What will Kmart, Target and Big W look like in give years time? IBISWorld analyst Lauren Magner presents her case in this preview from our August edition.
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Over the next five years, the industry’s larger companies will continue to strategically reposition their brands and products, restructure supply chains, and expand their store networks to capture market share from mid-tier and up-market department stores such as Target, Myer and David Jones.
Business models are expected to focus on offering the lowest prices possible for a diverse range of products, and targeting consumers that have prudent spending habits.
However, fierce price competition from online stores, specialised retailers and other department stores will constrain growth.
Consequently, industry revenue is forecast to grow by an annualised 2.9% over the five years through 2020-21, to reach $11.8 billion.
Price is the primary basis of competition among industry operators, and discount department stores have actively sought to be market leaders in this aspect.
Improved global sourcing methods have enabled retailers to purchase inventory at a lower cost.
By sourcing products directly from manufacturers in low-wage countries such as China, industry operators have been able to bypass the wholesale part of the supply chain, saving on intermediary costs.
Companies have passed on some of these cost savings to consumers in the form of lower prices.
This was the main factor driving growth in 2012-13 and 2013-14.
The fall in purchase costs as a share of revenue has also granted industry players with greater scope to boost their profit margins over the past five years.
Major players Kmart and Big W have adjusted their business models and overhauled their pricing strategies to take advantage of this change in consumer behaviour.
Low prices are the main selling point of discount department stores.
Operators risk being pushed out of the industry if they are unable to offer the low prices demanded by consumers.
During the past five years, Kmart has implemented a new pricing strategy, which involves reducing its products to the lowest prices possible.
Prices were streamlined to target specific demographics, and this has proven to be successful in increasing sales volumes.
Big W launched its ‘everyday lowest prices’ campaign to capitalise on the growing number of value-conscious consumers.
Additionally, major players, such as Kmart, have also phased out discounting as a pricing strategy, enhancing in-store foot traffic as consumers no longer have to delay purchasing until sale periods.
Over the past five years, discount department stores have performed well in a challenging retail environment, relative to their mid-tier and up-market counterparts.
Volatile consumer confidence stemming from instability in global financial markets and poor domestic employment figures over the period prompted many households to scale back expenditure on discretionary purchases.
These poor economic conditions supported demand for the industry’s products, as value-conscious consumers opted for the cheaper alternatives offered by discount department stores.
As a result, industry revenue is forecast to rise at an annualised 2.1% over the five years through 2015-16, to total $10.2 billion.
Revenue is anticipated to grow by 3.0% in the current year, as a recovery in consumer sentiment and continued growth in discretionary incomes support demand for industry products.
Online retail is expected to remain a major source of competition for the industry.
The diverse product range and low prices offered by online stores will continue to attract value-conscious, time-poor customers.
Discount department stores will increasingly lose market share to online retailers, as new technology and software programs result in more sophisticated websites and tech-savvy consumers.
Online transactions are expected to become more commonplace, as the volume of retail-related internet traffic is expected to grow over the next five years due to the increased use of mobile devices to make purchases.
Tech-savvy consumers will increasingly use their smartphones while shopping in-store to compare prices with those offered online.
Discount department stores that are unable to balance both an online and physical retail presence will struggle to maintain relevance in an increasingly competitive trading environment.
Major retailers such as Big W and Kmart are expected to continue enhancing their multichannel strategies by upgrading their mobile applications and websites.