By Kayla Olaya
You might imagine that the crunch on household budgets from high inflation and interest rates would drive a rush towards $2 shops and discount retailers such as Hot Dollar and The Reject Shop.
But in Australia and overseas, experts say conditions have been getting tougher for this part of the market, as online behemoths such as Shein, Temu, Amazon and local giant Kmart focus on winning over thrifty consumers.
Discount store sales are not growing as rapidly as their online and in-store behemoth counterparts Temu, Shein and Kmart.Credit: Gabriele Charotte
Australia’s largest discount variety retailer, The Reject Shop, this year recorded its lowest profit in four years of $4.7 million in the 2024 financial year, and its share price has fallen more than 40 per cent this year.
Meanwhile, discount department giant Kmart has been a star performer for its owner, Wesfarmers. Kmart reported record profits this financial year of $958 million, buoyed by shoppers’ love for in-house brand Anko.
While consumer spending has generally been lacklustre, online sales have been accelerating, posing a risk for Australian retailers, according to a study by Retail Mosaic. “Amazon, Temu and Shein are taking a disproportionate share of the growth,” it stated.
Professor Gary Mortimer from Queensland University of Technology, an expert in consumer behaviour and retail marketing, said Shein and Temu were overwhelmingly becoming the key competitors for discount retailers.
“We know that there’s higher foot traffic through discount department stores, there’s a great growth of demand for private label products as consumers focusing on the cost of living and shift towards greater value, low-price options,” he said. “I think investors may be concerned about the growth of Temu and Shein entering the marketplace.”
Despite the stiff competition from players such as Shein and Temu, this appears to have had less impact on Kmart, which appears to offer a “cheap and cheerful” in-store experience that shoppers find more attractive than dollar stores or other budget retailers.
Roy Morgan retail expert Laura Demasi said: “The challenge The Reject Shop has is similar to Big W in that it feels really low-brow, it really feels discount in their stores. This all comes back to the store experience – it feels cheap and difficult in there.
“There’s a lot of opportunity for the Reject Shop if they reinvent that store experience and the brand as well. But I think that’s what’s held them back; I just think it doesn’t have that vibe, that cheap-and-cheerful thing like there is with Kmart and Temu.”
Shopping on a budget no longer carries the stigma it once did with consumers – Demasi said consumers weren’t afraid to admit they shop at discount stores as they felt the pinch from higher interest rates and inflation.
“In the last two years, people are trading down to cheaper brands and focusing more online, very much bargain-seeking behaviour. The types of people that probably didn’t really go to Kmart very often, or maybe went in and got the odd thing, goes to Kmart in an average month. It’s huge penetration into the population,” said Demasi.
In the United States, major discount store chains have been struggling, despite shoppers trading down in response to high living costs. Shares in major US player Dollar Tree are down more than 50 per cent this year, while Dollar General is down about 45 per cent.
At the start of the pandemic, investors jumped on The Reject Shop shares, rocketing the price from around $2.50 to above $8 a share in June 2020. The share price has been more than halved since that initial spike and is sitting below $3.
But retail analysts from Jarden are tipping The Reject Shop will bounce back, outlining in a note last month that they believe the stock could outperform if the company could see off competition from the likes of Temu.
Brian Walker, founder of consultancy Retail Doctor Group, says discount shops such as The Reject Shop have experienced static growth during cost-of-living pressures, and that its latest trading update showed more of a “break even” in profits.
“The Reject Shop is in an interesting position because it’s small format in higher rent areas. It’s typically done well in contracted markets, such as the one we’re in now,” he said.
“Kmart has been the success story of [the] discount department store cycle for a few years now. It’s positioned well, it’s created a very good brand image. It’s been super efficient in its retailing, and it’s grown quite aggressively,” said Walker, pointing to Wesfarmers’ recent results that were driven predominantly by Anko, Kmart’s in-house brand. “It’s really all coming out of Kmart.”
The Reject Shop did not respond to requests for comment.
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