Discount retailing flourishing after the pandemic
For several years, one major trend in the retail environment has been the rapid growth of different discount retail formats. In food retailing, the German discounters Aldi and Lidl have been taking market share from traditional grocers.
In the non-food categories, the discounter competition is more varied. The big and established retailers have thrived, and small upstarts have seen excellent performance during the last five years.
There are big differences in the size of the companies in different regions
Tractor Supply and Five Below have nearly doubled revenues in the US since the pre-pandemic times. In Europe, some challengers, such as Action in the Netherlands and Puuilo in Finland, have more than doubled revenues in five years. More established players, like Europris, B&M, Tokmanni & Motonet, have grown less robustly. Europris and Motonet saw revenues decline slightly in 2022 as the market environment changed dramatically.
Margins squeezed with the inflation
As the market changed due to the relaxed pandemic restrictions and rising inflation, almost all non-food retailers grappled with growing inventory levels.
Many retailers (such as Nike or Target) have cleared the excess inventory through promotions. This has led to lower gross margins. Dollar General was the only discounter to increase margins in 2021. However, Dollar General’s inventories rose rather rapidly. Tokmanni, on the other hand, was able to slow down the inventory growth.
Puuilo even managed to turn inventory levels down (absolute levels and relative to revenues).
On the other hand, Puuilo operates on a higher inventory level than its main benchmarks in the Nordics. It is interesting how Motonet has been able to run on such low inventory levels to sales compared to Tokmanni. After all, a significant share of Tokmanni's revenue comes from grocery products, which tend to turn over rapidly.
The gross margins of Tokmanni and Motonet have marked this difference. Traditionally Motonet’s margins have hovered close to 40%, whereas Tokmanni has had margins of around 35%. Lately, Motonet margins have come down rapidly.
Cost efficiency - the heart of discounting
The core of discounting is to keep the costs low so that the products can be sold cheaper than mainstream retailers. Within the discounters, there is quite a lot of variance in the costs to revenue margins. The image depicting cost efficiencies has been divided into the Finnish companies and others. This is mainly to ensure the numbers are comparable to other peers.
The American discounters have similar cost-to-revenue ratios, with Five Below somewhat lower than others.
In Finland, the differences between Puuilo and Motonet are stark. Puuilo is running a relatively tight cost control.
And then there is Costco, which operates in a league of its own with only 8,7% of costs to revenue ratio. On the other hand, Costco's margins at 12,4% are about one-third of the traditional discounters'.
The discounters' cost ratios are significantly lower than many traditional non-food retailers such as fashion & apparel or home goods companies. Companies like Macy’s or Williams-Sonoma operate with SGA costs of 25-35% of revenue.