The Reject Shop feels the pain as it faces a massive slump in profits

Article by Ben Graham / /
October 19, 2018 /
Click here to view original /

IF THERE’S one thing Aussies love more than anything else it’s a bargain.

We’re regularly making a name for ourselves as one of the most expensive countries in the world, so it’s no wonder we start frothing at the mouth every time we see Tim Tams on special or grab a cheap snag every time we’re idling around Bunnings.

So how is it that one of our most popular discount variety store chains, The Reject Shop — which has 340 stores across Australia — is facing an uphill battle to survive?

Yesterday, the embattled chain slashed its profit forecast, triggering a whopping 44 per cent slump in its price — which was already at a worrying low.

It has had to slash its profit forecast from $17.7 million to between $10 million to $11 million for the first half of the year, unless there is a massive turnaround between now and Christmas.

So, how can this happen to a bargain lover’s paradise in a nation of bargain lovers?

Queensland University of Technology associate professor Gary Mortimer told said there were a number of key factors making life extremely difficult for The Reject Shop, which began life as a single Melbourne store in 1981.

He says the gravest challenge to The Reject Shop’s model has been the rise of the discount department store, which offer pretty much the same things at the same prices.

“The appeal of The Reject Shop was that you could go in and buy a bag of lollies for $1 and a bottle of shampoo or conditioner for $2,” he said. “But, now you can go to stores like Kmart (and similar stores such as Big W and Target) and pick up pretty much the same thing for the same price.”

Business trends expert Dr Lauren Rosewarne from The University of Melbourne said Kmart, has rebranded dramatically in recent years, meaning customers can now buy low-priced goods “in an environment less ramshackle and a little more Zen than the Reject Shop offers”.

Not only that, the Aussie bargain market has a new and ever-expanding German kid on the block who has disrupted the industry in style, Aldi.

Mr Mortimer said the European supermarket has made a name for itself by cleverly switching up its specials — meaning shoppers can find new deals almost every time they shop.

“The growth of Aldi has also been a major challenge because they are very focused on low prices and they will constantly evolve their biweekly specials,” he said.

Mr Mortimer added that the supermarket launches these new offers on Wednesdays and Saturdays and The Reject Shop has found it difficult to keep up with an ever-changing array of merchandise in the German giant’s stores, which can range from blow-up mattresses to cheap guitars depending on the day.

The three-pronged attack is tipped by online traders, notably eBay and Aliexpress, according to Dr Rosewarne.

She said that, to deal with these threats, The Reject Shop needs some sort of experience to entice customers to visit its shops.

“The Reject Shop never had a ‘destination’ or ‘experience’ element to it for customers, nor an ability to truly offer visitors goods they couldn’t get elsewhere,” she said.

“These two things need to be worked on by chain retailers wanting to survive in a challenging space. A store needs to be more than a place to by an emergency roll of wrapping paper or a close-to-expiry box of cereal in 2018.”

However, the company’s managing director, Ross Sudano, said the sales slide is due to an “extremely challenging consumer environment”, rather than any problem with the company’s strategy or execution.

“The continuing absence of real wage growth and increases in the cost of many basic expenses (including mortgage rates) ensures that competition for the discretionary spend of consumers remains high,” he wrote in a market statement.

“In addition, we have seen increased investment in promotional pricing across many retailers, particularly in the fast-moving consumable goods (FMCG) space, resulting in additional investment in our FMCG pricing to ensure our value proposition is not damaged.”

Mr Mortimer says The Reject Shop still has its key quality going for it — it’s darn cheap.

“The Reject Shop often based itself on procuring cancelled orders and oversupplied products and tapping into parallel-sourced products manufactured for the Indonesian or Filipino market for example,” he said.

“It will source those products and supply them in store at a cheaper price than many other stores.”

However, the significant competition and ever-increasing cost of running stores in Australia are making it a tough climate for all third-tier discount stores.

“Prices can’t keep coming down if the cost of rent is always going up, because that means wages go up and logistics go up too,” he said.