Discount retailers: slowing growth, but big potential

After years of rapid growth (especially during the pandemic), discount retailers have seen facing a more challenging trading environment in 2022.

For the two big Finnish publicly listed discount retailers, Tokmanni and Puuilo, the growth has slowed down quite significantly.

The Like-for-Like (LfL) growth for Tokmanni has been declining for the last three quarters. This similar phenomenon has happened in other countries, such as in the UK with B&M, as illustrated in a previous post.

Puuilo has shown more robust growth figures. Albeit those figures are coming from a significantly smaller base.

Tokmanni is still roughly four times as big as Puuilo.

After years of growing faster than the general non-food market, over the last 18 months, Tokmanni’s growth has occasionally slipped below the market growth.

Shouldn’t discounters grow at a time of inflation & uncertainty?

As the pandemic uncertainties have moved aside, the retail market environment has changed (again) dramatically due to the high inflation and the war in Ukraine. That has led to a slowdown of growth for many pandemic-era success stories, such as discounters (B&M, Target, Europris…) and online retailers (Amazon, Zalando, Shopify, Ocado…).

The uncertain trading environment will benefit the discounter model in the long run.

The advantage for discounters is already playing out in the grocery sector, where the German discounters (Aldi & Lidl) are growing rapidly in multiple markets.

Aldi & Lidl also highlight another trend that might be at play in the wider retail sector. As inflation squeezes consumption, customers could be reducing spending in other consumption categories and use that money for buying food.

During the first half of 2022 restaurants have been growing rapidly. One has to wonder whether that growth can continue for long.

Probably much of the spending to the restaurants will divert back to the grocery store.

That should benefit Tokmanni, which has an extensive assortment of groceries and some fully fledged grocery stores.

Puuilo and Motonet have significant growth ambitions

Puuilo is aiming to grove to 400+ M€ by the end of 2025. That would require annual growth of 10%. That level of growth is entirely achievable, but will probably need more new stores per year than the 3-4 that Puuilo currently opens.

Motonet in Sweden

Motonet on the other hand has an interesting growth opportunity ahead of them as they enter Sweden. The focussed and well executed concept that Motonet has honed in Finland could work well in Sweden also.

The big question is whether Motonet can really challenge Biltema in its home market? In Finland it has succeeded.

In terms of growth potential in the store network, Tokmanni operates almost 200 stores (196). Puuilo and Motonet operate only 30-40 stores. This gives them a big potential for growing through store openings. However, the stores are somewhat different for these retailers. The differences in the store networks highlight the differences in these companies. Whereas Tokmanni sells everything from groceries to DIY and gardening and clothing, Motonet and Puuilo are more focused on their assortments. 

The wide assortment has enabled Tokmanni to grow in revenue, whereas Puuilo and Motonet can operate stores with more revenue per store and higher profitability. The right-hand side image makes it obvious why Tokmanni has a strategic objective of investing in the bigger format stores, thus driving higher sales per store.

Inventories are inching up after the pandemic

Over the last six months, one of the hottest topics in retailing has been the increasing inventories. Many big retailers have struggled with significant amounts of unsold inventories as the era of rapid sales growth and unreliable supply chains suddenly changed to slowing growth during the first half of 2022.

One should note that the inventory levels compared to sales are still below pre-pandemic levels. The inventory per sales ratio has grown significantly for both Motonet and Puuilo. They are still at 2018 levels or below them.

For Tokmanni, this number is lower, perhaps due to the higher amount of groceries that are sold faster. Groceries are also a reason why Tokmanni’s profitability is lower than it’s two rivals.

The growth in inventories has had an impact on profitability. The profit margins that had been growing before and during the pandemic have now declined.

The profits will probably be squeezed further down in the coming quarters. This is a result of retailers cleaning out inventories through margin squeezing promotions and customers focusing more on price. One example of a smart tactic to give customers trust for low prices (the core advantage for a discounter) is a Price lock campaign that Asda has been using in the UK. Tokmanni was the first retailer to introduce Price locking in Finland.