seek out further high-street properties, preferably those that have been left by retail insolvencies. Discount retailers believe that there are advantages in setting up on the high street, in order to target less affluent consumers who, in the current economy, do not own or have access to a car. However, retail parks also offer good opportunities for larger retailers, due to the excessive space provided and the provision of public transport links within the surrounding areas.