Reject Shop set to rival Kmart with ambitious $3 billion plan

Discount darling The Reject Shop is in the middle of a massive revolution. And if it all goes to plan, it could blow its rivals out of the water.

It has long been a favourite of budget-savvy shoppers – but if The Reject Shop’s bold new plan succeeds, it could knock its competitors off their pedestals.

The humble discount store is in the middle of a drastic overhaul, with executives hoping it will soon take on retail heavyweights like Aldi and Kmart.

And it’s in with a shot thanks to a dream team consisting of new CEO Andre Reich – who previously helped turn around Kmart – chief financial officer Clinton Cahn, who joined the company in March, and chief operating officer Dani Aquilina, who has been with The Reject Shop since 2007 before taking over the position in January.

And investors are already taking notice.

Last month, investment banking heavyweight Morgan Stanley predicted The Reject Shop could become a $3 billion stock within the next decade.

It upgraded the company’s stock rating to overweight “in view of a large addressable market, change in strategic direction, and large prize on offer for success” as its share price soared to almost $8.50 compared to just $2 the previous July.

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The Reject Shop has big expansion plans.

Part of The Reject Shop’s success so far comes down to its incredibly loyal customer base, with many of the 1.1 million shoppers served per week being regulars.

But how else is the 40-year-old retailer planning on pulling off the mammoth feat?

GAP IN THE MARKET

While there are many successful dollar stores overseas, in the Aussie market, The Reject Shop’s closest competitors are Aldi and Kmart.

“Nobody is really playing in the segment – there are heaps and heaps of mid-market brands like Coles, Woolworths and Myer and even online players like Catch and Amazon, but their prices are a little higher and nobody is really doing what we’re doing,” Mr Reich told news.com.au.

He said the company was looking at its products and strategy to capitalise on that gap in the market and reach more customers.

“A lot of the share value has been created by the belief we can return the business to success and then expand,” he said, adding the idea was to “fix everything”.

SMART STRATEGY

There are 354 outlets across Australia at the moment, a figure that could be doubled in three to five years.

A major strength behind the chain’s expansion plan is the fact its stores are typically smaller compared with its competitors, at around 500sq m.

That means The Reject Shop can enter “places Aldi and Kmart can’t go” – such as rural, regional and suburban locations – as they are usually “five or six times” bigger.

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With smaller stores, The Reject Shop can enter markets competitors like Aldi can’t. Picture: Matthew Vasilescu/AAP

“In many respects, we may go head to head with them in larger markets, but there are many rural and suburban opportunities which means we would have the ability to reach more customers to our advantage,” Mr Reich said.

The company has also launched a new website which will allow customers to eventually shop online, is ramping up its social media presence and is also overhauling physical stores, making them cleaner with better price co-ordination.

NEW PRODUCTS

The second part of the new strategy involves improving range.

“Where we compete is that rather than having a massive range of say 10 pet beds as you would find in Kmart, we might have two of the best at the best price in the market,” Mr Reich said.

“We’re also focused on improving our product selection and making sure our taste levels are on par and on trend.”

In others words, a plan is under way to make The Reject Shop cool, with a slew of new teen-friendly stationery with more of a Typo or Smiggle vibe in the pipeline.

Clothing, electronics, crafting, knick-knacks and games will also likely be added in a bid to appeal to a younger crowd.

“It’s definitely a new area of focus, making our product range cooler and appealing to more people but still at a low price,” Mr Reich said.

At the moment, The Reject Shop’s biggest sellers are surprising ones, with sweets sales leading the charge followed by health and beauty – including items like toothbrushes and toothpaste, shampoo and hair dye – and then cleaning products like detergent and garbage bags.

The pet category has also exploded, especially during the coronavirus pandemic, with panic buying also driving up sales of stay-at-home activities like craft supplies as well as cleaning and storage supplies.

THE TIME IS RIGHT

Another weapon up The Reject Shop’s sleeve is timing, with customer attitudes towards cheap and cheerful retailers evolving and with the coronavirus-fuelled recession making shoppers more budget-conscious than ever.

“When Aldi came to Australia 15 years ago people said, ‘Why would you want to buy cheap food?’ and in 2009 when Kmart started its turnaround journey, they asked ‘Why would you want to offer cheap homewares and clothing, because people wouldn’t buy it,’” Mr Reich said.

“But things have changed a lot. Australia is a very expensive place to live but we also want to have everything we need for a good life … so if you’ve only got a fixed income, you’ve got to find ways to save in certain areas.

“It hasn’t been so cool or socially acceptable in Australia to shop down in a value store, but now people don’t worry as much where they shop as long as they save money.”

TRADING UPDATE

In an investor update last week, The Reject Shop posted sales of $820.6 million, up 3.4 per cent on the prior corresponding period, while gross profit jumped 0.3 per cent to $335.8 million.

Mr Reich said in a statement the chain was “well positioned” to navigate the “uncertain trading environment” posed by COVID-19, but acknowledged there was work to do to “fix” the business before it could reset and grow.

“During the COVID-19 pandemic, new and existing customers have shopped with us for their everyday essentials. We quickly responded to this demand by pivoting towards more consumable-based products while finding ways to keep our team members and customers safe,” he said.

“The Reject Shop is repositioning itself as a place for customers to shop first and save. As Australia enters into uncertain economic conditions, The Reject Shop will help all Australians save money every day.

“The discount variety sector is currently under-represented in the Australian retail landscape relative to major comparable overseas markets. This imbalance suggests that significant latent opportunity exists for the Australian discount variety sector to achieve material sales growth over the medium to long term.”