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Is the variety store model sustainable?

Woman in supermarket aisle with food shelf reading shopping list and holding basket. Woman buying groceries in store. Retail, sale and consumerism concept.

supermarketVariety stores have struggled in Australia recently, but that’s not necessarily the case in other parts of the planet where a number of variety store chains are continuing to march across Europe and Asia. Why are they struggling here and not elsewhere?

In the beginning

Dollar or variety stores actually predate supermarkets. The first self-service grocery store, Piggly Wiggly, opened in Memphis in 1916 and then the first ‘supermarket’, according to the Smithsonian Institute, was King Kullen in New York in 1930.

Variety stores were an answer to the more highly-priced department stores including the UK’s Fortnum and Mason, established in 1707; Le Bon Marche, Paris, founded in 1852; and Macy’s in the USA, in 1858.

The concept of the variety store – offering a wide assortment of inexpensive personal and household items – originated in the USA with the dimestore, also known as five-and-dime stores; and dubbed threepenny and sixpenny stores in Britain.

Frank Winfield Woolworth opened the first successful five cent store in Lancaster, Pennsylvania in 1879. In the 140 years since, a number of retail formats have evolved, the main competitor to dollar and variety stores being the discount store, which proliferated from the 1950s to 1980s.

Leaving aside the category killer operators, the most well known discount store –  termed discount department store or mass merchant in Australia – operators include Walmart, Target, and Kmart. In the USA, many discount stores have taken the form of supercenters and in Asia as hypermarkets.

Then there are the successful hybrid supermarket/discount store models, such as Aldi, established in 1946, Essen, Germany, and warehouse clubs including Costco, founded in Seattle, 1983; and Sam’s Club in Oklahoma City, 1983. So dollar and variety stores are being squeezed by supermarkets on the one side for FMCG items, and discount stores and hypermarkets on the other for household and non-food goods.

Dollar store operators or price point retailers

Dollar store operators work on the fixed price point model, with products designed to fit those price points through a combination of generic and private labels, grey market products, distress purchase/closeout sale goods, and smaller pack sizes. Successful examples are listed below.

Daiso (Japan): Founded during 1977 as a ‘100-Yen store’, and as of 2017 numbering 2,800 stores in Japan, and 700 stores across Australia, Bahrain, Brazil, Cambodia, Canada, China, Hong Kong, Indonesia, Kuwait, Macau, Malaysia, Mexico, Myanmar, New Zealand, Oman, Philippines, Qatar, Saudi Arabia, Singapore, Taiwan, Thailand, United Arab Emirates, USA, and Vietnam. In Australia, Daiso launched in 2010 and ranges product at a flat rate of $2.80

Poundland (UK): Launched in 1990, now with an estimated seven million customers shopping there weekly. Poundland began expanding into Europe in 2011, in the Republic of Ireland and later operating a subsidiary chain of discount stores in mainland Europe under the name Dealz.

Poundland acquired closest rival 99p Stores in 2015, leaving Poundworld as their closest competitor. Poundland was acquired in August 2016 by Steinhoff International for £610m.

Poundworld, however, has not been so fortunate. In 2017 Poundworld introduced a range of multi-price products to offer customers ‘More Choice, More Savings’ but due partly to high competition from the multi-price products and the weak pound, Poundworld entered administration in June 2018.

Flying Tiger (Denmark): Founded in 1995 with a name based off its similar sound to the ten-kroner note, as of May 2018 there were 805 stores worldwide.

Other successful fixed price point retailers include:

  • Asia: China’s Miniso, Malaysia’s RM2, US Dollar Store in India.
  • Europe: Spain’s Todo a 100, Hungary’s 100 Forintos Bolt, Germany’s ToBi, France’s Monoprix and Uniprix, Russia’s FixPrice
  • South America: Argentina’s Todo por dos Pesos, Brazil’s Um e noventa e nove (meaning $1.99 stores) and Chile’s Todo a Mil.

The obvious issue with the fixed price model, as seen with Poundworld, is that inflation can make the price point unsustainable, and limits the range to low value goods. An example is Euroland (Netherlands), whose initial €1-only policy was dropped, and other, more expensive goods brought in. Now they’ve reached a compromise by ranging €1 goods around the side walls, with more expensive goods in the middle of the store. However, the market positioning of a fixed price store is clearer than that of variety stores.

Variety stores

Variety stores operate on a low-cost high volume bulk buy strategy, with a variety of price points although their names may reflect their dollar store heritage – Family Dollar and Dollar Tree being but some examples.

Many appear to be closer to discount stores and mass merchants in nature:

Hema (Netherlands): Founded in 1926 and originally a fixed price point retailer until World War II, nowowned by the British investment firm Lion Capital since 2007. The chain is characterised by relatively low pricing of generic housewares, which are mostly made by and for the chain itself, often with original designs. Standard pricing was reintroduced in 2010. Since 2011 the chain has been expanding across Europe.

Action (Netherlands): Founded in 1993, now with 1000+ stores and owned by the British private-equity fund 3i. It sells low budget, non-food and some food products. Action operates in the Netherlands, Belgium, Germany, France, Australia, Luxembourg and Poland. It stocks both known brands and private label, leading on price through large volume buys.

B&M (UK): Formed in 1978 one of the leading variety retailers in the United Kingdom, employing over 28,000 staff. Less than 10 per cent of their products are sold for £1.

The business operates 500 high street and out of town stores across the United Kingdom as of July 2018, as well as 49 stores under the Jawoll and Hafu brands in Germany. One of the fastest growing retailers in the UK, its focus on homewares and its category range, judging from its website, puts it more in the realm of a discount store than a variety store in my opinion.

Who shops in dollar and variety stores?

Though not confined to just the lower socioeconomic strata, although Poundland seven million weekly customers are primarily women in the lower categories determined by the UK’s National Statistics Socioeconomic classifications and obviously the success of price point retailers in South American markets and dollar stores in India is indicative of the size of the lower socioeconomic demographics in those markets. Dollar and variety stores tend to see an uptick in recessions such as the GFC, and struggle when disposable incomes rise as is currently the case in Canada and Australia.

Final thoughts

In the USA, Canada and Australia the dollar and variety store markets are considered mature, and in the cases of Canada and Australia growth has slowed or declined, according to IBISWorld reports on the sector. Aside from a large middle class, I suspect part of the problem here in Australia is market positioning.

The fixed price stores such as Hot Dollar and Dollar King are mostly gone, price wars between the supermarkets and the discount pharmacy chains and the strength of Aldi on FMCG lines means that low-cost everyday products are available elsewhere, leaving variety stores who struggle to compete with the seemingly relentless march of Kmart. If not moribund, I see the channel remaining niche at best in Australia.

Norrelle Goldring has 20 years experience in retail, category, channel and customer strategy, marketing and research, working in and with global retailers, manufacturers and research houses.

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