Over recent years business at the discount retailers has boomed. They have been one of the biggest beneficiaries of the financial crisis as pressure on household incomes has encouraged bargain hunting on a national scale. The discounters have also benefited from a shift in attitudes with more middle class shoppers embracing the discount concept, vowing never to return to the days of frivolous spending.
The market share of Aldi and Lidl has more than doubled over the last decade, yet they still account for only 8% of the UK's food retail market. This compares with around 40% in Germany. Discount general merchandise retailers may have an even bigger opportunity, currently accounting for less than 3% of the total general merchandise market.
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If this trend towards discount retailing continues it could have profound consequences. The big four supermarkets are already struggling. In order to stem the onslaught of Aldi and Lidl they may have to cut prices aggressively which could eat into margins.
On the other hand Poundland, B&M and Card Factory (a discount card retailer) could grow their market share further. The discount general merchandise market is forecast to grow by 9.3% between 2012 and 2017 (source: PwC), and all three companies are pursuing aggressive store opening programmes. They trade on an average P/E of 21, a 40% discount to that of Primark-owner Associated British Foods, despite the fact that the latter has much lower forecast sales growth and is not even a pure play on the discount general retail theme (see Steve Clayton's article: My approach to picking stocks).
Discount general merchandise market: historic and forecast sales growth
Source: PwC, Poundland IPO prospectus. *Forecast
|Company||Forecast sales growth||P/E|
|Associated British Foods||4.7%||30.0|
Source: Bloomberg, correct as at 3 December 2014
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