KN52173

KEY NOTE DISCOUNT RETAILING : March 2003

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This report covers: discount grocery retailers, discount non-grocery retailers, preferred day for grocery shopping, distance travelled for grocery shopping, frequency of grocery shopping, expenditure levels on grocery shopping

Companies covered include: Aldi Stores, ASDA, Brown & Jackson, Costco Wholesale UK, Kwik Save Stores, Lidl, Makro, Matalan, Netto Foodstores, New Look Group, Peacock's Stores, Poundland, Primark Stores, TJ Hughes, TK Maxx,

EXECUTIVE SUMMARY

The discount retailing market is broadly divided into grocery and non-grocery retailers. The grocery sector is dominated by foreign-owned companies, which have had considerable success in their own countries. The German-owned companies, Aldi Stores Ltd and Lidl Ltd are the two major players in this sector and their parent companies have huge turnovers and buying power. In Germany, the discount grocers command approximately 30 percent of the grocery market. However, the companies have found the UK to be a much tougher market than expected. Despite having entered the market in the early 1990s, they only account for approximately 1 percent of grocery sales in the UK and the pace of their expansion has slowed considerably in recent years. The main factors behind this are the tough planning controls that make it difficult for the companies to open new stores and the fierce resistance encountered from the established retailers.

Clothing and footwear retailers dominate the non-grocery sector and —unlike their counterparts in the discount grocery sector — these companies are increasingly to be found in out-of-town factory and discount outlet centres. These retailers buy stock at discounted prices, often from major brand suppliers, and pass the stock on at low profit margins. Major companies active in the market include TK Maxx, Matalan PLC and Peacock's Stores Ltd. The sector has been the most dynamic area of the retailing world in recent years, enjoying phenomenal rates of expansion — the sector grew by 52.6 percent in 2000 and by 30 percent in both 2001 and 2002.

Indeed, the total market size for discount retailing almost doubled in value, achieving 97.5 percent growth between 1998 and 2002. The phenomenal pace of growth of the non-grocery sector has been the key driving force behind the expansion of the total market. It is likely that the overall market still has plenty of scope for further expansion, given that discount sales account for less than 1 percent of total retail sales in the UK. However, Key Note believes that a marked slowdown in the pace of growth in the non-grocery sector will occur in the next few years.

The primary reason for this less optimistic outlook is the convergence of the discount sector with the mainstream retailing industry. In the past few years, an increasing convergence within the grocery retail market between established retailers and the new discounters has taken place. The large supermarket multiples, with their huge economies of scale and massive buying power, are well placed to hold their own with the discounters.

The decision by Levi Strauss to supply mass-market retailers — having once fought in the law courts to prevent companies such as Tesco from selling its jeans — is also likely to have an adverse impact on the clothing discount retailers. Other brand suppliers are likely to follow Levi's example and consumers might begin to wonder why they need to visit a discount store if they can buy the same goods at low prices in their local supermarket.

TABLE OF CONTENTS

Text © 2004 Key Note

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Last updated by Amanda Porteous February 2004