The Reject Shop blames profit drop on merchandising “execution issues”: How competition is heating up for retail store layouts

The Reject Shop has said a failure to execute its merchandising strategy contributed to a 28% drop in net profit for 2017, as one retail expert warns competition for attractive store layouts in the discount retail space is only going to heat up further.

Ross Sudano, chief executive of The Reject Shop, says it is an “extremely challenging” time in the retail sector, but the company’s latest financial result also came down to issues with its in-store merchandising, explaining the business has now taken steps to “better showcase our value driven offer”.

Speaking to Fairfax, Sudano said the execution of The Reject Shop’s in-store strategy, including a decision to place brand-name goods inside stores and not in prominent positions, “didn’t resonate with the customers”.

The company says it changed things up in the second half of the last financial year, but on Wednesday announced it had banked a net profit after tax of $12.3 million, down 27.8% on the year before. Earnings before interest and tax also dropped 25% compared to the previous year, coming in at $18.6 million.

“We have implemented actions to address this, including better managing promotional activity and the frequency of change in store, and reinvesting in our key everyday lines,” Sudano said in a statement on the full year results.

Speaking to SmartCompany, Sudano explained that in a move to introduce new and fresh products, The Reject Shop’s “merchandise mix moved too heavily towards a focus on variety products”.

In the second half of the year, he says The Reject Shop changed the way it organised both stock on the floor and stock flowing into stores, including reducing “frequency of change in stores” and reinvesting “in our key everyday lines and branded bargains to ensure availability and visibility” within the store.

The impact of these changes could only really be realised from March, but the company says they “are already having a positive impact on the key metrics of the business”.

Read more: How The Reject Shop and other specialist retailers are also feeling the heat from Aldi

Professor of marketing and consumer behaviour at Deakin University Paul Harrison says The Reject Shop will be making these in-store changes against a very challenging backdrop for discount retail stores.

“The Reject Shop was a unique offering in the marketplace 15 years ago,” Harrison says.

In the time since, a number of bricks-and-mortar entrants that aim to deliver similarly low-cost products with a higher-end aesthetic have entered the space.

“For example, Muji is a little more expensive but it makes it [low cost products] an aesthetic experience. Muji is the evolution of The Reject Shop,” Harrison says.

If a brand wants to drive more sales, Harrison says his typical advice would be to remove clutter from a store floor space, but that would be a challenge in this case because The Reject Shop relies on some clutter to encourage “purchases on a whim”.

“One of the things you’ve found in retail over the past couple of years is the idea of having “zones” — or to have your hero products in one area, then have the other things around them,” he explains. 

“So if they have some hero products, they should be tidying up that area.”

Organising your store? Don’t trust yourself

Harrison observes one of the challenges for Australian retailers, particularly at the smaller end of the spectrum, is the temptation to design a store based on the owner’s individual tastes.

“I think a lot of the organisation is retail particularly at the smaller end is, to be blunt, not very sophisticated,” he says.

“Probably the worst judge of what a customer wants from you in your store is yourself. The moment someone says ‘I know what customers want’, that should be a red flag.”

Instead, there are plenty of models that a business owner can research around where products should be placed and how people shop.

If a business owner is unsure, there’s always scope to test these out on the floor and “come up with a potential solution and then test it”, Harrison says.

“There’s so much information out there about how to do it properly.”

While everyone might have their own design tastes and style preferences, your shop layout and merchandising shouldn’t be all about you. Instead, think about the problem the customer needs solved, he says.

“Basically, business owners should never just trust their own instincts on this,” says Harrison.

Never miss a story: sign up to SmartCompany’s free daily newsletter and find our best stories on Twitter, Facebook, LinkedIn and Instagram.