Amid the cost of living crisis, consumers have been turning to value retailers to save money as household budgets are stretched.
Almost half (48%) of UK consumers report they are trading down, either in the products they buy or where they shop, according to GlobalData. This trade-down trend has led to discounters in the grocery sector growing market share, with Aldi surpassing Morrisons to become the UK’s fourth biggest supermarket last year.
GlobalData forecasts the UK value, discount, variety stores and general merchandise retail sector is set to grow by 5% per year taking its value to £59.4bn in 2027.
While the food and grocery sector will continue to be disrupted most by discounters, according to GlobalData, the value home and electricals sector is also set to grow, increasing sales by £1.2bn over the next five years.
With the macroeconomic environment favouring value retailers, it may have come as a surprise to many that Wilko has collapsed. The retailer fell into administration last week, with PwC appointed to oversee the process.
Wilko was simply not set up for success, says Retail Economics chief executive Richard Lim. He notes the retailer’s slide into administration became almost “inevitable” as it failed to make big changes to transform itself into a viable business.
The company had too many stores in the wrong locations and hadn’t invested in these stores to make them attractive to consumers, he says. Wilko had also failed to invest in its online presence to become an omnichannel retailer.
Nostalgia [for the brand] is not going to ensure the commercial success of the retailer.
Richard Lim, Retail Economics
“It doesn’t have a compelling enough proposition given the competitive environment,” he says.
Wilko failed to rectify fundamental mistakes in its business with haste, meaning its collapse should be seen as an outlier in discount retail rather than indicating a direction of travel for the sector.
“Demand for discounters will continue to be strong,” forecasts GlobalData lead retail analyst Nick Gladding.
With this in mind, there are reportedly a number of parties interested in buying some or all of the business.
Bidders – who have until the end of the working day today (16 August) to confirm their interest – reportedly include both large retailers and financial groups. How much of the business each of these interested parties might want to buy is not yet clear. Some potential buyers may be solely interested in buying some or all of the brick-and-mortar stores owned by Wilko, or its stock; others might be interested in acquiring the brand and its intellectual property.
When Tesco acquired collapsed stationery business Paperchase in January this year, it acquired only the brand and none of its stores.
What kind of deal is struck between Wilko’s administrators and any prospective buyer will hugely depend on what their current business looks like, as well as the value of the company’s assets.
While Wilko undoubtedly made mistakes in the execution of its business, it’s not to say the business is without appeal to a potential buyer.
“There’s definitely value in the brand,” Lim says, stating that it has a “sentimental” appeal and is well-known on the British high street, having been a fixture for decades.
YouGov’s BrandIndex platform suggests that, despite its collapse into administration, Wilko retains higher brand strength versus other retailers. As of 31 July 2023, its index score was 28.4, versus a retail sector average of 11.1.
The index score is a measure that brings together metrics like impression, value and purchase intent to provide an overall picture of brand health. Other value retailers, like Home Bargains, B&M Stores and Poundland have significantly lower brand health, according to YouGov’s BrandIndex.
As of 31 July 2023, Home Bargains had an index score of 19.6, B&M achieved 18.6 and Poundland scored just 4.5.
In the past year, Wilko has also consistently outperformed these rival retailers on both quality and value perceptions.
Its value score for 31 July was 40.3, versus B&M’s 35.6, Home Bargains’ 35.4 and Poundland’s 24.0. The average for the sector is 5.7.
Wilko is perceived as being much better quality than B&M, Home Bargain and Poundland. As of 31 July, its quality score was 13.4, with the next highest score from any of its discount rivals being Home Bargains at -0.1.
There are some reports that rival discount retailers may be among potential bidders for Wilko.
GlobalData’s Gladding says discounters cannot sit back and rest on their laurels if they want to continue to enjoy success.
“When the economy does recover, retailers will need to adapt their ranges to retain customer loyalty,” he says. “Expect to see them increase their focus on quality and improve their ethical credentials. We are also likely to see them broaden their offer of higher priced items.”
The acquisition of the Wilko brand could help a potential buyer drive quality perceptions. However, Lim strikes a warning note that if someone was to acquire parts of the business they would need to invest time and money into it.
“Nostalgia [for the brand] is not going to ensure the commercial success of the retailer,” he says. “I would argue there’s a lot of work that needs to be done in order to turn the business around and get it on the right footing.”