Big Lots (NYSE:BIG) is a U.S. off-price retailer that sells everything from food and clothes to furniture and appliances. Specifically, it is a closeout retailer -- it purchases merchandise, at very low prices, directly from vendors that result from production overruns, packaging changes, discontinued products, liquidations, or returns -- and thus is able to offer products at much lower prices than traditional discount retailers like Dollar Tree Stores (DLTR). The company is also able to acquire merchandise from brand name retailers and appeals not only to the lower-class but also price-conscious middle-class consumers.
Big Lots is somewhat shielded from the negative impacts of tough economic times by its position as a niche market retailer for thrift-minded middle-class consumers who put emphasis on quality and value. During economic slowdowns, discount stores like Big Lots typically have an influx of customers looking to save money. Big Lots faces the challenge of maintaining and strengthening the customer base it gained during the recession.
Big Lots is a national retailer of closeout merchandise that results from production overruns, packaging changes, discontinuation of products, liquidations, and returns. The company's business model is organized into two distinct and important steps. The first step is to find and maintain a steady supply of closeout merchandise. Due to the nature of closeout merchandise, BIG has formed important arrangements with top vendors to ensure that its store are stocked with merchandise from all categories. The second step is to price significantly below general and other discount retailers to appeal to value-minded consumers interested in purchasing brand-name merchandise at a large discount.
Big Lots sells closeout merchandise from different retail categories, including:
During slow economic times, big brand retail stores struggle getting merchandise off store shelves, and many of them are left with excess inventory. Additionally, retailers that go bankrupt, like Circuit City Stores (CCTYQ), Linens n' Things, and KB Toys, enter liquidation during which they are looking to get rid of their merchandise by any means necessary. During the recession, both of these occurrences were highly advantageous for Big Lots because it relies on finding sources of closeout merchandise from brand-name retailers to maintain its store inventory of discounted goods. Furthermore, as general retailers and bankrupt companies were eager to clear out excess merchandise, Big Lots was be able to purchase closeout merchandise at lower prices, reducing cost and increasing profit margins. A strong economy means that retailers will have less trouble getting items off store shelves and fewer of them will go bankrupt. If Big Lots isn't able to provide its customers with quality items at low enough prices, the company's bottom line would be negatively impacted.
Big Lots purchases a quarter of its merchandise directly from foreign vendors (most coming from Chinese vendors). A substantial portion of the merchandise Big Lots purchases domestically are also originally supplied by overseas vendors. As the value of the dollar fluctuates against foreign currencies, especially the Chinese yuan, Big Lots risks decreases in its profit margins, since the cost of acquiring merchandise from overseas vendors will increase if the dollar weakens relative to foreign currencies.
Big Lots is a discount retailer that competes with other stores that have similar business models. Thus, Big Lots faces direct competition from dollar-store chains, such as Family Dollar Stores (FDO) and Dollar Tree Stores, that sell many products are very low prices.
As a discount retailer, Big Lots also faces significant competition from big-box sellers, such as Wal-Mart Stores (WMT) and Target (TGT), whose enormous scale allows each to extract value in their inventory purchases and pass these savings on to consumers. With an average square footage per store of 29,800 sq. ft., Big Lots stores are smaller than Wal-Mart's or Target's, but larger than comparable dollar discount retailers. In some sense, it is more nimble and less concentrated than big-box competitors, but does not necessarily enjoy the same economies of scale (though, as a large closeout discount retailer, it has some).