Finding Hidden Value At Value City, Et Al

Conventional wisdom holds that if regional discount stores, indeed, most regional stores of any ilk, have not already succumbed to the onslaught from large, national big-box stores, they likely will do so in the next few years.

Yet a new study suggests that all is not dust in the wind for regional holdouts, companies such as Value City, Duckwall-ALCO, ShopKo, Pamida, G.I. Joe’s, Rex Stores, Tweeter, Good Guys, Ultimate Electronics, Duane Reade, Longs Drug and Wolohan Lumber. To be sure, not all of them are operating on all cylinders, but they can take comfort in a report prepared by Leo J. Shapiro & Associates of Chicago.

Studying consumers in six Value City markets, Shapiro’s chairman George Rosenbaum concluded, “Value City is something of a jewel. It has a sizeable customer constituency that shops there and expects to continue doing so. Value City’s penetration of its trading areas and strong customer relationships represent a foundation for reversing its declining performance.” (For the fiscal year ended Feb. 2, Value City, the $1.36 billion subsidiary of Retail Ventures, suffered a sales decline of 1.4% from the prior year. More disappointing, compstore sales for the 113-store Columbus, Ohio-based chain dropped 5.6% in the fourth quarter, a sharp decline from the full year’s 1.3% shortfall.)

What led to this optimistic conclusion was the underlying belief that few consumers are content to shop just one store, no matter how low its prices are.

“When there is a choice in their area, nearly all Wal-Mart customers shop at two or more competitors,” said Rosenbaum. “This explains why 74% of Wal-Mart customers cross-shop with Target and why most of the Kmart chain survives even though 92% of Kmart customers also shop at Wal-Mart.”

Even more interesting is how Value City customers shop. Within the six markets studied, nearly 50% of the households shop Value City, averaging one visit per month, spending $326 at the store annually. Shapiro found 70% of those customers also shop Wal-Mart, with no effect on their Value City spend. In fact, Shapiro found a counter-trend—Value City customers who shop at Wal-Mart spend an even greater-than-average $367 a year at Value City.

Value City’s problems in merchandising, store personnel and housekeeping are keeping it from maximizing its potential. New management or direction might be able to tap into the consumer mother lode, especially in the area where Value City far outdistances Wal-Mart, namely apparel. Within the last 12 months, Shapiro found, more than 75% of customers bought apparel from Value City, while nearly one in two said that at least half of the dollars they spent at the chain in the past year went for clothing.

Value City provides an object lesson of why many companies are in play. They possess vast potential. They provide a choice of stores. “The limp performance of [Value City] stores,” said Rosenbaum, “is not a consequence of an eroding customer base but of management’s weak response to [the] desire to shop at Value City and, in particular to make Value City a source for their apparel purchases, a capability that it has been difficult for Wal-Mart to acquire.”

The bottom line—find your differentiating appeal and exploit it to its fullest.