Independent View: The march of the discounters

Sales are soaring as recession-conscious, bargain-hunting consumers head to discount indie stores in their droves, reports Beth Phillips


Faisal Lalani is in high spirits. Sales at 99p Stores, where he is buying director, went "through the roof" in March. The discount store is on course to open its 80th outlet by the end of April and is aiming to notch up its century by the end of the year.

"I came into this year with a plan for 100 stores and I believe this is easily achievable," Lalani proclaims bullishly.

His optimism is felt across the independent discount sector. TJ Morris, the company behind Home Bargains, claims it is on course to double its business in the next three to four years and hit the billion-pound turnover mark by 2015, while 99p Stores has doubled its store estate in the space of a year and Frozen Value is planning to open 10 new stores in 2009 after posting record turnover and profits in January. The list goes on.

Indeed, The Grocer's Top 50 independent grocery retailers ranking, published in February, reveals that, of the six discounters that made the grade - TJ Morris, Farmfoods, B&M Retail, 99p Stores, Heron Frozen Foods and Frozen Value - five reported double or triple-digit year-on-year profit growth.

So what's behind their phenomenal success and how much bigger can they become?

Having the right product mix is one important factor. Independent discount retailers typically sell an eclectic mix of products but primarily focus on fmcg categories such as household goods, health & beauty, ambient and impulse lines. The products are usually branded, but can include tertiary lines as well as a handful of own-label lines.

Many products are end-of-the-line stock with a limited shelf life, allowing retailers to negotiate rock-bottom prices with suppliers. According to IGD, the typical consumer tends to be older, female and less affluent.

Although this cost-conscious demographic has driven the growth of the discount indies for a number of years, the economic downturn has played straight into their hands. And a key factor has been Woolworths' demise.

When Woolworths closed its doors for good at the beginning of the year, analysts predicted that the multiples would be the main beneficiaries. But with the majority of supermarkets in out-of-town locations, the 99-year-old chain left a gap on the high street for stores where shoppers could pick up items as diverse as a bag of sweets, a toilet brush and a packet of AA batteries in the same place - and cheaply.

"The demise of Woolworths has been our greatest opportunity in the past few years," admits Lalani. "The former Woolworths stores we bought off landlords were reopened as 99p Stores within a week."

The sheer number of vacant units on the high street has provided opportunities for value retailers to negotiate good deals with landlords, adds James Flower, retail analyst at Verdict Research.

And it's not just Woolworths that has left gaping holes on the high street, of course. A number of retailers - particularly in the fashion arena - have gone under or curbed their expansion plans, leaving empty units that town councils would prefer to see occupied by a value retailer rather than stand empty.

"Expansion is easier because other retailers are pulling back on new openings," says Simon Arora, director of B&M Retail, which owns 113 B&M Bargains stores.

Store expansion has played a crucial role in the success of indie discounters. Coming from a relatively low base they have been able to acquire stores relatively easily (at least compared with the multiple supermarkets). Frozen Value, for example, increased its estate by 9% last year to take it to 51 stores and Heron Frozen Foods upped its outlets by 4%. TJ Morris, 99p Stores and B&M Retail saw growth of 16%, 36% and 46% respectively.

As purse strings tighten, the popularity of discounters is increasing; and with this comes acceptance. A check on money-saving internet forums highlights legions of loyal shoppers and message threads viewed by hundreds of thousands of users.

"Only a few years ago discounting had a real stigma," says Lalani. "But companies such as Primark have made saving popular. Discounters have done so well that companies are copying them, like Tesco with its Discounter range."

Independent discounters are consequently upping their game, says Joe Morris, operations director of TJ Morris. "They are increasingly offering good products at low prices in a pleasant shopping environment with prompt and efficient service," he says. "This is what the customer wants."

IGD named discount indie Home Bargains as one of the retailers to watch in 2007 for its breadth of range, quality of product and store fit-out.

"Home Bargains stores offer a clean and bright environment with a minimum of clutter with only limited point-of-sale 'noise', while the exterior beyond the message 'Top brands - bottom prices' carries little indication of the telltale signs of the discount offer," says Patrick Mitchell-Fox, analyst at IGD. "This quality of presentation clearly provides the opportunity to overcome many of the stigmas of the discount store, enabling the offer to achieve a wide demographic appeal."

Farmfoods is also raising its standards. The freezer centre is currently rebranding in an attempt to give stores a more upmarket feel, ditching its garish blue, red and yellow fascia for a field scene on a black background. This move appears to be working. Sales rose 14.7% in the 12 weeks to 22 February, according to TNS Worldpanel. It now has a 0.5% share of the grocery market, just behind Netto at 0.7%.

Much larger companies are now beginning to view independent discounters as credible competitors. "Everyone is starting to sit up and take notice of them," says one wholesaler. "They are moving further into grocery and attracting more customers."

What they're not doing, however, is sparking a mass exodus from the supermarkets. "We can't compete with the multiples head on," says Morris. "They are incredibly efficient operators. We have to be different from them."

Arora agrees. "The key to competition is product differentiation," he says. "The market is big enough for all of us. We just concentrate on maintaining and enhancing store standards."

Suppliers are also in on the game. Look at the brands in a typical value discounter and you'll find big names such as Cadbury, Kellogg's, McVitie's, Colgate and Kleenex.

"As the discount shopping sector gains in popularity it becomes a more valuable sector for major brands to benefit from," says Alan Saywell, CEO of discount supplier Rowan International, whose sales rose 21% last year. "We know this is the case because, far from being adversely affected by the economy, our business is booming and set to get even better in 2009. As well as the immediate impact of getting rid of unwanted product, there is also the benefit of introducing a brand to new consumers who may not encounter it normally."

The discount retailers have big plans for 2009. TJ Morris is completing a £30m expansion to its Liverpool distribution centre and planning to invest further in its system to support even more stores, while B&M Retail is upgrading its IT systems. 99p Stores is planning store expansion and Farmfoods is expected to complete the rollout of its store refurbishment programme across its 300-store estate.

It all points to a bright future for independent value operators, according to Flower. "In the short-term, a lot of people are looking to value retailers where they can save money so they are in an optimum position," he says. "In the medium to long term, they are still relatively immature retailers and there are still expansion and brand-building opportunities available, so it looks promising."