Are Discount Retailers a Worthwhile Investment Opportunity?

Stack it High

When you look through the doors of many discount retailers, the last thing on your mind would be giving them any capital by means of investment. In the main, they can be truly horrific places, shelves a mess, litter strewn on the floor, and unsightly stacks of product from floor to ceiling all around.

Despite not being somewhere you would want to spend any great amount of time, they turn over a hell of a lot of money. In fact, the takings in these stores can dwarf what even some of the best-known retailers take across the year. In an austere thinking world, money talks, and if you can offer a person something cheaper or more conveniently than anybody else, that is an option they are more often than not going to take.

A primary concern for an investor may well be that if someone is selling something at a hugely discounted rate there is little scope for cash flow through the business, as there is an assumption that these companies operate on razor sharp margins and have little room for manoeuvre.

Balance Sheets

Naturally, if you sell something at £1, for example, there is a likelihood that the margin on that is not going to be especially spectacular. Thankfully, discount retailers have many ways in which they are able to massively boost their margins and turn themselves into excellent potential investment opportunities.

First of all is the deals they do with vendors. It is ridiculous how often wholesalers will have far too much product in comparison to what they actually need, meaning that discount stores can often pick up masses of stock extremely cheaply, pass on a brilliant discount to the consumer and still make an acceptable level of margin on it.

The second way is perhaps the most lucrative, however, and it comes in the form of self-branded merchandise. By offering their “own brand” on the shelf alongside those of globally popular brands, they are showcasing their own product and setting up a win-win situation. The customer saves an awful lot of money against what they would have spent originally on the branded item, while the store takes anything up to 85% profit in most cases due to the fact they have produced it themselves and not had to pay a King’s ransom in sourcing it and getting it into their stores.

Investment or Not?

Given the clamour for a bargain among consumers, it would be plain stupid to rule out investing in discount chains, especially those whose business plan operates along similar lines to that detailed above.

DealMarket is the private equity platform that allows anyone in the sector to get a leg up on the competition. Whether you’re looking for business investors or financial advice, DealMarket is your one-stop private equity shop.

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Written by Guest Contributor

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