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Could $93m share market wipe-out spell doom for Reject Shop?

WHEN was the last time you put a trip to The Reject Shop on your to-do list?

If you can't remember, you're not alone - and that's a big problem for the discount chain, which is scrambling to stay afloat after investors wiped $93 million from its value in the wake of a dramatic profit downgrade.

A massive 40 per cent drop in The Reject Shop's share price came after the company warned the market on Friday of expected second-half losses of at least $5 million. The stock has now fallen from $8 to $4.16 a share.

Retail experts say the bargain chain is suffering from an identity crisis, warning that it could meet the same fate as Clint's Crazy Bargains, which was forced to sell off its loss-making stores in 2014.

Do you shop at the Reject Shop?

This poll ended on 15 April 2017.

Current Results

Yes, it's fantastic and I am always there

92%

Sometimes

5%

Hardly ever

2%

This is not a scientific poll. The results reflect only the opinions of those who chose to participate.

It comes as the shrinking variety retail sector battles to sustain itself in the face of increased competition from discount department stores and online shopping, while Japanese chain Daiso muscles in on the action.

In a statement to the ASX on Friday, managing director Ross Sudano blamed "extremely challenging" retail conditions and a problematic merchandising mix for The Reject Shop's "disappointing" performance, which is expected to slash the company's full-year profit to $12.5 million.

"Recent sales results as well as feedback from customers tell us that, in attempts to broaden our focus on introducing new and fresh products, our merchandise mix has moved too heavily towards a focus on variety products," Mr Sudano said.

"This reduced focus on our everyday value and bargains, and its impact on our in-store promotional program, has adversely affected our foot traffic."

He vowed to turn things around by improving the retailer's product mix and tweaking its marketing activity and in-store presentation "to emphasise a stronger blend of everyday value".

But some commentators have warned that a more drastic overhaul of the brand is needed.

The Reject Shop in the new $30 million Stockland Kensington Shopping Centre.
The Reject Shop in the new $30 million Stockland Kensington Shopping Centre. Mike Knott BUN070417COLES20

REJECT SHOP SUFFERS 'LACK OF RELEVANCE'

The fundamental question confronting The Reject Shop, according to retail analyst Barry Urquhart, is: "Where does it fit in the marketplace?"

"It doesn't seem to fit in a category where people would say 'it's got to be on my shopping list'," Mr Urquhart said.
He said the retailer was plagued by a lack of relevance, not just competitive pressures.

While Woolworths was known as the "fresh food" destination, Coles for its "everyday low prices" and Aldi for private-label essentials like laundry powder, he said, The Reject Shop had lost its unique selling point.

"If they're not famous for anything, it comes down to: how relevant are they to consumer needs and expectations?" Mr Urquhart said. "And therefore, they fall off the shopping list."

He said while in the past The Reject Shop had a clearly defined offering that appealed to the impulse buyer, its efforts to adjust to the new economic reality had failed.

These days, he said, "value shoppers don't want 'reject', end-run types of products; they want value."

And while up to 68 per cent of shoppers were still on the hunt for a bargain, they were accustomed to rampant discounting at department stores - and expected brands to have an online presence where they could "window shop" and compare prices.

"The problem is that The Retail Shop does not appear to have established a new presence in the marketplace," Mr Urquhart said.

'THEY'VE LOST THEIR DIRECTION'

Retail analyst Geoff Dart of DGC Advisory agreed, saying it was no longer a "destination".

"They've painted themselves in the corner with the brand," Mr Dart said. "They just don't know who they are; they've lost their direction and value proposition."

He said Daiso was beating The Reject Shop at its own game when it came to homewares, while Typo had cornered the stationary market and Chemist Warehouse was dominating health and beauty.

"They can't compete with the supermarkets on all the dry goods and grocery and cleaning products," he said. "They can't compete on garden products and you've got [generic] $2 shops ... They just don't mean anything anymore."

Reject Shop managing director Ross Sudano.
Reject Shop managing director Ross Sudano.

A SECTOR IN DECLINE

As the major player in a sector that has been shrinking for years, The Reject Shop is in a difficult position.

According to IbisWorld's latest report on the industry, published in January, the retailer lays claim to a 38 per cent share of Australia's $2.2 billion discount variety store market.

Over the past five years, it has embarked on a rapid store expansion program, which boosted revenues but also drove up operating costs.

The Reject Shop now employs more than 5500 people and operates 349 stores, selling food, cosmetics, toiletries, furniture, kitchenware, sporting equipment, toys and other household merchandise.

The company has previously flagged plans to reduce costs, improve efficiencies and rationalise marketing expenditure in an effort to boost profit margins.

Competition from discount department stores like Big W and Kmart was a significant threat, wrote IbisWorld analyst Brian Lo.

"These stores generally offer better service and product quality as well as a larger shopping environment," Mr Lo wrote.

And while their prices tended to be slightly higher than variety stores like The Reject Shop, he said, Big W and Kmart had the benefit of economies of scale, allowing them to buy stock at a cheaper price.

Meanwhile, he said, the market conditions that had fuelled discount stores' rise had now reversed, with consumer sentiment projected to recover in the next five years while discretionary spending continues to fall.

Topics:  business reject shop

News Corp Australia


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