The Rise of the “Super Discounters”- Part II

I’ve blogged about how super low price retailers and a new class of “non-retailers” are threatening the dominance of Big Box stores.

So why are more and more consumers bypassing Wal-Mart? Is it simply because of the zeal to find the lowest prices? In my case it was that and a chance to get even with the brainiacs at Texas Instruments.

The story goes like this.

Late on Saturday our daughter informs us that she needs a graphing calculator for her high school freshman AP math class by Monday.

We knew this was coming. The calculator was on the list of school supplies we knew she would need back in August. But we had put off buying the calculator because the cheapest one we could find that fit the requirements cost $150.00. Some were retailing for upwards of $180.00.

So here we were, late into the weekend having to scramble to make a purchase that we really didn’t want to make. Being unwilling to risk our daughters’ acceptance into Berkeley over a lousy $150.00, I figured we were going to have to pony up the money.

We had a problem with the concept of spending that kind of dough for a variety of reasons.

My wife had a problem with spending the money because she didn’t see why a class in high school should require such an expensive piece of equipment.

I put off buying it because I simply refused to pay $150.00 for technology that Texas Instruments first introduced in the late 70’s.

Today’s $150.00 TI-89 bears a remarkable resemblance to the TI-58 launched by the company in 1977. I remember having to buy this calculator for my college classes, it cost about the same in 1983 as it does now. It was an ungainly piece of technology and I never did learn exactly how to use it.

My thinking was that if the cost of computers can drop from something like a million dollars in the 70’s to around $200 today, why is this piece of technology still being sold at 1970’s prices? I mean, my first cell phone cost me just north of a grand, but today I can pick one up for $29.00, not to mention that I don’t think my 1989 suitcase phone could take pictures.

Perusing the features listed on the packaging, I don’t think the TI-89 performs one iota better that the TI-58 did. And that brought back all of the painful memories of struggling with that damn calculator through statistics class. I was determined not to give those bastards at TI another $150.00 to be completely humiliated…again!

“Thank God for Craigslist”, were my wife’s exact words. She bypassed the usual retail channels and found a slightly used TI-83, which is the same as the TI-89 (and the TI-58 for that matter) being sold on Craigslist for a mere $50.00.

So late on Sunday, I take a trip to the local mall, not to go into the mall mind you, but to meet the owner of the TI-83 in the parking lot.

After a brief introduction and a quick review of the product, I handed the man $50.00 and drove home with our prize. I was happy to have gotten the calculator my daughter needed, but I was even happier about the fact that I had pulled one over on the jerks at Texas Instruments.

Who are these guys that think they have no need to adjust the prices of their beloved calculators to match the real world reduction in the costs of producing electronic devices?

And with that, a $150.00 in revenue is lost to the retail industry. It’s that type of transaction, which is happening everyday, that is speeding the demise of what we think of as retailers.

Wal-Mart may be able to offer the TI-89 at some reduced price, but even they can’t sell it for $50.00 and make $50.00 in profit like the man from Craigslist did.

This is a radical idea among most of the people in the industry that still talk to me. I have found that telling people how everything they think about retail is completely wrong doesn’t get you a great many returned phone calls.

Recently I tried to put the growth of this phenomenon into some kind of numerical perspective. I am attempting to correlate the trend towards these outlets with the movement of stock prices, more on that later, but here’s what I have so far.

The growth of the Super Discounters has been impressive, but is still in its infancy. The companies that provide numbers give some idea of the scale:

Company # stores Revenue

Family Dollar 6,500 $7.4 B

Dollar Tree 3,450 $4.6 B

Dollar General 8,414 Taken Private by KKR

99¢ Stores 279 $1.3 B

So no big threat here… until you consider that the segment is growing at a rate above 6%, during a time when most retailers are struggling to keep from shrinking out of existence.

It’s also telling that the biggest player has been taken private by KKR. Those are the folks who started the consolidation frenzy in the supermarket industry in the early 1990’s that drove company valuations through the roof.

Maybe they know something?

I’m just saying.

The second part of the argument is a bit harder to quantify. “Non-retailers” don’t report annual numbers. Craigslist has no clue how much of the stuff offered for sale is actually bought and nobody reports the profits from their garage sale, don’t take my word for it, ask the IRS.

There is some anecdotal evidence however.

The National Association of Resale and Thrift Shops (yes, this proves that there is a group for everybody) takes the pulse of the industry thought a series of surveys.

The latest NARTS results show that over the second quarter of this year the growth rate of the industry accelerated from a 5% annual figure to 7%. 64% of those responding had an average increase in sales of 31% and a 77% increase in new customers. 65% saw an increase in inventory offerings that averaged 28%. Most of the members reported that the inventory offerings increased in quality over previous years.

When was the last time you saw any big box retailer with double digit sales and customer traffic increases?

New stores, new customers and a new “Frugalista” mentality (the trend towards selling off your old stuff to buy new stuff) feeds into the future growth of this type of retail…at the expense of the status quo.

Nobody at Wal-Mart is afraid of these guys today, but I remember when nobody in the retail industry was afraid of Wal-Mart. These things have a way of creeping up on you.

Stay Tuned!