RETAIL’S SHARE MASTER: THE DISCOUNTER
Byline: Valerie Seckler
NEW YORK — Propelled by fundamental shifts in spending priorities and lifestyles of U.S. consumers, broad-lines discounters have picked up 19 percentage points of retail market share since 1994 — unfettered by one of the headiest booms in the economy’s history.
This phenomenon — it is common to find BMWs and other upscale imports in the parking lot of the local Target; shoppers are pairing Gucci tops with Kathy Ireland capris from Kmart — has been fed by numerous forces both inside newly trendy discount stores and beyond their walls.
These range from the increasingly casual dress code emerging in all walks of life to consumers’ growing appetite for a bargain, preferably at a store close to home. Their hunt for value has stirred some snob appeal for cross-shopping, compelling people who a decade ago wouldn’t have been caught dead at Wal-Mart to brag about how much money they saved by shopping there.
Some of the channel’s gains, of course, have been built on significant improvements discounters have made in the quality and fashion content of their assortments and the execution of their operations. And their convenient neighborhood locations have grown more attractive to many Americans who feel more pressed for time and are spending less of it on leisurely shopping excursions.
Industry observers said as baby boomers have shifted their budget priorities, spending less on apparel and more on merchandise for the home, entertainment and travel, pricy apparel labels may have lost some luster.
“With more people spending more dollars now on home goods than apparel, they are economizing on apparel by going to a Target or Kohl’s or ShopKo,” said Kurt Barnard, president of Barnard’s Retail Consulting Group. “Designer labels have lost some of their cachet.”
As discounters’ share of retail dollar volume, excluding automobile and restaurant sales, expanded 19 percent in the past five years; dollar share at department stores declined 15 percent; apparel stores, 7 percent, and food stores, 9 percent, according to Commerce Department data compiled by the International Mass Retail Association.
Sales surged 11 percent at building and garden stores from 1994 through 1998 and climbed 10 percent at furniture stores.
A dozen or so retail executives and observers contacted by WWD said they expected market forces to keep fueling the discount channel’s momentum into the new millennium. Here, some reasons:
Improved execution at the stores has resulted in fewer stockouts, more seasonal assortments, increasingly sophisticated displays and better housekeeping.
Fresh marketing campaigns have built higher profiles for proprietary labels and store brands, like Kmart’s TV spots featuring Penny Marshall and Rosie O’Donnell, and Target’s print ads, which have appeared in Vogue and the New York Times Magazine.
Real estate strategies focused on power shopping centers and neighborhood sites have brought favorable lease terms, allowing for promotional pricing of national brands like Lee jeans and Champion activewear, and better-grade goods throughout the store. l Expanded assortments of consumables, especially perishable food, are driving customer traffic and sales.
“The mere fact that discounters are thriving while the economy is experiencing such strong growth, and a bull market on Wall Street — when one would expect more business in traditional department stores — shows that people are truly looking for value when they shop,” said Warren Flick, president of Warren Flick Associates, a new strategic consulting firm, and a former president and chief operating officer of Kmart’s discount chain in the U.S.
“Right now, retail is in one of the strongest positions it has been in in years,” Barnard asserted. “We’ve found through numerous consumer surveys that people are confident in their outlooks about their lives and job security, or job prospects. Consumer spending will continue strong so long as job formation stays around 150,000 to 200,000 per month, and unemployment stays low.”
Even if the creation of new jobs slows down, unemployment accelerates or the Federal Reserve raises interest rates again this year, Barnard does not expect consumer spending to drop significantly any sooner than the second quarter of 2000.
Since 1977, the aftertax income of the wealthiest 1 percent of Americans has ballooned by an average of 115 percent, and surged 43 percent among the richest fifth of the population, according to a study released this month by the Congressional Budget Office. However, the aftertax income of the least affluent fifth of Americans declined by an average 9 percent during that period; incomes of middle-class households gained less than 8 percent, on average.
Discounters have benefited on both ends.
Despite the declining average wages of lower-income earners, an increase in the minimum wage and the creation of jobs at a robust pace have boosted the confidence of many of those consumers, as a new range of private label credit cards, issued by discounters in the past five years, has extended their purchasing power. More affluent customers have been hopping on the cheap-chic bandwagon and shopping discount stores, even as the gap between the richest and poorest Americans has widened in the past 22 years.
“This search for value is a fundamental change, not cyclical,” Flick said. “No matter what the channel, the value player is getting the big increases. Whether it’s Wal-Mart, Kmart or Target, off-pricers like T.J. Maxx and Marshalls, a specialty store such as Old Navy or a family store like Kohl’s, what I am seeing is growth in market share.”
Compared with five or 10 years ago, Flick said, “the merchandise content in these kinds of assortments today is on trend and of a higher quality. Discounting is far less of a commodity business and far more timely, but the value is still there.”
Retail consultant Walter Loeb of Loeb Associates also believes the rising tide of dollars flowing into the discount channel is “a fundamental shift,” and one that “will hit small shopkeepers a great deal.”
It already has taken a well-documented toll on giants Sears, Roebuck & Co. and J.C. Penney, respectively the country’s second- and fifth-largest publicly held retailers, as well as Montgomery Ward, the largest privately held general merchant.
Traditional, midtier department stores, including The Bon-Ton, Stern’s, Belk’s and Dillard’s, have felt the impact during the Nineties, as have defunct regional discounters Caldor, Venture, Jamesway, Clover and Rich’s Department Stores.
In 1998, the discounters captured 65.6 percent of dollar share within the broad-lines sector made up of traditional department stores, discount stores and mass department stores like Sears and Penney’s, up 8.9 percentage points from 57.7 percent in 1994, according to Commerce Department data.
Share controlled by traditional department stores during that period slid to 19.9 percent of the broad-lines segment from 24.2 percent, while the national chains’ share sank to 14.5 percent from 18.2 percent in 1994.
These shifts show that discounters have made nearly half of their market share gains in the past five years by siphoning sales from the traditional department stores and national chains, while winning the balance from other formats, such as supermarkets and toy stores.
That’s because a good deal of the value that discounters offer lies in their enhanced apparel assortments, an improvement that shoppers often discover when lured to a discount store for aggressive promotional prices on other items, like food and toys. These survivors of retail’s ongoing consolidation have leveraged the resulting economies of scale to market more sophisticated fashion merchandise.
During the Nineties, those mass merchants increasingly developed their own apparel and home goods, instead of simply buying private label merchandise from a third party, while building high profiles for burgeoning proprietary brands like Wal-Mart’s line of Kathie Lee Gifford apparel and Kmart’s collection of Martha Stewart home fashions, and lawn and garden goods.
Like their higher-priced cousins, the discounters have extended their best-selling proprietary brands. This spring, for example, Kmart has extended its Martha Stewart brand from home goods into lawn and garden, after expanding its Route 66 brand of denim, originally focused on junior and young men’s, throughout the store.
“Mass retailers are more strategically focused on what they want their stores to convey to their customers,” Flick noted. “They no longer are just thinking about items and tactics, or how to run their stores with someone else’s idea.”
A strong dollar, deflation of apparel prices and generally low inflation for several years have helped discounters upgrade design-driven home and apparel assortments.
“In the old days, the quality of goods offered at discount stores was lower-end compared with the department stores,” recalled Gerald L. Storch, president of credit and new business development at Dayton Hudson, Target’s corporate parent. “Today, that is no longer true. The merchandise is often made in the same factories, and in some cases, it is equal or better quality.”
The upgrade of apparel has come in improved fabrics and constructions, which have brought better shrinkage control and color fastness. Today’s discounter assortments are in sync with fashion trends, rather than a season — or a few seasons — behind, and they are leveraging improvements in information systems and distribution networks to stay in stock on hot items.
“National brands of commodities and consumables are one area driving the discount business, and values in proprietary brands are another, whether it’s Martha Stewart home goods or Sesame Street apparel,” said Robert Burton, divisional vice president of investor relations at Kmart.
“When the Asian currencies weakened last year, we went over there and raised the quality of our fashion goods instead of holding down prices,” Burton related. “We upgraded fabrics and added details like a pocket or decorative stitching. This is one thing discounters have done to get more traffic and sales.”
“The discounters’ ability to create exciting product, coupled with a real estate strategy that provides for rapid growth and a price advantage, means they will continue to be a big threat to large and medium-size stores,” projected Robert E. Kerson, chairman of Levy-Kerson, a division of Korn/Ferry International.
“If you shop at Target, Kohl’s and, to a great extent, Wal-Mart, you know that the store is well managed, well stocked, seasonal, clean and practically in your backyard.
“It is my opinion,” Kerson added, “that discounters will continue to gain market share.”
Sears and Penney’s appear to have seen the writing on the wall.
“One of the great shifts has been Sears’ move from the Softer Side marketing plan to a more aggressive promotional program,” Loeb noted. “This indicates Sears has lost share to a vibrant discount market; they’ve admitted chains like Kohl’s, Target and Home Depot are hurting them. I think J.C. Penney has been hit by everyone.”
As a result, Loeb said, “Sears is reviving its Sears sales days, and J.C. Penney is getting more promotional. So while Wal-Mart and Target have been price-focused, they and others, including the specialty stores, will have to get more promotional, too. This is a serious concern of mine.”
The strides made by discounters, a steady stream of promotions at department stores, ongoing expansion of manufacturers’ outlet stores and the rise of chains such as Kohl’s and Old Navy have already taken a toll on the off-price sector; Loehmann’s and Filene’s Basement both filed for bankruptcy protection this year.
This plethora of choices, which did not exist 10 years ago, makes for quicker, easier shopping than the treasure-hunt atmosphere typical of off-price stores. And as outlet stores have proliferated and department stores have gotten more aggressive on pricing, the off-pricers have been hurt by the dilution of products available to them.
“The three core off-pricers, T.J. Maxx, Marshalls and Ross Stores, are just about what the market can support,” Barnard maintained. “These chains are perceived as fashion-intensive discount stores, whether the goods are under a famous label or not. The off-price sector is likely to see its business shrink gradually, over the next 10 years, as outlet stores thrive.”
“The off-pricers have changed tremendously from what they used to be,” said DH’s Storch, discussing the sector’s consolidation. “Much of the merchandise sold there is made for that market. If it wasn’t, they would have run out of goods to sell.”
Given these dynamics, the best prospects for off-pricers besides the big three lie in regional markets, said Thomas Burns, senior executive vice president of The Doneger Group.
“Smaller, regional players, like Daffy’s and Century 21, have, to a large degree, taken over the niche that was once owned by Loehmann’s and Filene’s Basement,” Burns said. “The [declining] availability of designer goods and growing need to micro-merchandise stores lends itself to a regional strategy.”
Industry observers expect there will continue to be opportunities for niche players in a variety of formats, including Ames Department Stores and ShopKo Stores, among the ranks of the broad-lines discounters.
“Certainly, there’s room for a niche player in any market,” Storch said. “That’s what Ames has been doing very well.”
Aiming at niche markets — as Ames targets senior citizens, college students and ethnic customers — is one of three tacks discounters are taking to drive business, Storch added. The others, he said, are being the lowest-price provider — the turf Wal-Mart has come to dominate — and differentiating assortments with powerful proprietary labels and national brands, as Target and Kmart have done.
For the near future, retail watchers generally are optimistic in their outlook for both Ames, which targets people in households with annual incomes of between $25,000 and $35,000 annually, and ShopKo, which, like Target, caters to a more affluent core customer, those with average household income of more than $40,000 a year.
“I think ShopKo’s potential is unlimited, given the quality of its management, execution and presentation of merchandise,” said Kerson, peaking of the chain whose stores are concentrated in the upper Midwest and Pacific Northwest. “I think it’s the next Kohl’s, now that its store growth plan calls for acquisitions like Pamida.”
Barnard concurred, saying, “We have interviewed many consumers exiting ShopKo and found that they enjoyed the shopping experience.”
“Ames has a niche and, with the acquisition of Hills, is likely to endure for quite a while,” Barnard predicted. “Bradlees will be here as long as Target and Kohl’s are not a big threat in this region. But as those two build their presence in the Northeast, it will get much harder for Bradlees.”
Despite the bullish outlook for discounters, observers listed a handful of challenges that could pose problems over the long term. These include:
Stoking sales gains in spite of intensifying price competition from a growing number of retail formats.
Mounting pressure on Kmart to re-enter the international arena, and on Wal-Mart to step up global growth as the two giants saturate the U.S., completing plans to expand existing discount stores and roll out supercenters that combine supermarkets and discount units.
Battling competition from the Internet, which has established itself as a channel for low-cost books, CDs and other goods on sites ranging from auction houses like EBay, to off-pricers such as Bluefly.com and Outletmall.com, to entertainment e-tailers like Amazon.com and Cdnow/N2K.com.
“Fears over the Internet are justified, but an even bigger issue now is what the brick-and-mortar stores will do to keep pushing sales up, especially with the growing value-consciousness of consumers,” Loeb contended.
“This will lead to more segmentation of the marketplace, a widening gap between luxury goods retailers and promotional stores and down-and-dirty fights to maintain market share,” Loeb forecast. “Over the next two years, I expect consolidation to advance further among regional discounters and department stores like Bradlees, ShopKo, Ames, The Bon-Ton and Dillard’s.”
Sales of both Wal-Mart and Target have increased an average 14 percent annually in the past five years, said DH’s Storch. He said Kmart’s sales climbed an average 5 percent a year during the same period, while the combined share of store sales of broad-lines discounters other than Wal-Mart, Target or Kmart has fallen 1 percent.
Retail analysts, including Richard L. Church, a managing director at Salomon Smith Barney, estimated Kmart lost 3 or 4 percent of market share in the past five years. Even though Kmart’s sales have maintained a fairly healthy pace, the company’s share has been eroded by the increases in Target’s and Wal-Mart’s selling space and sales, Church pointed out.
“Wal-Mart and Target have both been growing by between 10 and 15 percent annually for a long time, versus an overall retail growth of 3 to 5 percent,” Storch said. “I believe this trend will continue. Retail is becoming a more competitive business, and the successful companies have gotten there largely through superior execution of information systems, logistics and distribution, and not just by improving the merchandise.”
Nonetheless, the strong sales gains of discounters are bound to cool off, unless they can keep spicing up their assortments with new hot labels.
“As long as they don’t get the top-selling brands, whether it’s Polo Sport apparel or Estee Lauder prestige cosmetics, discounters face a challenge in trying to keep building customer traffic,” said Michael Exstein, retail analyst at C.S. First Boston.
According to Kmart’s Burton, a recent survey of the chain’s customers found their preference for buying goods at discount stores was climbing in 30 of the 35 categories they were asked about. The category they most liked to buy at discount chains? Electronics. Apparel improved, relative to prior surveys, Burton said, but he declined to specify.
“Where we’ve been hit are categories like lawn and garden,” Burton said. “The Home Depots and Lowe’s have hurt us, which is one reason we extended Martha Stewart into lawn and garden.”
And Loeb does not expect the department stores to simply roll over and give up more share.
“Traditional department stores are doing well now,” he said, acknowledging exceptions such as Dillard’s and Saks Inc. “They are leaders in spelling out what’s new in fashion merchandise. They are also running regular promotions.”
For the most part, though, observers are upbeat on the prospects of the broad-lines discounters.
“Discounters will walk away with the lion’s share of comp-store growth in 2000,” projected Barnard. “I also think department stores will have a tough battle to capture the young customer, who has defected to the specialty stores. These kids are growing up with the specialty store habit, and to the extent chains like Abercrombie & Fitch, American Eagle and Old Navy have web sites, they will go online, too, before they shop at department stores.”
Barnard expects the discounters, among others, to feel significant effects of competition from online retailers within five years.
“I think the Internet will account for between 20 and 25 percent of all retail sales, except automobiles, by 2004,” Barnard estimated.
“It will also bring about an entirely new chapter for retail — without inventory,” Barnard said. “Increasingly, the manufacturers themselves will become the ‘retailers’ — the ones carrying the inventory — and retailers will become the order-takers.”
As a result, Barnard concluded, “All retailers will eventually compete with each other online.”