Key Takeaways
- The Reject Shop’s decline in profit stemmed from stronger competition, failed merchandising changes, and rising operating costs.
- The Reject Shop regained sales growth as pandemic demand drove a 3.4% rise in sales to $820.6 million in 2020.
- Its turnaround focused on smaller stores, new products, cleaner layouts, and digital expansion.
- A loyal customer base and stronger value proposition helped support its return to profitability.
The decline in profit at The Reject Shop reflected growing competitive pressure. Rivals offered similarly affordable products in more appealing stores.
The Reject Shop reported a $16.9 million net loss for FY2019. Its annual report recorded $21.941 million in impairment expenses, comprising $15 million for corporate assets and $6.941 million for store assets.
Financial analysts partly blamed the decline on poor execution of its 2017 merchandising strategy. The Reject Shop also faced competition from brick-and-mortar retailers with similarly low prices and more appealing stores.
>Download Now: Free PDF How to Drive Pricing Strategy to Maximise EBIT Growth
If a brand wants to drive more sales, removing clutter from the store floor may seem logical. However, The Reject Shop relies on some clutter to encourage “purchases on a whim”.
Take Muji, for example. The concept emerged as the Japanese economy developed and people enjoyed greater material wealth. The original concept assumed that people’s day-to-day needs were already met.
A key problem for The Reject Shop is changing consumer preferences. Australian shoppers increasingly want less clutter and more aesthetically pleasing spaces. The comparison with Muji highlights a potential opportunity for The Reject Shop to improve its store presentation while retaining its focus on affordable products.
The Reject Shop, on the other hand, is not really capturing change and giving us the same, old tired experience. Something is missing, making shoppers go to similar stores but with better and more pleasing aesthetics. Muji is the evolution of The Reject Shop.
In this article, we’ll examine The Reject Shop’s business model, the challenges it faced and the strategies that supported its turnaround in 2020.
The Reject Shop is now part of Canadian discount retailer Dollarama. Dollarama completed its acquisition of the Australian retailer in July 2025. The analysis below looks at the challenges and turnaround strategy that shaped The Reject Shop’s recovery in 2020.
What caused The Reject Shop’s decline in profit?
The Reject Shop’s decline in profit was driven by several pressures:
- Stronger competition: Other brick-and-mortar retailers offered similarly low-cost products with a higher-end store aesthetic, while independent dollar stores created further price competition.
- Merchandising problems: Financial analysts attributed the decline partly to a failure to execute its merchandising strategy in 2017.
- Higher operating costs: Rising rent, wages and logistics costs made it harder to keep prices low.
- Online competition: The Reject Shop struggled to transition to the digital world while retailers such as Amazon and Alibaba expanded their reach.
- Changing customer expectations: Shoppers increasingly compared The Reject Shop with retailers such as Aldi, Kmart, Target, Coles and Woolworths.
The business began to recover as demand for essential goods during the pandemic drove sales growth. Its turnaround plan focused on new product ranges and cost-cutting. It also included store redesigns, smaller locations, a new website and a stronger social media presence. These changes formed part of a broader effort to reposition the business and respond to changing customer expectations.
The following sections examine the competitive pressures and strategic changes behind this decline and subsequent turnaround.
The Reject Shop Competition Affecting its Decline in Profit
At the time, The Reject Shop used a cluttered store layout to encourage impulse purchases and help customers find what they needed. Its affordable prices illustrate an everyday low-price strategy.
The Reject Shop never established itself as a shopping destination. It also struggled to differentiate its product range from competitors’ offerings. Its initial value proposition centred on a wide product range. It offered thousands of stock-keeping units (SKUs), with 80% of products priced below $10.
Independent dollar stores expanded across Australia. This increased price and non-price competition and put further pressure on The Reject Shop’s pricing and value proposition.
However, The Reject Shop struggled to compete with smaller dollar stores on price while covering its operating costs. Customers, in turn, began comparing The Reject Shop with smaller dollar stores and soon chose the cheaper option, especially as many of its products were not of the highest quality.
US and Canadian Discount Retailer Business Models
Market changes have prompted discount retailers to seek new ideas. The Reject Shop can draw lessons from discount retailers in the US and Canada. These retailers attract bargain hunters with affordable everyday products and clear value propositions.
US retailer Dollar Tree and Canadian retailer Dollarama show how discount retail businesses can thrive under the right conditions. Closer inspections of their business models show the importance of clear price leadership and a unique customer proposition.
For instance, Dollarama has a much lower lease and wage cost base than The Reject Shop. It sources its products directly, cutting out the middle agent and providing control over product design. Its value merchandise seems to agree with the customer base.
Customer-created YouTube videos featuring Dollarama products also help showcase its merchandise online.
Dollar General focused on providing discounted everyday goods in rural towns too small to attract Walmart or other large retailers. Dollar Tree built its proposition around value pricing, attracting customers seeking affordable everyday products.
However, The Reject Shop also faced growing competition from online retailers such as Amazon and Alibaba, highlighting the need for a stronger digital presence.
The Reject Shop had struggled to implement changes successfully despite repeated strategic adjustments and leadership changes. Different store layouts, price points and merchandising mixes were tested unsuccessfully, contributing to the decline in profitability.
Pricing Problems Contributing to the Decline in Profit
The real problem is that not all its products are competitively priced. Rising rents, wages and logistics costs make it harder for The Reject Shop to keep prices low.
Another issue is that shoppers don’t see the price difference as being that big. Shoppers now judge The Reject Shop’s prices against those of Aldi, Kmart, Target, Coles and Woolworths. This puts pressure on the retailer to remain competitive.
Applying a competitive pricing strategy could help The Reject Shop recover, while poor pricing decisions could deepen its financial problems.
Parallel importing of branded fast-moving consumer goods could offer The Reject Shop another source of competitive advantage. Instead of purchasing merchandise directly from manufacturers, the retailer could source products through a foreign third party.
The need to transform to halt its decline in profit
As part of its turnaround, the company could strengthen its digital presence. It could retain its discount variety retail concept with proper planning, or follow other traditional businesses that had transformed their core business into a different but profitable model.
It could also consider expanding into regional and rural town centres where larger retailers had reduced their presence, just as US Dollar General did.
Other challenges facing The Reject Shop include online competition and the increasingly blurred distinction between it and discount department stores. Other retailers sell brands similar to those at The Reject Shop, potentially at lower prices.
Another challenge was the growing shift towards online shopping. At the time, The Reject Shop was still developing its digital capabilities. Most businesses nowadays have moved to the digital world to service their customers.
How The Reject Shop Returned to Profitability
Discount retailer The Reject Shop returned to profitability in FY2020 as pandemic demand for essential goods helped lift sales. Revenue rose 3.4% to $820.6 million, while statutory net profit after tax reached $1.1 million. Sales surged in March as Australians stocked up on essential goods during the early stages of the COVID-19 pandemic.
Comparable-store sales increased 0.5% in the first half of FY2020 and 7.1% in the second half, resulting in full-year growth of 3.5%.
At the time, The Reject Shop was undertaking a major turnaround focused on strengthening its operations and competitive position.
In 2020, media reports cited Morgan Stanley’s estimate that The Reject Shop could be worth $3 billion within a decade.
The Reject Shop’s loyal customer base helped support its turnaround, as budget-conscious shoppers continued to seek affordable everyday products.
In 2020, CEO Andre Reich was leading a full-scale turnaround plan for The Reject Shop. The plan included new product ranges, cost-cutting measures, and store reformats as the business sought to recover after years of declining profits.
Capitalise on the gap in the market
During its 2020 turnaround, The Reject Shop competed with discount retailers such as Kmart and Aldi, as well as independent dollar stores.
In 2020, then-CEO Andre Reich said:
“Nobody is really playing in the segment; there are heaps and heaps of mid-market brands like Coles, Woolworths and Myer and even online players like Amazon and other ecommerce retailers, but their prices are a little higher and nobody is really doing what we’re doing,” Reich told news.com.au in 2020. He added, “A lot of the share value has been created by the belief we can return the business to success and then expand to fix everything.”
He mentioned that the business was examining its products and strategy to capitalise on that gap in the retail industry and reach more customers.
Smart tactic
One advantage of the retailer’s expansion plan is that its stores are generally smaller than those of its competitors. This allows The Reject Shop to operate in suburban, rural and regional locations that may not suit larger retailers such as Aldi and Kmart, whose stores can be five or six times larger.
“In many respects, we may go head to head with them in larger markets, but there are many rural and suburban opportunities which means we would have the ability to reach more customers to our advantage,” Mr Reich said.
The company was also strengthening its digital presence through a new website, online shopping capabilities and increased social media activity. It was also refurbishing physical stores to make them cleaner and more organised, with clearer price presentation.
New Products
The Reject Shop’s other new strategy is to improve its product range.
Mr Reich said, “Where we compete is that, rather than having a massive range of, say, 10 pet beds as you would find in Kmart, we might have two of the best at the best price in the market. We’re also focused on improving our product selection and making sure our taste levels are on par and on trend.”
The plan was to make The Reject Shop’s stores more appealing to customers while keeping prices low. It also included plans to add products such as teen-friendly stationery similar to that offered by Typo or Smiggle. To appeal to a younger crowd, it’s also likely to add electronics, crafting, clothing, knick-knacks, games and more.
Right timing
In 2020, shoppers were becoming more budget-conscious amid the economic disruption caused by COVID-19. The Reject Shop’s timing was therefore central to its turnaround strategy.
Then-CEO Andre Reich said that things had changed significantly and that it was becoming increasingly expensive to live in Australia. But people also want to have everything they need for a good life.
Mr Reich further said, “It hasn’t been so cool or socially acceptable in Australia to shop down in a value store, but now people don’t worry as much where they shop as long as they save money.”
Implications
- The Reject Shop’s turnaround demonstrated how targeted changes to pricing, merchandising and operations could strengthen a discount retailer’s performance.
- Although the discount retailer had experienced declining profits, a more experienced management team and a simplified strategy could support its turnaround.
- Discount retailers may find opportunities in regional and rural communities where larger-format competitors have a limited presence.
〉〉〉 Get Your FREE Pricing Audit 〉〉〉
Bottom Line
- The Reject Shop’s 2020 turnaround team, led by CEO Andre Reich, focused on improving the product range, cutting costs and lowering rents.
- The factors that contributed to The Reject Shop’s success included price, convenience, value and profitability.
- The case highlights the importance of digital capability as online competition changes how customers discover, compare and buy products.
- The layout and merchandising shouldn’t be based on an internal view of value; that is, an inward-looking, business-centric perspective. It should reflect what customers want, how they perceive value and how they want to experience the store.
Click here to access your free pdf guide on driving pricing strategy in your business.
For a comprehensive view on maximising growth in your company, download a complimentary whitepaper on How To Drive Pricing Strategy To Maximise EBIT Growth.
Are you a business in need of help to align your pricing strategy, people and operations to deliver an immediate impact on profit?
If so, please call (+61) 2 9000 1115.
You can also email us at team@taylorwells.com.au if you have any further questions.
