Value added

With disposable income reduced by the cost of living crisis and consumers seeking greater value for money, does it mean all value retailers will be successful? And what impact could this have on physical space if value retailers are the only ones taking new space?

Value retailers
Home Bargains and B&M performed strongly during the pandemic, experiencing revenue growth in 2021 of 13% and 12.6% respectively, while The Range tripled its profits in 2020. Though each retailer continues to expand their offering (The Range has a vast variety of branded and own brand products across 16 departments) it is the core business models of each that has led to their success, as their low prices, clear store layouts and promotion of offers are augmented by a no-frills in-store experience shorn of experiential aspects, such as interesting shop window displays or complicated instore presentation, which minimalises additional costs.

These retailers are expecting to benefit from the increased financial pressure consumers are coming under, as relevance of their variety of goods at value price points will increasingly appeal. All three retailers plan to continue expanding their store estate and are likely to do very well in the current market, particularly in light of high vacancy rates and limited estate expansion from other retailers.

Single price retailers
Despite the general success in the value sector, single price operators have fared less well over the past few years: Poundworld closed in 2018 and 99p Stores was bought by Poundland in 2015. The inflexibility of the business model meant increased costs were difficult to pass onto consumers and retailers lost out to more price-flexible competitors.

Poundland itself has experienced mixed performance and was particularly hit during the pandemic, given its high street-focused estate, with store sales down 60%. Though back on the expansion trail (Poundland's store rollout includes more than 30 new stores) focus is now on diversifying the offer, bringing in more home, clothing and grocery products and dual branding with parent company Pep&Co.

Discount supermarkets
Aldi and Lidl performed extremely well during the 2008 recession, increasing their sales 21% and 31% respectively due to a surge in new middle class customers. These retailers are expecting to excel within the current economic climate, albeit at a slower rate given their growth since 2008. Aldi and Lidl have benefitted from a surge of over one million new shoppers since the beginning of 2022, increasing their sales 6% in the 12 weeks to 15th May, in contrast to the wider market which experienced a 4% decline. Both retailers are at record high market shares of 9% and 7% respectively and are increasingly diversifying their location strategy, broadening beyond standalone stores and retail parks to town centres and shopping centres.

Future prospects
Though the prospects for operators in the value sector look strong from a consumer demand perspective, there are challenges. Costs - whether it be raw materials, logistics, heating and lighting or staff wages - continue to rise, putting pressure on already razor-thin margins.  Added to this is the sheer degree of competition in a market, where the differentiation of product and offer is comparatively low. All operators have considerable store estates, supply chain networks and buying power and the business model thrives on efficiency, making it difficult to envisage how a single operator may achieve a competitive advantage.

The impact on shopping locations
Demand for additional space will come at a welcome time for landlords, who are increasingly dealing with a lack of demand from occupiers who are continuing to struggle to determine the role and value of stores as sales shift online. Though relevant to an increasing number of shoppers, landlords must be careful not to allow a value proposition to dominate schemes at the expense of other price points and experiences.

The lack of variation in the offering suggests the addition of more value stores risks spreading sales across a wider pool of operators and reducing sales and profits, rather than generating new sales. Many town and shopping centres already suffer from an oversupply of value stores, limiting their appeal to anything but a convenience driven shopping trip. The use of flexible leases is one way landlords may be able to benefit from the short-medium term increase in demand for value whilst retaining the potential to diversify the offer when/if the economy takes a turn for the better.

As ever, an understanding of consumer demand and occupier performance in your location is key to implementing the most advantageous strategy.

Emily Brown