Discount gift shopping

Once a very small, obscure component in retailing, closeout shopping has emerged as a key concept in appealing to today's savvy, value-conscious shoppers. Most extreme-value chains dabble to varying degrees in closeouts--that group of unwanted merchandise that includes overstocks, packaging mistakes or failed or overproduced new products--while several retailers have carved out a niche specializing in this business. The most successful is segment leader Big Lots, which grew sales 12.7% to $3.86 billion last year and doubled earnings per share.

Other closeout specialists are upscale gift and home goods chain Tuesday Morning, with sales of $729 million, and food and general merchandise chain Grocery Outlet, which reported sales of $580 million. Smaller operators are National Wholesale Liquidators, Ocean State Jobbers, Odd Job Stores and Building #19, with revenue for those retailers ranging from $150 million to $350 million.

Changing dynamics in the retailing industry are working in this segment's favor, resulting in a wealth of available closeout deals. The trend toward just-in-time inventory requirements among larger retailers has shifted inventory risk to manufacturers, in some cases resulting in overproduction of items that must be liquidated quickly.

As a result, closeout retailers are finding better and more abundant opportunity buys, which improves both their image and appeal. The largest chains, such as Big Lots, have worked to secure strong relationships with key suppliers and no longer have to fight for such opportunity buys. The supplier, in many cases, calls on them.

Execution tactics among the players vary. Tuesday Morning, for example, uses low-frills merchandising and low-rent locations to keep operating costs low, yet this strategy has worked well, resulting in a loyal and upscale consumer base. In contrast, Big Lots has made stores more visually enticing, roomy and offer better quality product at unbelievable prices.

Once an operator of several different store banners and the KB Toys chain, Big Lots exited toy retailing and converted all its stores to the Big Lots name last year. The retailer has also launched a national ad campaign to spread word about its concept as it moves beyond its current 45-state market.

As with many extreme-value formats, Big Lots' prime customer base is budget-conscious with limited income. But about 33% are considered middle-income, while 17% fit into the "treasure hunter" group with higher incomes. The ethnic consumer--primarily Latino--is another area of focus.

Nonperishable food, seasonal items and furniture have become core sales categories for Big Lots. Small furniture selections are available in about half of the chain's 1,424 stores, while the company also operates about 49 freestanding furniture stores.

Big Lots stores vary greatly in size, from 20,000 square feet to 60,000 square feet, offering an assortment typical of a regular discount store, but with the added furniture component. Prices are generally 20% to 40% below those of discounters, and the assortment and brands may change quite frequently depending on the deals secured.