Discount Stores
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Industry Overview
The discount department store industry includes about 5,000 stores with combined annual revenue of $130 billion. Major companies include Wal-Mart (excluding supercenters); Target; and Kmart (a subsidiary of Sears Holding Corp). The industry is highly concentrated: the top eight companies hold 100 percent of industry sales.
Unlike most traditional department stores, discount department stores have a central checkout versus checkout registers within individual departments.
Competitive Landscape
Population growth and consumer spending drive demand. The profitability of individual companies depends on efficient supply chain management, effective merchandising, and competitive pricing. Large companies dominate the industry, and enjoy advantages in purchasing, distribution, and marketing. Average annual revenue per worker is $175,000.
Discount department stores carry a wide range of merchandise and compete with a diverse set of retailers, including department, drug, grocery, off-price, outlet, and specialty stores; warehouse clubs; and Internet and catalog retailers.
Products, Operations & Technology
Major products sold include apparel (20 percent of sales); personal care products (15 percent); electronics and groceries (7 percent each); and toys (6 percent). Apparel includes women's, men's, and children's. Personal care includes cosmetics and health and beauty products. Electronics include video and audio equipment (TVs, DVD players, stereo systems). Companies may also sell kitchenware, sporting goods, towels and sheets, and footwear. Discount department stores may have instore pharmacies, photo processing services, or restaurants.
Large chains dominate. Companies aim to provide "one-stop shopping" for price-conscious consumers by providing a wide range of merchandise at low prices. By leveraging low operating and purchasing costs, companies are generally able to offer everyday retail prices lower than those in most other retailers. Some discount department stores are open 24 hours a day. Centralized checkout areas, typically in the front of stores, allow companies to process large numbers of customers efficiently.
Discount department stores occupy a big footprint and require large amounts of real estate: average size is about 100,000 square feet. Most stores are either stand-alone or anchors in large strip malls. Some companies select locations near population centers, other retail centers, or major highways. Wal-Mart has been successful by targeting small towns and rural locations, where few retail options exist. Most companies also have a supercenter format, which averages 180,000 square feet and offers a more extensive merchandise selection and a complete grocery section. A typical discount department store can generate between $40 and $50 million annually. Sales per square foot may range from $300 to $450.
Large volume purchases allow companies to buy most merchandise directly from manufacturers and enjoy volume discounts. Because discount department stores represent significant volume opportunity for suppliers, companies negotiate hard and typically receive favorable purchasing terms. Companies may forgo advertising allowances and vendor-supplied transportation in favor of lower purchase prices. Effective purchasing helps companies offer retail discounts while maintaining margins.
The discount department store industry has pioneered effective supply chain management. Efficiencies within networks of warehouses and distribution centers reduce replenishment time and shipping costs. Deliveries from suppliers come in large shipments in pallet quantities by truckload. Within distribution centers, workers may manage sorting equipment to assemble orders for individual stores. Dispatchers coordinate truck scheduling, and stores may receive shipments several times a week. To reduce costs and transit time, companies occasionally use cross-docking, allowing suppliers to ship products directly to stores. Companies may dedicate distribution centers to certain categories, such as grocery products, apparel, online sales, or imports.
Inventory includes many major consumer retail categories with a broad selection of products within each category. Companies offer both brand name and private-label products. "Hard goods" include tools, furniture, home accessories, and kitchenware; "soft goods" include apparel, footwear, and bedding. Because many customers rely on discount department stores for household staples, such as toothpaste and soap, maintaining high in-stock levels are important. To maximize product availability, Wal-Mart allows some suppliers to monitor their own inventory levels and generate replenishment orders.
Technology, including point of sale (POS) systems, automated distribution centers, and computerized inventory management systems, has been crucial in keeping operating costs low. Companies use hand held scanners, bar codes, and radio frequency identification (RFID) tags to track merchandise movement electronically. Because monitoring sales and inventory across the nation is so important, Wal-Mart has a dedicated satellite communication system linking all facilities.