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Consumer "Shift to Thrift" Drives Discount Stores

Wal-Mart, Kmart and Target still rule a retail sector that promises to see continued growth.

Shopping at discount stores is making more sense to an increasingly dollar-conscious consumer. And the lure of merchandise at "everyday low prices," coupled with the caution that many shoppers are exercising when it comes to parting with money, is translating into strong performance for many players in the discount store sector, with no weakening in sight.

Consumers provide backdrop "When you talk about the discount store industry, you have to start by looking at today's consumer," says Kurt Barnard, president of Barnard's Retail Trend Report, a Scotch Plains, N.J.-based forecasting firm. "And what we have found to be absolutely true, particularly for the past 18 months, is that there is a definite 'shift to thrift' taking place when it comes to consumer spending -- and this shift plays right into the hands of the discount retailer," he says.

Even though the economy is robust, consumers feel the need to hold on to their dollars these days, Barnard says. This is largely a result of the hard lessons learned (and still being learned) in the early 1990s. "Almost every day, the papers are still full of stories of massive layoffs due to corporate downsizing," he says. "Many consumers, even those with very good jobs, are terribly concerned that the 'pink slip' is going to land on their desk next and have decided that the time is right to feather their nests in anticipation of possible darker days."

At the same time, concerns about funding retirement and college educations for children are leading many consumers to cut back on retail spending, siphoning off increasing amounts of money into investments. "Many have invested heavily in mutual funds, for example," notes Barnard. And with the late-1997 gyrations in the stock market, "this same group is now terribly concerned about the safety of their nest eggs."

Consumer uncertainty about ever-changing economic conditions has made a major impact on shopping patterns, Barnard says. "Today, when people shop, they look for a wide assortment of merchandise offerings, good quality, and a pleasant shopping environment -- all under the umbrella of modest prices," he says, adding that "the discount store industry is extremely well-positioned to serve their needs."

Ken Gassman, senior vice president and retail analyst for the investment brokerage firm of Richmond, Va.-based Davenport & Co. LLC., agrees with Barnard's assessment. "Price is nice," he says, but there are other factors at work, depending on the type of merchandise being considered.

"Consumers want value, but price is not always the overriding factor in the value equation," Gassman says. When it comes to apparel, for example, "I know that Kmart, Wal-Mart and Target are not going to have what I want. I'm going to have to visit a department store," he explains. But for what Gassman calls the "commodity items" that are part and parcel of everyday life, price is overriding. "If I want a roll of film or a compact disc, I'm going go to the cheapest place in town."

Discounters performing well A lot of people must be buying a lot of commodity items at discount stores, judging by their performance in 1997. This sector was tops in terms of comparable sales figures, according to Mark Marcon, research analyst for Cleary Gull Reiland & McDevitt Inc., a Milwaukee-based investment brokerage firm.

In the last nine months of the year, "we have seen a kind of barbell' effect in retail store [comparable] sales," he says. "At one end of the price spectrum, the high-end retailers such as Neiman Marcus and Saks Fifth Avenue have been doing every well," Marcon reports. "And at the opposite extreme, you have the Wal-Marts, Kmarts and Targets of the world outperforming the market as a whole."

Others agree. As the end of 1997 approached, discount store year-to-year sales comparables outpaced those of the retail industry as a whole, according to a report from San Francisco-based NationsBanc Montgomery Securities. "While the overall pace of retail [sales comparables] slowed during September, the discount chains still fared the best, posting [comparable sales] gains of 4 to 8 percent," the report shows.

And while the all-important holiday season numbers were unavailable at presstime, the results of an American Express Retail Index survey of consumer's holiday shopping plans boded well for discounters. Shoppers polled planned to spend an average of $879 on gifts, according to the survey. Discount department stores were cited by 65 percent of respondents as a favorite place to shop, just behind department stores with an 80 percent figure.

The big three rule The major players in the discount sector were generally strong performers in 1997, according to Terrance McCrary, retail analyst with Stamford, Conn.-based Auerbach Pollak & Richardson Inc. Among what can be called "the big three," he notes that Bentonville, Ark.-based Wal-Mart "had kind of a slow start, a plateauing of growth -- but after all, there are only so many stores one chain can open in the United States."

Troy, Mich.-based Kmart "has gone through a pretty good resurrection," McCrary says, "but is still not a real strong competitor." Meanwhile, Target, a subsidiary of Minneapolis-based Dayton Hudson Corp., "is still performing extraordinarily well with room for more growth," he notes.

In a retail sector where low prices are the draw for consumers, there are some advantages to being big like Wal-Mart. "The Wal-Mart perspective is to get the best price possible for its customers," says Marcon. And when a retailer is as big as Wal-Mart, he adds, "it can really squeeze its suppliers on pricing -- sometimes to the bone."

The use of computer technology in inventory control is another major factor helping Wal-Mart, among others, cut its own costs while passing on good deals to its customers, according to Marcon. "Wal-Mart, in particular, is famous for electronically hooking up its stores, distribution centers and suppliers," he says.

With suppliers electronically able to access certain levels of store sales data, "someone at Procter & Gamble can, in effect, become a category manager for a product like diapers, for example, and know exactly when it is time for reordering and shipping." This method of operation puts Wal-Mart "light years ahead of traditional department stores," Marcon notes, while also helping the discount giant "cut out labor costs."

Additionally, the use of technology helps Wal-Mart make pricing decisions on a more rational basis. "Their systems are so powerful that they can quickly determine the optimal pricing point for maximizing profits -- not so high as to cut in on sales and not too low either," Marcon points out.

Kmart is back in the game, says Gassman, after some tough times that were due primarily to "a lack of focus on the core business. We had almost written Kmart off, but it looks like they are making a comeback." In the world of discount retailing, "Kmart and Wal-Mart sell a lot of identical merchandise," he says, and both have been "supersizing" by adding grocery-store components to selected new and existing stores.

Kmart's resurgence has been marked by an upscaling in product quality, Marcon adds. "One well-publicized example is the Martha Stewart Collection," he says. "Kmart has gotten to the point where, in bed linens, for example, it is carrying 230 thread-count, 100 percent cotton sheets. Three years ago, it wouldn't have had 100 percent cotton, period -- much less 230 thread-count cotton."

Target is a discounter whose stores "have less of a discount feel to them," says Marcon. "Target stores are a slight notch above Wal-Mart and Kmart in how they look." Target also emphasizes soft goods to a greater extent than its two major competitors, he continues, while in terms of using technology to more effectively run itsbusiness, "it is close to Wal-Mart."

Regionals having problems There are a number of regional players in the discount store retail arena. Their ranks include Caldor Corp. (Norwalk, Conn.) and Bradlees Inc. (Braintree, Mass.), both now in Chapter 11 bankruptcy proceedings, according to McCrary; Rose's (Henderson, N.C.); Ames Department Stores (Rocky Hill, Conn.); ShopKo (Green Bay, Wis.); and Consolidated Stores Corp. (Columbus, Ohio), which as of this writing was going through the regulatory approval process as part of merging with Rancho Dominguez, Calif.-based MacFrugal's Bargains-Closeouts Inc.

"A fundamental trend I am seeing is that the regional discounters are in real trouble," Gassman says. "The nationals are out there continuing to open new stores while mopping up market share -- at the expense of the regionals," he says. In addition, they enjoy the operational efficiencies and "supplier-squeezing" benefits of simply being big.

"When you look at a regional discounter, you have to ask just what exactly is the reason for their existence," Gassman says. "Wal-Mart can go into any size town, and consumers can take advantage of Wal-Mart's better buying power and pay lower process -- and know that the store will be around for a while." Some regionals may attempt to undercut Wal-Mart on price, he adds, "but they won't be around for long if they do."

Another group of discounters cover varying portions of the United States, typically with smaller stores. The better known of these chains include Family Dollar (Matthews, N.C.) and Dollar General (Nashville, Tenn.). "One of these stores is to a Wal-Mart as a 7-11 is to a supermarket," Gassman says. "Their focus is on everyday commodities with an emphasis on customer 'quick in-quick out.'"

The future looks good Analysts generally agree that the outlook for discount store retailers is positive. "Their outlook is extremely good," Barnard says. "They are, as a group, well situated to take advantage of the consumer 'shift to thrift.'"

Of course, no retail sector outlook is 100 percent rosy. The very nature of discount store retailing makes it a hard business in which to remain successful. "The problem you face as a discounter is that your sole competitive differential is perceived to be price," Gassman says. And, when a retailer's competitive edge is predicated on price, "it is tough to make a profit."

Analysts expect two of the top three to slug it out in many markets. "Wal-Mart and Kmart are going head-to-head," Marcon says. In this struggle, "Wal-Mart has the inherent advantage with stronger supplier relationships and better technology. The big question about Kmart is whether it can continue to survive." Marcon adds that "it has been improving steadily, and the new management team has helped."

Unlike some other retail sectors, discount store retailing is not seeing the trend toward consolidation, McCrary points out, noting that this sector's fortunes will follow those of the overall economy. "The general trend in retailing is toward [the discount] group," he says, "and as long as the economy cooperates, discount store retailing will do well."

At the very least, this price-driven sector also can break even in the face of hard economic times. "When the economy tanks, consumers move from shopping at department and specialty stores to discount stores," McCrary says, "which makes this portion of the retail spectrum a lot less cyclical than others."

Martin Sinderman is an Atlanta-based freelance writer.

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