Discounters dominate domestics market share - Discount Industry Annual Report, part 2

Discount Store News, July 20, 1992

Due to a combination of the failure of large department stores, expansion of categories, and upscaling in both fashion and price point, discount stores are now the dominant channel of distribution in the area of domestics. This carries through virtually every major product category, with the exception of window treatments, which still find their way to market through specialty stores as a rule.

But in towels, bed linens, bedding, kitchen textiles, tabletop and most other home fashions categories, the full-line discounter is king, a trend that has led directly to the near-death of the Market Week system. Chain preference for partnerships with major mills has led to the type of close, ongoing relationship that make a twice a year showcase at very best redundant.

"I have my best customers in and out of here every few weeks," one manufacturer said. "Since they account for about two-thirds of my sales, I don't know why we even bother [with Market Week]."

Full-line discounters accounted for an estimated $5.1 billion in domestics sales last year, of an estimated industry volume of $16 billion. Membership warehouse clubs accounted for another $1 billion, and specialty discounters added another $2.6 billion. So well over half of all domestics sales were rung up at discount cash registers.

The market as a whole has been flat for several years, but discounters' share continues to grow. Even the recession, which caused retailers to cut back on inventory and even ship back unwanted merchandise, failed to slow the overall swing to discounters. The continued weakness of the department store and mass merchant categories favored discounters.

However, the recession did place a strain on margins for both vendors and retailers. Domestics is one of the most profitable areas in the discount store, with gross margins in the low 30s for many products. However, prices continue to drop precipitously for opening price point goods, and in some cases, retailers are virtually giving high volume, traffic-building items away.

Merchants are attempting to build profits back into the department by adding new products or categories (down comforters, area rugs, 100% cotton sheets), coordinating departments to stimulate high-margin accessory sales, and by reacting more quickly to fashion directions. Chains that used to be 18 months behind the fashion curve are now only 30 days to 90 days behind, which most feel is about right. The discounter doesn't want to be a fashion leader; "We don't want to be out front of our customer," one executive explained.

Generally speaking, Target has taken over the high fashion end of the discount spectrum, with Kmart running a close second. Wal-Mart, which is not nearly as fashion-forward as the other leading chains, nevertheless has the most productive departments, and is the leading domestics dealer in the industry.

But other discounters have not given up the fight. There is a growing trend to develop more effective merchandising through improved signage, interactive videos to illustrate coordination options, and most importantly, improved fixturing.

For years, discounters have sold home fashions on fixtures developed for and more appropriate to products like hammers and board games. ShopKo, Ames and Kmart are all testing more upmarket presentations, borrowing approaches favored by both department stores and upscale but off-price specialty chains like Bed, Bath & Beyond and Pacific Linens.

Long term, such experimentation is necessary, as the rapid growth rate in this channel of distribution is certain to slow in coming years. And, discounters are unhappy with the low turn rate in the category (less than two full turns a year), and better merchandising is seen as the answer. And, finally, the constant erosion in price means that retailers now have to sell, for example, two towels for every one they sold a few years ago to keep dollar volume steady. To grow, retailers will have to find ways to step the customer up to better quality, higher price point goods.

     Domestics
     $8.7 Billion
Full-Line Discounters     $5.1B
Catalog Showrooms           -
Membership Warehouse      $1.0B
Specialty Discounters     $2.6B
     Full-Line Discount
     Store Productivity
Sales                     $5.1B
Sales Per Store         $638,000
Dept. Size            3,600 Sq. Ft.
Sales Per Sq. Ft.        $177.08
Turns                      3.1
Initial Markup             42.1%
Gross Margin               32.2%
Source: DSN research