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Penthouse profits for bargain basements

  • Story Highlights
  • McDonalds and Wal-Mart are making profits despite the recession
  • Retailers offering bargain basement prices are attracting consumer attention
  • Mixed goods, middle-market retailers feeling pressurized by value retailers
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By Priyanka Deladia for CNN
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LONDON, England (CNN) -- While the global economic slump is spelling disaster for many big name firms, the worst of times could prove the best of times for retailers targeting one often undervalued consumer group: the thrifty.

Bargain basement store.

A shopper walks past a bargain shop in Glasgow, Scotland.

Massive job layoffs, mortgage foreclosures and tumbling revenues have put the squeeze on most companies, with stock market prices tumbling the world over.

But as consumers become more prudent with their pennies, retailers catering to the less expensive end of the market are cashing in on a boom analysts say mirrors the success, if not the glamour of the movie industry of the 1930s.

With retail sales in the U.S. dropping by up to eight percent during the traditionally bountiful pre-holiday sales period, according to one survey, it comes as no surprise that U.S. budget burger vendor McDonalds and stack-it-high-sell-it-cheap retailer Walmart were among the few companies trumpeting a rise in share prices in 2008.

The picture was equally gloomy in Britain, despite retail stores touting discounts as high as 90 percent in a bid to attract shoppers over the Christmas period.

With longstanding retail names like Marks and Spencer announcing poor sales followed by job cuts and main street icon Woolworths forced to close altogether, it seems there is little prospect for growth.

But again, thrift appears to be thriving. Have your switched to a value retailer because of the recession? Share your thoughts.

British value-retailer ASDA -- owned by Walmart -- recently announced plans to create 7,000 new jobs, while German-owned discount chain Aldi has also seen its sales rise in the UK and Europe -- so much so that it is reportedly opening 75 new stores in the U.S. in 2009 to benefit from the belt-tightening crunch.

It doesn't stop there. UK value retailer Poundland, which offers products for just £1 ($1.28), has seen a rise in sales by 122 percent since the beginning of 2008. Interestingly, the company says it has seen a 22 percent increase in consumers from wealthier social groups because of the recession.

"We've been successful in the good times and the poor," Poundland chief executive Jim McCarthy told CNN. "One of the main reasons for our success is that with Poundland there won't be a shock bill at the checkout, thus attracting hard pressed consumers affected by the recession."

McCarthy added that "eBay savvy" consumers know that for every price displayed on the shelves, something is available cheaper, helping make bargain basement prices a booming business.

Many of the mixed goods middle-market retailers are now under pressure from the value retailers, retail analysts Robert Clarke, from Retail Knowledge Bank told CNN.

"For a long time now, some UK retailers have enjoyed heavy margin profits. These retailers will need to change their business model without compromising the position of their brand, or cut down under performing stores in order to improve profits," he said.

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Penn State University Marketing Professor Gary Lilien compares the growth in value retailers to the movie industry boom in the 1930s when consumers saw movies as an affordable escape the painful reality of economic depression.

"Walmart, McDonalds and other successful retailers provide an escape for consumers and are successful because they have had to make little changes to their business model to take advantage of the situation -- rather, they tapped into their core positioning and struck a timely note with consumers," he said.

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